After fierce lobbying, the Treasury sets the rules for billions in hydrogen subsidies

The Biden administration on Friday made it final his long-awaited plan to offer billions of dollars in tax credits to companies that make hydrogen, in hopes of building a new industry that could help fight climate change.

When burned, hydrogen emits mainly water vapor, and could be used instead of fossil fuels to make steel or fertilizers or to power large trucks or ships.

But whether or not hydrogen is good for the climate depends on how it is made. Today, most hydrogen is produced from natural gas in a process that emits a lot of carbon dioxide from the planet. The Biden administration wants to encourage companies to make so-called clean hydrogen using wind, solar or other low-emission electricity sources.

In 2022, Congress approved a lucrative tax credit for companies making clean hydrogen. But the Treasury Department needed to issue rules to clarify what, exactly, companies had to do to claim that credit. The agency published a proposed guide in 2023 but many companies are waiting for the final rules before making investments.

The latest guidelines that were released Friday follow months of intense lobbying by lawmakers, industry representatives and environmental groups and about 30,000 public comments. They include changes that make it a little easier for hydrogen producers to claim tax credits, which could total tens of billions of dollars over the next decade.

“Clean hydrogen can play a critical role in decarbonizing multiple sectors across our economy, from industry to transportation, from energy storage to much more,” said David Turk, the secretary of the energy “The final rules announced today put us on a path to accelerate implementation.”

Initially, the Treasury had imposed strict conditions on the hydrogen subsidies: companies could claim the tax credit if they used low-carbon electricity from newly built sources such as wind or solar energy to run a machine called electrolyzer which can split water into hydrogen and oxygen. Starting in 2028, those electrolyzers should operate during the same hours as the wind or solar farms operate.

Without those conditions, researchers he had warnedElectrolyzers could take a large amount of power from existing power grids and drive a spike in greenhouse gas emissions if coal or gas-fired power plants have to run more often to meet demand.

But many industrial groups and legislators in Congress he complained that the proposed rules were so strict, they could throttle America’s nascent hydrogen industry before it even gets off the ground.

Among the concerns: The technology to match the production of hydrogen with hourly fluctuations in wind and solar energy is still in its infancy. Nuclear reactor owners also said they were left out.

So the final rules contain several significant tweaks:

• Hydrogen producers will get two extra years – until 2030 – before they are obliged to buy clean electricity every hour to match their production. Until then, they can use a wider annual standard and still claim the tax credit.

• In some states that require utilities to use more low-carbon electricity per year, hydrogen producers will now find it easier to claim the credit, in theory that these laws will prevent a peak in emissions. For now, the Treasury said, only California and Washington meet this criteria, but other states may qualify in the future.

• Under certain conditions, companies that own nuclear reactors that have to be retired for economic reasons can now claim credit for producing hydrogen if it would help the plants stay open. Existing reactors that are profitable will not be able to claim the credit.

• The final rules also set criteria that companies could use methane gas from landfills, farms or coal mines to produce hydrogen — if, for example, the methane would otherwise be emitted into the atmosphere.

The guidelines “incorporate useful feedback from companies planning investments,” said Wally Adeyemo, the deputy Treasury secretary.

Some hydrogen producers said many, but not all, of their biggest concerns were addressed in the final guidance, which runs nearly 400 pages.

“There is some relief that the rules are, on balance, an improvement on the original bill,” said Frank Wolak, executive director of the Hydrogen Energy Association and the Association, a trade group. . “But there is much in the details that needs to be assessed.”

The lack of clear guidance had held back investment, said Jacob Susman, chief executive of Ambient Fuels, a clean hydrogen developer that plans about $3 billion in projects across the United States. “Now that we actually have something solid, we can get down to the business of building,” he said.

Environmentalists said most of the safeguards in the original proposal to prevent emissions were kept in place.

“The extra flexibilities granted to the green hydrogen industry are not perfect from a climate perspective,” said Erik Kamrath at the Natural Resources Defense Council. “But the rule maintains key protections that minimize dangerous air and climate pollution from electrolytic hydrogen production.”

The Department of Energy estimates that the use of cleaner forms of hydrogen It could grow to 10 million tons per year by 2030from almost nothing today.

But political uncertainty is looming. A new Congress could repeal the tax credits, although hydrogen generally enjoys the support of Democrats and Republicans and a number of oil and gas companies have invested in hydrogen technology. The Trump administration could also revise the rules around the credits, though that could take years.

The economy is another obstacle. The production of cleaner hydrogen still costs $3 to $11 per kilogram, according to data from BloombergNEF. By contrast, it costs about $1 to $2 per kilogram to make hydrogen from natural gas.

The new tax credit will be worth up to $3 per kilogram, which could bridge the gap in some cases, but not all. Technology costs should drop dramatically.

Even with huge subsidies to produce hydrogen, it is not clear that enough buyers will emerge. Worldwide, hydrogen companies they canceled several major projects in recent years due to lack of demand. Steel producers and electric utilities that might be interested in the fuel often balk at the expensive equipment needed to use it.

“These new rules will probably help, even if they don’t go as far as many in the industry would like,” said Aaron Bergman, a fellow at Resources for the Future, a nonpartisan research organization in Washington. “But there is still the challenge of finding people to consume the hydrogen it produces.”