ANALYSIS | Why the US climate bill may be the single most important moment in the history of green hydrogen

The Inflation Reduction Act (IRA) was passed by the US Senate on Sunday. This may be the most important event for green hydrogen in history so far. Green hydrogen is a new industry that is just starting out, and this may be a turning point for it to grow beyond American borders.

The new act will give tax credits of $3/kg for 10 years to anyone who produces renewable hydrogen in the US. This will make renewable hydrogen the cheapest form of hydrogen in the world. Many other countries are also planning to produce large amounts of renewable hydrogen, so this act will help the US stay competitive in this new market.

Dimitry Dayen, a renewables analyst at global equity manager ClearBridge Investments, called the credits a “game-changer” for the clean hydrogen industry. This is because the credits make it possible for businesses to get clean hydrogen more cheaply.

Even though blue hydrogen can get tax credits, it would be hard for a project like this to get the full amount of money. This is because the government wants to give more money to renewable H2 projects.

What the tax credit means for the US H2 sector

As Recharge reported, the latest figures from S&P Global Platts say that a $3/kg tax credit on green hydrogen would make it cheaper to produce in most parts of the US than existing sources of grey hydrogen. Ten million tonnes of grey hydrogen is used every year in America for oil refining and chemicals production.

The cheapest way to produce hydrogen in the world today is in the US Midwest, where it costs an average of $1.71/kg. Green hydrogen production in the US Northwest costs $3.73/kg, but with the tax credit this would cost a developer $0.73/kg to produce.

According to a calculator on the online learning platform Keynumbers, if natural gas were priced at zero, then the price of grey hydrogen would be reached.

Wind and solar power are becoming cheaper all the time. Green hydrogen producers can also use renewable energy tax credits to make their production more affordable. This means that green hydrogen will likely be cheaper than grey hydrogen for a long time to come, unless the tax credits are taken away by a future Republican-dominated Congress.

This means that US hydrogen users will soon be able to save money by switching their grey hydrogen supply to green. This is a potential market of ten million tonnes of H2 - before even considering the possible demand from new hydrogen uses such as transport, steel production and back-up power.

The price of green hydrogen needs to be lower than $1.50 per kilogram for green steel to be cost-competitive with steel that is made from polluting fossil fuels, according to a recent Hydrogen Europe report. If the price falls below $1/kg, this might increase the demand for green steel in other industrial sectors such as cement and glass-making.

Lowering the price of hydrogen-powered road transport could make it more financially attractive. This is because the new law (which is expected to be passed by the House of Representatives and signed into law by President Joe Biden within the week) includes subsidies for fuel-cell cars and fuel-cell trucks. The subsidies are up to $7,500 for cars and up to $40,000 for trucks.

What this means for green H2 industry outside the US

Many green hydrogen developers around the world would be interested in taking advantage of the $3/kg subsidy. This would likely lead to more of them focusing on the US market, especially since there is less clarity about funding for H2 elsewhere.

More than 300GW of renewable energy projects have been announced, but in almost every case, no final investment decision has been made. This is largely because developers and potential customers are waiting to see what sort of subsidies might be available to ensure that the projects will be profitable and the energy affordable.

If a country finalizes a subsidy scheme for green hydrogen, it would become more attractive to developers and equipment makers. The United States has proposed the most generous tax credits for hydrogen yet.

Aside from the United States, only the United Kingdom has announced a national subsidy for clean hydrogen. The subsidy is based on contracts for difference, which makes it cost competitive with traditional fuels. The European Commission has also announced plans for a similar scheme, but this will require the sign-off of 27 nations and the European Parliament. Germany has also revealed a €900m ($920m) auction scheme for green hydrogen imports from outside of the EU.

Although the production of green hydrogen is currently more expensive than grey hydrogen, this fact does not seem to be leading to decisions to invest in this type of project. This is because gas prices are expected to fall to more normal levels in the coming years - certainly during the lifetime of any renewable hydrogen project.

There are concerns surrounding the European draft proposals, which includes stringent “additionality” rules that do not allow renewable electricity to be stored and used later on. As the levelised cost of green hydrogen falls the more hours per year an electrolyser is in operation, this rule could lead to extremely expensive renewable H2.

This means that the US tax credit plan is the only legislation that will make it cheaper to buy a green car than a blue or grey one.

A dozen or so countries have announced their plans to become world leaders in green hydrogen production. This includes India, China, Australia, Chile, Egypt, the UAE, Oman and Namibia. They will not want to lose out on investment in clean hydrogen technology to the US and will adjust their strategies accordingly to attract investors. This includes equipment makers.

This type of policy has been used before. It happened when there was a big increase in the number of renewable energy sources. This happened because Germany started a program that gave people money for using renewable energy. People in other countries are watching what the US is doing with taxes and credits for renewable energy. They might start giving people money for using clean hydrogen instead of regular hydrogen soon.

Potential downsides to the tax credits

The tax credits will make it less expensive to produce hydrogen using green methods. In a competitive market, this would mean that the cost of hydrogen would be lower than if it wasn't subsidized. Some developers might decide to sell the hydrogen in other countries where the demand is high and prices are high.

If this imported US green hydrogen costs less than the clean H2 produced in other countries, that could be against the rules of the World Trade Organization. Other countries might put import tariffs on green hydrogen from the US, and there could be a whole lot of back-and-forth tariffs between different countries. This could happen if the US is led by a nationalist Republican government at that time.

If the Inflation Reduction Act is passed, it could lead to the government spending more money than expected on subsidising green hydrogen. There is no limit on how much money could be spent, meaning that Washington could end up spending billions of dollars more than initially thought. For example, if one million tonnes of clean hydrogen is subsidised annually, it would cost $3bn each year. If ten million tonnes is subsidised, the cost would be $30bn.

Spain had a similar problem in the 2000s. A government program that offered people money for putting solar panels on their roofs became more popular than expected. This left the government with ten times as much solar power as it had planned, and a bill for $3 billion each year. This caused a right-wing government to get rid of all solar subsidies in 2014. They also withdrew the FIT from older projects, even though those projects were based on the promise of a 20-year tariff. This move completely destroyed the Spanish solar industry, bankrupting thousands of people while also making Spain seem unreliable to international investors.

And as all 50 Republicans in the US Senate opposed the IRA, they might want to overturn it, or elements of it, when they regain some power in the US Congress. However, Republicans rarely, if ever, act against the interests of the domestic oil & gas lobby. This group largely seems to supports the bill, especially as it contains a requirement — at key Democrat Senator Joe Manchin’s insistence — for the government to offer oil & gas leases on federal land and in the Gulf of Mexico.

The hydrogen tax credits have won support from the US oil industry. Even ExxonMobil, which has been a big climate laggard, thinks they are a good idea. Exxon CEO Darren Woods said that he thinks they are "absolutely critical to society." There are some potential difficulties with the tax credits, such as the need for an "unrelated third party" to verify the lifecycle emissions of each project.

How can we be sure that each set of life cycle emissions analysis is accurate without some kind of federal oversight? If these third-party companies are paid by each developer, they may be influenced to give favourable opinions that would save their clients millions of dollars. Some unscrupulous executives could even resort to bribery or blackmail to get them.

The US oil and gas industry has a long history of using its money to get what it wants. This includes using underhanded methods to influence climate-related issues. It is possible that questions will be raised about suspiciously low methane emissions levels on certain blue hydrogen projects, or the activities of certain "unrelated third parties".

‍