We're about to give billions of dollars to clean hydrogen. How should we define it?

The exact definition of “clean” hydrogen, interconnected with the definition of “clean” electricity, has enormous implications for the distribution of federal tax credits to boost the industry. In this episode, hydrogen expert Rachel Fakhry of the Natural Resources Defense Council discusses what’s at stake.

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David Roberts

Volts subscribers understand that a decarbonized energy system will require lots and lots of hydrogen, to store energy and to serve as a fuel in applications that are otherwise difficult to decarbonize. They also understand that while 95 percent of the world's hydrogen is currently produced using fossil fuels, there is a carbon-free way to produce hydrogen.

It involves running electrical current through an electrolyzer, which splits hydrogen out of water. (Volts listeners heard all about electrolyzers a few episodes ago.) But the resulting hydrogen is clean only if the electricity that is run through the electrolyzer is clean. That's the recipe for clean hydrogen: clean electricity plus electrolyzers.

Democrats also understand the need for clean hydrogen to scale up quickly, and they included tax credits for clean hydrogen production in the Inflation Reduction Act.

And therein lies the rub. The IRS is currently in the process of determining exactly how those tax credits will be structured and to whom they will be available. At issue is a question that sounds simple but turns out to be devilishly complex: what exactly counts as clean hydrogen? More specifically, what exactly counts as clean electricity?

The details matter enormously — up to $100 billion worth of subsidies are on the line. Big companies from BP to NextEra are lining up to try to make the standards as lax as possible, to maximize their short-term profits. But lax standards could perversely end up increasing greenhouse gas emissions, as electrolyzers come online, gobble up the available clean energy, and push grid managers to start up fossil fuel plants. (For more, read Canary Media’s deep-dive series on the hydrogen tax-credit battle.)

To get to the bottom of all this, I’m excited to talk with Rachel Fakhry, who runs the hydrogen and energy innovation portfolio at the Natural Resources Defense Council, about the technical details of this fight, the ability of the industry to meet higher standards, and the enormous stakes involved, for the industry and the larger project of decarbonization, in getting it right.

So with no further ado, Rachel Fakhry. Welcome to Volts. Thank you so much for coming.

Rachel Fakhry

Thanks so much for having me Dave.

David Roberts

You're brave to come on and address this subject. It is big and complex and hairy. There's a lot of ins and outs, "a lot of strands in the Duder's head." So let's start. So we get we need a bunch of hydrogen. We get we need it to be clean. We get basically what clean hydrogen is, sort of. So let's just start first by talking about what are these tax credits? What does the Inflation Reduction Act contain for clean hydrogen?

Rachel Fakhry

So the IRA offers one of the largest subsidies for clean hydrogen in the world. It is a production tax credit which ranges between $0.6 to up to $3 per kilogram of each hydrogen produced. And the three kilogram, as I'm sure we'll talk, is kind of the big prize that all the projects are gunning for. It is a technology-neutral credit. So there's no colors green, blue, pink, any of that. It all depends and is tied to the life cycle greenhouse gas emissions of hydrogen. That top prize of $3 can only be eligible for clean hydrogen that achieves zero point 45 kilogram of carbon per kilogram of hydrogen relative to today's status quo hydrogen that's gas derived uncontrolled, which is roughly around ten.

So to get that top rise, you have to reduce emissions from status quo by 95%, which is a lot.

David Roberts

Right.

Rachel Fakhry

You have to be very clean to get that. And it's a very long list credit. It lasts for ten years for each project that gets it, and projects that commence construction as late as early 2033 would still be eligible. So what this means is that by 2045, you could still have hydrogen projects that are getting taxpayers dollars. Even if we think the technology is going to improve and drop in price and so on, there are going to be projects still heavily subsidized.

David Roberts

Yeah, it's a lot of money. One thing I would add, just in case listeners are not familiar ... listeners have probably heard production tax credit and investment tax credit, PTC and ITC, tossed around just for anybody who doesn't know a production credit, you get a certain amount of money per quantity of the subsidized thing produced. So, in other words, this is you get the subsidy per ton or per kilogram of hydrogen produced versus the investment tax credit, which subsidizes capital costs of building the thing in the first place. And these have somewhat different dynamics, which I think we can return to later.

But this is specifically, it's the production of hydrogen per kilogram that gets the subsidy. And you note the subsidy for the lowest, for the cleanest hydrogen, is $3 a kilogram, which is huge. What's the next tier like? What do you get if you don't quite reach that threshold?

Rachel Fakhry

It's a big cliff. You drop from three to one dollars per kilogram.

David Roberts

What?

Rachel Fakhry

Yeah. And this is, I think, an excellent indicator of the type of hydrogen Congress really wanted to incense. They really wanted to incent the cleanest of the cleanest.

David Roberts

Yeah. So this is actually an important background fact about these subsidies, is they're non-linear. They don't scale up linearly with the cleanness. There's, as you say, a big cliff like the jump from not meeting that top threshold to meeting it gets you from one dollar per kilogram to $3 per kilogram, which is a huge increment. So all of which is to say, how you define how exactly you structure who is in that top tier matters enormously. There's an enormous amount of money on the line.

Rachel Fakhry

Absolutely, we'll get to that. But it all hinges on how treasury guidelines will look like for determining the life cycle greenhouse gas emissions, which in turn will determine whether you get the top prize or something much more reduced. But since you mentioned that it's a lot of money indeed, this is an uncapped credit. It depends on how much hydrogen you actually produce, but we think this could be more than $100 billion. Our colleagues at Energy Innovation have produced a really useful number, essentially taking one of the larger hydrogen projects being announced in Texas between AES-Air Products, large electrolyzer powered by wind and solar on-site.

They estimate that between the hydrogen tax credits and the renewable tax credits, it could be a $30 billion subsidy for just one project.

David Roberts

Holy s**t. So I just want to fl