Policies that incentivise truly clean hydrogen production are in scarce supply, making it no coincidence that low-emission hydrogen continues to make up much less than 1% of global demand.
Yet just before Christmas, the US government presented a rare example of positive hydrogen policy: draft rules for clean hydrogen production tax credits under the country’s Inflation Reduction Act (IRA).
The IRA aims to reduce domestic inflation in the US while tackling climate change, with a key goal of slashing carbon emissions by around 40% by 2030.
This is a goal that the proposed rules, in their current form, could concretely help the US to achieve by kickstarting a truly green hydrogen industry – thanks in large part to three core conditions.
The three pillars of green hydrogen
The draft rules set out the conditions under which hydrogen projects will qualify to receive tax credits up to a maximum of $3 for each kilogram of hydrogen that is produced, with tiers based on emissions intensity [1].
Most likely to claim the top tier credit is green hydrogen – the only near-zero-emission form produced from renewable electricity – provided it satisfies three vital conditions that ensure electricity made from fossil fuels is not used directly or indirectly to power its production.
These conditions are known as the three pillars of green hydrogen: additionality, regionality and temporality.
Additionality: Green hydrogen must be produced using ‘additional’ or new renewable electricity generation projects. This avoids hydrogen production using renewable electricity that could otherwise decarbonise the grid by displacing fossil fuel electricity.
Regionality (also known as geographical correlation or matching): Green hydrogen must be produced using renewable electricity that is generated in the same region. This ensures there is a physical flow of renewable electricity to hydrogen production via the local grid, avoiding the need to draw on fossil fuel electricity as an intermediate energy source.
Temporality (also known as temporal correlation or time matching): Green hydrogen must be produced using renewable electricity that is generated during the same timeframe as production. This ensures that renewable electricity demand from hydrogen production is matched by corresponding generation, and fossil fuel electricity is not used as a supplement when renewable electricity generation is low.
What does all this mean? In simple terms, the three pillars ensure that green hydrogen is truly low emission because it is made from new renewable electricity produced at the same time and place.
Transition timing
Under the rules proposed by the US, green hydrogen eligible for tax credits must use electricity from renewable generating projects installed within three years of the start of hydrogen production (additionality) and located on the same regional grid (regionality).
The timeframe within which green hydrogen production’s renewable electricity generation and consumption can be correlated (temporality) will transition from annually to hourly over the course of the next four years, as the US proposes a transition regime with annual time matching until 2027. This is to avoid production at hydrogen plants stalling in the short-term, as renewable capacity and storage ramps up.
While the European Union introduced similar rules related to the classification of renewable hydrogen in early 2023, it plans to allow time matching within a calendar month until 2030, from which point hourly matching will also be required.
Annual time matching will temporarily provide more scope for green hydrogen production to use grid electricity when needed, while later returning the same amount of renewable electricity to the grid from its typical renewable energy source.
Farewell fossil fuel hydrogen
The US should be applauded for setting exemplary standards that prevent fossil fuel grid electricity from being used to produce ‘clean’ hydrogen and ensure that green hydrogen projects only receive tax credits if they do not raise local electricity grid emissions.
While green hydrogen is most likely to earn the full tax credit, some blue hydrogen – produced from fossil fuels combined with partial carbon capture – will likely still qualify, if only for the lowest tax credit tier, due to its higher emissions intensity.
These rules on clean hydrogen production remain proposals that will not be finalised until late March at the earliest, following a period of public consultation.
How could they be improved in the meantime? By adding a requirement that the scarce supply of clean hydrogen is produced for end uses that make sense in the energy transition – like decarbonising current global fossil hydrogen production which emits more emissions than the aviation industry.
This would also allow renewable electricity to directly replace fossil fuel electricity wherever possible, rather than be used to make hydrogen for uses that can more efficiently be electrified such as heating and transport.
Nonetheless, the proposed IRA rules are an excellent first step on the road to a truly green hydrogen industry and set a global example we hope that other countries will soon follow.
Footnotes:
[1] The US hydrogen production tax credit is split into four tiers based on well-to-gate emissions intensity. Hydrogen projects with an emissions intensity of 0.45 kilograms of carbon dioxide equivalent per kilogram of hydrogen produced (kg CO2e/kg H2) or less are eligible for the maximum tax credit of $3 per kg of hydrogen produced. At the opposite end, projects with an emissions intensity up to 4 kg CO2e/kg H2 will receive a tax credit of $0.60 per kg of hydrogen produced.
