The American climate plan includes an ambitious section on hydrogen: its production will be heavily subsidized, provided that it is decarbonized.
Hydrogen has many uses. It is also presented as the “Swiss Army knife” of decarbonization because it could be used as an energy source in industries where reducing emissions is the most complex. At this stage, any self-respecting energy transition scenario is based on hydrogen.
However, its “unavoidable” character is not without controversy. In the short term, the increase in its production could even have a negative impact on emissions.
The situation in the United States, which is in the process of defining which type of hydrogen will be able to benefit from the generous subsidies of the climate plan (Inflation Reduction Act or IRA), illustrates the complexity of the subject.
IRA CHANGED THE OUTLOOK FOR HYDROGEN IN THE USA
The IRA has created a new tax credit to subsidize the production of “clean” hydrogen. In particular, manufacturers will be able to receive a production-related subsidy1. The amounts received will depend on the lifecycle greenhouse gas emissions associated with the production of hydrogen.
At this stage, there is no cap on the subsidies that green hydrogen producers could receive under the CTPs: the more they produce, the more they are subsidized.
Although industry players have a choice of subsidies, the Holy Grail is to be eligible for the highest level of PTC, which is a subsidy of USD 3/kg of hydrogen produced. This amount will not only allow “green” hydrogen to be competitive with conventional “grey” hydrogen in terms of cost, but it will even allow, where green electricity is cheapest, to reach negative production costs!
At this stage, there is no cap on the subsidies that green hydrogen producers could receive under the PTC: the more they produce, the more they are subsidized. This windfall could represent more than $100 billion and the industry does not intend to let it pass.
GREEN HYDROGEN = ELECTROLYSER + CLEAN ELECTRICITY
Hydrogen can be produced in several ways. To qualify for subsidies, its production must use an electrolyzer (an electric current separates water into oxygen and hydrogen) and electricity from a renewable source (solar, wind…). The hydrogen produced is then qualified as “green” (only 2% of the world production today).
HOW TO DEFINE CLEAN ELECTRICITY?
Opinions differ when it comes to defining what is clean electricity. In the vast majority of cases, electrolysers are connected to the electricity grid. The electricity used is therefore representative of the local energy “mix”, which remains very carbon intensive. Hydrogen producers intend to use renewable energy production certificates (REC2) attesting to the “clean” origin of their supply in order to benefit from future subsidies.
For some, too strict a definition of green electricity will greatly reduce the potential for development of green hydrogen production and massively increase its cost.
The U.S. Treasury Department will have to define precisely how the carbon footprint of hydrogen production will be calculated and thus its eligibility for subsidies.
Some want to measure green electricity production on an annual basis to coincide with annual hydrogen production. This is the case of the major oil groups (Shell, BP) or certain American utilities (NextEra Energy). This flexible approach is strongly contested by many ecological associations, which believe that three pillars must be respected
1. Additionality: electricity used for hydrogen projects must come from new renewable capacity
2. Regionality: clean electricity generation and hydrogen production must be connected to the same grid
3. Time Matching: hydrogen production must be concurrent with renewable energy generation
Companies at the forefront of offset strategy (such as Google) are shifting to a “per hour” approach.
A DEBATE THAT WILL SHAPE THE FUTURE OF THE INDUSTRY
This debate is not unlike the one that accompanied the definition of taxonomy in Europe.
For some, an overly strict definition of what constitutes green electricity will greatly reduce the development potential of green hydrogen production and massively increase its cost, at the risk of maintaining the domination of hydrogen production from natural gas.
Conversely, those who oppose a more lax approach fear an increase in emissions… subsidized by a climate law! The reputational impact could be catastrophic for the nascent green hydrogen industry.
1 The subsidy is equal to a specific dollar amount per kilogram of hydrogen produced (known as the PTC or Production Tax Credit).
2 REC – Renewable Energy Certificate
Source: Allnews | 17 Apr 2023 | Bruno Allain, Quaero Capital.
Bruno Allain, Senior Analyst Clean Energy
Bruno Allain joined Quaero Capital (France) SAS in August 2021 as a senior analyst on the Accessible Clean Energy fund. He had already been working for two years as an external consultant for the fund on topics related to financial analysis and new technologies. Bruno started his career in 1998 at Aurel-Leven as a financial analyst.
Quaero Capital is an independent international asset management boutique that brings together free-spirited managers who rely on original research to offer highly active strategies to institutional clients and distributors. Founded in Geneva in 2005, Quaero Capital is 100% employee-owned and its founding partners play an active role in its investment process.