The Fight to Define Green Hydrogen, With Billions of Dollars at Stake

The Fight to Define Green Hydrogen, With Billions of Dollars at Stake
NextEra and BP argue for looser rules on tax credits for hydrogen production
By Amrith Ramkumar Follow and Katherine Blunt Follow
Feb. 12, 2023 5:30 am ET

Some of the world’s biggest companies are fighting over what qualifies as green energy. At
stake are tax credits worth billions of dollars under the new U.S. climate law for one of the
most-hyped clean-energy technologies.

Industry leaders such as BP PLC BP 2.78% and NextEra Energy Inc. are arguing against
renewable-energy companies including Vestas Wind Systems A/S and Intersect Power LLC
over tax credits for hydrogen, a fuel that when made from renewable energy could reduce
carbon emissions from transportation and other industrial sectors by replacing oil and gas.

The battle is about what types of hydrogen should be classified as “clean” and receive tax
credits. The incentives are seen as vital to making clean hydrogen cost competitive with
hydrogen made from natural gas, which can be several times cheaper but emits carbon in the
production process.

Businesses large and small are repositioning themselves to try to capture some of the tidal
wave of government cash from the new law dubbed the Inflation Reduction Act, signed into
law last year. The rules defining eligibility for hydrogen tax credits, now being written by the
Internal Revenue Service and Treasury Department, are some of the most contentious
because they could affect project investment decisions and the development of a new
industry.

“The decisions the IRS and Treasury make on this will absolutely shift billions of dollars
moving forward,” said Danny Cullenward, policy director at CarbonPlan, a nonprofit that
analyzes climate solutions. “The big risk is throwing out massive subsidies that don’t do
anything.” His main concern is loose criteria that spark interest in the tax credits or increase
emissions without boosting the core technology to make hydrogen.

The Treasury Department is working to finalize its rules and standards to implement the law
in the coming months. A spokeswoman said the agency is working with stakeholders and
partners including the Energy Department to make sure the hydrogen rules help energy
security and fight climate change.

Most proposed clean hydrogen projects use machines called electrolyzers that split water into
hydrogen and oxygen. When electrolyzers run on electricity produced from renewable
sources, that hydrogen is considered clean or green.

The issue is that electrolyzers currently consume huge amounts of energy to make a small
amount of hydrogen. Many energy companies and upstarts such as Plug Power Inc. PLUG 0.00%
have proposed making hydrogen using power drawn from the electricity grid—
some of which is generated using fossil fuels—and buying renewable-energy certificates, or
RECs, tied to green-power projects elsewhere to still qualify that hydrogen as clean.

Clean-energy firms such as Vestas and Intersect, as well as environmentalists, have argued in
recent comments to the IRS that those companies should have to effectively prove they are
using green power by matching their hydrogen plant’s electricity consumption to renewable power generation on an hourly basis and making sure the green project is located in the same region.

Not doing so means that some hydrogen plants tied to the electricity grid wouldn’t in fact be
green, some companies argue, and could at times be more carbon-intensive than conventional
hydrogen made from natural gas, given that some regions remain reliant on coal to generate
electricity.

“There’s a lot of self-serving behavior being driven by the availability of a really juicy
subsidy,” Raffi Garabedian, chief executive of Electric Hydrogen, said in an interview. His firm
is backed by Amazon.com Inc., Honeywell International Inc. and Rio Tinto PLC and works to
make more efficient electrolyzers to lower the cost of green hydrogen.

Electric Hydrogen has pushed for the tighter rules alongside renewable-energy firms such as
Vestas and Intersect. Mr. Garabedian is the former chief technology officer of solar panel
maker First Solar Inc.

The tighter rules might mean proposed hydrogen facilities would have to shut down for parts
of the day when the wind isn’t blowing or sun isn’t shining, potentially making such projects
less viable.

NextEra NEE 2.01%, the owner of Florida Power & Light and one of the world’s biggest
renewable energy developers, as well as energy stalwarts including BP and Shell PLC, are
pushing for a much looser time period such as monthly or annual matching. They say such
concessions are needed to kick-start the industry until technology improves and costs come down.

Rebecca Kujawa, chief executive of NextEra Energy Resources, the company’s renewable
development unit, said an hourly matching requirement would make clean hydrogen
substantially more expensive to produce and constrain the number of customers willing to buy it.

“If you end up having an uneconomic green hydrogen product relative to alternatives, there
will be no market adoption,” she said. “It’s truly an industry that is either waiting to get off
the ground or will be dead on arrival, depending on what the Treasury ultimately
determines.”

The cheapest hydrogen made from natural gas costs about $1.50 per kilogram to produce,
while green hydrogen costs roughly $5 or more. The proposed tax credit is up to $3 per
kilogram, depending on the carbon emissions associated with the hydrogen production.

NextEra last summer said it plans to reduce greenhouse-gas emissions to near zero by 2045
without using carbon offsets or RECs that some other businesses use to neutralize their
environmental footprints. The company is planning to build large solar projects and run
power plants on hydrogen.

Ms. Kujawa said the company sees a path to producing hydrogen for power generation
without using RECs but that they are needed in the near term to develop a market for
industrial customers looking to use hydrogen for other means.

Some of the renewable-energy firms arguing for the tighter standards could benefit from
them because they have planned projects that would be connected to on-site green energy
without using the grid.

Some analysts and industry executives such as Sheldon Kimber, Intersect Power’s CEO, said a
phased approach that tightens the restrictions over time could be a realistic compromise.

Looser time-matching requirements could still be effective if the government requires RECs
to be tied to new renewable facilities in the same region as the hydrogen plants, some analysts said.

“It’s a danger if they are actually not adding new, truly green power,” said Mark Jacobson, a
professor of civil and environmental engineering at Stanford University.

Write to Amrith Ramkumar at amrith.ramkumar@wsj.com and Katherine Blunt at
katherine.blunt@wsj.com