Funding Clean Electricity Will Help Grow the Hydrogen Economy

The Inflation Reduction Act of 2022 is as much a climate and green energy bill as it is legislation aimed at curbing inflation. In addition to its electric vehicle credit reform, it contains provisions aimed at transitioning industry away from coal and natural gas.

The so-called 45V tax credit, named for the section of the tax code created by the tax and climate bill, limits the full tax credit to hydrogen produced with an output of greenhouse gas less than 0.45 kilograms per kilogram of hydrogen. In plain language, the hydrogen must be produced by clean electricity to qualify for the tax credit.

Some climate activists and Senate Democrats are calling for the maintenance, or even enhancement, of the restriction to cleanly generated hydrogen. But others argue that placing too restrictive requirements on tax credits will stifle the industry before it has an opportunity to develop.

The solution? Let’s better fund and streamline the competing clean electricity sector and its related tax credit regime.

The approach from a tax policy perspective should be viewed as an investment in the climate rather than as a stimulus for a given industry. As such, the problem of clean hydrogen requiring more clean electricity requires us to look at investing in clean electricity as tantamount to investing in clean hydrogen—you can’t have one without the other.

This interconnected relationship stems from the technologies themselves. The source of the electricity used to separate hydrogen from water makes all the difference between hydrogen being a clean energy source and one that results in significantly higher carbon emissions than the status quo.

For industrial purposes, hydrogen is chiefly generated through two options: a “cleaner” option that separates hydrogen from water through the use of electricity or steam-methane reforming. Neither process can be perfectly clean, but either is cleaner than that generated by an electrolyzer powered by fossil fuels.

Wind turbines operate at a wind farm on Feb. 22, 2023, in Palm Springs, Calif.

Photographer: Mario Tama/Getty Images

In threading this needle, the US won’t be traveling untrod ground. Earlier this year, the EU implemented a comprehensive renewable hydrogen regulatory framework that emphasized the need for new hydrogen generation systems to be connected to new renewable energy generation systems rather than simply being connected to the existing grid.

This is because of how electricity is supplied. Connecting to grid-connected renewable energy systems, such as existing solar and wind farms, is more akin to preferring clean energy rather than selecting it exclusively.

During periods where demand for clean energy outstrips supply, traditional coal and natural gas fired generation stations snap into action to supply power. This means any hydrogen-generating system attached to the existing power grid will use fossil-fuel generated electricity, at least occasionally.

This connects clean hydrogen’s fate to that of its competing clean energy system, electricity. There are indications that uncertainty elsewhere in the clean energy sector, with regards to tax credit eligibility, may be slowing down production of clean electricity systems such as solar cells.

For instance, incentives for projects placed in low-income communities and those with domestically manufactured components have guidance that is so haphazardly tailored, developers need to market, sell, and sometimes install a given system before they can be certain the project qualifies for the credits. In an industry that already has thin margins, that kind of precarity can keep many developers out of the market entirely—they’ll simply wait for additional clarity.

If you wish to foster the renewable hydrogen industry and bolster a tax regime to support it, you must first streamline and clarify the clean electricity tax credit system. There are benefits to regulatory alignment with early movers such as the EU in clean energy production—we’d do well to follow their lead for purposes of encouraging investment.

The future of the planet rests on our ability to shift away from fossil fuels and toward clean and renewable energy sources. But it’s nearly as clear that tax policy’s role isn’t to choose winners and losers from among the renewable energy technology options.

For that reason, the policy approach should focus on locating, streamlining, and clarifying bottlenecks in existing regulatory frameworks and tax incentives. If the nascent clean hydrogen industry needs more clean electricity to grow, investments earmarked for hydrogen should be redirected to grow that segment of the clean economy.

Look for Leahey’s column on Bloomberg Tax, and follow him on Mastodon at @andrew@esq.social.