News and Highlights
- As the August 15th deadline approaches for the U.S. Treasury and Internal Revenue Service to determine tax rules for clean hydrogen, the debate over the definition of clean hydrogen continues to heat up. Recently, the American Clean Power Association (ACP) issued its framework for green hydrogen and we take a look at the ACP document below.
- BHP recently outline its plans to decarbonize operations and identified electricity as the preferred pathway to eliminate diesel in haul trucks. According to BHP’s estimates, the “fuel-to-wheel” efficiency of electricity is more than twice that of hydrogen.
American Clean Power Association (ACP) Issues Green Hydrogen Framework
Earlier this month, the ACP put forth its green hydrogen framework. Naturally, the document received predictably mixed feedback given that the ACP’s leadership includes various executives from large power generation companies. That said, given the depth of the ACP’s framework, and the group’s considerable industry influence, we felt compelled to review the document in today’s note.
As outlined in one of the first few paragraphs of the document, there is vigorous debate over how best to incentivize green hydrogen production, which the ACP admits is not currently cost effective with other forms of existing hydrogen production. The challenge moving forward, as ACP stakeholders tend to see it, is two-fold. On the one hand, incentive structures that are overly restrictive may inhibit the growth of the green hydrogen industry deeply enough to prevent the U.S. from meeting stated climate goals. However, if the rules around green hydrogen tax incentives are too lax, there is a risk that renewable power may be pulled away from existing uses to the production of hydrogen, possibly leading to an increase, and not a decrease, in carbon emissions. With that challenge in mind, ACP put forth its framework, focusing on what it calls the “three pillars” for green hydrogen produced by renewable energy.
Time Matching: ACP clearly outlines the concerns and economic realities of hourly versus annual matching of renewable electricity to electrolyzer usage. Given what it sees as an overly burdensome cost structure needed to currently implement hourly matching, the ACP framework recommends that facilities that start construction before the end of 2028 only be required to achieve annual matching. After that point, hourly matching would be required on facilities that start construction in 2029 and beyond. The logic here is that over time the overall cost structure for the green hydrogen value chain will decline, making hourly matching more feasible. The ACP guidance also recommends grandfathering the facilities that start construction before 2029, assuming the current four year safe harbor from the start of construction to the commencement of commercial operations.
Additionality: In order to offset some of the concerns around its proposed time matching recommendation, the ACP is proposing what it terms “more stringent” requirements for additionality and regionality, the second and third of its “three pillars”. There are three pieces to the group’s additionality framework. First, ACP recommends that electrolyzers purchase electricity from new renewable generation facilities that have come online no more than 36 months prior to the green hydrogen facility becoming operational. The 36-month window represents a grace period to account for potential delays in renewable project timelines. Second, the proposal supports the procurement of renewable energy that is currently congested or curtailed, while admitting that a framework needs to be put in place to validate such circumstances. Finally, the additionality rules proposed by ACP would include renewable sources placed in service under the 80/20 rule.
Regionality: The final pillar of ACP’s framework covers how close an electrolyzer should be to its power generation source. The ACP proposes that an electrolyzer and the renewable energy supporting it should be located in the same balancing authority. However, the generation may also be located in a different balancing authority provided there is enough transmission between it and the electrolyzer.
