Gimme Three Steps - Additionality Rules Throw a Monkey Wrench Into Plans for Hydrogen Scale-Up

The federal government’s Hydrogen Production Tax Credit (PTC), also known as 45V, provides the highest incentives for hydrogen produced using clean sources of power generation, like wind and solar. That might seem like great news for current and potential hydrogen producers looking to take advantage of the credit, since the U.S. has added significant renewable generation capacity in the last several years, but the reality is much different. In today’s RBN blog, we’ll explain how “additionality” fits into the “three pillars” of clean hydrogen, how it would be calculated under the proposed guidance, and some ways the rules might be adjusted to give hydrogen producers and power generators a little more flexibility. 

The proposed rules around 45V were rolled out in late December 2023. Under 45V, credits are available based on the rate of lifecycle greenhouse gas (GHG) emissions during a clean hydrogen facility’s first 10 years of operation. As defined by the Inflation Reduction Act (IRA), clean hydrogen is produced in a way that results in a lifecycle GHG emissions rate of not more than 4 kilograms (kg) of carbon dioxide (CO2) equivalent per kilogram of hydrogen (CO2e/kg). As we described in Part 1 of this series, that new standard could severely limit how much of the tax credit is available to many of the potential low-carbon hydrogen production facilities. For example, a blue hydrogen project — one in which hydrogen is produced through the auto thermal reforming (ATR) or steam methane reforming (SMR) of natural gas, with the resulting emissions mitigated by carbon capture — can qualify for the credit if it has sufficiently high carbon-capture rates, but the proposed regulations likely limit it to the less lucrative bottom two tiers of the credit due to a “locked” upstream natural gas feedstock emissions factor. There are four tiers to the credit, maxing out for the top tier (GHG emissions rate of less than 0.45 CO2e/kg) at $3/kg but falling to $1/kg or less for the other three tiers (between 0.45 and 4 CO2e/kg).

The Treasury Department’s proposed PTC rules rely on the use of energy attribute certificates (EACs) to demonstrate a hydrogen producer’s purchase of clean power. The guidelines establish the critical criteria — the “three pillars” we noted above — that must be reflected in the EACs used to claim the tax credit: temporal matching, deliverability and additionality. The first blog in this series focused on temporal matching. Under that provision, the EACs used to establish compliance will generally need to be matched to clean energy production on an hourly basis starting in 2028 — meaning that the claimed power generation for hydrogen production must occur within the same hour that the electrolyzer claiming the credit is operating. In that example, an electrolyzer running on renewable sources of generation would have to reduce output or shut down when those power sources are generating at lower levels or offline. The proposed rules include a transition period to allow annual matching through 2027, by which time hourly tracking systems are expected to be more widely available.

In Part 2, we turned our focus to deliverability (sometimes referred to as geographic matching) and how the proposed rules are designed to work. Just like with many renewable portfolio or clean energy standards, geographic boundaries are used under 45V, with balancing authorities in the Lower 48 grouped into one of 13 regions to determine EAC eligibility. Why does it matter where that energy is produced? According to the proposed rules, the “three pillars” serve as guardrails to ensure that the electricity used can be reasonably deemed to reflect the overall emissions — direct and indirect — associated with the specific generators from which the EACs were purchased and retired.