How the Biden Administration is overlooking blue hydrogen, according to API

The American Petroleum Institute (API) has urged the Biden Administration to revise its proposed regulations for the Section 45V tax credit on clean hydrogen production, which it claims fail to recognise the role of blue hydrogen as a climate solution.

Blue hydrogen is hydrogen produced from natural gas with carbon capture and storage (CCS), which reduces the greenhouse gas (GHG) emissions associated with the process. According to the API, blue hydrogen is a key component of several of the Department of Energy’s (DOE) recently announced regional clean hydrogen hubs, and can help the U.S. achieve its ambitious hydrogen targets of producing 10 million metric tons (MMT) by 2030 and 50 MMT by 2050.

However, the API argues that the draft regulations issued by the Department of Treasury and the Internal Revenue Service (IRS) on December 22, 2023, are too restrictive and discriminatory against blue hydrogen, as they focus almost exclusively on hydrogen produced using electricity generated from entirely renewable energy sources, such as wind and solar. The API says that the regulations also impose unrealistic and arbitrary thresholds for GHG emissions reductions, and do not provide adequate pathways for credit for CCS-enabled hydrogen.

“Simply put, we are at a crossroads with U.S leadership on hydrogen. We can either work together on innovative solutions to reach our ambitious hydrogen targets or we can follow the narrow path proposed by the Biden administration that discriminates against certain technologies and feedstocks,” API Senior Vice President of Policy, Economics and Regulatory Affairs Dustin Meyer said.

The API has filed comments on the proposed regulations, calling for a more inclusive and flexible approach that prioritises production of hydrogen of all types and feedstocks, and empowers individual hydrogen producers to take the risks necessary to scale these much-needed solutions.

The Section 45V tax credit, enacted by the Inflation Reduction Act, provides a production tax credit (PTC) of up to $3 per kilogram of clean hydrogen produced during the taxable year for the first 10 years after the hydrogen generation facility is placed into service. The amount of the PTC depends on the carbon intensity of the hydrogen, measured by the lifecycle GHG emissions per kilogram of hydrogen. Taxpayers may elect to claim the investment tax credit (ITC) under Section 48 in lieu of the Section 45V PTC.

The proposed regulations provide that a clean hydrogen production facility means a single production line that is used to produce qualified clean hydrogen, which is hydrogen that has a lifecycle GHG emissions intensity that is at least 50% less than the baseline GHG emissions intensity for the applicable calendar year. The baseline GHG emissions intensity is determined by the Treasury Department and the IRS based on the most recent data available from the DOE and the EPA.

The proposed regulations also describe how taxpayers must use the 45VH2-GREET model developed by Argonne National Laboratory to determine the lifecycle GHG emissions intensity of their hydrogen production process. The 45VH2-GREET model is a version of the DOE’s well-established Greenhouse Gases, Regulated Emissions, and Energy Use in Transportation (GREET) model, that is specifically tailored for hydrogen producers seeking the Section 45V tax credit.

The table below shows the proposed PTC rates for different types of hydrogen production processes, based on the 45VH2-GREET model and the baseline GHG emissions intensity of 11.7 kg CO2e/kg H2 for 2023.

Hydrogen production process Lifecycle GHG emissions intensity (kg CO2e/kg H2) PTC rate ($/kg H2)
Grey hydrogen (natural gas reforming without CCS) 10.8 0
Blue hydrogen (natural gas reforming with 90% CCS) 1.1 2.86
Green hydrogen (electrolysis with 100% renewable electricity) 0 3

The API contends that the proposed regulations do not adequately reflect the clear intent of Congress in the Section 45V tax credit, which is to foster more development and flexibility for hydrogen expansion, not less. The API also points out that the proposed regulations are inconsistent with the Biden Administration’s own hydrogen strategy, which recognises the potential of blue hydrogen as a low-carbon fuel for various sectors, such as power generation, transportation, and industrial applications.

The API urges the Treasury Department and the IRS to revise the proposed regulations to include the following changes:

  • Allow blue hydrogen to qualify for the full PTC rate of $3 per kilogram, regardless of the GHG emissions intensity of the natural gas feedstock or the electricity used in the production process, as long as the CCS capture rate is at least 90%.
  • Provide a clear and simple method for determining the GHG emissions intensity of the natural gas feedstock, based on the actual source or the regional average, rather than the national average, which may not reflect the lower-methane intensity natural gas available in some areas.
  • Provide a clear and simple method for determining the GHG emissions intensity of the electricity used in the production process, based on the actual source or the regional grid mix, rather than the national grid mix, which may not reflect the higher renewable energy penetration in some areas.
  • Provide more flexibility and certainty for hydrogen producers to claim the ITC under Section 48, by allowing them to elect the ITC at any time before the end of the first taxable year in which the facility is placed in service, and by clarifying the eligibility and basis rules for the ITC.

The API believes that these changes would better align the Section 45V tax credit with the goals of advancing hydrogen as a clean energy source, supporting U.S. leadership and competitiveness in the global hydrogen market, and creating jobs and economic opportunities in the hydrogen sector.

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