Critical Measures to Boost U.S. Clean Hydrogen Sector Outlined

Greater clarity on tax credits and a commitment to rigorous certification rules are essential to integrating clean hydrogen into the U.S. energy mix, according to a report from U.S. law firm Troutman Pepper. The report, titled “Fueling Up: How to Make U.S. Clean Hydrogen Projects Happen,” compiles insights from industry experts to propose actionable steps for realizing the potential of clean hydrogen.

The report emphasizes the need for enhanced export strategies, strengthened domestic manufacturing of hydrogen technologies, and the development of ‘backbone’ infrastructure to mitigate project risks. The passage of the Inflation Reduction Act and Bipartisan Infrastructure Law has sparked significant commercial interest in American clean hydrogen projects. However, the complexities and stipulations of these regulations present challenges that must be navigated.

Navigating Tax Credit Regulations

A key issue highlighted in the report is the tax credits designed to incentivize clean hydrogen production. The proposed IRS regulations on Section 45V, set to be introduced in December 2023, have been criticized for their stringent criteria. To qualify for these credits, hydrogen must meet three requirements: additionality, time matching, and deliverability. These stipulations demand that hydrogen facilities source power from new projects, match electricity generation with hydrogen production within the same hour and locate both the electricity source and hydrogen facility in the same geographical area, as defined by the DOE.

Developers and utilities have expressed concerns that these stringent regulations could increase costs and hinder project funding and construction, prompting many to pause progress as they await further clarity from the IRS.

Certification Standards and Market Confidence

To stimulate demand, the Biden Administration has allocated $7 billion to establish seven regional clean hydrogen production hubs. However, businesses are seeking improved certification standards to ensure transparency and reliability in clean hydrogen sourcing. Industries such as chemical manufacturing, metal production, oil refining, transportation, and utilities are wary of the current ambiguity in hydrogen classifications, which complicates their efforts to meet environmental impact reduction mandates.

The report suggests that states could encourage greater adoption of clean hydrogen by implementing policies similar to renewable portfolio targets. Currently, only California, Oregon, and Washington have introduced low-carbon fuel standards. State-led commitments would boost confidence among clean hydrogen users and support the development of a robust domestic market.

Export Potential and Infrastructure Development

The report also explores the potential for the U.S. to become a major exporter of clean hydrogen, particularly to Europe and Asia, where regulatory pressures to decarbonize are intensifying. Exporting clean hydrogen, including in the form of ammonia, could attract capital and off-take agreements from international markets, while fostering a spot market for hydrogen and related products.

Domestically, the report underscores the importance of developing manufacturing facilities for hydrogen technologies and prioritizing infrastructure to reduce project risk. With 68% of global electrolyzer manufacturing currently based in China, there is a short-term assurance of equipment access, but a long-term need for the U.S. to bolster its domestic production capabilities. The DOE’s June 2023 National Clean Hydrogen Strategy & Roadmap identifies an annual investment requirement of $2 billion to $3 billion in hydrogen infrastructure projects through 2030 to achieve the goal of producing 10 million metric tonnes of hydrogen annually by 2030.

Advancing the Clean Hydrogen Agenda

Mindy McGrath, a regulatory and finance partner in the energy practice group at Troutman Pepper, emphasized the consensus among sector specialists on the significant potential of clean hydrogen. She highlighted the importance of government incentives and financial support in driving production and demand but noted that the practical implementation of these mechanisms remains unclear, with overly stringent or ambiguous regulations potentially stifling progress. The report calls for efforts to clarify regulatory matters and provide clear guidance to create a cohesive framework for advancing the clean hydrogen sector.

Critical measures are needed to transform clean hydrogen into a viable and productive component of the U.S. energy landscape. By addressing regulatory uncertainties and fostering supportive infrastructure and market conditions, the U.S. can capitalize on the vast potential of clean hydrogen.