Blue Hydrogen Can Qualify for 45V Tax Credits

Coauthored by Richard Shandross and Julia Chotoo

In the evolving landscape of decarbonization, blue hydrogen—produced from natural gas through reforming processes combined with carbon capture and sequestration (CCS)—stands as an important component of sustainable strategies for producing energy and many manufactured products. The Inflation Reduction Act’s Production Tax Credit (PTC) for hydrogen, spelled out in tax code section 45V, is a landmark clean hydrogen tax credit that is poised to enhance the adoption and impact of blue hydrogen. Although some have posited that blue hydrogen pathways do not have greenhouse gas emissions levels that could qualify them for the 45V PTC, our analysis shows otherwise.

For example, drawing on analyses published by the U.S. Department of Energy (DOE) in support of its Hydrogen Shot initiative, a recent article in a hydrogen industry publication asserted that blue hydrogen from steam methane reforming (SMR) and autothermal reforming (ATR) plants would not have low enough carbon intensity (CI)—less than 4.0 kg CO₂e/kg H₂—to qualify for the 45V PTC. However, the Internal Revenue Service requires the use of Argonne National Laboratory’s 45VH2-GREET tool for determining the CI to qualify hydrogen for the 45V PTC, while the analysis in DOE’s Hydrogen Shot Technology Assessment uses different background assumptions than 45VH2-GREET. Specifically, the cited DOE study assumes significantly higher values for both upstream natural gas leakage and the global warming potential of methane. Thus, while the results are valid for the Hydrogen Shot interpretations that the DOE analyses support, they are not relevant to the question of PTC eligibility under 45V.

Guidehouse used 45VH2-GREET to analyze the CI of SMR and ATR pathways that use natural gas or landfill gas as feedstock. We used the process parameters specified in a recent report by the National Energy Technology Laboratory (NETL) that examined the performance of plants with “current, commercial technologies within plant configurations, and at scales, representative of next commercial offerings facing no fundamental research and development (R&D) obstacles.” Thus, our results are likely to reflect those that would be achieved by new (and probably some retrofitted) SMR and ATR plants. The NETL report does not analyze ATR without CCS, so we estimated feedstock usage for that case.

The figure below shows the CI scores for each pathway, as well as the corresponding levels of 45V PTC that can be earned in various bands of CI. All of the pathways that employed CCS had low enough emissions to qualify for the 45V PTC.

Carbon Intensity of Blue Hydrogen by Production Pathway

NG = natural gas; LFG = landfill gas. All pathways use Texas Reliability Entity electricity mix.

(Source: Guidehouse)

Based on our analysis, several key conditions provide the highest likelihood that blue hydrogen projects can receive the maximum possible 45V PTC:

1. Use the lowest carbon electricity source possible. Integrating renewable electricity into the production process, as opposed to high carbon grid electricity, can improve a project’s CI, potentially moving it across 45V PTC tier boundaries. This includes using renewable electricity to power ancillary processes or offsetting emissions through renewable energy credits. For example, in our modeling, using renewable power to operate the air separation unit at an ATR plant increased the PTC value received from $0.60/kg H₂ to $0.75/kg H₂.
2. Improve the carbon intensity of the feedstock. When possible, using natural gas with lower carbon emissions (such as landfill gas, renewable natural gas, or responsibly sourced gas) should be explored. However, these clean feedstocks are limited and currently expensive, making them unlikely to comprise more than a relatively small portion of the total hydrocarbon feed for an at-scale reforming plant.
3. Employ a high carbon capture level. When using natural gas feedstock, the implementation of CCS is nonnegotiable for achieving a CI needed for 45V PTC eligibility. Typically, such SMR and ATR systems will need to achieve a 90% level of capture to be eligible. Thus, an SMR plant using natural gas and deploying CCS in the common configuration that captures around 65% of CO₂ would not lead to a PTC.

The ability of any blue hydrogen project to earn a 45V PTC will of course depend on the specifics of the plant’s design, as well as the availability and choice of feedstocks. The above guidelines should be considered in the project development process.

In our next post, we will explore how the inclusion of tax credits improves the levelized cost of hydrogen for various pathways.