IRA Delivers a Level Playing Field for Clean Hydrogen

On August 16, 2022, President Joe Biden signed into law the Inflation Reduction Act (IRA) of 2022, designed to help Americans that are struggling with rising costs. However, the law also includes nearly $370 billion in incentives for clean energy and climate-related programs and is considered one of the most significant spending packages in history for climate change mitigation and adaptation. This blog is part of a series whereby Guidehouse Insights’ subject matter experts cut through the 755 pages of legislation to identify the IRA’s most significant elements and synthesize what they really mean for the future of clean energy technologies.

The IRA is set to be a game changer for the clean hydrogen industry. Among other provisions, the package includes a new Production Tax Credit (PTC) for clean hydrogen projects. The PTC is set to eliminate the biggest barrier to industry scale-up: a lack of cost competitiveness with grey hydrogen produced from unabated fossil fuels. 

Clean Hydrogen Will Compete on an Even Footing

Until recently, green hydrogen produced from renewable electricity was the most expensive source available, averaging around $5-$6/kg. Cost targets of $2/kg, required to reach cost parity with grey hydrogen, were not expected to be achieved until the 2030s in most locations. Recent fossil fuel price spikes have shifted this outlook over the short-term; however, volatile prices aren’t sufficient to justify investments in projects with lifetimes measured in decades. 

With the PTC, green hydrogen can be produced at an effective rate of $2/kg well ahead of schedule. Hydrogen projects that begin construction prior to 2033 will be eligible to receive a credit of $3/kg produced, providing lifecycle emissions are below 0.45 kg of CO2 equivalent. In practice, this level of emissions intensity is likely to be achieved only by hydrogen produced using zero emissions electricity generated by renewables or nuclear energy. Credits will be awarded over a 10-year period, with developers given the option to receive the credit as a direct payment over at least the first 5 years. Developers will also need to meet a variety of employment-related requirements to be eligible for the PTC. 

The PTC Rewards the Cleanest Sources of Blue Hydrogen

Less generous credit rates will be awarded to projects with higher emissions intensity levels. The lowest credit rate of $0.6/kg will be granted to projects with greenhouse gas emissions of between 2.5 kg and 4 kg of CO2 equivalent per kilogram produced. Although production costs are lower for blue hydrogen than green hydrogen under ordinary gas pricing conditions, lifecycle emissions are higher due to incomplete capture rates and upstream methane leakage. Linking credits to emissions intensity will incentivize producers to opt for autothermal reformers with high capture rates and natural gas supplies with limited methane emissions.

While green hydrogen projects will also be able to claim PTCs for electricity produced by colocated renewable energy resources, blue hydrogen projects will not be eligible to receive the 45Q tax credit awarded to carbon capture, utilization, and storage projects alongside the hydrogen PTC. In addition, clean hydrogen projects can opt to receive an investment tax credit to cover a maximum of 6% of the total project costs, also linked to emissions intensity.

By leveling the playing field between different hydrogen sources, the IRA builds on the technology-neutral approach established within the Infrastructure Investment & Jobs Act (IIJA) last year. The IIJA provided $8 billion to establish hydrogen hubs across the US, targeting a mix of green hydrogen, blue hydrogen, and pink hydrogen produced from nuclear energy. 

From the perspective of end users, cheaper sources of clean hydrogen will enable usage across a range of applications that had previously been uneconomic, providing that supplies and infrastructure are able to scale effectively. Interest is likely to be focused on applications that are difficult or impossible to electrify, including existing feedstock uses for grey hydrogen, iron and steel production, shipping, aviation, and long-haul trucking, which accounts for a disproportionate share of emissions from the heavy duty vehicle segment.

To learn more about how the IRA applies to large energy providers, reference the Guidehouse Guide to the Inflation Reduction Act for Energy Providers. For more information on how Guidehouse Insights can help you navigate the impacts of the IRA, please reach out to richelle.elberg@guidehouse.com.