The first is to assume that the production credit is simply another revenue stream to be levelized over the lifetime of the plant and then determine the fixed price of hydrogen such that the producer recovers all of its costs over that time. Compared to a carbon tax, which penalizes based on the amount of emissions released into the atmosphere, the 45Q subsidy could give a larger incentive to a technology that captures more carbon dioxide, even if the ultimate emissions rates are identical. However, additional energy is required to run the capture equipment, partly mitigating the emissions reductions. SMR takes methane, the primary component of natural gas, and heats it in the presence of steam to create a mixture of carbon monoxide and hydrogen: In addition to consuming natural gas as a feedstock, this reaction requires heat that can be produced by the combustion of additional natural gas. Carry on browsing if you're happy with this, or find out more. Hydrogen producers have the option of either receiving a credit equal to a specified dollar value per kilogram of hydrogen produced (a production tax credit; PTC) or a tax credit equal to a specified fraction of their capital expenses (an investment tax credit; ITC). We will calculate the implicit carbon prices and discuss the calculation of life cycle emissions. Only blue hydrogen produced through autothermal reforming a more energy-intensive and expensive process that enables up to 98% of CO 2 emissions to be captured would qualify for the 15% tax credit rate, but only just. Next, we turn to the impact of the tax credits on the cost of hydrogen. Next, we see how the competition between technologies is impacted by the subsidies. The fossil-fuel technologies have no benefit to a low capacity factor, so they will always choose the PTC. On the Issues However, for the electrolyzer with a PPA, that is reduced to $2/kg H2 due to the low electricity costs from the PPA. The first is a new tax credit (section 45V of the tax code) where the value of the credit is based on life cycle emissions. For potential green hydrogen investors and developers, the IRA is exciting because producing clean hydrogen can now generate tax credits for the first time. WebMichaels work on this has been essential. However, a more expensive $40 PPA would make an SMR cheaper if natural gas prices were less than ~$5/MMBTU. 28 Jun 2023 15:55:30 For many projects, the tax credits will be worth more than the hydrogen itself, making clean hydrogen projects (and clean hydrogen-carrier projects) more economical The Inflation Reduction Act has positioned the US to be a green fuels In this section, we will show the thresholds for the different levels of the 45V tax credit for the natural gas technologies as a function of upstream emissions rates (i.e., methane leakage rates and the grid greenhouse gas intensity). The IRA creates new tax credits with respect to the production of clean hydrogen. The IRA aims to change that. If the only need for clean hydrogen were to decarbonize its current usage, it would likely not justify the level of investment that the US government has made over the past few years. To encourage clean hydrogen production, beginning in 2023, the IRA offers a credit of anywhere from $0.60 to $3 per kilogram of qualifying clean hydrogen produced, depending on the level of greenhouse gas emitted from production and if prevailing wage and apprenticeship requirements are met. The credit would be available through 2032. When paired with a PPA for zero-carbon power, the net LCOH is well below the other technologies, with a value of $0.02/kg H2. Last years Infrastructure, Investment and Jobs Act (IIJA) contains $9.5 billion funding for hydrogen, including $8 billion for hydrogen hubs. 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. Beyond its current use in chemicals and refining, hydrogen has potential new and expanded uses in, for instance, process heat, iron and steel, electricity generation and transportation. Subject to subparagraph (B), the term lifecycle greenhouse gas emissions has the same meaning given such term under subparagraph (H) of section 211(o)(1) of the Clean Air Act (42 U.S.C. In both figures, the curves with lower leakage are slightly below the lines with higher leakage, reflecting that the SMR with CCS receives a greater subsidy. WebMichaels work on this has been essential. 7545(o)(1)), as in effect on the date of enactment of this section. This process produces greenhouse gas emissions from the carbon dioxide released as the hydrogen is extracted from the natural gas (or other hydrocarbon). If not, at least at current capital costs, it will be hard to operate an electrolyzer at a high capacity factor competitively. With respect to electrolysis, it currently requires very low electricity-associated upstream emissions to qualify for a higher tier of 45V tax credit, and even with that credit, it remains significantly more expensive than SMR-based production. We look both at the direct and life cycle emissions associated with hydrogen production for each technology using current values for the grid carbon intensity and upstream methane leakage. No facility may take both the 45V and carbon capture and sequestration tax credits. To ensure the incentives in the IRA make these clean energy investments a reality, ACPs comments focus on areas where guidance from Treasury will be essential to provide sufficient market certainty for developers. In this way, one can convert the subsidy into an equivalent carbon price as follows. The 45Q tax credit can create some perverse incentives. This is also a volume-based credit, with up to $3 per kilogram of clean hydrogen produced over a 10-year period, says Quynh Nguyen, senior manager, Deloitte Tax LLP, and also a podcast presenter. Long story short Michael Wheeler on LinkedIn: IRA Clean Hydrogen Tax Credit: Debunking Five Myths The prevailing wage requirement is that the construction of the facility and any subsequent alteration or repair must pay workers at least the local prevailing wages for a similar activity as determined by the Secretary of Labor under the Davis-Bacon Act. This tax credit was created in the Energy Improvement and Extension Act of 2008 and subsequently modified by the Bipartisan Budget Act, which increased the level of the credit, replaced the prior tonnage cap with a fixed duration of 12 years and expanded eligibility to include direct air capture while setting various capture thresholds for qualification depending on the type of facility. The ITC will support 15% to 40% of eligible projects costs based on life cycle carbon intensity and the facilitys ability to meet labor requirements. In Figure 14, at low leakage rates, the subsidized SMR with CCS has a lower LCOH than an SMR. Jun 30, 2023, Emissions Effects of Differing 45V Crediting Approaches, Journal Article In the short term, upstream emissions can be reduced by using zero-emission electricity. Web(i) not greater than 4 kilograms of CO2e per kilogram of hydrogen, and (ii) not less than 2.5 kilograms of CO2e per kilogram of hydrogen, the applicable percentage shall be 20 percent. In the PEM with PPA technology, costs are reduced by purchasing electricity from a wind farm, but the lower capacity factor increases the levelized cost of capital. One such provision is a new tax credit for clean hydrogen production generally considered a promising low carbon fuel particularly for trucks and ships. The 45V credit is Alternatively, under Section 45V of the IRA, producers of clean hydrogen can qualify for a Production Tax Credit, which makes payments over a 10-year period. President Bidens top advisers recently argued that the Inflation Reduction Act (IRA) will be a climate game changer for two reasons: first, by putting domestic emissions targets within reach, and second, by reducing the costs of clean energy technologiesin There are additional challenges in developing a national clean hydrogen network: transportation and storage, which we have not considered. In contrast to the natural gas comparison, for the PEM, the plane of price differences is not nearly as parallel to the X-Y axis, leading to the significant price differences seen in the prior section. Both forms of hydrogen production are potentially eligible for the 45V tax credit, but they must demonstrate low life cycle emissions to do so, with the magnitude of the credit depending on the level of emissions. But without careful implementation, the credit could backfire by inadvertently increasing nationwide carbon pollution. Under the law, low-carbon hydrogen production facilities can take advantage of a production tax credit for the first 10 years the facility is operating, they noted. Other technologies, such as photoelectrochemical water splitting, are under development. For this analysis, we generally assume technologies have a high capacity factor, reflecting the need of most end uses for a steady stream of hydrogen. Production using hydrocarbons uses a series of chemical reactions to release the hydrogen, where the remaining carbon atoms are usually released as carbon dioxide. To produce additional hydrogen, the reforming reaction is usually followed by a water-gas-shift reaction that converts the carbon monoxide to carbon dioxide and additional hydrogen: This reaction is exothermic (i.e., produces energy), as opposed to the SMR reaction, which is endothermic (i.e., uses energy). The ATR currently is right on the border to qualify for the smallest 45V subsidy. These issues are discussed in detail in an RFF blog post. IR-2023-116, June 14, 2023 The Internal Revenue Service issued proposed regulations and frequently asked questions today describing rules for applicable entities that earn certain clean energy credits and choose to make an elective payment election and While this will likely change as electrolyzer costs decline, this suggests that in the short run, it may be difficult for electrolysis to be a competitive source of hydrogen at a high capacity factor. WebThe per-kilogram 45V PTC amounts are a game changer. If it can, as the zero grid lines in Figure 18 show, it can be competitive with an SMR with CCS at electricity prices not too much lower than current national prices and within range of the prices in the least expensive regions of the country. In these scenarios, we assume that the methane leakage rates for natural gas consumed by the hydrogen producer and consumed by the electric sector are not linked. This applies in particular to hydrogen, itself an indirect greenhouse gas, which is not one of the standard Kyoto gases usually considered and where its GWP is still being debated. Hydrogen producers can take either the 45V tax credit (ITC or PTC version) or the 45Q tax credit. A lot of folks approached this as an adversarial story, but his team was able to navigate the complexity of marginal Specifically, the Act introduces a clean hydrogen production tax credit (PTC) and broadens the existing investment tax credit (ITC) in Section 48 of the Internal Revenue Code (Code) to apply to hydrogen projects and standalone hydrogen storage technology. (B) GREET MODEL.The term lifecycle greenhouse gas emissions shall only include emissions through the point of production (well-to-gate), as determined under the most recent Greenhouse gases, Regulated Emissions, and Energy use in Transportation model (commonly referred to as the GREET model) developed by Argonne National Laboratory, or a successor model (as determined by the Secretary).. plug-in hybrids and hydrogen fuel cell vehicles. The opportunity to submit comments offers developers and investors in these emerging clean The amount of the credit shall be multiplied by five in the event (1) the construction of the qualified clean hydrogen facility begins prior to 60 days after the US Secretary of the Treasury publishes guidance with respect to wage and apprenticeship requirements, and the prevailing wage requirements as set out in the Act are satisfied in the This underlines the need to find low-cost electricity to make electrolyzers economic. This means that the breakeven natural gas price at current electricity prices of $-12.7/MMBTU only translates into an $0.18 price difference between the two technologies at the natural gas prices in the prior section. Capturing only the process emissions from an SMR (which would provide from 60-66% emissions reduction) is not an option in NRELs models. The tax credit has no cap, and could pay out more than $100 billion over the lifetime of the credit. For the ATR with CCS (Figure 15), the breakeven curves vary very little with respect to gas prices because the unit gas consumption is almost the same as an SMR without CCS. Due to the high levels of electricity consumption, very clean electricity is needed to qualify for the 45V tax credit at any level. Instead of rewarding the amount of emissions reduced, it rewards the amount of carbon stored in the ground. The hydrogen production tax credit, under Section 45V, gives projects that begin construction before 2033 a tax credit for 10 years after theyre placed in service, getting 60 cents for every kilogram of clean hydrogen produced. Looking at the price difference as a function of natural gas and electricity prices, it is a plane that intersects the x-y plane at the breakeven curve. The two important tax credits in the IRA for hydrogen are the new tax credit for hydrogen production and the increase in value of the existing credit for carbon sequestration. With many in industry arguing that these incentives were too small to foster widespread use of CCUS, the IRA further increased the level of the credit for facilities built after the passage of the Bipartisan Budget Act to a flat $85/tonne for sequestered carbon dioxide and $60/tonne for utilized carbon dioxide, including for EOR, replacing the linearly rising scale in the Bipartisan Budget Act. This is consistent with DOEs definition of well-to-gate given in the Funding Opportunity Announcement for the H2Hubs. Description of the policy. Importantly, all technologies assume a 40-year lifetime and an 8 percent internal rate of return with a 60/40 debt/equity split using revolving debt at 3.7 percent paid off at the end of the plants lifetime. The choice of the PTC or ITC is a trade-off between revenues from the sale of hydrogen and a reduction in capital expenditures. However, this technology requires high heat, which NREL assumes comes from natural gas combustion. Finally, Whitaker et al. WebMichaels work on this has been essential. In addition to cost, these present difficulties with respect to leakage and the embrittlement of infrastructure. The IRA creates a new tax credit for the domestic production of clean hydrogen at a qualified production facility. This concept is borrowed from the Renewable Fuel Standard The credit was expanded under the IRA and includes additional types of qualified investments for up to $10 billion in We do not examine natural gas technologies with and without CCS, as no prices exist where the LCOHs of the technologies are lower. The Inflation Reduction Act of 2022 changed the rules for this credit for vehicles purchased from 2023 to 2032. For the electrolyzers, we will examine a scenario where a constant stream of hydrogen is produced by blending zero-emission intermittent power with power purchased from the grid. The resulting gas is then run through a water-gas shift reaction to produce more hydrogen. However, we also model a PEM electrolyzer with a power purchase agreement (PPA) from a wind farm with a capacity factor of 30 percent. Another important question is the meaning of paragraph (B) in the first quotation above. The IRA expanded a tax credit that provides incentives for solar manufacturers, among other clean energy producers, for purchasing and commissioning property to build a manufacturing facility before January 1, 2025. This can be rearranged to give t = s/(d-c), which is the per-unit subsidy cost divided by the per-unit abatement. The size of the tax credits available to US clean hydrogen producers depends on the lifecycle greenhouse gas (GHG) emissions of each project and more importantly, on how much staff are paid. The subsidy will be a function of the percent of clean power and the carbon intensity of the remaining power used. Note that this does not mean that the subsidy is more likely to lead to abatement in that scenario as the abatement cost in dollars per tonne will also increase because there are fewer emissions to be abated. The two acts together mount an estimated $370 billion in federal funding over the next five to ten years to facilitate the clean-energy transition. Clean Hydrogen. At the current grid intensity of roughly 0.44 kg CO2e/kWh, to produce hydrogen all the time, the electrolyzer needs greater than 84 percent zero-emission energy to receive any subsidy under 45V. The Costs and Emissions of Hydrogen Production, 5. A more reasonable assumption may be that the heat comes from a carbon free source, but that data is not available. 117-169, commonly referred to as the Inflation Reduction Act of 2022 (IRA), expanded and extended two nonrefundable tax credits meant to encourage individuals to invest in energy efficiency improvements or clean energy in their homes: 1. the energy For transportation, the correct unit will depend on the end use. As such, we do not include this technology in our analysis. . Report The other tax credit, Section 45V, is based on the carbon intensity of hydrogen production. This tax credit is available irrespective of the life cycle emissions and, as we will see, can be more valuable than the 45V tax credit. Jun 29, 2023, Emissions and Energy Impacts of the Inflation Reduction Act. Many of these provisions were introduced in the Build Back Better Act that stalled in Congress at the end of last year and are now being enacted, The definition of this term is consistent with the term well-to-gate and lifecycle in Section 45V Credit for Production of Clean Hydrogen in the Inflation Reduction Act.. (excluding leakage from local distribution), and a carbon intensity of the grid of 0.39 kg CO2/kWh. One could add the cost of storage and transportation to achieve a steady stream of hydrogen, but we have not done so, as those costs are not provided in the NREL models. This is set to zero for PEM with PPA, so we only show one curve there. For example, due to its relatively short lifetime in the atmosphere before it is converted into carbon dioxide, methanes GWP is roughly 2.7 times larger over a 20-year time scale as opposed to a 100-year timescale. While such an externality is extremely difficult to quantify, the larger subsidies here could potentially be justified in the broader context of trying to create a clean hydrogen economy, as we discuss later. The IRA creates a PTC or an ITC for clean hydrogen, giving the owners of production facilities the option to elect either of the two. This is a relatively rigorous means to demonstrate the consumption of clean power, which will most likely be allowed under the regulations. 4. In the Inflation Reduction Act (IRA), signed into law by President Joe Biden in August, some $369bn of federal funds are due to be channeled into clean energy and hydrogen including a production tax credit of up to $3 per kilogram of H 2.. (2018), and a more aggressive scenario of 0.3 percent, similar to the 2020 One Future reported value (their 2021 reported value was 0.424 percent). On November 3, 2022, the Internal Revenue Service (IRS) issued notices requesting comments on how the Inflation Reduction Acts (IRA) new clean hydrogen tax credit and modifications to the existing carbon capture credit should be implemented. Based on what weve seen, companies can purchase hydrogen for $1.00 to $1.50 per kilogram, depending on various factors. The 2022 Toyota Mirai has a fuel efficiency of 72 miles per kg H2. We compare with a gasoline fueled car that achieves 25 mpg. This week: protecting coastal communities, electric truck infrastructure, and more. Figure 11 shows the thresholds for each level of the 45V subsidy for the natural gasbased technologies. The Hydrogen Hub program in the IIJA envisions a a national clean hydrogen network to facilitate a clean hydrogen economy. This analysis shows that the subsidies embedded in the IRA should be sufficient to enable the use of clean hydrogen where hydrogen is currently used. However, this metric does not guarantee that the profits will be sufficient to recover capital and fixed costs. The Secretarys decisions on quantification of life cycle emissions will have important implications for the ability of various technologies to take advantage of the 45V tax credit. We conclude with a discussion of the broader hydrogen economy. This will depend on the marginal cost of production (i.e., the cost to produce a single unit of hydrogen). Interestingly, this modeling shows that, even under the full $3/kg H2 subsidy, hydrogen from electrolysis is not competitive with hydrogen from an SMR with CCS when purchasing power directly from the grid due to the high price of electricity. Using the 2021 value of 22.3 percent coal generation, combining all three values gives a total life cycle greenhouse gas intensity of the grid of 0.44 kg CO2e/kWh. Figure 13 shows the breakeven curve comparing the PEM technology with an SMR with CCS and an ATR with CCS. This metric ignores capital costs and is shown in Figure 3. Territories, Rural Energy Co-ops, and More to Access Tax Credits for Building a Clean Energy Economy Washington, D.C. As part of the Biden The credit is available to individuals and their businesses. In addition, direct air capture is given a credit of $180/tonne and $130/tonne for sequestered and utilized carbon, respectively. New Inflation Reduction Act Provisions Allow State, Local, and Tribal Governments, Non-profits, U.S. It appears to say that the GREET model must be used to determine the scope of the life cycle emissions calculation but not necessarily the coefficients. We also examine the competitiveness of the CCS technologies and the electrolyzers when subsidized. the increase in value of the existing credit for carbon sequestration. In addition, for all taxpayers, the credit is transferrable in return for cash, which allows monetization with fewer transaction costs as compared to bringing in an outside investor with tax appetite (i.e., a positive tax bill). We will first show the breakeven curves between various pairs of technologies in the absences of a subsidy and then with the inclusion of the subsidy. The second is to assume that the producer will lower prices by the full amount of the subsidy in the years that it is available and then increase prices to the unsubsidized LCOH subsequently. Most hydrogen produced globally is through steam methane reforming (SMR) which falls into the first category. Since the Inflation Reduction Act is a 10-year plan, the changes won't happen immediately. An advantage of ATR over SMR is that it requires no additional natural gas, as the partial oxidation reaction provides the heat. For the PEM with a PPA, the marginal cost is quite low because we are neglecting the increase in levelized capital costs due to the low capacity factor. WebI have not posted much, been hard at work ever since August 2022 working on how best to implement 45V, the new tax credit for clean hydrogen. Best Roth IRA Accounts. Slightly higher electricity prices or natural gas prices would change that, however. The Inflation Reduction Act changed a wide range of tax laws and provided funds to improve our services and technology to make tax filing easier for you. This novel ability to sell tax credits would allow developers and investors to streamline tax credit We will analyze the impacts of these tax credits on the costs of hydrogen production using a set of hydrogen production models from the National Renewable Energy Laboratory (NREL). However, the goal of these tax credits is not solely to correct for the lack of a price on carbon but also to aid the deployment of nascent hydrogen technologies. The credit amount equals $0.60 per kilogram if the facility produces qualified clean hydrogen that results in lifecycle greenhouse gas emissions of less than 0.45 kilograms of CO 2 e per kilogram of hydrogen; if the CO 2 e level is between 0.45 kilograms and 4 kilograms, the credit is available but at a lower credit rate. The slopes of the curves are all identical because the PEM technologies do not use natural gas, so the slope reflects only the natural gas usage of the SMR with CCS. Natural gasbased technologies and electrolyzers need a roughly $1/kg H2 or $4 decrease, respectively, in levelized cost to be competitive with current SMR production. Clean hydrogen, that is, hydrogen production with little to no greenhouse gas emissions, can be a key component of decarbonizing the industrial sector. In contrast, using the PPA prices, Figure 19 shows that the PEM with PPA is cheaper than the SMR. Clean hydrogen is defined as less than 4 The Treasury Department and the IRS will allocate the remaining credits in future allocation rounds. Hydrogen will be a key energy technology in a low-carbon future. A lot of folks approached this as an adversarial story, but his team was able to navigate the complexity of marginal The IRA also changes the eligibility requirements as follows: The same reductions for tax-exempt bonds as for the 45V PTC and the same provisions that allow direct payments also apply to the 45Q credit. These include the release of methane from upstream natural gas and coal production and transportation and the emissions associated with any electricity used. The impact of the two subsidies could occur in at least two ways, depending on how the producer prices the hydrogen. The clean energy provisions of the Inflation Reduction Act of 2022 a historic effort to encourage the development of clean energy and reduce carbon emissions. We will also examine in detail how the relative competitiveness of the various forms of production depends on natural gas and electricity prices. For example, for electricity, this would include both the emissions at the point of generation and any upstream emissions resulting from the production and transportation of the fuels consumed but not any embodied emissions in the infrastructure used to generate the electricity. This remains true at the 30 percent capacity factor assumed for the PPA. This report analyzes the impacts of two tax credits on the costs of hydrogen production using a set of hydrogen production models from the National Renewable Energy Laboratory. These may depend, in turn, on the viability of low capacity factor production. Because it captures less carbon dioxide, for the ATR, the 45Q subsidy is $0.74/kg H2. For process heat, the important quantity is the price to deliver a Joule of heat. WebInflation Reduction Act of 2022. The credit will apply to hydrogen produced after the end of 2022. In addition, the Bipartisan Budget Act added carbon monoxide as an eligible gas, except in the case of direct air capture. Temperatures in the worlds oceans have broken fresh records, testing new highs for more than a month in an unprecedented run that has led to scientists stating the Earth has reached uncharted territory in the climate crisis. With both the Infrastructure Investment and Jobs Act and the Inflation Reduction Act, the United States is set to be a leader in the development of this industry. With grey costs at $1-2/kg of hydrogen versus green at $5-8/kg, this $3/kg tax credit has scope to bring green However, as noted above, an important externality exists beyond climate change: the potential spillovers from technology demonstration and deployment. In this section, we will quantify the costs and the emissions of various hydrogen production technologies using a set of models produced by the National Renewable Energy Laboratory (NREL). We will briefly discuss this later. Figure 12 shows the thresholds for the various level of subsidies as a function of the PPA capacity factor and grid emissions rate. The hydrogen PTC is offered to clean hydrogen, defined as any hydrogen resource that reduces emissions by at least about 60% relative to todays incumbent and dirty grey hydrogen. For the electrolyzer, which can reduce emissions by only running when it has access to clean electricity, the breakeven capacity factor is ~30 percent. For the ATR with CCS, the greater electricity consumption means that the low methane leakage level combined with the current grid intensity is not sufficient to obtain the $1/kg H2 45V tax credit, so that breakeven curve is the same as the line for the high leakage rate. The IRA gives anyone producing clean hydrogen the choice of production tax credits of up to $3 a kilogram for 10 years on the hydrogen produced or an investment tax credit of up to 30% of the cost of the electrolyzer and other equipment. These tax credits along with $8bn of federal funding for clean hydrogen hubs in the separate The tax credit can pay out as much as $3 per kilogram of clean hydrogen produced over ten years, awarding projects developed as late as January 1, 2033. No Senate Republicans support the bill. Work on the level of support needed for production and the appropriate carbon intensity tiers is underway, the statement said. The height of the black bar is the LCOH less the value of the subsidy, and the combined height of the two bars is the original LCOH. A lot of folks approached this as an adversarial story, but his team was able to navigate the complexity of marginal A clean hydrogen credit, called 45V, will provide up to $3 per kilogram in tax credits after adjusting for lifecycle greenhouse gas (GHG) emissions and producers compliance with prevailing wage and apprenticeship requirements. The IRA also significantly increases the level of the tax credit for carbon oxide sequestration. One of those is advanced manufacturing, which includes tax credits for investments related to industrial or
