Maximizing blue hydrogen production tax credits

Blue Hydrogen projects can qualify for millions of dollars in additional tax credits by addressing upstream emissions from feedstock and power generation

Nishadi Davis, PE

The Drive to Net Zero

It has been just over a year since the Inflation Reduction Act (IRA) was signed into law, containing the largest investment for climate action in history. The IRA allocates over $370 billion dollars for clean energy advancement through loans, grants, and tax credits to further the United States’ energy transition and energy security goals. One area of interest to further these goals is hydrogen.

Hydrogen plays a pivotal role in energy transition for several reasons. It is a versatile clean energy carrier that can be produced using renewable energy resources such as wind, water and solar, as well as conventional energy sources such as natural gas. Additionally, hydrogen serves as a form of energy storage and can help address the intermittency of renewable sources by storing excess energy during times of surplus and releasing that energy when there is a shortage of renewable power available, thereby increasing grid stability. Finally, hydrogen, on a mass basis, is an   energy dense fuel  that does not produce any carbon dioxide when combusted. This is beneficial in heavy industry, where hydrogen can replace or be blended with conventional fuels in situations where it is a challenge to electrify directly.

Because of the important role that hydrogen plays in energy transition, there has been an incredible amount of money allocated to ensuring that both production and consumption are heavily incentivized. The Department of Energy (DOE) plans to award up to $8 billion in grant funding to develop several hydrogen hubs across the United States. Additionally, the IRA introduced a new 10-year production tax credit incentive for clean hydrogen production: Section 45V.

IRA 45V Overview

Though a year has passed since the IRA was implemented, full guidance from the Treasury Department for 45V has not yet been released. At a high level, we do however know that the production tax credit will be paid out based on the produced hydrogen’s carbon intensity (CI), with a bonus credit that increases production credits five-fold if developers meet prevailing wage and apprenticeship requirements. Taking this bonus into account, the maximum credit amounts break down as shown in the table below.

While the carbon intensity brackets have been defined in the initial IRA legislation, Treasury has yet to release additional guidance or regulations for calculating the life cycle greenhouse gas (GHG)   emissions that will be used to calculate the carbon intensity of the hydrogen.

Table 1: Hydrogen Production Tax Credit Brackets

Life Cycle Emissions and Carbon Intensity

Depending on the lifecycle emission    boundaries, a life cycle assessment (LCA) can be described as “gate-to-gate,” “cradle-to-gate” or “cradle-to-grave" emissions, with the latter term encompassing the total amount of greenhouse gases emitted throughout the entire life cycle of a product, process or system. It considers all stages that a product progresses through, from raw material extraction, processing and transportation to end use and end-of-life disposal or recycling. The expected system boundary for 45V is “cradle-to-gate.” This boundary is similar to the “cradle-to-grave” boundary, but it does not consider the emissions impact a product has once it leaves the manufacturer’s facility, so emissions associated with transportation from the manufacturer’s production facility to the final destination, and emissions associated with the product’s use, are not considered.

Carbon intensity normalizes emissions produced, typically measured in carbon dioxide equivalent (CO₂e), to a unit of specific activity, input or output. In the case of 45V, the carbon intensity is measured in kilograms of CO₂e per kilogram of hydrogen (Kg CO₂e/Kg H₂).

Hydrogen Production Pathways

There are several different pathways, with varying carbon intensities, to produce hydrogen and each production pathway has been anointed with a color classification. Green hydrogen uses renewable energy sources to create electricity that is then used to split water into hydrogen and oxygen atoms through a process called electrolysis.  Electrolysis was discovered over two centuries ago but has not been an economical pathway to producing hydrogen because it is a very energy intensive process. With falling renewable electricity prices  and the drive towards a net zero energy economy however, there is a plethora of research  in this space as companies begin to scale up green hydrogen production in order to take advantage of government tax incentives.

Hydrogen production from fossil fuel sources, such as natural gas, has been around for many decades and is the most economical hydrogen production pathway to date. Currently, the majority of commercial hydrogen is produced from methane that is typically sourced from natural gas. While economical, this process emits a significant amount of carbon dioxide (CO₂) and is known as grey hydrogen. It is however possible to capture the CO₂ in the production phase before it is emitted into the atmosphere. When this is done, the hydrogen is known as blue hydrogen.

Blue Hydrogen GHG Emissions

Blue hydrogen is primarily produced by steam methane reforming (SMR), or auto thermal reforming (ATR) with a carbon capture unit downstream of the hydrogen production process.

Figure 1: Blue Hydrogen Production Process

In both steam methane reforming and autothermal reforming, the associated chemical reactions produce about the same levels of GHG emissions. These process emissions represent a significant share of the total GHG emissions of hydrogen produced through fossil fuels. With the latest carbon capture technologies, CO₂ capture rates of 95%  and above may be achieved. This reduces the GHG emissions, and therefore overall CI, inherent to the blue hydrogen production process. However, to meet the top tiers of 45V credits, other well-to-gate reductions must be accomplished.

The diagram below shows well-to-gate emissions associated with grey hydrogen production. There are three primary emission sources that contribute to the overall CI: natural gas extraction and transport emissions, facility hydrogen production emissions, and emissions associated with power production. The International Energy Agency (IEA) estimates the carbon intensity of grey hydrogen produced from unabated natural gas to be in the range of 10-14 Kg CO₂e/Kg H₂¹ which does not qualify its usage for any government tax incentives.

Figure 2: Well-to-Gate Grey Hydrogen Emissions

Direct emissions released in the hydrogen production process from steam methane reforming are around 9 Kg CO₂e/Kg H₂¹ and can be minimized with carbon capture as shown in Figure 3 below.

Figure 3: Well-to-Gate Blue Hydrogen Emissions

The IEA estimates 93% CO₂ capture from direct emissions sources within a SMR facility can reduce the carbon intensity within the production facility to 0.7 KgCO₂/Kg H_2, bringing the total CI of the blue hydrogen to a range of 1.5-6.2 Kg CO₂e/KgH_2. To achieve the lower end of this range, upstream emissions must be minimized accordingly.

Blue Hydrogen Decarbonization Opportunities

The table below summarizes the emissions sources that must be considered when computing the carbon intensity of blue hydrogen

Table 2: Blue Hydrogen Carbon Intensity Scenarios

Using this table, we can calculate the tax credits that can be earned. Natural gas and electricity production make up a significant portion of the overall blue hydrogen carbon intensity. The average CI of natural gas in the United States is 2.49 Kg CO₂e/Kg H₂². This can be reduced to 2.25 Kg CO₂e/Kg H₂ when removing the emissions associated with the distribution networks that hydrogen plants typically do not utilize. The median carbon intensity for electricity in the US is .7 Kg CO₂e/Kg H₂³ and has been used in place of the mean.

Scenario A:

Using the average CI for US natural gas  and the median CI for electricity in the US, the total carbon intensity is calculated to be 3.4 Kg CO₂e/Kg H₂ which correlates to the lowest tax credit bracket of $0.60/kg H₂.

Scenario B:

Next, let us consider a scenario that sources differentiated natural gas with a methane leak rate of 0.16%² and a CI of 0.8 Kg CO₂e/Kg H₂.In this scenario the CI of the blue hydrogen is reduced to 1.95 Kg CO₂e/Kg H₂ which qualifies for the $0.75/kg H₂ tax credit.

Scenario C:

Finally, let us reduce the carbon intensity of our electricity by switching to renewable power. Our CI in this final scenario becomes 1.28 Kg CO₂e/Kg H₂ and qualifies for the $1.00/Kg H₂ production tax credit.

The table below summarizes what the monetary implications of the above scenarios are for a blue hydrogen plant producing 1000 MTPD H₂ with an 85% efficiency rate.

Table 3: Tax Credit Implications for 1000MTPD H₂ Production Facility

The table above demonstrates that a blue hydrogen facility producing 1000 MTPD H₂ can generate $292,000,000 per year in tax credits if electricity and natural gas are strategically sourced. This is an increase of over $116,000,000  per year compared to the base credit rate. Conversely, facilities that do not assess their emissions associated with natural gas and power could fall outside of the base credit amount if their electricity and feedstock are procured from high emitting sources.

It is imperative that an emissions assessment be carried out to determine the actual CI associated with any specific production facility. New projects should conduct these assessments beginning in the concept phase so that decisions can be made in early design stages to minimize carbon footprint in the most economical way. As the project continues to develop, the emissions assessment should be updated with new and specific information to ensure that the project stays on track to meet carbon intensity targets.

Conclusion

Although most of the anticipation for the full 45V guidance is focused on green hydrogen production emissions accounting, it is important to recognize that regulations on upstream emissions accounting will also have a major impact on blue hydrogen. As demonstrated in this article, emissions reductions in blue hydrogen feedstock and electricity usage can result in hundreds of millions of dollars in tax credits. Additionally, incentivizing emissions reductions in this way furthers the United States’ goal of reducing methane emissions in upstream and midstream assets to reach net zero targets by 2050.