When the Treasury Department released long-awaited proposed guidance for the clean hydrogen production credit, the industry hoped it would provide the certainty needed to push deals and projects through to fruition.
But in the two months since, anxiety has crept in. Many are concerned that the 45V guidelines, which essentially determine what hydrogen can be considered “clean” or “green”, may have the unintended effect of hampering the domestic green hydrogen market’s liftoff.
Jason Munster, who led the 45V analysis for DOE’s Office of Clean Energy Demonstrations and who now runs a hydrogen consultancy, said that the proposed guidance will mean that very few green hydrogen projects in the works today will be cost competitive.
“Making a project go forward is going to be a lot more complicated, and we’re not going to deploy at scale,” Munster told Latitude Media. “There are very few pathways to new players, new entrants, and new hydrogen offtakes this way.”
The vast majority of the green hydrogen project pipeline comprises projects that haven’t yet reached a final investment decision, or FID, Munster said. According to data from BloombergNEF, only around 9% of low-carbon hydrogen expected to be online by 2030 has an offtake agreement — of those agreements, only 23% are binding. The 45V guidance as written is going to drive up project cost, Munster added, which means that a lot of projects are going to fall apart, even those in later stages.
“I would expect that a significant number of projects that have hit FID are no longer going to move forward,” he said. “They’re looking at redesigning their system, downscaling their system, or canceling the project entirely.”
The hourly matching debate
The Biden administration has big goals for green hydrogen. DOE is pushing to bring down the cost to $1 per kilogram by 2031, and in October announced recipients of $7 billion in infrastructure law funding for clean hydrogen hubs. Plus, the International Energy Agency has called for 550 gigawatts of hydrogen electrolysis capacity by 2030, as part of its roadmap to net-zero emissions.
However, many in the industry are concerned that the 45V guidelines are essentially too much too soon, and will push those goals even further down the road. One key challenge to ensuring deals pencil out has been the proposal of an hourly matching requirement, which states that electrolysis must be powered by renewable energy produced that same hour. Essentially, when variable renewable energy isn’t available, electrolyzers would need to power down.
Proponents of hourly matching say the requirement would benefit the industry in the long-term, and will ensure that billions in federal tax credits aren’t going to projects that are adding emissions rather than removing them. But that requirement, though not entirely unexpected, comes with a number of complications that developers will need to address.
First, there’s the technical challenge; most electrolyzers on the market haven’t proven that they can deal with the fluctuations needed for hourly matching, explained BNEF hydrogen analyst Payal Kaur. And while there are a handful of solutions to that problem, it will mean an increase in project costs, she said, pointing to options like adding battery storage to projects or using more than one electrolyzer.
“We still have to model out quantitatively how these increases in costs will match up to the tax credit,” Kaur added. But she’s optimistic that, even with the inevitable increase in project costs, many projects will still see a benefit from the credit.
I would expect that a significant number of projects that have hit FID are no longer going to move forward. They’re looking at redesigning their system, downscaling their system, or canceling the project entirely.
Munster, for his part, said that technical challenge will hurt domestic electrolyzer manufacturers and prove a boon for Chinese makers, whose electrolyzers tend to be cheaper, though less efficient. If projects have to account for a significant amount of downtime anyway, downtime caused by lower-performing electrolyzers is less of a problem, he added.
“If regulations are causing you to have unpredictability anyway, why pay the extra money for a Western electrolyzer that is predictable?” Munster said. “At some point those foreign electrolyzers are going to cost, installed, half the price that ours do, because we’re not moving down that cost curve while they are.”
Janice Lin, founder and CEO of advisory firm Strategen and president of the Green Hydrogen Coalition, pointed to another potential issue facing developers in the United States: renewable energy certificate tracking. According to 2023 data from the Center for Resource Solutions, only three out of nine tracking systems currently have the ability to track hourly data. The timeline for other systems to implement hourly tracking ranges from one to five years, the report found.
“If we can’t track it today, how are we going to start contracting for this today?” Lin asked. “If you’re going to be required to do hourly matching by 2028, and six out of nine tracking systems can’t even do it, I really don’t know how you convince your investors that the numbers all work.”
The additionality puzzle
Munster said the hourly matching requirement would be less of an obstacle if another key element of the guidance, additionality, were more flexible. That requirement means that the electricity for green hydrogen production must come from generation that comes online within 36 months of the hydrogen facility, the goal being to ensure that the electrolysis isn’t pulling clean energy away from other, already-existing loads.
That essentially removes hydro and nuclear power from the running, Munster said.
“It really comes down to how difficult it is to put together a profile of power that allows you to operate 24/7,” he said. “There are very few cases in which you can produce hydrogen that’s renewable, and make it cost effective for reliable delivery without having 24/7 operations.”
In the future, once a domestic green hydrogen ecosystem is up and running and connective infrastructure is in place, an additionality requirement makes sense, he said: “But we’re not there yet. We’re not going to be there until 2030 at least, and it’s questionable we’ll ever get there with the trajectory we’re on now.”
Ultimately, Lin said that while the Treasury guidance is a great starting point and lays out some necessary requirements, it doesn’t take into account the current realities of project development.
“We’re kind of at the beginning with a green hydrogen economy, and we need a glide path to get these projects up and going, to get to a sufficient scale so we can start building needed shared infrastructure,” she said.
Building a green hydrogen economy
But not all green hydrogen developers are unhappy with the proposed guidelines.
Matt McMonagle, CEO and founder of green hydrogen developer NovoHydrogen, told Latitude Media that he is happy with the guidance, and had been building flexibility into projects far in advance to avoid any risk.
Novo’s portfolio is made up of a mix of grid-connected projects and those connected directly to wind and solar power, located largely in the U.S. The company is also a partner in two of DOE’s hydrogen hubs.
“We never assumed we were going to run 100% of the time,” McMonagle explained. Extensive optimization modeling showed that producing best-price green hydrogen couldn’t include paying peak or high-demand energy charges, he added: “We are full speed ahead with our projects.”
For a 20-year project, Novo estimates that the 45V tax credit will reduce the end cost of green hydrogen by $2.50 per kilogram, cutting it roughly in half.
All of Novo’s planned projects are scoped using polymer electrolyte membrane electrolyzers, which McMonagle said are more conducive to the variability of renewables than the alkaline electrolyzers that have been in use for decades.
“From a technical perspective, PEM is the most flexible,” he explained. PEM electrolyzers can be kept on “standby” at a lower temperature, and react more quickly, he added. A plant still has a continual load in the form of auxiliary systems, but it’s minor compared to the energy needs of running the plant 24/7, he said. (PEM electrolyzers have their challenges as well — they can be expensive to manufacture, and use some rare, expensive materials that are subject to price fluctuations.)
Major players in the hydrogen industry have also voiced support for the guidelines; in a December letter to Treasury Secretary Janet Yellen, a coalition including Hy Stor Energy, Air Products, CWP Global, and others urged skepticism against “claims that proposed strong guidance will kill the industry.” They specifically voiced support for the hourly matching requirement.
The signatories have a pipeline of more than 50GW of electrolyzer projects in the U.S., they said, which is “ample volume” to achieve electrolyzer cost reductions, spur investment, and ensure cost-competitiveness.
Of course, electrolysis isn’t the only way to make hydrogen — today, most hydrogen is produced using natural gas. The company Etch, for instance, is producing hydrogen from methane decomposition by stripping carbon from natural gas, leaving hydrogen fuel. That process, said CTO and founder Jonah Erlebacher, doesn’t require any water, and doesn’t create any carbon emissions. With these novel technologies in mind, Erlebacher said the 45V guidance shouldn’t pick a technology winner; instead, “it should pick a goal: hydrogen without emissions.”
The guidelines in their current form allow for newer tech to have a pathway to commercialization, but Erlebacher is concerned that the final guidance may be less conducive.
“If new technologies are nascent and coming up the pipeline, the rule writers should be very sensitive to that,” he said. “A solution might exist out there that’s still in its early stages, and rules should be structured in a way to foster those.”
Decision time
Ultimately, it would be a mistake for the green hydrogen industry to rely too heavily on 45V to fix its problems, said Kaur. Indeed, it still remains unclear when and if enough demand for the fuel will materialize.
“Offtake is pretty bleak globally in comparison to supply,” she said. “We need to see more demand-side incentives as well.”
Kaur pointed to tax credits issued in places like Colorado and Illinois as roadmaps that other states could follow. In fact, she anticipates most of the states involved with the regional hydrogen hubs will follow their lead later this year.
“There’s a lot of focus on 45V, but there are other moving parts as well that could help stimulate this industry,” she added.
It’s also important to consider the country’s position in the broader global hydrogen economy, said Lin. The 45V guidelines are potentially more strict than the parallel guidance in the European Union, which allows for some grandfathering, requires monthly matching through 2029, and doesn’t move to hourly matching until 2030.
For Munster, the real question for Treasury as it works through the thousands of comments it has received on the guidance, is whether the goal is to create a new hydrogen economy, or to replace existing hydrogen uses with something cleaner.
“Are we going to aim to make a hydrogen economy viable to address end uses that electrification alone can’t address?” he said. “Or are we going to play around with the notion of it and wait for China and the EU to get way ahead of us again?”
The clock is ticking on making that decision, he added. “We were the center of gravity for hydrogen, and with 45V as it is, we no longer are. The rest of the world is going to move ahead.”
