Feature
Sponsored
Hydrogen
Regulation

The fate of the hydrogen tax rules in a second Trump term

Many see the GOP's sweep as adding pressure on Treasury to loosen 45V green hydrogen guidance. But uncertainty persists.

|
Published
November 22, 2024
Listen to the episode on:
Apple Podcast LogoSpotify Logo

Image credit: Lisa Martine Jenkins

Image credit: Lisa Martine Jenkins

In its waning days, the Biden administration has unfinished business to wrap up for the nascent green hydrogen industry. On Wednesday, with 60 days to go, the Department of Energy announced an additional $2.2 billion in funding for two more hydrogen hubs, leaving only two, much smaller projects, awaiting final approval on federal funding.

Like the rest of the industry, however, the hubs are still waiting on a decision on exactly what types of hydrogen projects can be considered “green” — and thereby qualify for the valuable 45V production tax credit. That uncertainty has left the industry in limbo since the passage of the Inflation Reduction in 2022. And the Treasury Department’s release of proposed guidance last December did little to assuage it.

Those rules, which outlined a so-called “three pillars” approach to designating hydrogen projects as “green,” were met with immense pushback in the form of more than 30,000 public comments. They sparked tension in the industry between those that support stricter guidelines and those that want something that includes a wider range of projects.

And then, in June, the Supreme Court overturned the Chevron Doctrine, effectively stripping agencies like Treasury of their power to interpret laws like the IRA. In the wake of that ruling, the expected August release of final rules was delayed yet again. Most in the industry, already all too familiar with uncertainty, assumed the Biden administration was working to ensure the rules would be lawsuit-proof in the post-Chevron legal landscape. 

A Harris win on election day might have prompted the Biden administration to continue to take their time, perhaps even pushing the release of final rules to early next year. But instead Donald Trump won — and 45V drafters are facing an incoming majority that has long supported looser interpretations of that tax credit. 

As a result, those within the industry who are gunning to nix one or more of the proposed requirements are optimistic that the pressure of an incoming Trump administration may swing the final rules their way. (That’s a group that includes the leaders of all seven hydrogen hubs.) It’s a hope based on the assumption that the Biden administration would want to avoid having the tax credits tied up in court, possibly for years — and delaying commercialization as a result.

Driving toward certainty

Despite his promises to smash the Inflation Reduction act, the U.S. hydrogen industry isn’t too worried about Republicans sacrificing 45V entirely. Hydrogen has generally enjoyed bipartisan support, and developers and industry analysts alike are in agreement that the $3 per kilogram tax credit is not very vulnerable to the spending trade-offs likely to be negotiated in DC next year. 

A much more acute harm, as developers see it, is continued lack of guidance on the tax credit.

At this point, uncertainty is essentially the status quo for the nascent green hydrogen industry, explained Beth Deane, chief legal officer at electrolyzer manufacturer Electric Hydrogen, but she hopes that will soon change. The question, though, is how soon that certainty — which is required for projects to get built and for the industry to get off the ground — comes.

More flexible rules could provide more immediate clarity for the market, she said, given that they would be less likely to face a challenge by the incoming Trump administration.

“If rules come out before January that are palatable, which is possible given the signals the [Biden] administration has put out about flexibility, certainty would come very quickly,” Deane told Latitude Media.

Stricter rules, though, may not provide as much certainty. Not only would they face legal challenges from within the industry, but they could face pushback from the Trump administration, which could suspend implementation or even withdraw and re-write the guidance, Deane said.

But don’t expect those changes to come on day one. According to Power Brief CEO and founder Jason Clark, any Trump administration reaction to hypothetical strict rules is likely to take several months — and extend uncertainty even further. 

“Day one meetings in the Oval Office of the Trump administration are not on the three pillars of 45V guidance,” he said. And, by finalizing the guidance before a new administration comes in, the Biden team would ensure that changing or repealing it is much harder to do.

Making the pillars palatable

In the draft guidance released in December last year, the Treasury laid out rules designed to ensure that hydrogen projects minimize their own emissions.

The three pillars at the center of the debate around the guidance are hourly matching, deliverability, and additionality. Essentially, if the rules are finalized as drafted, electrolyzers must be powered by clean energy generated within the same hour it’s used, and within the same region as the hydrogen project. All of that electricity must be generated by clean energy projects that come online within 36 months of the hydrogen facility itself.

It’s the hourly matching and additionality requirements that have prompted the most pushback from developers — one of whom reported hearing from Department of Energy officials that the additionality pillar is “definitely dead.”

Listen to the episode on:
Apple Podcast LogoSpotify Logo
If rules come out before January that are palatable...certainty would come very quickly.
Beth Deane, chief legal officer at electrolyzer manufacturer Electric Hydrogen

Jacob Susman, CEO and founder of developer Ambient Fuels, is hopeful that the administration will ultimately release rules that are in line with a proposal submitted by the American Clean Power Association, which calls for hourly matching to be phased in more slowly, applying to projects that start construction in 2029 and beyond. That proposal would also allow hydrogen developers to draw electricity from clean energy projects facing “chronic curtailment” or excess power.

“Republican operatives themselves are saying that [the ACP position] is a position that the next administration can probably get comfortable with,” Susman told Latitude Media. That’s key, because lawsuits opposing “overly restrictive rules” would effectively tie up the credits in court for months or years.

“And that’s not good for anybody,” he said “It will mean that well-meaning policy that they thought they were putting out around these tax credits got even further from being realized because companies like ours are simply unable to proceed with any comfort around the credits while we’re waiting for challenges to be litigated.”

But the outcome of the election hasn’t erased the tension within the hydrogen industry around the outcome of 45V. Instead, advocates of strict guidance are now hopeful that the fall of the Chevron doctrine — which Susman expects will empower those looking to challenge the three pillars — could also be leveraged to ensure maximum emissions avoidance.

Dan Esposito, a senior policy analyst at Energy Innovation, said the proposed rules are closely aligned with the emissions intensity thresholds laid out in the statute, meaning a stricter final guidance could actually stand up better in court. Essentially, he thinks 45V lawsuits are almost inevitable. 

“There’s some players that would not have a way to make clean hydrogen if not for loosening the rules, so maybe they’d go for it regardless," he explained. “From a climate or environmental standpoint, you don’t have a lot to lose by contesting a set of rules that would build out a highly polluting industry, which would be the case if the 45V rules were weakened.”

The business case for stringency

There’s another reason Esposito and other proponents of the three pillars are hopeful the strict guidance might be upheld under the new administration: more flexible guidelines means the credits would become more expensive at a time when the government will be looking to cut spending.

“Loosening rules would blow up spending in a huge way,” Esposito explained. “Once you open the floodgates on all sorts of projects that shouldn’t qualify but end up getting funded anyway, it’s on the order of tens to hundreds of billions of dollars in annual spending.”

WHITE PAPER
How VPPs Support Growing Capacity Needs

Brought to you by Uplight: Learn how virtual power plants differ from traditional demand response programs and how utilities can unlock grid flexibility.

DOWNLOAD NOW
WHITE PAPER
How VPPs Support Growing Capacity Needs

Brought to you by Uplight: Learn how virtual power plants differ from traditional demand response programs and how utilities can unlock grid flexibility.

DOWNLOAD NOW
WHITE PAPER
How VPPs Support Growing Capacity Needs

Brought to you by Uplight: Learn how virtual power plants differ from traditional demand response programs and how utilities can unlock grid flexibility.

DOWNLOAD NOW
WHITE PAPER
How VPPs Support Growing Capacity Needs

Brought to you by Uplight: Learn how virtual power plants differ from traditional demand response programs and how utilities can unlock grid flexibility.

DOWNLOAD NOW
Get in-depth coverage of the energy transition with Latitude Media newsletters

And Energy Innovation is also concerned that looser rules would build an industry that can’t outlive the tax credits. If domestic hydrogen can’t “wean itself off of subsidies,” the risk is “never-ending spending,” Esposito said.

Even if the U.S. finalizes looser rules, Esposito said, the domestic market is still young — so in the near term, much of the offtake will likely be in Europe. The market’s strong emissions rules could force U.S. producers who want to take advantage to follow guidelines that are ultimately quite close to Treasury’s initial proposal, he added.

That said, regardless of which way the final rules come down, getting them out as soon as possible is the top priority for most of the industry.

“It’s possible that these conversations we’ve been having about whether to weaken or strengthen the rules…are going to continue for a while,” Esposito said. “But…the longer [the guidance is] out there, the more the industry is going to want to say ‘please let this just be so we can get moving on shovels in the dirt.’”

Susman, at Ambient, said hydrogen may be able to “keep its collective head down” during the second Trump administration, even as other parts of the renewables sector become more of a target, almost regardless of final rules.

“We don’t think they’re coming for hydrogen first,” he added. “That said, it is mission critical to the success of this sector that [Treasury] produce a final set of rules by the end of the year.”

No items found.