Orsted calls for compromise on clean hydrogen production tax credit rules
Renewables developer argues for 15% of project capacities exempted from shift to hourly matching if commissioned before 2032
Danish renewables developer Orsted “largely supports” the Treasury’s draft guidelines for the clean hydrogen production tax credit worth up to $3/kg, Thomas Gerrity, the firm’s head of power-to-X in the Americas, told a government hearing.
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However, the company is still calling for modifications that would support the take-off of the first projects —which he argued would struggle to secure financing under the current guidelines.
“Regarding time matching, Orsted is supportive of a transition from annual to hourly matching,” Gerrity said. However, he noted that without some level of grandfathering for early-mover projects, developers will have to design their facilities for hourly matching from the start.
“This is primarily because tax equity partners and financing institutions will not fund a project that will rely on the major technical, commercial and operational changes required to change a time matching paradigm during a project’s lifetime,” Gerrity added.
The shift from annual to hourly matching would mean fewer hours an electrolyser can operate, and therefore a drop in how much hydrogen can be produced.
“As early-mover projects are generally designed for specific offtakers, with constant hydrogen needs, a sudden output drop is not acceptable, and thus a project would need to add new electrolysis capacity,” Gerrity noted.
However, this would necessitate a pause in production, the procurement of extra land, and a second construction phase, as well as a change to how the facility is operated — requiring extra training, safety processes and staffing.
He also pointed out that commercial agreements for offtake or power supply would likely have to be negotiated for two phases, before and after hourly matching comes into force, or otherwise potentially not qualify from 2028 onward.
“Investors or project finance diligence, will not accept these risks to the project or tax credit qualification,” he argued, meaning facilities will be built for hourly matching from the start.
However, since the electrolyser market is “still in its infancy” and it is unclear whether technology to track renewable electricity matched to hydrogen production will even be available by 2028, Gerrity warned that a full shift to hourly matching by that year could be “too early”.
Instead, he called for a “more nuanced solution” than full grandfathering — which fellow green hydrogen project developer Fortescue has called for — which would see 15% of capacity from projects that start construction before 2028 and come on line before 2032 allowed to continue annual matching for the full ten-year tax credit payout period.
This is because Orsted calculates that allowing 15% of capacity to continue annual matching would allow 75% or more of the levelized cost of hydrogen achieved with 100% annual matching, while still keeping induced emissions from extra grid demand low.
“That risk exposure is untenable for investors or financial institutions, which will prevent projects being built,” Gerrity said.
(Copyright)Proposed US guidelines on green hydrogen production
The US Treasury's proposed guidelines on green hydrogen production, published in December, call for three requirements or "pillars" that will ensure H2 is truly green and will not lead to increased emissions: additionality, temporality, and deliverability.
“Additionality” means that the green hydrogen would have to produced from new renewables projects, so that they do not utilise existing clean electricity facilities that would otherwise help decarbonise the power grid.
For this pillar, the Treasury wants hydrogen producers to source their power from zero-carbon projects built within three years of the H2 project.
“Temporality” relates to how frequently producers would have to prove that their electrolysers have been powered by 100% renewable energy — usually hourly, weekly, monthly or annually — and therefore to what extent they can use grid electricity at times when the wind isn't blowing and the sun isn't shining, and then send the same anount of renewable energy back to the grid at a later date.
Here, the Treasury is calling for renewable power to matched on an annual basis up to 2028, and then hourly from then on.
"Deliverability" — or geographic correlation — relates to how physically close the hydrogen-producing electrolysers are to the source of renewable energy they use. Distances can be set to ensure that an electrolyser in, say, Texas, is not powered by solar panels in California through renewable energy credits, which in practice could mean that green power is sent to a grid that doesn't need it, with the electricity actually used by the electrolyser coming from fossil-fuel power plants.
The US Treasury wants green hydrogen projects to be within the same regional grid as the renewable energy projects powering them.