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

Thomas Gerrity, head of power-to-X Americas at Orsted, speaking at CERAWeek in March.
Thomas Gerrity, head of power-to-X Americas at Orsted, speaking at CERAWeek in March.Photo: Emil T. Lippe/CERAWeek

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.

Stay ahead on hydrogen with our free newsletter

Keep up with the latest developments in the international hydrogen industry with the free Accelerate Hydrogen newsletter. Sign up now for an unbiased, clear-sighted view of the fast-growing hydrogen sector.
Sign up now

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.

However, like Fortescue, Orsted calls for the GREET model — a method to calculate lifecycle emissions from an H2 project — to be locked in from when a project starts construction, rather than potentially disqualifying projects following an update.

“That risk exposure is untenable for investors or financial institutions, which will prevent projects being built,” Gerrity said.

(Copyright)
Published 27 March 2024, 08:15Updated 27 March 2024, 08:15