'US plans for hourly matching would drive up both the cost of green hydrogen production and emissions': WoodMac
Analysis commissioned by renewables group argues that average carbon intensity could increase as more blue hydrogen projects would come on line instead
Stay ahead on hydrogen with our free newsletter
This is according to Wood Mackenzie analysis commissioned by the American Clean Power Association (ACP), a renewables trade group that has been lobbying for changes to the Treasury Department’s draft guidelines that were unveiled at the end of last year.
The hourly-matching rule has come under fire for potentially driving up the cost of green hydrogen production by vastly reducing the number of hours an electrolyser can run, thus increasing the overall cost of hydrogen production over the lifetime of the asset.
As such, a number of industry voices have warned that the cost of production will be increased beyond what offtakers are willing to pay for — and therefore prevent projects from ever getting off the ground and delaying industrial switching to cleaner feedstocks and fuels.
WoodMac estimates in its analysis that the cost of green hydrogen delivered to the end user would have to fall between $1-2/kg to be competitive with fossil fuels used in medium- or heavy-duty transport and industry.
But it calculates that in 2032 — even with the full $3/kg tax credit and expected price reductions in electrolysers and renewables — the fewer hours a plant can run would mean the levelised cost of producing green hydrogen in California or Texas with hourly matching would range from $3.30-7.40/kg.
The research firm also notes that the main drivers for levelised costs of hydrogen are capacity factor and electricity price, with relative capex only 10-20% lower for alkaline electrolysers compared to PEM equipment.
Meanwhile, blue hydrogen without a PTC would cost between $2.10-2.22/kg, dropping to $1.44-1.57/kg if producers access the 45Q tax credit for carbon capture and sequestration, which offers $85 per tonne of CO2 permanently stored.
Details of the US hydrogen tax credit
The $433bn Inflation Reduction Act of 2022 creates a tax credit that would pay clean hydrogen producers up to $3 per kilogram (adjusted for inflation).
The size of the tax credits available to US clean hydrogen producers depends on the lifecycle greenhouse gas (GHG) emissions of each project, with a sliding scale depending on lifecycle emissions — measured in carbon dioxide-equivalent (CO2e) — of the H2 produced, including upstream methane emissions.
Hydrogen manufactured with less than 0.45kg of lifecycle CO2e emissions per kg of H2 would receive 100% of the credit, followed by 33.4% for 0.45-1.5kgCO2e/kgH2, 25% for 1.5-2.5kg and 20% for 2.5-4kg.
The lifecycle emissions would have to be verified “by an unrelated third party”, and only projects that start construction before 2033 would qualify.
However, WoodMac calculates that while annual matching would decrease the delivered cost of hydrogen by 22% in Texas and 31% in California in 2028, it would still not drive prices into the $1-2/kg range.
With annual matching for projects starting construction before 2029, as proposed by the ACP, green hydrogen made in Texas and California would still cost $2.65/kg and $5.37/kg, respectively, in 2032, the analyst says, suggesting that without additional subsidies even more time may be needed for electrolyser and renewable electricity prices to fall far enough to achieve cost parity.
The ACP itself proposes a ten-year window for annual matching as long as projects started construction before 2029 and operations before 2033, while keeping rules on additionality and geographical correlation in place.
Developers that had started construction or operations on their facilities any later would have to switch to hourly matching from 2033 onwards under the ACP’s suggested guidelines.
More blue than green
Blue hydrogen producers can benefit from not only the 45V clean hydrogen production tax credit (albeit at a low rate), but also the 45Q carbon capture and storage tax credit if their emissions intensity is too high to qualify for the PTC.
Blue hydrogen proponents have had their own criticisms of the Treasury’s guidelines for the 45V, with comments arguing that the method of calculating greenhouse gas emissions uses a blanket assumption for upstream methane emissions regardless of how polluting each project’s source of natural gas actually is.
Additionality, time-matching and geographic correlation
“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.
“Time-matching", or "temporal correlation”, 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.
"Geographic correlation" refers to how close the hydrogen-producing electrolyser is to the source of renewable energy it uses. 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.
All three rules would prevent fossil-powered grid electricity being used directly or indirectly to produce "green hydrogen".