Proposed US tax credit rules will keep green hydrogen expensive and hinder sector growth, warns Fitch Ratings
Credit rating agency warns that ‘three pillars’ of additionality, time-matching and geographic correlation will come with increased risk and project costs
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The credit rating agency warns that the requirement for “additionality” — ie, new renewables projects — means that developers will either have to put extra capital toward building their own power supply, or work with third parties to build and operate new zero-carbon generators, “which elevates counterparty risk”.
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.
The credit rating agency also warns: “Projects supplied with solar energy would not be able to produce during overnight hours and would see capacity factors ramp down during the day. A hydrogen project may need to rely on two or more solar projects to acquire sufficient energy to operate at maximum capacity during daylight hours.”
The credit rating agency warns that additionality means that developers will either have to put extra capital toward building their own power supply, or work with third-parties to build and operate new zero-carbon generators, “which elevates counterparty risk”.
The credit rating agency also warns: “Projects supplied with solar energy would not be able to produce during overnight hours and would see capacity factors ramp down during the day. A hydrogen project may need to rely on two or more solar projects to acquire sufficient energy to operate at maximum capacity during daylight hours.”
“New pipeline networks will add to project scope, costs, and timelines, all elevating completion risk,” Fitch notes.
The agency also warns that water could be a potential concern when it comes to location. “Even if large volumes of water are available at a favorable renewable energy site, longer-term water availability and cost to support forecast production are key credit concerns, particularly for projects in areas with stressed water supply such as Texas and California.”
Fitch argues that all of these extra costs mean that the “revenue/expense gap is likely to persist” and limit how much credit developers can access, “absent offtakers willing to pay a much higher price, developers willing to put in a lot more equity, or final policy rules that ease restrictions on energy supply”.
| Emissions intensity (kgCO2e/kgH2) | Maximum tax credit ($/kgH2) |
| 0-0.45 | $3.00 |
| 0.45-1.5 | $1.00 |
| 1.5-2.5 | $0.75 |
| 2.5-4 | $0.60 |