United States: It's Elemental: Hydrogen Tax Incentives To Fuel The Energy Transition - Part I

Roughly 10 million metric tons of hydrogen are produced every year in the United States, enough to power 20 to 30 million cars or 5 to 8 million homes.¹ Yet this hydrogen production is used primarily not to power cars or homes but to refine petroleum, produce fertilizer, and treat metals.² Transitioning to a ''hydrogen economy'' - the vision of an economy that relies on hydrogen as the low-carbon energy source for fuel, vehicle power, and energy storage - is going to take significant investment in hydrogen technology, facilities, equipment and infrastructure.

Around the globe, measures to address climate change focus on the reduction of carbon emissions. Hydrogen produced through low-carbon means offers a solution that is expected to drive significant growth in hydrogen projects in the coming decades. The EU and its member countries, Australia, Canada, and Japan have all developed national strategies to stimulate investment in low-carbon hydrogen production.³ The development of policies supporting hydrogen investment, including tax incentives, is similarly moving to center stage in the United States. The Biden Administration's recent proposal to increase infrastructure investment contained multiple references to hydrogen development. It has become clear that the retention and expansion of tax incentives for hydrogen will be an essential part of U.S. climate change measures.

This article is presented in two parts. This Part I will first provide some background information regarding hydrogen production and projects to set the stage for a discussion of hydrogen tax incentives. It will then describe existing federal tax incentives supporting hydrogen development in the United States. Part II, which will be published in coming weeks, will provide a description of certain proposed federal tax legislation intended to affect hydrogen investment. It will offer some commentary on the role of tax incentives in transitioning to the hydrogen economy, including a comparison to the role such incentives have played in stimulating investment in renewable energy sources such as wind and solar. Part II will also describe existing state tax incentives supporting hydrogen developmen

HYDROGEN PRODUCTION AND PRODUCTS

Hydrogen is not found in pure form on Earth, so it must be produced; primarily it is currently produced from natural gas, but it can also be produced from biomass, alcohols or water. Regardless of the source, the conversion of such compounds into hydrogen takes energy. The carbon footprint of hydrogen therefore depends on the nature of the energy used to produce it, and hydrogen is generally categorized by type of production - its ''color,'' as described below.

It is also important to recognize that hydrogen is not an energy source itself, such as wind. Instead, hydrogen functions as an energy carrier or energy storage medium. In fact, the ability of hydrogen to store renewable energy from intermittent sources, such as wind and solar sources, is viewed as a key element of the role it can play in decarbonization efforts (as illustrated, for example, by the Mitsubishi and Magnum Developments Advanced Clean Energy Storage project, described below).⁴

Hydrogen fuel cells combine hydrogen and oxygen in an electrochemical reaction to generate electricity. Thus, fuel cells are used to convert hydrogen into electricity, which then can power homes or power a vehicle. That is why policies and incentives for hydrogen investment are spoken of almost synonymously with policies and incentives for fuel cells and the tax incentives that we describe below include tax provisions related to fuel cells specifically.

The Colors of Hydrogen

All discussions of hydrogen projects inevitably reference the ''color'' of the hydrogen, as a shorthand for describing the method of production of the hydrogen.

We present here a quick guide:

Green Hydrogen: produced from the electrolysis of water using electricity from renewable sources, such as wind, solar or hydropower. The system that produces hydrogen is referred to as an ''electrolyzer.''

Blue Hydrogen: produced from natural gas with the carbon oxide by-product of such production, rather than being emitted, being captured and sequestered

Grey Hydrogen: produced in the same manner as blue hydrogen but the carbon oxide by-product is emitted.⁵

While ''green'' hydrogen is the lowest-carbon technology currently being widely considered, the path toward developing a hydrogen economy will likely include incentivizing all types of hydrogen-including the much cheaper ''grey'' hydrogen-in order to develop the required infrastructure⁶.

Obviously, the color of the hydrogen molecule itself does not vary; the hydrogen molecules are entirely fungible regardless of their method of production or the carbon footprint of that method of production (the ''color''). As a result, increasing attention is being paid to the means by which the source of hydrogen will be verified, tagged, certified or credited.⁷

Recently-Announced U.S. Hydrogen Projects

In recent years there has been a significant increase in the initiation of hydrogen projects in the United States. To help frame the discussion regarding the role that tax incentives play in the development of hydrogen projects, we list below several recent examples:

• In May 2019, Mitsubishi Hitachi Power Systems and Magnum Development announced an initiative to launch their Advanced Clean Energy Storage project in central Utah. The initiative will develop 1,000 megawatts of 100% clean energy storage, including storage of green hydrogen. The project will utilize new gas turbine technology that enables a mixture of hydrogen and natural gas to produce power with lower carbon emissions. The project aims to use 100% green hydrogen as a fuel source with the result that the turbines produce electricity with zero carbon emissions.⁸
• A green hydrogen project was launched in California in May 2020 by the global energy company SGH2.⁹ The facility in Lancaster, California will be able to produce up to 11,000 kilograms of green hydrogen per day using a proprietary biogenic waste gasification technology, pursuant to which it gasifies plastic, paper and other waste to produce hydrogen it describes as ''greener than green'' because it uses no externally sourced energy and avoids more carbon dioxide emissions than green hydrogen from renewables.¹⁰
• A $10.8 million project to integrate hydrogen storage, fuel cells and fuel cell refueling property began in September 2020 through a partnership between Frontier Energy, the University of Texas, and the Department of Energy, known as H2@ Scale.¹¹ The UT-Austin campus will host a project integrating commercial hydrogen production, distribution, storage, and use.¹² The hydrogen power will power a stationary fuel cell and supply a hydrogen station with fuel for a fleet of hydrogen fuel cell vehicles.¹³

Footnotes

1 Department of Energy, Office of Energy Efficiency and Renewable Energy, https://www.energy.gov/eere/fuelcells/h2scale.

2 Energy Information Agency,https://www.eia.gov/ energyexplained/hydrogen/use-of-hydrogen.php.

3 See Appendix for a summary of some of these strategies.

4 See text at Note 8, below.

5 Other colors sometimes referenced include black (coal-fired), white (powered by electricity from the grid, not renewable power), pink (nuclear-powered), brown (coal gasification) and turquoise (pyrolysis with a solid carbon by-product).

6 See Special Committee on the Climate Crisis, The Case for Climate Action: Building a Clean Economy for the American People 36 (Aug. 25, 2020).

7 How will buyers know they are getting hydrogen produced by one method versus another and does it matter whether they are getting the molecules produced by a certain method or is it sufficient that the seller produced some molecules by that method even if those were not the molecules transferred to the buyer? These questions tare receiving increasing attention as policymakers consider how to best support the greenest hydrogen production methods. See Akane Okutsu, Saudi Aramco Bets on AmmoniaHydrogen Business with Japan, Nikkei Asia (2021); Dr. Thomas Oberst, Tuv Sud Provides Green Hydrogen Certification, TUV 500 (2020).

8 Magnum Energy: World's Largest Renewable Energy Storage Project Announced in Utah (May 30, 2019), https:// magnumdev.com/. The announcement explains that there are times of day when demand for electricity is lower than the production of renewable power, which leads to curtailment of renewable generation and negative electricity pricing. Therefore, the goal of the project is to store excess power for later use.

9 Christian Heartquist, World's Largest Green Hydrogen Project to Launch in California, Businesswire (2020).

10 See Note 9, above.

11 See Darrel Proctor, DOE-Backed Hydrogen Project Underway in Texas, Power (2020).

12 See Note 11, above.

13 See Note 11, above.

Co-authored by Thomas Holmberg, Co-Chair of the Hydrogen Practice Group at Baker Botts LLP

To read the full article click here

Originally Published by Bloomberg Tax