This story was updated at 11:47 a.m. EST.
The Treasury Department’s proposed tax rules for “clean” hydrogen have sparked an internal dispute in the Biden administration.
The Department of Energy is pushing Treasury to relax the rules to give the industry time to embark on a massive expansion, according to three people familiar with the discussions.
DOE officials are concerned that the tax guidance proposed in December will hamstring their department’s hydrogen initiatives, including a $7 billion program to create regional hydrogen production hubs, said the people who have worked directly with DOE staffers on hydrogen policy.
The hydrogen credit — officially referred to as 45V — is a major part of the Biden administration’s climate agenda, which views the fuel as a clean source to decarbonize sectors of the economy such as heavy industry. The credit, which was created by the 2022 Inflation Reduction Act, will directly impact how much hydrogen the U.S. produces and the financial bottom line for many companies.
The department has been publicly supportive of the existing draft guidance. But DOE officials pushed for Treasury to adopt less stringent guidance before it was issued in December, said the three people, all of whom were granted anonymity to speak freely about the credit. Two of the people said DOE officials have continued to press for different rules in 2024.
One of the proposed rules — known as “additionality” — would require hydrogen made from electricity to use verified new low-carbon energy sources like solar farms.
“Their starting point is any form of additionality will limit the amount of available hydrogen, which in turn reduces the possibility of a hydrogen economy actually starting,” said one of the people familiar with DOE’s hydrogen discussions.
Now, the administration is working to finalize its tax guidance after a comment window closed Monday. The more relaxed rules that DOE advocated for, according to the three people granted anonymity, would make it easier to produce hydrogen with tax breaks in the U.S.
Environmentalists say strict rules that consider additionality are critical to ensure hydrogen is a low-carbon climate solution. The administration had received more than 29,000 comments on the proposal as of Wednesday.
“Treasury has requested public comment on key issues, and will consider all comments in developing final regulations,” said Treasury spokesperson Ashley Schapitl in an email Thursday.
She did not address questions about what advice DOE has given Treasury on proposed tax regulations or how closely the two agencies are continuing to work together on the issue.
“Treasury’s proposed rules reflect months of interagency policy work and advice, including from the Department of Energy, to ensure that the United States can unlock significant opportunities for domestic hydrogen,” DOE said in a statement in response to questions for this story.
DOE did not directly address whether it is seeking changes to the hydrogen tax guidance.
The department has tasked the EFI Foundation, a think tank run by former Obama administration Energy Secretary Ernest Moniz, with developing a program to ensure the clean hydrogen that is produced by the hubs is actually purchased on the market, also known as “offtake.”
David Crane, DOE undersecretary for infrastructure, recently downplayed the influence of the department’s stance on proposed clean hydrogen tax credit guidance, considering it’s coming from Treasury.
“I’m told when a rule goes from draft to final, what the DOE thinks doesn’t matter anymore,” he told reporters last week. “I’m just out there working with hubs and working on offtake and things like that.”
A person familiar with DOE’s hydrogen position said the department is opposed to hourly matching rules, which require hydrogen to be made in the same hour as clean electricity is generated starting in 2028.
“If the goal is to launch a hydrogen economy as quickly as possible, hourly matching will inhibit that,” said the person.
Another person who was granted anonymity said DOE has pushed for grandfathering, which would allow some of the first hydrogen projects to not have to meet stricter tax rules to receive subsidies.
In a December white paper, DOE said the proposed rules are needed to address the impacts of a hydrogen producer’s load on grid greenhouse gas emissions.
Without the rules, “there is a strong likelihood that the hydrogen production would in many cases significantly increase induced grid GHG emissions beyond allowable levels” for the hydrogen tax credit, the department said.
Environmentalists praised Treasury’s initial proposal for ensuring that hydrogen made from electricity has low to zero carbon emissions. However, it caused an uproar among most hydrogen producers, who say the rules will hamper investment. DOE’s private concerns with Treasury’s tax rules align the department with anxious hydrogen producers.
Public comments
Leaders of all seven of DOE’s hydrogen hubs signed a joint letter Monday calling on Treasury to revise its tax rules without offering specific recommendations. The hubs argued that proposed regulations would harm their projects, putting potential jobs and emissions reductions at risk.
The letter aligns the hubs with prominent industry groups that have called for Treasury to ease final regulations before the comment period closed.
“Proposed regulations are overly restrictive for specific production pathways and de facto exclude other commercially viable clean production pathways,” said Hydrogen Forward, a coalition of companies across the hydrogen supply chain, in a filing with Treasury.
The coalition said that proposed rules would raise the cost of and delay projects related to hydrogen made from renewables. It also argued that hydrogen made from nuclear and hydropower, low-carbon energy sources, would effectively be ineligible for the tax subsidy.
Comments from the Fuel Cell and Hydrogen Energy Association, a hydrogen trade group, expressed similar concerns. The group wrote that Treasury should not require additionality and hourly time matching, adding that if the department keeps those provisions, they should not go into effect until 2032. Proposed rules would implement additionality immediately and hourly time matching in 2028.
The American Clean Power Association homed in on Treasury’s hourly time-matching proposal in a letter, arguing that it would increase the cost of producing hydrogen made from renewables. ACP cited research it commissioned from Wood Mackenzie finding that ACP’s proposal to delay hourly time matching to 2032 is more beneficial to growing the hydrogen industry in its letter.
In addition to industry groups, the top Republican on the Senate Energy and Public Works Committee, Sen. Shelley Moore Capito of West Virginia, urged Treasury to relax its rules.
The “guidance includes overly burdensome requirements that will stifle the capital-intensive investments necessary to develop the sector, regardless of the method used to produce the hydrogen,” Capito told Treasury Secretary Janet Yellen in a letter.
The Democratic governors of California, Oregon and Washington called on Treasury to develop “an alternative compliance pathway for states with firm commitments to get to 100 percent clean electricity” in a letter. The three states have announced goals to have zero-carbon power account for 100 percent of the grid in the coming decades.
DOE Secretary Jennifer Granholm has sought to reassure the hydrogen community that the industry will take off. Last week, Granholm said she was bullish on DOE’s hydrogen hub program.
“We will be guaranteeing a certain price for the hydrogen, so that the hub itself can guarantee offtake,” Granholm said at a National Press Club event.
A person familiar with DOE’s deliberations said the department’s hydrogen advocacy has been “back burnered” because of the department’s recent pause on new approvals for liquefied natural gas exports.
Environmentalists also weighed in before the end of the comment period, urging Treasury to maintain and strengthen environmental protections despite intense pressure from industry.
“We urge the Treasury and IRS to ensure that the final rule maintains the rigor of this draft rule, while also addressing the loopholes,” wrote nonprofit Friends of the Earth US on behalf of dozens of environmental groups.
The coalition praised Treasury for including guardrails such as the requirement that certain types of hydrogen production must use new clean energy sources. The coalition also argued for Treasury to implement hourly time matching sooner than 2028. It cited a report by the nonprofit Center for Resource Solutions finding that six out of 10 U.S. electricity generation tracking systems will have the ability to perform hourly time matching by 2026.
The Natural Resources Defense Council similarly welcomed Treasury’s initial tax guidance but called for Treasury to reject proposals that would undermine climate goals. For example, the green group urged Treasury to not allow 5 to 10 percent of clean energy placed in service before 2023 to count for additionality.
“A broad 5-10 percent allowance for existing clean energy resources will result in significant induced grid emissions, in violation of the Inflation Reduction Act lifecycle emissions thresholds,” NRDC wrote.
The exception to the requirement that hydrogen must be made from new clean energy could either increase or decrease emissions, depending on how it is implemented, according to a study from the Rhodium Group.
The Clean Air Task Force echoed NRDC’s concern about allowing some existing clean energy to be used for hydrogen production in its letter. The task force added that Treasury should allow nuclear power plants that avoid shutting down by doing business with a hydrogen producer to receive tax credits if the facility passes one of two “economic tests.”
One of the tests would be for nuclear power plants to prove that they qualified for a separate zero-emission nuclear power production tax credit in two out of the last three years before they start producing hydrogen.
Reporter Brian Dabbs contributed.
