The Inflation Reduction Act contains tens of billions of dollars of subsidies meant to accelerate the growth of clean hydrogen. But what exactly counts as clean hydrogen? And who will be able to claim these subsidies? It's more complicated than it looks -- I dive into it with Rachel Fakhry of NRDC.
Thank you for this session. I am not an expert at all but I got the general ideas of all the permutations involved in scaling this energy source to scale and its drawbacks. But, overall I am encouraged by the discussion. Also, I would like to see the answer to Mark Norman's questions below. Thanks so much!
Where is the "production" calculated for the credit? Could a green hydrogen producer power their electrolyzer with on-site solar during the day, get paid for all that production, then use a portion of the hydrogen they've already been paid for as fuel to run a generator or fuel cell that powers the electrolyzer at night and also get paid for that production? Yes, I realize there would be big losses associated generating electricity from the hydrogen but it might pencil out if you were paying a negative price for your fuel. Ostensibly, the onsite green hydrogen electricity would meet the requirements of the 3 pillars.
The combustion efficiency of hydrogen is considerably lower than gasoline (I've seen as low as 20%, but that's probably a straight fuel swap rather than an engine meant to burn hydrogen), so you'd probably get less in terms of subsidy than you would with a proper off-take for the hydrogen. Adding a fuel cell generator would increase your CapEx and complexity (system risk) in order to double the conversion efficiency of a gasoline engine - that's probably also not worth the squeeze.
The subsidy is significant enough that this is a reasonable worry, but I think in practice the conversion costs cycle down too quickly for ongoing subsidy farming to be more favorable than just selling the hydrogen on the open market. That is, until we've saturated the market and then the subsidy should be withdrawn rather than support an ouroboros situation. I don't know that there is an automatic trigger for recognizing this limit and withdrawing this subsidy, or even if one can be sensibly crafted then one of the intents of policy is to create a market, both the supply and demand.
The key is there are no greenhouse gases released, only hydrogen and solid carbon (does not evaporate or melt) The solid carbon can be used in industrial processes (e.g. making tires) or stored in any convenient location. Does hydrogen made this way qualify as clean hydrogen? It seems from the wikipedia article that it does, but it is not being discussed here. Thank you for your thoughts about this.
Adam Tooze has just put out a substack article about Hydrogen, and I tried to put a link to your interview here as a comment to that article but comments are turned off, so let me do the opposite and give you a link to his article and see if you two can connect up. https://adamtooze.substack.com/p/carbon-notes-5-green-hydrogen-the
Pre-existing is a curious concept in our real world of significant interconnection queues and project delivery timelines; any *this date* system is going to smack straight into Xcel’s 15-year approval wall for interconnection for instance. If a hydrogen electrolyzer can provide additionality on these kinds of pre-existing (permitted but not build or connected) green facilities and encourage project survival and progress even when that facility is stuck behind an interconnection queue... then that has unlocked real societal value. I think this is probably the highest and best use for hydrogen electrolyzers, as a mechanism to facilitate new green power construction in the face of clunky grid and interconnection limitations. It is clearly better for the world than shipping containers generating bitcoin as a consumer of last resort for a disconnected power generator.
Once that green power is grid connected the value flips. Even if the power plant is new construction associated with the electrolyzer the carbon impact is greater through that green power displacing fossil power generation than by producing green hydrogen. On a system-wide balance, green hydrogen ought to draw power at a priority that soaks up curtailment of green power and not as a baseload useful for setting minimum grid capacities. And that leads to low utilization and capacity factors on the electrolyzer, harming their economic viability... until all grid power is green power. Then the situation flips again and we’ve moved into creating green power abundance, arguably the destination we’re seeking all along. Subsidy can help smooth expectations over those three inflection points.
To make hydrogen a thing it will require subsidy (or conversely, pricing the externality of dirty options). I don’t think it is a bad thing that there isn’t much casual market for hydrogen. I don’t think we need to create a consumer market to motivate industry to address these challenges. It is more likely that our policy function is captured by industry interests. But since we’ve gone here the hourly tracking seems like the least we can expect for this significant and generous subsidy.
Great discussion but one thing struck me as odd. I think Rachel said that the optimal utilization for an electrolyzer would be 50-70%. That's why she said the hourly matching wouldn't slow things down. As someone who just installed an electrolyzer to generate H2 for an industrial process- that just doesn't pass the smell test. How can it be optimal to run a new capital asset at 50%? I'd be reprimanded if the one I just installed only ran at 50%. It would be a huge loss for us! Curious to read that study.
The premise in that section was that without the full green subsidy (and marginal cost of power consideration) you don't build the electrolyzer at all. With the subsidy (and only with the subsidy) the CapEx is covered even if you don't get to run it all the time. The policy risk is that we go past promoting utility (more electrolyzers) and into exploitation and subsidy farming.
If one is operating an electrolyzer for a specific industrial process one probably matched demand to capacity - there is a real offtake and a physical reason to run the system. In the conversation one is evaluating subsidy seeking with no specific buyer or end use in mind. Just trying to maximize subsidy and minimize costs is what modeled out as viable despite an operational target that makes plant manager's eye twitch. Check out JessieJenkins google doc to see a visualization of impact of this subsidy on economic viability, available at the end of this short thread questioning how green hydrogen can even compete with blue or orange hydrogen: https://twitter.com/JesseJenkins/status/1497239626129428485
Thank you for this session. I am not an expert at all but I got the general ideas of all the permutations involved in scaling this energy source to scale and its drawbacks. But, overall I am encouraged by the discussion. Also, I would like to see the answer to Mark Norman's questions below. Thanks so much!
Where is the "production" calculated for the credit? Could a green hydrogen producer power their electrolyzer with on-site solar during the day, get paid for all that production, then use a portion of the hydrogen they've already been paid for as fuel to run a generator or fuel cell that powers the electrolyzer at night and also get paid for that production? Yes, I realize there would be big losses associated generating electricity from the hydrogen but it might pencil out if you were paying a negative price for your fuel. Ostensibly, the onsite green hydrogen electricity would meet the requirements of the 3 pillars.
The combustion efficiency of hydrogen is considerably lower than gasoline (I've seen as low as 20%, but that's probably a straight fuel swap rather than an engine meant to burn hydrogen), so you'd probably get less in terms of subsidy than you would with a proper off-take for the hydrogen. Adding a fuel cell generator would increase your CapEx and complexity (system risk) in order to double the conversion efficiency of a gasoline engine - that's probably also not worth the squeeze.
The subsidy is significant enough that this is a reasonable worry, but I think in practice the conversion costs cycle down too quickly for ongoing subsidy farming to be more favorable than just selling the hydrogen on the open market. That is, until we've saturated the market and then the subsidy should be withdrawn rather than support an ouroboros situation. I don't know that there is an automatic trigger for recognizing this limit and withdrawing this subsidy, or even if one can be sensibly crafted then one of the intents of policy is to create a market, both the supply and demand.
Hi Rachel, I have heard about using methane pyrolysis to produce hydrogen
( https://en.wikipedia.org/wiki/Pyrolysis#Methane_pyrolysis_for_hydrogen )
The key is there are no greenhouse gases released, only hydrogen and solid carbon (does not evaporate or melt) The solid carbon can be used in industrial processes (e.g. making tires) or stored in any convenient location. Does hydrogen made this way qualify as clean hydrogen? It seems from the wikipedia article that it does, but it is not being discussed here. Thank you for your thoughts about this.
Sorry, but Rachel's audio quality was so bad that I could understand only a little of what she said.
Adam Tooze has just put out a substack article about Hydrogen, and I tried to put a link to your interview here as a comment to that article but comments are turned off, so let me do the opposite and give you a link to his article and see if you two can connect up. https://adamtooze.substack.com/p/carbon-notes-5-green-hydrogen-the
Pre-existing is a curious concept in our real world of significant interconnection queues and project delivery timelines; any *this date* system is going to smack straight into Xcel’s 15-year approval wall for interconnection for instance. If a hydrogen electrolyzer can provide additionality on these kinds of pre-existing (permitted but not build or connected) green facilities and encourage project survival and progress even when that facility is stuck behind an interconnection queue... then that has unlocked real societal value. I think this is probably the highest and best use for hydrogen electrolyzers, as a mechanism to facilitate new green power construction in the face of clunky grid and interconnection limitations. It is clearly better for the world than shipping containers generating bitcoin as a consumer of last resort for a disconnected power generator.
Once that green power is grid connected the value flips. Even if the power plant is new construction associated with the electrolyzer the carbon impact is greater through that green power displacing fossil power generation than by producing green hydrogen. On a system-wide balance, green hydrogen ought to draw power at a priority that soaks up curtailment of green power and not as a baseload useful for setting minimum grid capacities. And that leads to low utilization and capacity factors on the electrolyzer, harming their economic viability... until all grid power is green power. Then the situation flips again and we’ve moved into creating green power abundance, arguably the destination we’re seeking all along. Subsidy can help smooth expectations over those three inflection points.
To make hydrogen a thing it will require subsidy (or conversely, pricing the externality of dirty options). I don’t think it is a bad thing that there isn’t much casual market for hydrogen. I don’t think we need to create a consumer market to motivate industry to address these challenges. It is more likely that our policy function is captured by industry interests. But since we’ve gone here the hourly tracking seems like the least we can expect for this significant and generous subsidy.
Great discussion but one thing struck me as odd. I think Rachel said that the optimal utilization for an electrolyzer would be 50-70%. That's why she said the hourly matching wouldn't slow things down. As someone who just installed an electrolyzer to generate H2 for an industrial process- that just doesn't pass the smell test. How can it be optimal to run a new capital asset at 50%? I'd be reprimanded if the one I just installed only ran at 50%. It would be a huge loss for us! Curious to read that study.
The premise in that section was that without the full green subsidy (and marginal cost of power consideration) you don't build the electrolyzer at all. With the subsidy (and only with the subsidy) the CapEx is covered even if you don't get to run it all the time. The policy risk is that we go past promoting utility (more electrolyzers) and into exploitation and subsidy farming.
If one is operating an electrolyzer for a specific industrial process one probably matched demand to capacity - there is a real offtake and a physical reason to run the system. In the conversation one is evaluating subsidy seeking with no specific buyer or end use in mind. Just trying to maximize subsidy and minimize costs is what modeled out as viable despite an operational target that makes plant manager's eye twitch. Check out JessieJenkins google doc to see a visualization of impact of this subsidy on economic viability, available at the end of this short thread questioning how green hydrogen can even compete with blue or orange hydrogen: https://twitter.com/JesseJenkins/status/1497239626129428485