Hydrogen could help decarbonize some very large sectors of the economy that are currently a major challenge, such as long-haul trucking and iron and steel production. However, hydrogen must be present. It is produced with no carbon emissions; otherwise, it is not a clean energy source. A tax credit included in the Inflation Reduction Act provides the maximum tax credit, $3 per kilogram, for hydrogen produced using renewable and nuclear energy.
A tax credit included in the Inflation Reduction Act could catapult the nascent clean hydrogen industry into a multitrillion-dollar enterprise in the coming decades. The tax credit will encourage hydrogen producers to develop cleaner methods of producing hydrogen, which is used in fertilizer production and other industrial processes. However, it has the potential to catalyze a whole new class of companies looking to use clean hydrogen as a replacement for fossil fuels in areas such as shipping, aviation, heavy industry, and energy storage and transportation.
Currently, 98 percent of hydrogen is made in a way that uses fossil fuels, according to the Center on Global Energy Policy at Columbia University. But “all the current hydrogen producers are looking to produce clean hydrogen,” explained Elina Teplinsky, a lawyer who serves as the spokesperson for the Nuclear Hydrogen Initiative, a group working to advance the development of the nuclear hydrogen industry. The law will make it more economically feasible to use carbon capture and storage technology to reduce the carbon emissions from hydrogen creation. It will also open the door to a whole range of companies looking for cleaner ways to make hydrogen and to use hydrogen as a replacement for fossil fuels in certain areas.
By 2050, between 60 and 80 percent of hydrogen production will be powered by renewables, according to a November report on the industry published by the Hydrogen Council, an industry group, in collaboration with McKinsey & Co. (This prediction was published before the tax credit was passed.) This kind of industry transition will require a lot of investment, as much as $7 trillion to $8 trillion through 2050. But on the plus side, by that date, the hydrogen economy could generate about $3 trillion in annual revenue, according to the Hydrogen Council and McKinsey report.
What is hydrogen used for today, and how could it fight climate change?
According to the Center on Global Energy Policy, roughly half of the hydrogen produced is currently used to make fertilizer and ammonia, with the remainder used in petrochemical refineries or production. The push for clean hydrogen is motivated by both the need to decarbonize current processes and the fact that hydrogen’s use cases are expanding. Industrial applications, which make up nearly all the demand for hydrogen today, will represent only 15% of total hydrogen demand by 2050, according to the Hydrogen Council/McKinsey report. Hydrogen has the highest energy per mass of any fuel and does not release any carbon emissions when it is burned or turned into electricity in a fuel cell. Entrepreneurs and advocates believe hydrogen could be useful to decarbonize some very large sectors of the economy, like long-haul trucking and industrial processes, including making iron and steel, maritime cargo shipping, and aviation.
“If it weren’t for climate change, we probably wouldn’t be expanding into all of these new use cases” for hydrogen, Emily Kent, the U.S. director of zero-carbon fuels at Clean Air Task Force, a global climate nonprofit, told CNBC. The largest end use for hydrogen by 2050 is expected to be mobility, including heavy trucking, long-range flights, and container ships, according to the Hydrogen Council/McKinsey report. In these cases, hydrogen would produce electricity through a fuel cell, in which hydrogen atoms and oxygen atoms are combined in an electrochemical reaction to generate electricity, heat, and water.
Kent explained that current electric battery-powered vehicles are unable to meet this demand because batteries large enough to store enough energy for long-distance travel would be too heavy and take too long to recharge. A hydrogen tank and fuel cell would be lighter, take up less space, and refuel faster than gas or diesel. “It’s possible that there will be huge breakthroughs in batteries or something else that will change things, but there aren’t great solutions right now,” Kent told CNBC. Hydrogen, like natural gas, can be burned to generate electricity in a turbine. According to Kent, up to 20% hydrogen can currently be blended with natural gas burned in conventional natural gas turbines without requiring any infrastructure changes.
“We’ll likely need adjustments to the turbines and infrastructure for higher hydrogen blends or pure hydrogen,” Kent told CNBC. “There are companies developing 100% hydrogen-ready infrastructure, in which pure hydrogen can be burned in a turbine to generate electricity.” Hydrogen can be used to store energy, which will be important as renewable energy sources such as wind and solar are scaled up and deployed across the country. Wind and solar energy are ineffective when the wind does not blow or the sun does not shine, so energy must be stored in some way to provide continuous, reliable energy. Meanwhile, battery technology is progressing, but batteries are not yet at the point where they can store enough energy for long enough to provide adequate backup for a fully renewable grid.
“If you produce a lot of solar in the summer and want to store a lot of it away for the winter,” Kent explained. “Hydrogen can be stored for sort of that many monthslong seasonal periods, and provide electricity back to the system when it’s needed.” Cleanly produced hydrogen is also being considered as a replacement for coking coal in a key part of the process of producing steel, a heavy-emissions industry that is considered a real challenge to decarbonize. And clean hydrogen will be needed for industrial processes that require especially high-grade heat, temperatures above 752 degrees Fahrenheit, like cement plants, glassmaking, and aluminum remelting, according to the Hydrogen Council/McKinsey report.
What is clean hydrogen?
Hydrogen is the most abundant element in the universe, but here on Earth, it only exists in compound forms with other elements, particularly with oxygen as part of water. Separating the hydrogen from the other atoms requires industrial processes and energy. Currently, China is the largest producer of hydrogen, according to the Center for Strategic and International Studies (CSIS), a bipartisan, nonprofit policy research organization. Of the hydrogen that China makes, 60 percent is made using coal and about 25 percent comes from using natural gas, according to CSIS. Outside of China, the largest hydrogen producers are industrial gas companies like Linde and AirProducts, according to Teplinksy.
Seventy-six percent of hydrogen produced globally and 95% in the U.S. is produced with a process called steam methane reforming, in which a source of methane, like natural gas, reacts with steam at very high temperatures, according to the Center on Global Energy Policy. Natural gas releases greenhouse gas emissions when burned, and also from so-called fugitive methane leaks as it’s extracted and transported. Globally, 22% (and 4% in the U.S.) is made with a process called coal gasification, where coal reacts with oxygen and steam at hot temperatures and high pressure.
Some companies are working to capture and store the carbon dioxide emissions from these processes in underground tanks. Making hydrogen in this manner is sometimes referred to as “blue hydrogen,” but from an emissions standpoint, an electrolyzer can be used to split a water molecule into hydrogen and oxygen, and it can be powered by almost any energy source, including zero-emissions sources such as solar or wind, producing “green hydrogen. An electrolyzer now produces 2% of the hydrogen produced globally and 1% in the United States. Nuclear energy can also be used to generate hydrogen with almost no additional CO2 emissions (this is sometimes referred to as “pink hydrogen,” but the terminology varies). As an added bonus, the steam and heat produced as byproducts of nuclear energy can be used in a much more efficient high-temperature electrolysis process. Furthermore, with the development of advanced nuclear reactors that operate at even higher temperatures than conventional nuclear reactors, hydrogen can be produced in a thermo-chemical water-splitting process that does not require an electrolyzer at all.
Because the majority of the cost of producing hydrogen through electrolysis is the cost of the electricity used, Teplinsky believes that producing hydrogen through nuclear energy and steam “really could have a tremendous contribution to lowering the cost of clean hydrogen production. The cost of producing hydrogen using these various methods varies greatly and is affected by input costs such as natural gas and power source. These input costs have shifted as a result of Russia’s war in Ukraine and climate change. According to a report published in December 2020 by the nonpartisan nonprofit Resources for the Future, a kilogram of hydrogen produced through steam methane reforming costs between $1 and $2. (including the costs). of some carbon sequestration). Hydrogen produced through electrolysis powered by wind and solar costs between $3 and $7 per kilogram. This is where the tax credit comes into play.
How does the new bill help?
The IRA tax credit is available for ten years and scales based on how clean the hydrogen production is. The tax credit is limited to $3 per kilogram of hydrogen produced if it is produced without emitting any carbon emissions. It then reduces the number of emissions released proportionally, as long as it is less than current production techniques. If hydrogen is produced with some carbon emissions, but fewer than are emitted by current production methods, the tax credit is reduced proportionally to the reductions in emissions.
The tax credit is “an absolute game-changer,” Akshay Honnatti, the leader of EY’s sustainability tax division for the United States, told CNBC. “There was no incentive to have hydrogen be cleaner. It costs to get hydrogen to be cleaner,” Honnatti added. “Now there’s a credit available for someone to make that additional level of investment and be able to justify that level of investment to their stakeholders and shareholders. The $3 per kilogram credit makes nuclear hydrogen highly competitive with fossil fuel-produced hydrogen, Teplinsky said. The U.S. Department of Energy has as a goal, one of its Energy Earthshots Initiatives, is to reduce the cost of clean hydrogen to $1 per kilogram in a decade.
The tax credit included in the climate bill will allow companies to enter the market for making clean hydrogen without losing money for many of these burgeoning use cases for clean hydrogen. “They could return to their shareholders and say, ‘Look, we can do this economically today.'” To enter this market, we do not need to forecast a loss for the next five years. We can actually enter this and make it profitable, or at the very least a breakeven project, in the near future,” Teplinksy said. The Bipartisan Infrastructure Law passed in November also included $8 billion to develop regional clean hydrogen hubs in the U.S. Between the two laws, the U.S. should be able to develop a clean hydrogen economy in seven to eight years, Teplinksy said.
