The Inflation Reduction Act has companies scrambling to take advantage of tax credits. Solar and wind projects are earmarked as are new initiatives for batteries and green hydrogen that fuel the electric grid. Incentives matter, but money is finite which is giving rise to some interesting discourse as to what truly qualifies as green energy.
The most talked about issue surrounds green hydrogen. Also known as “clean hydrogen,” machines called electrolyzers that run on electricity and are produced from a renewable source are vital inputs. Electrolyzers split water into hydrogen and oxygen. Yet, they consume an inordinate amount of energy to make a very small amount of hydrogen. Unless that energy is produced from renewable sources there is no point in emitting more CO2 for such a negligible trade-off.
The argument for offering incentives for green hydrogen companies is based on whether they’re using green power to produce clean hydrogen. The rules are being written, but firms like NextEra, the owner of one of the world’s largest renewable energy developers – Florida Power & Light – argue that more concessions are needed. The green hydrogen energy business is still very new and some are contending leniency is needed until the technology improves and/or the costs come down.
Green hydrogen costs roughly $5 per kilogram to produce. Hydrogen produced from natural gas costs $1.50 per kilogram. That’s a significant difference and without a proposed tax credit of up to $3 per kilogram (and likely more), the economics will be unsustainable for some producers. Yet, those producers who can scale up immediately with less generous incentives are lobbying hard to move forward as is. Tighter standards, they argue, will allow them to capitalize on planned projects and not wait for potential competitors to enter the field.
The unofficial estimate of the energy and climate package of the act is approximately $369 billion. The tax credits that companies receive are only valuable if the company registers taxable earnings. Many clean-energy companies are upstarts and/or too small to take competitive advantage of the credits. The tax credits could be used similarly to renewable energy certificates (RECs). Clean-energy facilities sell RECs to companies seeking to nail their climate targets. In 2021 in the US alone, S&P Global estimated that market being worth $11 billion.
The upcoming 10 months will be fraught with debate and a big credit scramble. But we still don’t know if the aggregate outcome will end up being truly green power.
