Sponsored by: KPMG
Much-anticipated guidance coming down the pipeline from the Internal Revenue Service (IRS) and Treasury Department is set to define how clean hydrogen can be produced in the US. Amid furious lobbying efforts, the release of this guidance has already been delayed once. With potentially hundreds of billions of dollars on the line, Adi Bhashyam, a hydrogen analyst for BloombergNEF, joins the show to share what he describes as a framework that should be followed for thoughtfully crafting and effectively implementing the hydrogen piece of the Inflation Reduction Act.
Adi's recent article: "US Hydrogen Guidance: Be Strict or Be Damned"
More resources from KPMG
The Hydrogen Horizon
Energy & Chemicals
Energy Institute 2023 Statistical Review of World Energy
Highlights from Adithya Bhashyam
The basics of the 45V hydrogen tax credit - (3:43)
Possible timeline for when to expect the guidance - (5:31)
How is 'clean energy' defined within this guidance? Which colors? - (6:25)
$70 billion in potential tax credits - (7:28)
Not the normal lobbying battle lines - (8:27)
Criteria for qualifying for the 45V tax credit: additionality, time-matching, deliverability - (9:40)
The ideal framework for US hydrogen guidance - (11:23)
Potential timeline for implementation - (14:13)
Outside factors and headwinds to consider - (17:45)
Adi's bold predictions about how it all plays out - (21:32)
(Note: This transcript was created using artificial intelligence. It has not been edited verbatim.)
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What's up everyone, and welcome to the Renewable Energy SmartPod. I'm your host, Sean McMahon. And as many of you know, I not only host this podcast, but I also edit a daily newsletter called The Renewable Energy SmartBrief. I mentioned this because one thing I have noticed in recent months is that listeners of this podcast, and readers of that newsletter really like stories about policy guidance that's related to the inflation Reduction Act.
They say the devil is in the details. And since most of that news and information focuses on tax guidance coming out of the US government, there are certainly plenty of details. So I get it. It's popular news, because it's important. And it's also potentially lucrative. And do you want to know another topic that people in the energy sector like to read and hear about clean hydrogen? It's true, I've got the data.
So with that in mind, today's guest is perfect, because he's going to talk about tax guidance related to hydrogen. Adi Bhashyam, is a hydrogen analyst for BloombergNEF. He's here to talk about the guidance that pertains to hydrogen that's coming down the pipeline from the IRS and the Treasury Department. Amid furious lobbying efforts, the release of this guidance has already been delayed once and as Adi wrote in a recent BNEF article, the guidance will influence how and where hydrogen is produced for years. So it's a big deal. That also means it's important for the IRS and the Treasury Department to get it right.
With potentially hundreds of billions of dollars on the line. Adi is here to share what he describes as a framework that should be followed for thoughtfully crafting and effectively implementing the hydrogen piece of the inflation Reduction Act.
If you haven't had a chance to check out the previous episode of this podcast, go ahead and give it a listen. It featured Lauren Collins and Michael Joyce from the law firm of Vinson and Elkins. As the title of the episode suggests, we spent some time talking about Climate Week, which by now, of course, has come and gone. But right about the 10 minute mark of that show, we pivoted to highlight the one year anniversary of the passage of the Inflation Reduction Act and we went on to spend an informative half hour dissecting many of the tax aspects of the IRA. Check it out, if you want to hear how the IRA is changing the renewable landscape as we ease into the second year of its implementation.
Looking ahead, we've got some great episodes on the schedule coming up. We'll delve into topics like sustainable aviation fuel, and of course, have a couple of shows dedicated to cop 28 when that event comes along in a couple of months.
So there's lots of great stuff on the way for this podcast. But right now, let's hear some great insights about what to expect from hydrogen guidance from Adi Bhashyam at BloombergNEF.
Hello, everyone, and thank you for joining me today. My guest is Adi Bhashyam, hydrogen analyst at Bloomberg. Adi, how are you doing today?
I'm doing well. Thanks.
Yeah, thanks for joining me, obviously, those who follow the hydrogen sector know we're kind of waiting on some guidance from the Treasury Department and the IRS here in the US, you and the team at BNEF. recently put out a paper about what to either expect from that or what would be ideal. So I want to talk about that with you today. But let's just kind of set the table for our listeners, what is the guidance going to be pertained to? And what are we expecting
Adithya Bhashyam 04:03
this guidance on the 45 V hydrogen tax credit, crucial guidance that I think the whole sector is waiting on because the tax credit that has been offered is quite lucrative offer about $3 per kilogram hydrogen, which we think at BNEF. Really, if you look at our cost projections by the end of the decade, with the dollars per kilograms over 10 years in subsidy, most green hydrogen project using an electrolyzer will be cost effective and cost comparable to fossil hydrogen. So the tax code itself is extremely lucrative. Every company that applies to it will get a tax credit because there's no funding cap on the tax credit itself. Now, the big question is how can you apply and qualify for the tax credit? And the way the tax rate is set up is set up by emissions thresholds? So the lowest emissions threshold gets you the highest tax credit? And that's up to $3 per kilogram. And the question on developers minds is now how do we qualify for this tax credit and get this highest tax rate of $3 per kilogram. And that's where crucial guidance is upcoming from the Treasury Department on how these emissions thresholds can be met. And there's a number of factors that are under discussion. But importantly, I think what is important say this guidance was expected in August 16. There's a lot of lobbying efforts on both sides for strict and looser guidance. And this debate has become really contentious now on how this guidance should look like. And we believe it will determine like billions in subsidies giving into the sector and how that will affect emissions associated with the subsidies.
Sean McMahon 05:31
So what does that timeline look like? Right now? I know you mentioned it was kind of expected in August, we're obviously economy staring at a government shutdown. I'm not trying to date this podcast, but we're recording on Thursday, September 28. And the US government is yet again facing the prospect of a government shutdown. So if there isn't a government shutdown, which could obviously last for who knows how long? What's the time I look for, like for when this guidance might come out?
Adithya Bhashyam 05:54
Yeah, that's anyone's guess, really. As I said, original date was August 16. That has passed, then there was rumors that it will come out in October. Now, with the looming government shutdown, we have heard suggestions directly from John Podesta, that the shutdown itself would delay issuance of the guidance, which would mean that the guidance is not coming out for the next month or two, maybe, maybe not until the end of the year. But that's a really speculation. And we have to see how far the Treasury is informing this guidance. And there's still companies like lobbying.
Sean McMahon 06:25
So for the purposes of this conversation, you know, how are we defining clean energy? Because you know, there's all kinds of colors out there. So is that even been defined yet?
Adithya Bhashyam 06:34
Absolutely. As it pertains to hydrogen specifically, there's really two ways to decarbonize the production of hydrogen and call that clean hydrogen. The easiest, or the simplest way is to just add carbon capture and storage to the existing fossil hydrogen plants. Typically, today, hydrogen is produced from natural gas. And you can capture the emissions from that and capture all 90 95% of the emissions and store them on the ground. That's what we call blue hydrogen and the industry. The slightly more complicated and less mature way to do this is called Green hydrogen, which is where we use water as the fuel source where we splitting water into hydrogen and oxygen and the use of electricity in a machine called an electrolyzer. Right, and that's where the electricity source really needs to come from renewables, solar, wind, hydro, or any other form of low carbon energy, like nuclear, to be able to call that hydrogen clean.
Sean McMahon 07:28
Okay. And I know you touched on it before, but what's at stake here, in terms of overall dollars? I mean, you said could potentially be almost limitless. But what kind of range are we speaking about here?
Adithya Bhashyam 07:37
We tried to estimate this number again, yeah. Because the tax rate is uncapped is hard to estimate a final number. But if you assume that all announced green hydrogen projects in the US will try to apply for a tax credit and get it. Right, which is about 2 million metric tons of hydrogen supplier. So on the green side, I think that alone will require about $70 billion in tax credits given out between now and 2030, to deadline for the tax credit. And that's probably an underestimate, because if you look at demand for hydrogen in the US today, which is more than about 10 million metric tons to decarbonize, all of that with just green hydrogen would probably require something like $300 billion in tax credits given up almost as big as the IRA package itself. Right. So that just goes to show you how much money is involved here.
Sean McMahon 08:27
You mentioned there's some lobbying going on? What does that landscape look like? Is it kind of the usual players for the usual positions or is a little more complicated than that?
Adithya Bhashyam 08:35
Yeah, I mean, in some aspects, it is the usual players arguing for lack for rules, and then environmental groups, arguing for more strict rules. But actually, if you look at this in more detail, there are many companies who are, were in favor of very strict requirements on these three criteria. So companies like air product, which is the largest hydrogen producer today, and has already taken investment decision on very large clean hydrogen projects globally, is arguing for relatively strict requirements for hydrogen production in the US to get the tax credits. There is a startup called Electric hydrogen, which is selling like very large electrolyzers. Also arguing for very strict requirements on hydrogen production. On the other side of the coin, there's companies like plant power, big electrolyzer manufacturer, which has opposed all requirements for hydrogen production companies like BP and and Chevron and so on. We've also posed strict requirements, obviously, because this room will raise costs, to some extent, but it is not as clear cut as just environmental groups arguing for very strict requirements and industry being completely opposed to it. So in a way, there's a lot more nuances within that.
Sean McMahon 09:40
Okay, and you mentioned the 45 V tax credit before. So let's dive a little deeper on that. What does that entail? What are some of the criteria for even meeting that tax credit?
Adithya Bhashyam 09:49
Yeah, the 45 V tax credit is a tax rate that is it's there's a investment tax credit, but the more interesting one is probably the production tax credit, where there's a subsidy offered perk. kilogram of hydrogen produced and that stacks up all the way up to $3 per kilogram. And to reach $3 per kilogram, there are certain emissions here that you need to reach. And the lowest emissions tier for $3 is less co2 emissions less than 0.45 kilograms co2 per kilogram hydrogen of the lifecycle of the hydrogen itself. And that's really hard to meet. So far, we only know that much that it's a lifecycle estimation, and that it's 0.45 or lower to get $3 per kilogram. Now we need more criteria to come in. And that's where Treasury guidance will come in on how these criteria will be defined, because there's problems with just setting an emissions threshold, but we can talk about in more detail.
Sean McMahon 10:43
We'll be right back.
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And now, back to my conversation with Adi Bhashyam from BloombergNEF, you talked about what's expected from Treasury and IRS. So let's step back a second. So you and the team kind of have your perspective on maybe what we call an ideal framework. So what is Bloomberg? nefs? Best case, sir, you know, recommended if you will framework for us hydrogen guns.
Adithya Bhashyam 11:38
This is nothing new. I mean, the debate around how hydrogen from electricity needs to be a grid electricity in particular needs to be produced, and be called Green is something that has been debated in Europe for the last year. And Europe, the European Union has settled on final rules, which offer a framework that could be repeated in the US. And the big question, as I mentioned, is really on how can you procure electricity from the grid, and then call that teen electricity that is being used for hydrogen production. And beyond just setting an emissions threshold, there's a few criteria that need to be added on top. And I'll go through them one by one. So the first one is called additionality or new clean supply. So this criteria suggests that all new demand from electrolyzers so all the electricity demand also needs to be met by new renewable or new clean electricity supply, rather than the wording away existing electrons on the grid from other potential use cases where they could have been used to decarbonize that sector, right. And the way to meet that would be to signing power purchase agreements with new electricity generators, or through buying renewable energy credits, and then showing that these are from new plants, rather than existing one. The second major criteria would be on so called time matching. Just by plugging an electrolyzer into the grid and running that flat out, there'll be a lot of hours in the year where your actual electron comes from natural gas or coal and not the renewables that you're supposed to be procuring electricity from, which means in a lot of hours in the year, you're actually producing fossil electricity based hydrogen, which has a much worse emissions profile than just producing fossil hydrogen in first place. And for that, the most strictest requirements call for hourly matching hourly time matching, which means that in every hour that you're generating hydrogen, that needs to match to renewable energy availability on the grid as well. So renewables need to be running at the same time. And that, again, can be done through renewable energy credits, showing that at this time, there were renewables on the grid, or through power purchase agreements with multiple different assets that are generating. And lastly, there's one big criteria on so called deliverability, or geographic correlation, which really just tries to limit where you need to locate your electrolyzer in relation to the renewables or the clean electricity generation. So that you're not really actually causing more grid constraints. And you're not located let's say in Texas, but you're procuring solar electricity from California that has no way of actually being physically deliverable to the electrolyzer in Texas, right. And you're just adding to more of the grid congestion is already a problem in Texas.
Sean McMahon 14:13
Okay, thanks for breaking that down. You know, the criteria of additionality, time-matching, deliverability. That's helpful. So I know, we talked about how the shutdown in US could delay the guidance, but that's really we're talking about, you know, weeks or months. And this whole plan is years long. So is there a timeline from your perspective for optimal implementation? And what that will look like over I guess a few years? Right?
Adithya Bhashyam 14:38
Yeah, I think it's important to say that like we at Bloomberg, we looked at this in a lot of detail to consider all the studies that have been done into in the space. And we came to the conclusion that you probably need very strict requirements over time, to really make sure that you're the hydro energy producing from grid electricity is clean. The problem is that some of these criteria can't happen from the start. because some of the technology to actually prove hourly matching, for example, isn't widely available. So there's probably what what needs to happen is a phasing of all of this right. So what we have argued for is that you start with additionality on new clean supply requirements from the start. But where you give some sort of leeway is by not requiring the renewable clean electricity source to come online at the same time. So it can come online, maybe three years before and three years after. So there, you account for different delays in the renewables coming online. There's issues with interconnection, which delay renewable energy projects to actually come online. As long as you're contracted with that renewable energy source, you should be fine. And that window should narrow over time. The second point where we've argued for a phasing of implementation is something I mentioned already is on hourly matching, there is already a way to show that you're procuring hourly electricity from renewables, that's available in tracking systems, like in PJM. But it's not widely available on a federal level yet. And there's startups trying to look into how to prove and give hourly certificate approve, or renewable energy energy was generated. And that that same hour, right. But for this to become widely available, we think there's a few years that are needed. That's why we argued from 2027 to phase in our early matching, targeted monthly matching, and then phase in our matching over time through that. What that phase in period also allows is, if you think about the hydrogen project today, we think a hydrogen project needs about five years from the conception and the first feasibility studies to actually becoming operational. So why we argue for 2027 is that if you start with, with Ollie matching from next year, for example, there's projects that are close to an investment decision today, which would suddenly need to go back to the drawing board and redesign the project to be able to comply with our rematching, which actually delay a bunch of projects. And we probably need some of these learnings from the early product to actually figure out if the technology works as intended. But if you start with all the magic from 2027, and tell everybody that it's happening in 2027, there's projects today that will only come online in 2027 or later and are currently being designed, which are able to take into account all of these criteria on hourly matching and so on and should be able to match on an hourly basis by 2027. On the delivery bility aspect that we think that should be implemented from the start meeting electrolyze need to locate as close as possible to the renewable electricity source to avoid grid congestion. In the beginning, you can do that on a transmission zone level over time. What really needs to happen is some grid scale planning with both the grid operator and the hydro producer to relocate electrolyzers in locations where it's actually beneficial to the grid to have electrolyzers rather than anywhere, right? And that's what this all needs to move towards long term.
Sean McMahon 17:45
Are there any other factors to consider? I know the European Union's done some things on this topic. And even here in the US like the political headwinds, right, we talked about the guidance might be delayed a little bit by a shutdown. But over the years, there could be, you know, a change administration, you know, state by state, we've seen some of the other Ira incentives, widely embraced in some states and kind of ignored and others. So what are some other headwinds, be it political or, you know, trying to keep up with other regions around the world?
Adithya Bhashyam 18:13
Absolutely. I mean, the lobbying efforts that have been arguing for looser restrictions on additionality time matching and so on, I've really tried to focus on the competitiveness of the us of our of us hydrogen. Because one thing is clear additionality already matching, and all of that will slightly raise costs of production for sure. So it definitely becomes more costly to do so. But that shouldn't preclude like, strict requirements, because in the end, what you want is low emissions, hydrogen production. And if cost is an issue, then more policy support needs to come in to able to close that cost gap. The other thing to consider is that Europe already has implemented similar requirements. And that if you want to be competitive on a global scale, and some US companies are now looking at exporting to Europe, producing hydrogen domestically converting that to something like ammonia, exporting that to Europe, because Europe is this huge energy consumer, then you need to meet your European criteria anyway, on renewable hydrogen production or clean hydrogen production. So in that sense, it almost doesn't matter to some extent for exporters of hydrogen from the US what US rules are, as long as they want to export to Europe or other markets that have similar criteria. That's one thing to consider. Next thing is like there is a very solid argument to be made that the US might need stricter rules on clean hydrogen production than other places in the world. And that's because the US doesn't have Emissions Trading Scheme or any carbon pricing on a federal level that would reduce power sector emissions over time. Anyway, the EU has that. There's also no such thing as a clean energy mandate. on a federal level. There's portfolio standards, but there's no clean energy mandates on a federal level that account for additional electricity demand from hydrogen and build out the renewables in the absence of any additional finality requirements as well. So all of these things need to be considered.
Sean McMahon 20:04
Okay, one of the questions I asked you, what region does at the best right now is the EU rules in place the best other better rules being considered, I don't know, places like Australia or something like that, or you know, who's kind of leading the way from your perspective who's doing it right, or at least planning to do it right. Even if the guidance isn't fully released or implemented.
Adithya Bhashyam 20:21
The EU is actually the only place in the world that has gone beyond just setting an emissions threshold to also saying actually, you need to produce the hydrogen in a certain way to be able to call that clean hydrogen and not just affect the rest of the grid and cause more emissions. So in a way, the EU is really the front runner in terms of setting out this criteria, because no one else really has done it. And everyone's looking at the EU and seeing how they can implement it themselves. If I'm being honest, the EU rules are lacks in some instances, and that's really driven by industry wanting lacks rules over time. And that already matching the EU is only implemented from 2030. Now, so before that, it's mostly matching. additionality is only implemented from 2028. So this is a relatively lacks. In reality, this should have been done much earlier from an admissions perspective. The argument in the US that you have additional guardrails, like emissions trading scheme, we have renewable energy deployment mandates and so on. Which was why the US just needs stricter rules, because it doesn't have any of those. But yeah, if you're looking for an example, to copy and then amend for your potential domestic use case, you're really looking at the EU as the only country or only region to have implemented any.
Sean McMahon 21:32
Do you have any bold predictions about how this all plays out?
Adithya Bhashyam 21:36
I think one thing is becoming clear. Despite a lot of efforts to not implement any criteria on hydrogen production like additionality, or time matching, I think, if you want to be able to compete on a global level, the US needs to implement these three criteria additionality time matching and deliverability. For sure. The debate is really on how when they're being phased in, like the timeline, and debate is really on how strict they are. And at this point, I would say you would, we would likely see from the US something with a phasing of these requirements, probably moving to at least monthly or hourly matching over time. And with some additionality requirements over time, maybe with some loopholes and leeway along the way. And maybe it's a bit laxer than in Europe. But at this point, I would believe that all these criteria will be implemented.
Sean McMahon 22:28
Okay, well, it, obviously we're all gonna be kind of waiting to see how that guidance takes shape and when it comes out from IRS and Treasury, but I appreciate your insights. And I'll see everyone to the piece. Obviously, we're talking about something that BNEF put out. We'll provide a link to that in the show notes. But thank you for your time today. I appreciate it.
Adithya Bhashyam 22:45
Thanks for having me.
Sean McMahon 22:51
That's our show for today. But before we get out of here, I want to say one final thank you to the exclusive sponsor of today's episode KPMG.
Thank you all for listening. And if you haven't already, please subscribe or follow this show on Apple, Spotify, Google or wherever you listen to your podcasts. And as always, please be sure to share it with your friends and colleagues. Have a great day.