A True Game Changer for the Hydrogen Economy
Like many in the industry, we are excited by the surprise deal announced by Joe Manchin and Chuck Schumer last week. The Inflation Reduction Act reads like a letter written to Santa Claus by renewable energy developers.
The bill would reinstate the Investment Tax Credit (ITC) to its original rate of 30% and even makes a 50% credit available under some conditions. Possibly no other single federal incentive has contributed more to the development of solar energy than the ITC, which for years has allowed energy developers to claim back a substantial portion of their construction costs in the form of a federal tax credit.
The Production Tax Credit (PTC) has also been extended. The PTC has allowed wind farms to build up tax credits for every kilowatt hour of electricity generated.
The credits are now transferrable to others, so developers will no longer have to resort to complicated tax equity structures to monetize their tax credits.
The list of measures goes on. One of our favorites, though, is the extension of the PTC to hydrogen production plants. Green hydrogen produced without CO2 emissions can claim a whopping $3 in tax credit for every kilogram of hydrogen produced during its first ten years of operation. If it costs between $3 and $5 to produce a kg of green hydrogen—the Lazard levelized cost of hydrogen for a large PEM facility—then, after PTC, the levelized cost drops to about $1 to $3 per kg.
So how does the cost of PTC-subsidized green hydrogen compare to other fuels? As you can see in the chart below, it’s coming close to being competitive with US natural gas. Without the CO2 emissions. It’s also a fraction of the cost of biodiesel, the other main CO2 neutral fuel (granted, the cost of biodiesel has skyrocketed this year).
If the bill passes with its main hydrogen provisions intact, it’s going to be a real game changer for green hydrogen projects in this country. Even without the PTC, green hydrogen projects had a reasonably good shot at being in the money if they could sell to refiners motivated by California’s low carbon fuel standards. Add an extra $3/kg on top of good-enough or almost good-enough economics, and a lot of these projects are going to be slam-dunks.
Let us know your thoughts!