As Congress seeks to pare government spending, the fate of the energy tax credits created by the Inflation Reduction Act (IRA) is uncertain. Which tax credits might be up for repeal or rescission is a matter of speculation, negotiation, and fierce lobbying. Among the many tax credits at issue is the 45V tax credit for producing clean hydrogen. Critics have decried the tax credit as just another piece of unnecessary climate spending in the IRA. Supporters propose instead that clean hydrogen could become a key component of an all-of-the-above energy dominance agenda. This analysis provides a brief outlook on the current state of clean hydrogen deployment and investment to highlight the importance of 45V to the sector’s growth.
Q1: How is hydrogen produced today, and how can clean hydrogen be produced?
A1: The United States produces over 10 million tons of hydrogen per year. Most of this production comes from the thermal conversion of natural gas into hydrogen. This thermal process, called steam methane reforming (SMR), releases carbon dioxide as a byproduct and costs about $1 per kilogram of hydrogen.
There are currently two leading methods to produce clean hydrogen. The first captures the carbon emissions derived from the SMR or other reformation processes. It costs about $1.8–2.2 per kilogram of hydrogen produced and releases less than a third of the lifecycle emissions of traditional methods. These projects will seek out the 45V tax credit to compete with—and potentially outcompete—incumbent production.
The second method uses electricity to split water into hydrogen and oxygen in a process called electrolysis. Clean hydrogen with near-zero lifecycle emissions is produced by powering electrolyzers with clean electricity. Electrolysis-based clean hydrogen currently costs about $5–7 per kilogram and accounts for less than 1 percent of current hydrogen production. While 45V could bring down the cost to between $2 and $4 per kilogram in the near term, it is expected to play a catalytic role in materializing further cost reductions from deploying this production pathway at scale.
Q2: Why has the 45V tax credit attracted controversy?
A2: Before Congress took on the energy tax credits as part of the reconciliation process, the 45V tax credit was already controversial. The statute created tiers of qualifying clean hydrogen based on the lifecycle emissions of its production.
As the treasury finalized the rules to implement the 45V credit, a debate raged over how granularly to measure the emissions intensity of clean hydrogen. The tension came down to a tradeoff between rapid deployment versus total system emissions. Proponents of “strict” guidelines posit that a granular approach to emissions accounting would prevent the subsidization of hydrogen that led to a net increase in system emissions. For example, connecting electrolyzers to the grid without procuring clean electricity that matches its consumption patterns would induce deployment of “marginal” high-emissions generation, such as unabated natural gas power plants, to balance out the new demand. Detractors argue that these concerns are overstated and that a “strict” approach would stifle deployment by imposing unnecessary burdens on a nascent industry. They propose instead that propping up rapid electrolyzer deployment and then decarbonizing the power sector over time will lead to better emissions outcomes than a scenario in which low-carbon reformation becomes the dominant source of low-emissions hydrogen.
Over time, the debate evolved to account for the fact that looser guidelines for 45V would result in excessive government spending at a time when Congress is looking to reduce it. For reference, granting 45V’s maximum value of $3 per kilogram of hydrogen to the Department of Energy (DOE)’s target of 10 million tons of clean hydrogen by 2030 would result in as much as $300 billion worth of subsidies. Compounding this, there are concerns that the industry wouldn’t be able to outlive the tax credit, leading to continued spending past 45V’s expiration date to keep the industry afloat.
Issued earlier this year, the Department of the Treasury’s final 45V guidance was considered by many to take a middle-of-the-road approach; one that included strict emissions standards with certain flexibilities that limit spending to ingenious projects capable of optimizing their cost of production around said flexibilities to remain competitive. Perhaps the sign of a good compromise, a diverse group of hydrogen stakeholders—some of which were previously at odds over details in the guidance—issued a collective appeal to congressional leadership to maintain the 45V tax credit in a bid to provide certainty to the nascent sector.
Q3: Why is the 45V tax credit essential to the success of clean hydrogen projects?
A3: In the case of low-carbon reformation hydrogen production that relies on carbon capture, the final 45V guidance would currently grant about $0.6–0.75 per kilogram. These credit values would bring down the cost of production close to the $1 per kilogram of incumbent unabated production. While the 45Q tax credit for carbon sequestration currently presents a similar value proposition, projects could access even higher values through 45V in the future by lowering their lifecycle emissions. Available options to do so include sourcing natural gas with low rates of methane emissions or natural gas that comes from certain renewable sources, like biomethane from farm waste. Through these methods, low-carbon reformation could reach the $1 per kilogram tier of 45V and potentially outcompete current unabated production methods.
On the other hand, electrolysis-based hydrogen is eligible for the maximum 45V value of $3 per kilogram of hydrogen. To ensure that the electricity used to power the electrolyzer is clean, Treasury’s final guidance introduced a set of guardrails commonly known as the “three pillars”: electricity should be sourced from a relatively new low-emissions source (incrementality) that’s within the same power grid region (deliverability) and is matched down to the hour of hydrogen production (time-matching). To ease the burden of compliance, the hourly time matching requirement will be phased in by 2030 and allows for certain exceptions to the incrementality requirement—such as electricity sourced from existing nuclear at risk of retirement or from states with clean electricity standards. Since the cost of electrolysis-based hydrogen is currently five to seven times higher than traditional SMR production, its viability—as well as the expected cost reductions derived from its deployment at scale—is highly dependent on access to the full value of the 45V tax credit.
Q4: What are the current and prospective uses of clean hydrogen?
A4: Current demand for hydrogen comes predominantly from the refining sector (used in the hydrotreating and hydrocracking of petroleum), from ammonia production (used in fertilizers), and from methanol production (used to manufacture chemicals). Clean hydrogen has the potential to help reduce emissions in these industrial processes and, if produced via electrolysis, increase resilience to fuel commodity price shocks by replacing incumbent hydrogen from unabated fossil fuels.
Beyond traditional industrial hydrogen uses, demand for clean hydrogen is expected to grow in sectors that are hard to decarbonize through electrification alone. In these sectors, clean hydrogen can replace fossil-fuel-based processes—for example, in generating high-temperature industrial heat used in steel manufacturing and as a feedstock to produce biofuels and synthetic fuels for maritime, aviation, and heavy-duty transport.
In addition to the industrial sector, clean hydrogen could play a role in the electricity sector as a source of long-duration energy storage and backup power. Clean hydrogen can be produced at times of excess clean power generation and stored over long periods until it is needed. The benefit of this over current grid storage is that it can serve as a source of backup power on the order of days, or even weeks, rather than on the order of hours. While expensive to transport and store, this could potentially be an important avenue for future grid reliability. In fact, we are seeing clean hydrogen emerge as a source of emissions-free backup power for data centers amidst surging electricity demand.
Notably, global policies such as the European Commission’s Carbon Border Adjustment Mechanism and the International Maritime Organization’s proposed carbon tax on emissions from ships are putting increasing pressure on U.S. industries to decrease their carbon intensities. Beyond reducing emissions, clean hydrogen can act as an energy security tool that enhances the resilience, reliability, and flexibility of the U.S. energy system by offering further diversification of supply, counterbalancing the variability of renewable generation, and acting as a store of energy to be used both for short-term grid balancing and interseasonal variations in supply and demand.
Q5: What is the investment and economic outlook for clean hydrogen?
A5: The DOE’s latest Commercial Liftoff report estimates that reaching 10 million tons per year of clean hydrogen production has the potential to unlock up to $240 billion worth of investments and create over 200,000 new jobs by 2030. As of January 2024, there were already 14 million tons per annum (MMTpa) in announced clean hydrogen production capacity, most of which lies in the early stages of development without committed investments. A sizable proportion of recently announced projects would be sited in the energy-rich states of Texas and Louisiana (Figure 1), showcasing how U.S. oil and gas firms see clean hydrogen as a key component of their low-carbon strategies. Other sources estimate that the private sector announced investment in electrolyzer manufacturing capacity totals over $2 billion as of the last quarter of 2024.
Figure 1: U.S. Announced Clean Hydrogen Production Projects, as of January 2024
