Inflation Reduction Act Boosts Clean Hydrogen Development and Signals a Shift Towards Green Hydrogen

The Inflation Reduction Act (IRA) is a comprehensive piece of legislation aimed at supercharging the energy transition with a focus on clean hydrogen. The IRA includes provisions that target the reduction of manufacturing and mining costs, incentivize clean energy production, and introduce a significant clean hydrogen production tax credit of up to $3 per kilogram. These measures are expected to have a profound impact on the development of clean hydrogen, particularly green hydrogen produced from renewables, at the expense of natural gas-produced gray hydrogen.

The IRA’s provisions for clean hydrogen development include advanced manufacturing production tax credits for clean energy components, such as solar panels, wind turbines, and inverters. These incentives, known as 45X credits, provide $30 billion of funding to encourage domestic production of these crucial equipment pieces. The act also aims to promote new mineral supply chains in North America and countries with free trade agreements with the United States.

Additionally, the IRA incentivizes clean energy generation, which has downstream benefits for green hydrogen. The legislation includes the technology-neutral 45Y clean electricity production tax credit (PTC) and extends the Section 48 investment tax credit (ITC) for clean energy technologies. The IRA introduces adders or incremental benefits for meeting specific requirements such as domestic manufacturing and siting projects in “existing energy communities.”

Furthermore, the IRA directly supports clean hydrogen production through a clean hydrogen credit called 45V. This credit provides tax credits of up to $3 per kilogram based on lifecycle greenhouse gas emissions and compliance with prevailing wage and apprenticeship requirements. The introduction of this credit is expected to have a transformative effect on the composition of hydrogen demand, with green hydrogen becoming more cost-competitive compared to gray hydrogen produced from natural gas.

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While the IRA provides some incentives for blue hydrogen, which is produced from natural gas with carbon capture and storage, it also imposes charges on methane emissions and does not allow for “stacked” credits for blue hydrogen producers. The legislation’s focus on green hydrogen, along with its support for carbon capture and storage, signals a shift towards cleaner hydrogen production.

Overall, the IRA is expected to accelerate the energy transition by supporting clean energy generation and clean hydrogen production. It is likely to displace existing demand for gray hydrogen and lead to the widespread adoption of green hydrogen in domestic markets by 2030, barring significant changes or external shocks. However, the future of hydrogen remains subject to political dynamics and global supply chain considerations.

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