Don't Let Me Be Misunderstood - Hydrogen's Colors Hog the Spotlight, but Tax Credit Puts Focus on Carbon Intensity - RBN Energy

Don't Let Me Be Misunderstood - Hydrogen's Colors Hog the Spotlight, but Tax Credit Puts Focus on Carbon Intensity | RBN Energy

Clean hydrogen’s supporters often tout its growth potential, boosted in no small way by the billions of dollars in federal subsidies that will soon go toward supporting the buildout of an extensive series of regional hubs across the U.S. Clean hydrogen has its share of detractors, too, who question how much of a fixture it can become in the U.S. energy mix and wonder about its reliance on all those federal subsidies. But there’s one thing just about everyone seems to agree on — nobody likes the seemingly ubiquitous hydrogen color scheme, with arguments that it is too simplistic, has become too politicized, and puts the industry’s focus on the wrong things. In today’s RBN blog, we look at the limitations of the hydrogen color scheme, the risks of relying on it too extensively, and how the new tax credit for clean hydrogen puts the focus on carbon intensity (CI) instead.

We’ve written a lot about hydrogen’s emergence over the past couple of years, from our initial series where we tried to make sense of the increased buzz around the fuel, to our dive into the long history of U.S. hydrogen markets, to our review of the different hydrogen production pathways, to an examination of its long-term growth potential and the development of several regional hubs in the U.S. In addition to the long-established hydrogen markets, hydrogen advocates like to tout its long-term potential for any number of uses, including as fuel to help decarbonize boilers in industrial processes, as a transportation fuel, and as an energy storage system for intermittent renewable power.

Hydrogen also gets attention because it can be produced in several different ways from a number of different fuels, including coal, natural gas, nuclear power and renewables. But while the hydrogen that is ultimately produced by each method is identical — hydrogen is hydrogen, after all — each method has its own environmental impact and its own CI score. To differentiate one type of hydrogen from another, which has become increasingly important in recent years as policies emerge to reduce or eliminate greenhouse gas (GHG) emissions, a color scheme has emerged (see Figure 1 below). While at best the scheme is far from perfect, it’s worth at least reviewing the rainbow of varieties.

Figure 1. The Hydrogen Color Wheel. Source: Journal of Petroleum Technology

Black/Brown: Hydrogen produced through the gasification of coal or lignite. The carbon dioxide (CO2) emissions are not captured in the process.

Gray: Hydrogen that is produced from natural gas using steam methane reforming (SMR) or auto thermal reforming (ATR). CO2 emissions are not captured in the process. It is the most common type of hydrogen produced.

Green: Hydrogen that is produced by running water through an electrolyzer, where the power is supplied from renewable sources. No CO2 emissions are created in the process.

Blue: Hydrogen produced by running natural gas through SMRs or ATRs, or via coal gasification, but the CO2 emissions are captured for eventual sequestration or other use.

Turquoise: Hydrogen that is made using a process called methane pyrolysis to produce hydrogen and solid carbon, with no gaseous CO2 emissions.

Pink: Hydrogen produced by electrolysis using nuclear power. As with green hydrogen, no CO2 emissions are created. (This is also sometimes referred to as purple or red hydrogen.)

White: Naturally occurring hydrogen found in underground deposits. There is no strategy for accessing and developing white hydrogen today.

We should note that there are myriad other ways to make hydrogen — such as fermenting microbes, pulling power straight from the grid for electrolysis, using renewable natural gas (RNG) produced in landfills, and burning biomass — and other hydrogen colors not listed above.

But while the color scheme is a helpful shorthand — one that we employ in RBN’s weekly

- How much do carbon-capture rates vary for different types of blue hydrogen projects, and how do those rates impact the fuel’s lifecycle CI?
- For hydrogen production that relies on fossil fuels, how much does the lifecycle GHG emissions of that fossil fuel factor into the lifecycle GHG emissions for the hydrogen that’s ultimately produced?
- Where does the renewable power used to produce green hydrogen come from, and is that power produced specifically for hydrogen, or is it just siphoned off the power grid, requiring more power from conventional sources to meet general demand? (This is a potentially critical element in the 45V tax credit and the subject of a future blog.)

It’s important to note that the color scheme also makes it very easy for discussions around hydrogen production to be politicized. The Biden administration has been pushing for the large-scale development of hydrogen to help decarbonize the economy and sees several different pathways for hydrogen production. The Hydrogen Shot program, announced in 2021, aims to slash the cost of producing green, blue and pink hydrogen by 80% by 2030. But while environmental groups mostly back efforts to develop green hydrogen because of its reliance on renewable power, many are opposed to any process that relies on natural gas or nuclear power, citing their goal to move away from fossil fuels and their concerns about the long-term environmental risks associated with nuclear power, regardless of how low the CI scores might be. (It’s also a lot easier for a politician or advocacy group to state an unequivocal opposition to anything other than green hydrogen, for example, when a more nuanced approach might be better — but also harder to explain.)

Section 45V Clean Hydrogen Production Tax Credit Rates

Figure 2. Section 45V Clean Hydrogen Tax Credit Rates. Source: cleanenergyfinanceforum.com

The labels that we attach to different types of hydrogen production might not seem like a major issue on the surface, but the debate becomes much more significant when you start factoring in things like the 45V production tax credit(PTC) for clean hydrogen, created as part of last year’s Inflation Reduction Act(IRA). Under that provision, credits (see Figure 2 above) of up to $3/kilogram (kg) are available based on the rate of lifecycle GHG emissions during a clean hydrogen facility’s first 10 years of operation. As defined by the IRA, clean hydrogen is produced through a process that results in a lifecycle GHG emissions rate of not more than 4 kg of CO2 equivalent per kilogram of hydrogen (CO2e/kg). In short, the less carbon-intensive the hydrogen, the more generous the PTC becomes.

Because the PTC is designed to be process-neutral — and not reliant on the color scheme — it’s available whether the hydrogen is produced through electrolysis to create green hydrogen, SMR to create blue hydrogen, or any other process, as long as the CI is low enough. The Internal Revenue Service (IRS) requested public comment on the tax credit in November 2022 in several areas, including further guidance on what qualifies as clean hydrogen, how lifecycle GHG emissions should be allocated to clean hydrogen that is a byproduct of industrial processes, and how to handle facilities that produce clean hydrogen during part of the year but also produce non-qualifying hydrogen during other times of the year.

The debate over those CI rules has intensified as the date nears for the IRS guidance, which is expected to be published at any time. In future blogs, we’ll explore three concepts concerning the power used to produce hydrogen — additionality, deliverability and hourly matching — and why the rules around them will play a central role in how the PTC is implemented, how much hydrogen is ultimately produced, and how clean that hydrogen actually is.

“Don’t Let Me Be Misunderstood” was written by Bennie Benjamin, Horace Ott, and Sol Marcus for Nina Simone, who recorded the first version of the song in 1964. British rock band The Animals released their version of the song as a single in January 1965 and it went to #15 on the Billboard Hot 100 Singles chart. It appeared as the first song on side two of The Animals’ third U.S. studio album, Animal Tracks. The song has been covered by many artists, including Santa Esmeralda, whose disco version went to #1 on the Billboard Club Play Singles chart, and Elvis Costello, whose version went to #22 in Ireland and #33 in the U.K. Bruce Springsteen has credited the song’s riff for the inspiration for his song, “Badlands.” Personnel on The Animals’ record were: Eric Burdon (lead vocals), Hilton Valentine (guitar, backing vocals), Alan Price (keyboards, backing vocals), Chas Chandler (bass, backing vocals), and John Steele (drums, percussion).

Animal Tracks was recorded in London between July 1964 and June 1965 with Mickie Most producing. The U.S. version was a hodgepodge of recent hit singles with songs left over from the band’s two previous album sessions. It bore very little resemblance to the U.K. version, which featured R&B covers. It would be the last album for original founder and keyboardist Alan Price, who left the band to pursue a solo career. Released in the U.S. in September 1965, three previous Top 20 hits were featured on the LP. The U.K. version of the album went to #6 on the U.K. Albums chart.

The Animals are a British rock band formed in Newcastle in 1962 by Alan Price, Eric Burdon, Hilton Valentine, Chas Chandler and John Steele. Their first major hit was “House of the Rising Sun” in June 1964. Twenty-three members have passed through the band since its formation. Original bassist and early Jimi Hendrix manager Chas Chandler died in 1996. Guitarist Hilton Valentine died in 2021. Singer Eric Burdon still fronts a touring version of The Animals with six other musicians. The Animals have released five studio albums in the U.K., three in the U.S., six compilation albums, five EPs, and 25 singles. After Eric Burdon moved to Los Angeles in 1967, the group became Eric Burdon and the Animals, and achieved continued success as a psychedelic band. The Animals were inducted into the Rock and Roll Hall of Fame in 1994.