Hydrogen and Decarbonization: Framing the Opportunities, Challenges, and Limitations (Part 1)

The following post is the first in a series exploring policy implications of federally funded “hydrogen hub” projects planned for Pennsylvania. 

John Walliser, Senior VP for Legal & Government Affairs

Reducing greenhouse gas emissions across all sectors of our economy is challenging, not only from a technology or deployment standpoint, but also in understanding and piecing together all the different pieces. What works in one instance may not be adaptable or appropriate in others. It is a work in progress – one that needs to be accelerated – but there are principles that can help guide those efforts.

PEC has issued a continuing series of policy and technology recommendations for decarbonization – the most recent being before the 2022 Gubernatorial election. We will soon be updating that report for 2024. But when you get to the heart of what principles drive our recommendations, they can be summarized as follows:

  1. Don’t let the ideal be the enemy of the good. In other words, we need to reduce emissions as quickly as possible, and should utilize the most effective and cost efficient technologies available now.
  2. Don’t let “good enough” be the enemy of what is essential and equitable. In other words, we support an “all in” approach to energy transitioning, but there are fundamental principles that cannot be pushed aside in favor of any one solution. That includes impacts to both the environment and communities.
  3. Start now. And, get it right from the start.

With the recent announcement of Department of Energy Hydrogen Hub funding awards, including two proposed Hubs that will include projects and infrastructure buildout in Pennsylvania, it’s important to consider how these principles might play out. Particularly in light of draft federal guideline recently published by the U.S. Department of Treasury on the Clean Hydrogen Production Credit established by the Inflation Reduction Act.

Our focus in this first post is on hydrogen’s potential, existing problems, and initial guideposts for addressing those challenges. While we highlight current challenges, that doesn’t mean that – with the right conditions and controls – hydrogen can’t be an important part of Pennsylvania’s energy transition. But, again, we have to get it right from the start. Thankfully, many in the hydrogen industry already recognize this reality.

Check out PECs recent interview about hydrogen with Sam Bailey from the Clean Air Task Force on our Pennsylvania Legacies podcast:

Why (and Where) Hydrogen?

Hydrogen has the potential to replace fossil fuels in several sectors of the economy, particularly those applications that require either energy for chemical and industrial processes like steelmaking or refineries, or which require dense forms of energy to propel heavy transport like vessels, aircrafts, and large trucks across long distances. These are applications where electrification and battery technology aren’t yet available or feasible, at least not in the foreseeable future.

To get a sense of where hydrogen use may be most appropriate, one of the best known examinations is known as the “Hydrogen Ladder” developed by Michael Liebrich. This analysis looks at hydrogen deployment from a technology, cost, and ready alternatives perspective. Another (and perhaps more visually helpful) comparative analysis is provided in a 2022 report by the International Renewable Energy Agency.

As you can see in the chart, hydrogen use will also be influenced by proximity between energy resources and end uses. This is also where some of the tension develops, since not all hydrogen production or use is appropriate for decarbonization.

Hydrogens (Current) Problem

Hydrogen’s foremost problem is that it is – at least for now – a costly and inefficient process made directly from fossil fuels. Domestic hydrogen production is responsible for approximately 100 million metric tons  of carbon dioxide (CO2) emissions in the U.S. each year — the equivalent emissions from 22.2 million cars. Even if hydrogen production in Pennsylvania was powered by our existing electricity grid, where coal and natural gas still account for a majority of total generation, it would produce more emissions than would be offset by that hydrogen’s use.

For hydrogen to be part of the clean energy transition, it needs to be dramatically cleaned up. The first order of preference is to make hydrogen from new, non-emitting sources of generation like renewables and nuclear energy. And for hydrogen made with natural gas, we need to strictly control both “upstream” emissions of methane as well as the emissions resulting from production itself.

An arresting – but still accurate – headline.

As we have stated in our broader advocacy for stronger methane emission controls for natural gas development and delivery, methane is a significant problem. Existing methane leakage projections have consistently underestimated actual emission observations. This is an extraordinary problem given methane’s contribution as a greenhouse gas to climate change, where methane’s impacts are significantly higher in short term than carbon dioxide. Without comprehensive controls, actual and continuous monitoring, and prompt leak detection and repair, methane emissions are already an untenable liability — regardless of whether natural gas is ultimately utilized for hydrogen production, or for any other end use. Given that Pennsylvania is one of the nation’s largest producers of natural gas, this problem hits especially close to home.

Thankfully, the Environmental Protection Agency recently finalized new rules that go a long way toward addressing this problem. Pennsylvania will need to promptly adopt and implement these rules over the next two years – PEC will be featuring this work in upcoming posts and podcasts.

For emissions resulting from the actual production of hydrogen with natural gas, we also need a robust carbon capture and management  program that ensures that the vast majority of those emissions — at least 95% — are not released into the atmosphere. Pennsylvania currently does not have a program in place, though legislation is under consideration in the General Assembly. Stayed tuned on this as well, since there is much to unpack on that work.

All that said, there are promising steps at hand.

Performance Thresholds – Home and Abroad

One of the biggest drivers of clean hydrogen production will be federal incentives from the Inflation Reduction Act (IRA). The IRA established a Clean Hydrogen Production Credit (also known as the “45V Credit”, referring to the relevant section of the Internal Revenue Code) with escalating credit value tiers based on the emissions rate of a hydrogen production process. The U.S. Department of Treasury was tasked with developing eligibility criteria for those credits; a draft of that guidance was released for public comment at the end of December 2023.

Among the performance requirements are three core principles — often referred to as the “Three Pillars” because they are interconnected — that have been identified by experts and advocates alike as essential for truly clean hydrogen production. They are:

  1. Ensuring that hydrogen is made from new clean energy sources that are not already providing electricity to the grid. Without this requirement, production would merely syphon existing clean generation that would be backfilled by emitting sources. This pillar is often termed “Additionality.”
  2. Require that the additional clean energy supply is physically deliverable to the hydrogen production facility or shared electric grid. This pillar is often called “Geography Matching.”
  3. Also require that the hydrogen production is only occurring when clean energy supplies are actually available. Without this, production would increase demand on the grid when higher-emitting sources of generation are predominant. This pillar is often called “Time-Matching.”
The playing field will be elevated, as shown in this report from September 2023 on the impact of the new Carbon Border Adjustment Mechanism for importers of goods into the European Union.

The draft Treasury guidance currently incorporates these pillars; the pressure will now be to ensure that they remain intact through finalization and implementation.

The United States isnt alone the European Union (E.U.) has already established the three pillars as guiding principles for its clean hydrogen rules. This is especially important because the E.U.’s rules will prevent importation of hydrogen, or even products derived from hydrogen, like fertilizer and steel, if they don’t meet those standards. So not only are robust performance standards necessary for ensuring we meet decarbonization goals, they are essential for our future economic competitiveness.

The Treasury Guidance also includes what are called “well-to-gate” rules for hydrogen produced with natural gas, which means producers will need to account for ​“upstream” leakage that occurs before the gas reaches their facilities, as well as any methane that escapes at the facilities themselves. This works hand in hand with the EPA rules mentioned earlier in this post.

In addition, the U.S. Department of Energy has set a target for natural gas-driven hydrogen projects seeking the Clean Hydrogen Production Credits 45V to capture 94.5% of the carbon emissions they generate. But it is not yet clear how the Treasury Department will require those projects to track and verify their capture rates.

So while initial guidance at the federal level is pointed in the right direction, there is still a long way to go to seeing these criteria established and successfully implemented.

But Wait, There’s More

This is a lot of information to take in, and we still haven’t gotten into the weeds on key issues like carbon capture, community engagement and equity, and regulation of hydrogen infrastructure.

We will continue to examine these in the months ahead, but we felt it was important to set the table. Again, we invite you to listen to our podcast with Sam Bailey from the Clean Air Task Force, which provides additional context and information on these key issues.

Important Acknowledgement:

While this post only reflects PECs views, we used information and insights from testimony provided by Sam Bailey (Clean Air Task Force) and Rachel Fakhry (Natural Resources Defense Council) before the Pennsylvania House Environmental Resources & Energy Committee in November 2023.