New Analysis: The 3 Pillars Will Support Large Hydrogen Deployment

A new study by Evolved Energy Research casts compelling insight into the heated debate around the IRA 45V clean hydrogen tax credits. The study finds that the three pillars of 1) new clean supply, 2) hourly matching and 3) deliverability will support substantial deployment of clean hydrogen in this decade. The study also concludes that all three pillars are the minimum guardrails against large carbon emissions increases from hydrogen production and derailing U.S. climate progress. The study – which can be added to the pile of evidence in favor of the three pillars—further crumbles unsubstantiated claims by proponents of looser rules that the three pillars will hobble industry growth. Those unsubstantiated claims are, yet again, proven to be resoundingly FALSE. 

The study comes against the backdrop of an increasing U.S. and global pipeline of announced three-pillar compliant projects and evidence from the European Union that their adoption of the three-pillars did not shrink the project pipeline.  It also comes concurrently with the American Clean Power association (ACP)—the foremost U.S. clean energy trade group—taking a weak position on 45V implementation, endorsing an excessively long transition period before hourly matching kicks in. The position would lock-in hundreds of millions of tons of carbon emissions through the 2040s. ACP fell for the myth – sponsored by a few companies hungry for billions of dollars of taxpayer money, carbon emissions be damned—that loosening one or more of the pillars is necessary to support industry growth. FALSE. Interestingly, several ACP members do not support this position.

The evidence is definitive: in upcoming Treasury guidance, Treasury, DOE, and the White House must require that all electrolytic hydrogen projects meet the three pillars to claim the highly lucrative top 45V credit of $3/kg. Looser requirements – including annual matching and arbitrary exemptions from new clean supply requirements -- will result in a grim U-TURN for the power sector, in the form of emissions increases. This would be completely unacceptable, in the very decade when the power sector must rapidly decarbonize to keep U.S. climate goals within reach. It would also bruise the credibility of the nascent clean hydrogen industry and amplify public opposition to hydrogen deployment. To quote a partner of ours: weak rules are a “monster gamble” on the U.S. power grid and the clean hydrogen industry’s credibility. But this gamble is completely unnecessary.

The Evolved study was supported by NRDC, but as the study authors note, all conclusions are their independent assessments. It is not just another study. Other analyses have either zoomed in on individual project financials, focused on the power sector, or relied on simplified user-selected assumptions. In contrast, the Evolved study examines economywide impacts linked to hydrogen production and can finally offer the coveted answer to the question: will the three pillars hinder industry growth and jeopardize U.S. goals to scale up a clean hydrogen market? The answer is a resounding NO. The study concludes that: 

1. The three pillars will support more than 8 million tonnes (MMT) of electrolytic hydrogen production by 2030. This tracks DOE’s ambitious 2030 clean hydrogen production target of 10 MMT (a combined electrolytic and blue hydrogen target). Further, electrolyzer deployment is very similar by 2030 under both three pillar rules and loose rules—a result that shatters claims that the three pillars will slow down deployment. 
2. The three pillars are necessary to prevent and minimize carbon emissions increases that will undermine U.S. climate goals, kick President Biden’s goal of a 100% clean power sector by 2035 further out of sight and compromise the industry’s credibility. The three pillars help avoid a cumulative 250 to 650 MMT of carbon emissions between 2024 and 2032. This is an enormous amount of carbon, with the upper bound equivalent to more than 40 percent of annual U.S. power sector emissions.
3. The three pillars will set the industry up for long-term success by incentivizing the right type of investments and behavior for hydrogen projects: flexible electrolyzers capable of operating in harmony with the variability of renewable energy. Evolved asserts that if the clean hydrogen market does not behave in this manner “it will not have nearly as large a role in a decarbonized energy system as we have projected in previous net-zero analyses.”

Let’s dig in.

Brief analysis description. 

Using their EnergyPATHWAYS and RIO models, Evolved examined the rate of clean hydrogen deployment and its impact on U.S. energy sector emissions across two implementation frameworks of the 45V credits: 

• A “No credit” case which assumes that the 45V credit does not exist. This serves as a baseline case against which to compare results. 
• A “Limited requirements” case which assumes that the 45V credits are in place and that Treasury guidelines impose loose eligibility rules on electrolytic hydrogen projects, including the ability to be powered by existing clean energy sources (i.e., no new clean supply requirements) and annual matching. Some companies (here and here) are heavily lobbying for such lax rules; and 
• A “three pillars” case which assumes that the 45V credits are in place and that Treasury guidelines require all electrolytic hydrogen projects to meet the three pillars of new clean supply, hourly matching, and deliverability. 

 For each of those scenarios, Evolved examined two hydrogen demand cases: 

• A restricted demand case, where hydrogen use is explicitly limited mainly to applications where it’s already used (in the form of status quo dirty “grey” hydrogen) —notably, oil refining and chemicals manufacturing. Many argue that the bulk of clean hydrogen production in this decade will likely go to those existing uses, given existing hydrogen infrastructure and familiarity with the fuel. And 
• An economic demand case, where the hard limit on hydrogen demand is lifted, and hydrogen can be deployed wherever the model finds it economic relative to other energy options. In addition to the uses in the restricted demand case, clean hydrogen is deployed in a wide range of new applications, including synthetic fuels production for marine shipping and aviation, as well as blending in gas turbines for power generation. While the economic demand case is unlikely to materialize in this decade as it does not account for real world constraints likely to slow down uptake in those applications, it serves as a useful test case to examine the technical potential of clean hydrogen deployment and potential impacts if the market accelerates further than we anticipate. Markets move faster than we expect when incentives are in place: the explosive growth of wind and solar over the past 13 or so years offers a useful precedent.  

Across most cases, Evolved assumes an annual limit on renewable energy deployment to account for real world constraints like siting, permitting and supply chains. Evolved relaxed the constraint for a few cases to examine impacts on hydrogen deployment and emissions.

The three pillars will support substantial clean hydrogen deployment, delivering on the IRA’s intent. 

Across all cases, the three pillars have limited impact on clean hydrogen production and electrolyzer deployment. By 2030, clean hydrogen production subject to the three pillars is more than 8 MMT. This is substantial. It nearly engulfs DOE’s ambitious 2030 clean hydrogen production target of 10 MMT, meant to be spread out between both “blue” hydrogen and electrolytic (or “green”) hydrogen and delivered by a suite of supportive policies, not just the IRA. 

Notably, electrolyzer deployment under loose requirements and three pillars is very similar and substantial (see figure below). Cumulative three-pillar compliant electrolyzer deployment ranges between 70 and 120 gigawatts (GW) by 2030, and 83 and 163 GW by 2032 (the upper limit reflects the economic demand case). In comparison, the International Energy Agency estimates that electrolyzer capacity worldwide currently in the pipeline amounts to approximately 130 GW by 2030 (though this pipeline is projected to rapidly grow). The sheer scale of deployment demonstrates the generousness of IRA subsidies for both clean hydrogen and renewable energy.

Evolved draws a similar conclusion to other studies: hourly-matched projects can achieve the levels of utilization necessary for projects to pencil out– on average more than 60%—by oversizing wind and solar capacity powering the projects. Therefore, U.S. regions with both wind and solar resources are well positioned to be first movers. Interestingly, Evolved finds that the geographic patterns of hydrogen production are fairly similar under the three pillars and loose rules, demonstrating that the three pillars will not unduly restrict the geographic opportunities for hydrogen production relative to looser rules. 

Evolved finds that while the three pillars will have an impact on the cost of clean hydrogen production, it will not hinder its cost-competitiveness relative to status quo “grey” hydrogen or large-scale deployment. Evolved then argues that since the cost impact of the three pillars will not hobble deployment, it becomes “a question of the expected returns for investors for hydrogen production and not whether IRA will be successful in driving electrolyzed hydrogen adoption.” Indeed, the role of taxpayer-funded, public subsidies should be to support sufficient deployment of electrolyzers to drive technology cost reductions and enable a flourishing, unsubsidized market. It’s not about wasting public funds to maximize shareholder value for a few companies. 

The results definitively undermine claims by proponents of weak rules – including annual matching and arbitrary exceptions for hydrogen projects from new clean supply rules—that the three pillars will hinder deployment and put on ice needed technology cost reductions. The very similar electrolyzer deployment under both cases is even more stark considering that Evolved made two assumptions that should make it harder for the economics of hourly-matched projects to pencil out: conservative electrolyzer costs that are higher than DOE projections and existing market quotes, and a prohibition on hourly-matched projects to generate additional revenue by selling excess renewable electricity generated by their oversized renewable energy projects (for a deeper dive into this piece, refer to the excellent studies by our colleagues at Energy Innovation and Princeton University’s ZERO Lab). 

The three pillars are necessary to prevent significant emissions increases and a grim U-TURN for the power sector and economy.

Emissions outcomes are substantially better under the three pillars relative to loose rules. Annual emissions through 2032 under loose rules are consistently far higher than under the three pillars, and the three pillars help avoid a cumulative 250 to 650 MMT of carbon emissions between 2024 and 2032. This is a huge amount of carbon, with the upper bound equivalent to more than 40 percent of annual U.S. power sector emissions.

Emissions increases are linked to increased coal and gas electricity generation to support hydrogen production. In particular, annual matching enables unchecked latitude for electrolyzers to balance their operations by drawing power from the grid whenever it suits them, regardless of how dirty the grid is, while procuring annual renewable energy credits (RECs) to qualify for the credit. But procuring annual RECs is ineffective at driving new renewable energy in sufficient volumes to counterbalance emissions increases. 

In contrast, hourly matched projects must vary their operations with the availability of renewable energy and have far less opportunities to balance operations by drawing from dirty grids. Instead, they must look to cleaner ways, like oversizing their clean energy supply and/or investing in hydrogen storage. As we discuss below, those are precisely the sort of investments that we need if hydrogen is to support economywide decarbonization.

Annual limits on renewable energy buildout have important bearing on the results. Evolved finds that even the three pillars may not guarantee a positive emissions outcome if we don’t accelerate the buildout of renewable energy, although any emissions increases linked to the three pillars remain substantially less pronounced than those under loose requirements. The hydrogen PTC is so lucrative that hydrogen projects are likely to be first in line to procure new renewable energy projects, eating into renewable energy deployment that would have occurred to serve other demand. Under a constrained renewable energy buildout, this drives an increase in fossil fuel generation. When renewable energy build constraints are relaxed, the three pillars almost entirely prevent an increase in fossil fuel generation and result in emissions decreases for the U.S. energy system relative to the baseline, owing to truly clean hydrogen replacing fossil fuels in various applications. This is precisely the outcome that the IRA intended. 

In sum, we extract a dual conclusion: 

• 1) The three pillars are necessary guardrails to minimize and prevent emissions increases in this decade and beyond and critical to prevent the torpedoing of U.S. climate goals., and
• 2) It is urgent that we lift barriers to renewable energy deployment, both for the sake of economywide decarbonization and to ensure truly clean hydrogen deployment.

The three pillars will set the industry up for long-term success by incentivizing the “right” type of investments.

One of hydrogen’s most attractive value propositions is its potential to serve as a beneficial link between various sectors of the economy. As our power sector becomes more reliant on variable renewable electricity, we anticipate increased occurrences of excess wind and solar electricity. Electrolyzers can operate flexibly and utilize this excess renewable electricity to produce and store hydrogen. This helps reduce electricity system costs, because it’s a better use of assets, while serving targeted hydrogen end-uses cost-effectively. 

But this picture will not materialize if annual matching is adopted (in line with ACP’s position for example). Because annual matching allows hydrogen projects to balance their operations by drawing power from the grid with near full impunity, there is no need to ramp operations with the availability of renewable electricity or invest in hydrogen storage. To quote an industry partner, annual matching will lead to “dumb technology”. In contrast, hourly matching incentives the right and needed behavior and investments – flexible electrolyzers that work in harmony with renewable electricity availability and supported by hydrogen storage.

Evolved argues that “encouraging this type of learning is as important to the development of hydrogen markets as is simply buying down the cost of electrolyzers”. In other words, annual matching is akin to spending a ton of cash on excessively fertilizing the soil only to harvest the wrong crop. Evolved also asserts that if hydrogen projects do not adopt flexible operations “[the hydrogen market] will not have nearly as large a role in a decarbonized energy system as we have projected in previous net-zero analyses.”

Bottom line: a three-pillar compliant clean hydrogen market will be robust and prevent climate harm.

The three pillars will support substantial growth of the clean hydrogen industry, ensure that it’s actually “clean”, and set it up to play a meaningful role in the U.S. transition to a clean economy. 1) Failing to require the three pillars, 2) allowing for lengthy transition periods before requiring them and/or 3) grandfathering in weak rules before the pillars kick in (a la ACP), would be an exercise in benefiting a few companies or business models, not an exercise in sound policymaking in service of the public.