'US plans for hourly matching would drive up both the cost of green hydrogen production and emissions': WoodMac




Analysis commissioned by renewables group argues that average carbon intensity could increase as more blue hydrogen projects would come on line instead


The US Treasury’s hourly matching rules for green hydrogen to qualify for the top rate of the $3/kg production tax credit (PTC) will not only make the gas more expensive, but indirectly benefit blue H2 — potentially increasing the average carbon intensity of “clean” hydrogen in the country.


This is according to Wood Mackenzie analysis commissioned by the American Clean Power Association (ACP), a renewables trade group that has been lobbying for changes to the Treasury Department’s draft guidelines that were unveiled at the end of last year.


The guidelines state that all green hydrogen production and renewable energy generation must take place within the same hour from 2028 (and within the same year until then) to try to ensure that the extra power demand from renewable H2 production does not take green electricity from the grid that would have to be replaced with fossil-fuel-fired power generation and thus increase overall emissions.


The hourly-matching rule has come under fire for potentially driving up the cost of green hydrogen production by vastly reducing the number of hours an electrolyser can run, thus increasing the overall cost of hydrogen production over the lifetime of the asset.


As such, a number of industry voices have warned that the cost of production will be increased beyond what offtakers are willing to pay for — and therefore prevent projects from ever getting off the ground and delaying industrial switching to cleaner feedstocks and fuels.


WoodMac estimates in its analysis that the cost of green hydrogen delivered to the end user would have to fall between $1-2/kg to be competitive with fossil fuels used in medium- or heavy-duty transport and industry.


But it calculates that in 2032 — even with the full $3/kg tax credit and expected price reductions in electrolysers and renewables — the fewer hours a plant can run would mean the levelised cost of producing green hydrogen in California or Texas with hourly matching would range from $3.30-7.40/kg.


However, this assumes the use of a proton exchange membrane (PEM) electrolyser, with WoodMac confirming to Hydrogen Insight that this is the only fair comparison for hourly matching scenarios given cheaper alkaline equipment is unable to safely or successfully operate with variable power input.


The research firm also notes that the main drivers for levelised costs of hydrogen are capacity factor and electricity price, with relative capex only 10-20% lower for alkaline electrolysers compared to PEM equipment.


Since the cost of grey hydrogen ranges from $1.48-2.24/kg, while diesel refined in the Gulf Coast and natural gas are estimated to respectively cost around $2.23 and $0.52 per energy-equivalent kilogram of H2, WoodMac warns that even the lowest-cost renewable hydrogen would not be able to reach cost parity with fossil fuels.


Meanwhile, blue hydrogen without a PTC would cost between $2.10-2.22/kg, dropping to $1.44-1.57/kg if producers access the 45Q tax credit for carbon capture and sequestration, which offers $85 per tonne of CO2 permanently stored.





However, WoodMac calculates that while annual matching would decrease the delivered cost of hydrogen by 22% in Texas and 31% in California in 2028, it would still not drive prices into the $1-2/kg range.


With annual matching for projects starting construction before 2029, as proposed by the ACP, green hydrogen made in Texas and California would still cost $2.65/kg and $5.37/kg, respectively, in 2032, the analyst says, suggesting that without additional subsidies even more time may be needed for electrolyser and renewable electricity prices to fall far enough to achieve cost parity.


The ACP itself proposes a ten-year window for annual matching as long as projects started construction before 2029 and operations before 2033, while keeping rules on additionality and geographical correlation in place.


Developers that had started construction or operations on their facilities any later would have to switch to hourly matching from 2033 onwards under the ACP’s suggested guidelines.


More blue than green


The ACP argues that blue hydrogen will take off faster than green hydrogen, in part because its feedstock of natural gas is extremely cheap at present. This means that incentives can more easily cover the cost gap with fossil fuels, even if the carbon intensity of blue H2 is likely to be higher due to upstream methane emissions.


Blue hydrogen producers can benefit from not only the 45V clean hydrogen production tax credit (albeit at a low rate), but also the 45Q carbon capture and storage tax credit if their emissions intensity is too high to qualify for the PTC.


WoodMac tracks that while 5.32 million tonnes of low-carbon hydrogen annual production capacity has been announced in the US, only nine green H2 projects with around 120,000 tonnes a year of combined capacity are actually under construction.


Meanwhile, it says roughly 260,000 tonnes a year of blue or other low-carbon production capacity is already operational, while nearly 1.8 million tonnes a year of extra blue H2 is in advanced development and likely to reach a final investment decision this or next year. A further 208,800 tonnes a year of blue hydrogen capacity has been delayed, but could start operations between 2025 and 2030.


However, just last week, ExxonMobil threatened to scrap its world-leading blue hydrogen project at its Baytown refinery in Texas, because it would not get high enough subsidies under the Treasury’s current draft guidance.


WoodMac’s analysis suggests that because fewer green hydrogen projects will come on line due to extra costs imposed by hourly matching, the Treasury’s proposed guidance would see an average carbon intensity of US clean hydrogen reach 3.1kgCO2e/kgH2 in 2028, falling to 2.5kgCO2e/kgH2 in 2032 and 1.9kgCO2e/kgH2 in 2035.


WoodMac calculates that the average carbon intensity under the ACP’s proposed regulations would be lower, at 2.4kgCO2e/kgH2 in 2028, 1.9kgCO2e/kgH2 in 2032, and 1.3kgCO2e/kgH2 in 2035.


Blue hydrogen proponents have had their own criticisms of the Treasury’s guidelines for the 45V, with comments arguing that the method of calculating greenhouse gas emissions uses a blanket assumption for upstream methane emissions regardless of how polluting each project’s source of natural gas actually is.


Similarly, blue H2 plants are likely to be subject to the same requirements as electrolysers to use renewable electricity in order to power methane reforming, or else have to account for extra emissions from power supply.




Updated with clarification from Wood Mackenzie that levelised costs of blue hydrogen production were calculated with assumption of 45Q tax credit, as well as reasoning behind PEM electrolyser assumption.



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