World first | Colorado approves clean hydrogen tax credit of up to $1/kg for usage in hard-to-abate sectors
But the legislation also contains the strictest rules yet on green H2 production, with requirements for additionality and hourly matching
The Colorado state legislature has passed a new law that provides tax credits of up to $1/kg for users of clean hydrogen in so-called “hard-to-abate” sectors — the world’s first public subsidy for low-carbon H2 usage, which happens to come with the strictest rules yet on what constitutes “clean hydrogen”.
House Bill 23-1281 — which has been passed by both Democrat-led chambers in the Colorado General Assembly — provides income tax credits of $1 per kilogram of clean hydrogen for “a qualified use that results in a tier one greenhouse gas emissions rate”.
It defines “tier one” as green hydrogen that would qualify for the top rate of the federal hydrogen production tax credit under last year’s US Inflation Reduction Act (IRA) — ie, that is produced with lifecycle greenhouse gas emissions of less than 0.45kg of CO2-equivalent (CO2e) per kg of hydrogen and therefore eligible for $3/kg of federal cash.
The Colorado bill adds that an income tax credit of $0.33/kgH2 will be available for “qualified uses” resulting in “tier two” greenhouse gas emissions rate, which it defines as the second-highest tax credit rate in the IRA — namely, hydrogen produced with between 0.45 and 1.5kgCO2e/kgH2.
This seems likely to rule out the use of blue hydrogen (produced from fossil gas with carbon capture and storage), due to the high levels of upstream methane emissions in the US, as well as fugitive emissions from the carbon capture process.
“Qualified use” is defined as clean hydrogen used in the state for the following “hard to decarbonize end uses” — heavy-duty trucks, aviation, industrial heat of at least 150°C and higher, and feedstock for industrial purposes, including the production of steel, ammonia, fertilizer and chemicals.
It explicitly points out that hard-to-decarbonize end use “does not include the direct use of hydrogen for residential or commercial heating”.
Crucially, the clean hydrogen must have been produced from new, purpose-built renewable-energy projects, or renewable energy that would otherwise have been curtailed.
In addition, producers must prove on an hourly basis that the electricity used by electrolysers to produce green hydrogen has come from new or curtailed projects — which is the most stringent rules yet applied anywhere in the world.
The relevant clause in the bill states the requirement for “the matching of electrolyzer energy consumption with electricity production on an hourly basis, if the technology is available [our italics]”, which is presumably a reference to technology that can track the sourcing and consumption of renewable energy every hour.
The law explains that the hydrogen producer must demonstrate “that the electricity used to produce clean hydrogen comes from renewable energy that would otherwise have been curtailed or not delivered to load or from new zero-carbon generation that began production no more than 36 months before the start of the operations of the electrolyzer”.
This is to ensure that no fossil-fuel-derived electricity is used to produce green hydrogen, and that the existing renewables supply — which would normally be used to help decarbonise the grid — is not cannibalised for H2 production, requiring its replacement by fossil-fuel-fired sources.
A similar proposal for so-called “hourly matching” was proposed by the European Commission, but after an outcry from the hydrogen industry, which argued that meeting such rules would result in very expensive H2, a compromise was reached to only permit hourly matching from 2030, with monthly matching until then.
There are still fears, however, that monthly matching would allow some fossil-fuel-fired electricity to be used for green hydrogen production, with a corresponding amount of excess renewable energy sent to the grid at a later date to compensate — even if the network cannot actually use that electricity at the time because it is surplus to requirements.
The US is yet to define its additionality and temporal correlation rules, with the Treasury tasked with producing a definition for clean hydrogen this summer.
Only last week, a group of hydrogen companies argued that the US should not include any additionality rules, arguing that there is no difference between renewable power being used for heat pumps, electric vehicles or electrolysers.
But the Natural Resources Defense Council (NRDC) non-profit was pleased that Colorado took the hourly matching approach.
“By requiring critical guardrails that will ensure genuinely clean hydrogen production for their state tax credit, Colorado can simultaneously influence the federal clean hydrogen standards and set its emerging clean hydrogen industry up for success,” said Rachel Fakhry, director of emerging technology at the NRDC, who previously wrote a column on the matter for Hydrogen Insight.
“Despite fierce lobbying by some industry groups to loosen the rules, the Colorado legislature held firm to bolster its climate progress, protect its communities from reckless polluting hydrogen development and boost the credibility of its emerging clean hydrogen industry. [The] Treasury, the Department of Energy, and other states should take note and follow Colorado’s lead.”
The Colorado bill sets limits for how much money an entity can claim in a single tax year — $1m from 1 January 2024 to 31 December 2025; $500,000 from 1 January 2025 to 31 December 2029; and $250,000 from 1 January 2029 to 31 December 2032.
It also states that the Colorado Public Utilities Commission (CPUC) will establish “a stand-alone application, review and approval process for investor-owned utility projects that result in the production of clean hydrogen”.
Applications by investor-owned utilities — which are subject to monopoly oversight by the CPUC to ensure that ratepayers are not overburdened by undue costs — must include leak detection monitoring, impact assessments on local communities and assessment of water usage, among a host of strict rules.
The bill also states that the CPUC must consider “opportunities to encourage non-utility of production of clean hydrogen in Colorado, including opportunities for an investor-owned utility to propose a tariff for the sale of renewable energy that would otherwise be curtailed”.
The CPUC process rules must be adopted no later than 1 January 2028, “or no later than one year after the deployment of hydrogen electrolyzers in the state exceeds 200MW, whichever is earlier”.
House Bill 23-1281 still requires the signature of Colorado Governor Jared Polis before it becomes state law, but this is considered a formality as he is a Democrat, and the party has sizeable majorities in the state House of Representatives and Senate that passed the legislation.