Hydrogen's Make-Or-Break Moment: Industry Awaits Key Treasury Decision On Tax Credits

Hydrogen fuel has been a top-of-mind carbon-free alternative for generations, but after decades of development, the industry is still not producing sizable revenues.

In order to reach full implementation, hydrogen companies rely on government subsidies, including the largest one in history, issued last year within the Inflation Reduction Act.

As an investment strategy, hydrogen's high costs and production hurdles pose significant challenges for bullish investors. Now, a Treasury decision on how subsidies should be regulated could be the make-or-break moment for the industry.

According to a study by Grand View Research, the hydrogen production industry was valued at $155 billion in 2022 and is projected to expand at a 9.3% annual growth rate from 2023 through 2030.

The Inflation Reduction Act of 2022 (IRA), signed by President Joe Biden in August of last year, was called by the White House "the most significant action Congress has taken on clean energy and climate change in the nation's history."

The ability to use hydrogen as a fuel without releasing harmful emissions into the atmosphere, has placed the compound high on the list of valuable technologies leading the shift to carbon neutrality.

Today, almost all the hydrogen consumed in the United States is used in oil refining, metal production, fertilizer production and food processing, according to the U.S. Energy Information Administration. 

But the use of hydrogen fuel cells, which combine hydrogen with oxygen to generate electricity, with the byproduct being only water, have raised the industry's prospects to include the possibility of it becoming a main source of power for long-haul shipping, maritime shipping, industrial heating and air travel, among other processes.

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Hydrogen can also be a great complement to wind and solar power, as it can be stored as a chemical battery to use when these power sources are not yielding enough for the grid's needs.

The IRA authorized a program called 45V, which allows a tax credit for hydrogen producers worth up to $3 per kilogram of hydrogen produced, if the hydrogen is generated from emission-free sources.

However, while there were 115 hydrogen projects announced by the Biden administration, only 11 had secured capital commitments by August of this year, according to S&P Global.

The problem lies in a debate over how the Treasury should measure hydrogen emissions. The Department of Treasury is in charge of adjudicating how the hydrogen production tax credit will be implemented, but it has yet to issue guidance on the subject.

Additional guidance on clean energy credits, which could include this topic, is expected to be released by the Treasury before year-end.

The debate divides the country's environmentally-friendly political community into two packs. 

One side, more pragmatic, considers the development of a working hydrogen industry to be an urgent goal for the reduction of carbon emissions, justifying the use of any source of electricity, even "dirty" ones, for that goal.

The more orthodox side expects the hydrogen industry to be built on green foundations, and expects the high-electricity demanding industry to be developed solely on renewable energy sources.

In February, a coalition led by the Clean Air Task Force and several other hydrogen stakeholders, including companies, warned that weak guidelines for grid-connected systems, such as allowing hydrogen production to come from fossil-generated electricity grids, risk driving up net emissions, hurting the Act's original intentions.

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"Weak guidance could therefore force the Treasury to spend more than $100 billion dollars in subsidies for hydrogen projects that result in increased net emissions," said the coalition.

The highly expected Treasury guidance on tax credits for hydrogen production has become a proxy for a wider debate on what constitutes a "clean" energy, which is now up to the Treasury to figure out, as per a report by CNBC.

According to an American Prospect report, 10 Democratic senators have signed on to a letter urging more flexible guidance for hydrogen companies to receive the tax benefits.

Plug Power PLUG, a 20-year-old hydrogen fuel cell company that has partnerships with Amazon.com Inc AMZN, Walmart Inc WMT and Home Depot Inc HD, has not yet achieved positive earnings, but benefited from a substantial hike in its share price in anticipation to the issuing of the IRA.

The company has already enjoyed tax cuts coming from state programs, yet its fate could hinge on the Treasury’s decision on whether tax benefits from the IRA can only go to companies using renewable electricity to produce hydrogen.

American Prospect postulates that Plug Power's business model might have been designed around a dependency on government subsidies

Air Products APD, a company with presence in 50 countries, has supported the so-called "three-pillars" approach to tax credits, which proposes that electricity for hydrogen production has to come from newly-built sources of clean electricity, and not from the existing grid. That electricity should also be regionally produced and accounted for by hourly metering, to make sure that the electricity used in hydrogen production comes directly from renewable sources in every step of the process.

Other hydrogen companies that could be affected by a Treasury decision include BP BP, Bloom Energy BE and FuelCell Energy Inc. FCEL.

ETFs following the hydrogen industry include Global X Hydrogen ETF HYDR, Defiance Next Gen H2 ETF HDRO and Direxion Hydrogen ETF HJEN.

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