Drafting the future of clean hydrogen: Build Back Better with an additionality requirement

Alternative fuels Strategies

It’s been a big year for hydrogen in transport. The European Union’s Renewable Energy Directive revision (RED III) established ambitious sub-targets for hydrogen blending, and automakers including Toyota and Honda continued to ramp up investments in hydrogen fuel cell electric vehicles (FCEVs). The enthusiasm also made its way to the chambers of the U.S. Congress just before Thanksgiving, when the House of Representatives passed the Build Back Better (BBB) Act, which includes a new tax credit for hydrogen producers.

The hydrogen provision in BBB is welcome in no small part because the value of the tax credit is tied to the level of greenhouse gas (GHG) reductions achieved relative to a fossil hydrogen baseline. In that way, the provision favors hydrogen produced from cleaner pathways such as renewable energy electrolysis (“green hydrogen”) over steam methane reforming (SMR) paired with carbon capture and storage (CCS; “blue hydrogen”). The latter pathway is one with dubious environmental benefits. Several reports released this year paint a bleak picture of blue hydrogen and suggest it might be even worse than previously believed because of the potential for methane leakage. Hydrogen produced via electrolysis powered by grid average electricity and used in FCEVs could have an even bigger carbon footprint; due to the high conversion inefficiency of FCEVs, fuel produced from this pathway could be up to three times worse for the climate than fossil alternatives.

Most of the policy support under BBB will go toward hydrogen made from renewables and that’s good. BBB’s current hydrogen provision might also prevent an overall increase in the production of higher-carbon fuels if it weren’t for a catch: It lacks an additionality requirement. Because of this, if renewable electricity supply cannot keep up with renewable electricity demand across multiple sectors in the system, some of the electricity used to power green hydrogen production could be power diverted from existing uses. Without proper safeguards, the remaining demand could then be filled by an uptick in fossil electricity production.

Unfortunately, these safeguards are not yet in place in the BBB bill. In its current form, green hydrogen producers are allowed to source electricity from facilities already receiving the federal renewable electricity production tax credit (PTC). Renewable power generators have utilized this incentive over the past decade to compete with other power generators on the electricity market or to feed into state-level renewable portfolio standards (RPS). So, even though the PTC phases out on December 31st of this year, the same renewable electricity generators that have been getting this credit are going to be eligible for the BBB tax credit. If the BBB provision leads to a sharp increase in electricity demand from green hydrogen producers, the power sector will have to make up the difference somehow.

Policymakers could prevent the use of fossil fuels to fill the gap via an additionality requirement. This would require that the electricity used to power electrolysis is both renewable and additional (i.e., not diverted from existing uses in the power sector). Additionality requirements involve measures such as power purchase agreements (PPAs) between an electricity supplier and hydrogen producer and excluding electricity that counts toward other regulatory targets or incentives from qualifying.

Failing to put a clear additionality requirement in BBB could result in unintended GHG emissions. Let’s do a quick “back of the envelope” calculation to estimate just how severe these impacts might be.

For this illustration, we follow the White House’s estimated demand for hydrogen economy-wide in 2030 from a strategy report released this fall. We combine the mid-point demand estimate with the average yield factor for electrolysis hydrogen from the literature to determine the total amount of electricity in terawatt-hours (TWh) needed for that level of hydrogen production. We find that over 160 TWh (1012) of electricity are needed to meet 2030 hydrogen demand if only electrolysis is used. If this quantity of electricity were to be diverted from the grid rather than sourced from dedicated suppliers, and demand does not decrease in other sectors, then new electricity capacity would have to be built to take its place.

There is a national commitment to decarbonize the electricity sector by 2035, but modeling projections based on current conditions aren’t quite as rosy. The Goldman School at the University of California, Berkeley has estimated values for new-build power generation capacity in 2030. Under a “No New Policy” or business as usual (BAU) scenario, approximately 14% of new capacity and 26% of new power generation would be sourced from natural gas, and the remainder would be sourced from renewable sources like solar, wind, hydro, and batteries. This means that, if future demand for hydrogen is non-additional, roughly 26% of diverted electricity would be replaced by new natural gas facilities. As illustrated on the left side of the figure below, that’s equivalent to bringing 14 new combined-cycle plants online in 2030 and is a 3% increase over today’s natural gas capacity.

Figure 1. New capacity additions for electrolysis hydrogen in 2030 under BAU (left side) and 100% renewable (right side) policy scenarios.

Alternatively, if ambitious decarbonization plans ensure that hydrogen is sourced from fully renewable sources, the additional demand would lead to the construction of a lot of new solar and wind facilities (right side of the figure). Using UC Berkeley’s new capacity projections under a clean electricity scenario, roughly half of 2030 electricity demand would come from wind power and the remainder from solar facilities. This would require building more than 16,000 additional commercial-scale wind turbines and nearly 7,000 large utility-scale solar facilities. That’s equivalent to nearly tripling the number of solar facilities in use today and increasing the number of wind turbines by 25%. New capacity would also require land. Using the National Renewable Energy Laboratory’s solar land-use estimates, we estimate that more than 1,000 square kilometers of land would be converted to solar panels to support this level of electricity demand.

It’s true that ambitious policies for decarbonizing the electricity and transport sectors are in place to do just this—rapidly increase renewable generation capacity. But generating enough electricity to satisfy demand from additional sectors will require even more investment, construction, and deployment of truly low-carbon energy within the next decade. Building in a provision to ensure that this new electricity is both renewable and additional is key.