Will ‘zombie’ Hydrogen projects be a reality in the future?

Stranded Assets and the Hydrogen Production Tax Credit (PTC)

The Inflation Reduction Act (IRA) can effectively make clean hydrogen cheaper to produce than fossil-based hydrogen, creating tremendous excitement around the energy industry. 

As the definition of clean hydrogen is still debated, The U.S. Department of Energy is seeking input from the industry regarding the rules being formulated on what constitutes the carbon intensity of hydrogen production. Dash Clean Energy recently published its opinion on this matter, and we are glad to see that Google has published its desire for ‘more restrictive green hydrogen rules.’

The IRA provides a ten-year up to a $3/kg tax credit for every kg of hydrogen produced. Unfortunately, this credit will not have long-term benefits because it does not contribute to driving down the cost of electricity which is a significant part of the operating costs. The IRA may drive capital costs down, but at $45/MWh, hydrogen production cost will average $2.50/kg, well above the current cost of fossil-based hydrogen.

What will happen to these projects after the ten years and tax credits are over? Do the off-takers go back to cheaper hydrogen produced from hydrocarbons? Will the project operate at a negative operating margin without the credit after year 10?

Our view is that there is significant merchant risk with the current subsidized economic model that could lead to many zombie hydrogen projects ten years from now with significant negative operating economics. 

We raise these issues because we all care about the environment, and short-term thinking will not solve our long-term carbon goals.