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Last year’s Inflation Reduction Act included a significant hydrogen production tax credit intended to jump-start the industry.
The long-dormant hydrogen industry won a game-changer subsidy in last year’s Inflation Reduction Act (IRA). The U.S. is making such a big bet on the fuel that it is willing to pay $3 per kilogram of green hydrogen, which in some places could be worth more than the cost of production, enabling some producers to make hydrogen at zero cost.
Analysts describe that hydrogen production tax credit, known as 45V for its section of the tax code, as both comically oversized and also necessary for the industry to take root. It could ultimately pay out more than $100 billion, and it is not even the only tax credit for hydrogen in play. Earlier this month, the Biden administration selected seven regional hubs to receive $7 billion in additional funding, which will pursue applications of hydrogen in everything from heavy-duty transportation to agriculture.
Yet despite an epic deal that would potentially unlock guaranteed returns, some hydrogen companies and lawmakers who stand to benefit from the new hubs are arguing that more needs to be done to smooth the way for the industry’s takeoff. The top request is a looser definition of green hydrogen, which is splitting Democrats’ industrial-policy coalition and becoming a test case for whether subsidies can remain targeted at the most publicly beneficial uses, or will include more far-fetched applications.
On one side, climate hawks insist that given the potential scale of the energy-guzzling industry, hydrogen producers should be required to use new, nearby sources of clean electricity at the same time as production takes place, instead of tapping power already on the grid that may or may not be carbon-free. Democratic senators like Sheldon Whitehouse (D-RI) and Jeff Merkley (D-OR) have taken up this fight, calling on the Treasury Department to adopt robust standards proposed by environmental advocates.
Some hydrogen producers are already complying with those conditions. For instance, a $4 billion mega-project in North Texas, which expects to begin operation in 2027, is building out wind and solar resources projected to total 1.4 gigawatts—more energy than is consumed by the city of Austin. Air Products, an industrial gas producer and developer of the Texas project, is among several hydrogen producers backing the stricter rules.
But other industry groups are pushing to allow their facilities to be powered by existing energy sources on the grid, while remaining eligible for the green hydrogen production credit. They claim that producers will struggle to procure new clean electricity in states where they have now won lucrative subsidies, hobbling the nascent industry.
Ten Democratic senators including Washington’s Maria Cantwell, Pennsylvania’s John Fetterman, and West Virginia’s Joe Manchin have signed on to a letter urging more flexible guidance. Their states all stand to benefit from hydrogen hub funding that involves Plug Power and a host of other firms.
The letter, which the senators plan to send to White House climate adviser John Podesta, Treasury Secretary Janet Yellen, and Energy Secretary Jennifer Granholm, taps into a growing anxiety in the Biden administration: In many regions of the country, subsidies may not be enough to jump-start growth.
Some hydrogen companies and lawmakers who stand to benefit from the new hubs are arguing that more needs to be done to smooth the way for the industry’s takeoff.
Many regions remain snarled in permitting battles or face higher startup costs due to rising interest rates, and may not be able to quickly build out hydrogen hubs, even when they are being paid to do so. Opponents of tight regulations cite a state of emergency—the climate crisis and its escalating risks—to argue that the industry must not only be subsidized, but that any obstacles in its way should be cleared.
Should Treasury adopt maximally accommodative rules for hydrogen, an industry that appears poised to become a juggernaut? One way to answer that question is with a hard look at Plug Power, a leading hydrogen company that has been waiting for tax credits to arrive since the Clinton years.
THE HYDROGEN HYPE CYCLE has historically proved almost as volatile as the fuel itself. Enthusiasm about H2, a molecule that can be stripped from oxygen in water using electricity, has spiked when fossil fuels come under threat. Hydrogen gained popular attention after the oil price shocks of the 1970s, spurring Japan to embark on major investments. When oil prices fell in the 1980s, so did the rage for hydrogen.
In the 1990s, interest soared again, along with the dot-com internet bubble. The ideas seemed linked. Hydrogen could be produced and distributed at decentralized nodes, inviting webbed networks of users to plug in. The Hydrogen Economy, a typical 2002 book on the fuel’s emancipatory potential, was subtitled “The Creation of the Worldwide Energy Web and the Redistribution of Power on Earth.”
Plug Power was born in that era. In 1998, it told The New York Times it hoped to make fuel cells for home electricity commercially viable by 2000. By March of that year, shares in Plug Power and other hydrogen companies jumped by as much as 1,000 percent, in a short-lived fuel cell bubble.
When the enthusiasm cooled, some competitors closed up shop. Plug Power stuck around, keeping the hope of hydrogen alive through the 2010s by striking partnerships with retail giants like Walmart, Amazon, and Home Depot, which had soft budget constraints and were willing to pay a premium for green-tinged deals.
With those partnerships, Plug Power pivoted into producing fuel cells for forklifts and logistics trucks at warehouses. The business strategy was always anticipatory, betting on future investments in hydrogen. Plug Power’s deals with Amazon have given the retail giant warrants to buy millions of shares of stock at pre-agreed prices, provided Amazon spends billions on Plug Power products.
The company’s valuation surged again in 2021, hitting $25 billion, though Plug Power had never turned an annual profit. The business model was so geared at future growth that it led to absurd-seeming outcomes, such as negative sales revenue. Plug Power had structured its agreements so that if its clients bought enough of its product, they would get stock warrants guaranteeing them the right to buy shares at a set price in the future. When the share price and sales soared in 2021, the company’s revenue went negative.
The company’s valuation surged in 2021, hitting $25 billion, though Plug Power had never turned an annual profit.
Plug Power’s meme-stock moment was set off by anticipation of the IRA, which passed the following year. Beyond the historic subsidies in the law, the IRA signaled a new direction for the energy transition. It was the strongest statement yet that the U.S. would look to replace every pipe and nozzle of the built environment with a greener alternative, without disrupting the flow of modern life.
If environmentalism once meant Meatless Mondays, recycling, and a little personal parsimony, it now promised that nearly everything could be swapped out for a near-identical—but cleaner and better and cheaper—equivalent. Hydrogen is the emblematic fuel of that plus ça change approach. It promises to replace hydrocarbons without forcing supply chains linked by long-haul trucking to reroute, for example.
Climate experts emphasize applications for hydrogen in carbon-intensive industries, like steel and cement production, which are hard to decarbonize through electrification. Why not use green hydrogen in cars, for example, like the 1990s dreams of fuel-cell vehicles? The answer is that, while hydrogen can be made using electricity, it is an enormously costly process—not just in dollars spent, but in terms of energy wasted along the way, in each step of conversion.
That extravagant waste of energy could be necessary for industries without better alternatives, many climate advocates argue. But they say it should be constrained to those sectors, and that truly green hydrogen must draw on new sources of clean energy.
Rachel Fakhry of the Natural Resources Defense Council, who leads the environmental group’s emerging technologies strategy, said hydrogen production involves many of the same risks as cryptocurrency mining.
“Hydrogen offers a lot more societal benefits than crypto—I don’t want to claim that they’re the same—but the parallel is very powerful. Both are very power-hungry,” Fakhry said, and both can drive up electricity costs for businesses and consumers, if allowed to plug into the existing grid.
PLUG POWER HAS EXISTED FOR TWO DECADES as something of a zombie, achieving a multibillion-dollar valuation without turning an annual profit, and readying itself for the day when the government would back hydrogen at scale. Now that green hydrogen’s moment is here, Plug Power has warned that it may pull back on its existing investments unless regulations accommodate its strategy.
Plug Power has already won generous incentives in New York, where, with support from Sen. Chuck Schumer and former Gov. Andrew Cuomo, the company was awarded a historic subsidy package at STAMP industrial park. The plant promised to employ 37 hydrogen operators and technicians, 30 truck drivers, and a plant manager, purchased by the state at $4 million per job.
More than half of the $269.5 million in tax breaks awarded to Plug Power came from discounted electricity rates, including hydropower from New York Power Authority (NYPA). That deal rankled the neighboring Tonawanda Seneca Nation, whose reservation sits near STAMP, since Tonawanda has been denied low-cost electricity from NYPA.
Currently, grid-powered electrolysis generates around twice the emissions as hydrogen produced using natural gas (through a process called steam methane reforming). For years, Plug Power has attempted to address these grid emissions by buying renewable-energy certificates, or RECs, which are tied to green-power projects elsewhere. But moving emissions from the point of production makes them harder to track, and RECs are a kind of “electricity shell game,” with little evidence that they actually incentivize more renewable-energy production.
Environmentalists have pushed for the Treasury’s 45V rules to follow the “Three Pillars” of sustainable hydrogen. Plants must plug into new supply of renewable energy nearby; the energy must be delivered to the same grid where the hydrogen plant draws its electricity; and it must be produced at the same time of day that the clean energy source is flowing—drawing from solar panels when the sun is shining, or wind when it is blowing—to ensure that the hydrogen production does not drive up demand from dirtier energy sources available at other times of day.
Plug Power has argued that requiring hydrogen plants to procure local clean energy would “drive hydrogen production to regions where it’s cheapest to comply.”
Plug Power has fiercely fought the Three Pillars approach. It is a principal member of the Fuel Cell & Hydrogen Energy Association, which has released full-page ads in The New York Times urging Treasury to weaken its rules for 45V. “America cannot reach our goals without clean, domestic hydrogen,” the ad reads. “Additionality [industry jargon for using new sources of clean energy to produce hydrogen] could undercut it all.”
In addition, Plug Power has spun its existing production to seem as green as possible. For example, when it announced its hydrogen production facility in Western New York, its press release seemed to suggest that the plant would be run exclusively, or primarily, on hydropower. “The plant will use 120 MW of Plug’s state-of-the-art PEM electrolyzers to make the hydrogen using clean NY hydropower,” the press release reads. “The mega site is strategically located in NYPA’s low-cost hydropower zone and will be serviced by high-capacity, 100% renewable, reliable and local power sources.”
In fact, a state press release made clear, just 10 MW of power would come from the Niagara Power Project, a hydropower facility that delivers renewable energy through NYPA’s low-cost hydropower program. Meanwhile, the press release explained, NYPA would procure 143 MW of additional power for Plug Power on the energy market.
The share of power drawn from hydropower versus other sources is a matter of accounting—it does not describe the actual flow of electrons. But the state press release reveals that only part of the power used by Plug would be renewable.
PLUG POWER HAS CONTINUED to advertise itself as a green hydrogen company, even as it positions itself to capture whatever hydrogen subsidies are coming online—including those that make no pretense of being green.
The company is a participant on four out of the seven hydrogen hubs chosen by the Department of Energy (DOE). That includes the Appalachian hub championed by Manchin, or ARCH2, which is explicitly aimed at drawing on the region’s natural gas reserves and producing hydrogen with carbon capture.
The Northeast hydrogen hub, which Plug’s Western New York facility would have been a part of, was passed over by DOE in a competitive bidding process. Schumer and Gov. Kathy Hochul’s offices did not respond to requests for comment on this loss. It may have been a matter of simple economics; to produce competitive green hydrogen, experts estimate producers will need to access electricity at or below a cost of $20 per megawatt-hour. That’s not available in the Northeast, and interconnection is also challenging.
The DOE’s selection of the hubs is just a warm-up for the Treasury’s guidance on tax credits, which has already been delayed, and controls an order of magnitude more federal dollars in potential subsidies. But the sequencing is important. Now that states like Washington are guaranteed to be receiving funding for hubs, lawmakers like Cantwell have a greater stake in fighting for looser rules on the production tax credit.
In fighting the Three Pillars, Plug Power has argued that requiring hydrogen plants to procure local clean energy would “drive hydrogen production to regions where it’s cheapest to comply.” States like New Mexico, Arizona, Wyoming, and Colorado might get the lion’s share of the benefit.
In theory, the regional hubs in places like the Pacific Northwest could act as a countervailing force on that incentive, nudging producers back to areas where it might be harder to build renewables. But Plug Power has argued that in many states, procuring renewable energy is too high a bar to clear.
Managing both a renewable hydrogen project and a utility-scale renewable-energy project would be an “incredible feat,” said Luke Wentlent, Plug Power’s principal R&D engineer, in a video on their opposition to the rules. “The intent of the PTC [production tax credit] was not to overly regulate the production of hydrogen, it was to incentivize and accelerate it.”
The company has gone as far as to suggest that adoption of the Three Pillars might cause it to withdraw from existing investments.
“IF STRICT GUIDELINES ARE PUT IN PLACE, it really calls into question how much you would invest more in the U.S. than we are today,” Plug Power CEO Andy Marsh told Bloomberg News over the summer. “I would have to think about even some of the plants that are beginning construction.”
Fakhry, of NRDC, suggested that the company may be bluffing. “A lot of Plug’s projects were announced prior to the IRA even being on the airwaves,” she told the Prospect. “Why is the IRA now so important for the economic feasibility of the projects?”
It seems possible, however, that Plug Power’s business model always hinged on the design of large-scale subsidies for hydrogen. That would help explain why its contracts are structured to give clients a foothold in a future hydrogen market.
A private company waiting around for future subsidies to materialize might sound predatory. But Jeff Gordon, a research scholar in industrial policy and property law at Yale Law School, argued that the strategy can help meet public goals.
“It’s in some ways preferable, from a policy perspective, to have companies designing their business models in anticipation of what the public wants, compared to designing their business model in light of market incentives unrelated to public values,” Gordon told the Prospect.
Being right too early is the same as being wrong, to paraphrase private equity investor Howard Marks. Plug Power held the hope of the hydrogen industry for years, including through the shale boom, when attention was elsewhere. However the fight resolves, it will hold lessons for the United States’ distinctive form of industrial policy.
When an industry like hydrogen is already concentrated even before it begins operating at scale, a first mover like Plug Power and its sponsor Amazon can have an outsize role in shaping the market structure. First movers can be essential in kick-starting industries—but there is also a risk that they embed their business model in regulation, even before the industry takes off.
