We're about to give billions of dollars to clean hydrogen. How should we define it?

The exact definition of “clean” hydrogen, interconnected with the
definition of “clean” electricity, has enormous implications for
the distribution of federal tax credits to boost the industry. In
this episode, hydrogen expert Rachel Fakhry of the Natural
Resources Defense Council discusses what’s at stake.


(PDF
transcript)


(Active
transcript)


Text transcript:


David Roberts


Volts subscribers understand that a decarbonized energy system
will require lots and lots of hydrogen, to store energy and to
serve as a fuel in applications that are otherwise difficult to
decarbonize. They also understand that while 95 percent of the
world's hydrogen is currently produced using fossil fuels, there
is a carbon-free way to produce hydrogen.


It involves running electrical current through an electrolyzer,
which splits hydrogen out of water. (Volts listeners heard all
about electrolyzers a few episodes ago.) But the resulting
hydrogen is clean only if the electricity that is run through the
electrolyzer is clean. That's the recipe for clean hydrogen:
clean electricity plus electrolyzers.


Democrats also understand the need for clean hydrogen to scale up
quickly, and they included tax credits for clean hydrogen
production in the Inflation Reduction Act.


And therein lies the rub. The IRS is currently in the process of
determining exactly how those tax credits will be structured and
to whom they will be available. At issue is a question that
sounds simple but turns out to be devilishly complex: what
exactly counts as clean hydrogen? More specifically, what exactly
counts as clean electricity?


The details matter enormously — up to $100 billion worth of
subsidies are on the line. Big companies from BP to NextEra are
lining up to try to make the standards as lax as possible, to
maximize their short-term profits. But lax standards could
perversely end up increasing greenhouse gas emissions, as
electrolyzers come online, gobble up the available clean energy,
and push grid managers to start up fossil fuel plants. (For more,
read Canary Media’s deep-dive series on the hydrogen tax-credit
battle.)


To get to the bottom of all this, I’m excited to talk with Rachel
Fakhry, who runs the hydrogen and energy innovation portfolio at
the Natural Resources Defense Council, about the technical
details of this fight, the ability of the industry to meet higher
standards, and the enormous stakes involved, for the industry and
the larger project of decarbonization, in getting it right.


So with no further ado, Rachel Fakhry. Welcome to Volts. Thank
you so much for coming.


Rachel Fakhry


Thanks so much for having me Dave.


David Roberts


You're brave to come on and address this subject. It is big and
complex and hairy. There's a lot of ins and outs, "a lot of
strands in the Duder's head." So let's start. So we get we need a
bunch of hydrogen. We get we need it to be clean. We get
basically what clean hydrogen is, sort of. So let's just start
first by talking about what are these tax credits? What does the
Inflation Reduction Act contain for clean hydrogen?


Rachel Fakhry


So the IRA offers one of the largest subsidies for clean hydrogen
in the world. It is a production tax credit which ranges between
$0.6 to up to $3 per kilogram of each hydrogen produced. And the
three kilogram, as I'm sure we'll talk, is kind of the big prize
that all the projects are gunning for. It is a technology-neutral
credit. So there's no colors green, blue, pink, any of that. It
all depends and is tied to the life cycle greenhouse gas
emissions of hydrogen. That top prize of $3 can only be eligible
for clean hydrogen that achieves zero point 45 kilogram of carbon
per kilogram of hydrogen relative to today's status quo hydrogen
that's gas derived uncontrolled, which is roughly around ten.


So to get that top rise, you have to reduce emissions from status
quo by 95%, which is a lot.


David Roberts


Right.


Rachel Fakhry


You have to be very clean to get that. And it's a very long list
credit. It lasts for ten years for each project that gets it, and
projects that commence construction as late as early 2033 would
still be eligible. So what this means is that by 2045, you could
still have hydrogen projects that are getting taxpayers dollars.
Even if we think the technology is going to improve and drop in
price and so on, there are going to be projects still heavily
subsidized.


David Roberts


Yeah, it's a lot of money. One thing I would add, just in case
listeners are not familiar ... listeners have probably heard
production tax credit and investment tax credit, PTC and ITC,
tossed around just for anybody who doesn't know a production
credit, you get a certain amount of money per quantity of the
subsidized thing produced. So, in other words, this is you get
the subsidy per ton or per kilogram of hydrogen produced versus
the investment tax credit, which subsidizes capital costs of
building the thing in the first place. And these have somewhat
different dynamics, which I think we can return to later.


But this is specifically, it's the production of hydrogen per
kilogram that gets the subsidy. And you note the subsidy for the
lowest, for the cleanest hydrogen, is $3 a kilogram, which is
huge. What's the next tier like? What do you get if you don't
quite reach that threshold?


Rachel Fakhry


It's a big cliff. You drop from three to one dollars per
kilogram.


David Roberts


What?


Rachel Fakhry


Yeah. And this is, I think, an excellent indicator of the type of
hydrogen Congress really wanted to incense. They really wanted to
incent the cleanest of the cleanest.


David Roberts


Yeah. So this is actually an important background fact about
these subsidies, is they're non-linear. They don't scale up
linearly with the cleanness. There's, as you say, a big cliff
like the jump from not meeting that top threshold to meeting it
gets you from one dollar per kilogram to $3 per kilogram, which
is a huge increment. So all of which is to say, how you define
how exactly you structure who is in that top tier matters
enormously. There's an enormous amount of money on the line.


Rachel Fakhry


Absolutely, we'll get to that. But it all hinges on how treasury
guidelines will look like for determining the life cycle
greenhouse gas emissions, which in turn will determine whether
you get the top prize or something much more reduced. But since
you mentioned that it's a lot of money indeed, this is an
uncapped credit. It depends on how much hydrogen you actually
produce, but we think this could be more than $100 billion. Our
colleagues at Energy Innovation have produced a really useful
number, essentially taking one of the larger hydrogen projects
being announced in Texas between AES-Air Products, large
electrolyzer powered by wind and solar on-site.


They estimate that between the hydrogen tax credits and the
renewable tax credits, it could be a $30 billion subsidy for just
one project.


David Roberts


Holy s**t. So I just want to flesh that elbow just to make that
clear for listeners. You have a big sort of solar and wind
renewable energy installation attached to an electrolyzer in this
Texas project and you're getting the tax credits for wind and
solar and you're getting the tax credits for producing the
hydrogen. That just means like, as you say, $13 billion. That's a
huge ...


Rachel Fakhry


It's a $30, actually 3-0.


David Roberts


$30 billion in subsidy. Criminy, yeah. So the point is, as a
background for all the rest of this discussion, we are dumping a
ton of money on clean hydrogen specifically, all of which is to
say this fight over how to define it, over what counts and what
doesn't is not an arcane technical matter here.


There are billions and billions and billions of dollars of
subsidies on the line depending how we answer these questions
that we're going to get into.


Rachel Fakhry


That's absolutely right, Dave. Yeah.


David Roberts


So NRDC and a coalition of partners has put forward what they
call the three pillars of clean hydrogen. Did that originate with
you? Where did the three pillars framework come from?


Rachel Fakhry


I'm happy to say we had nothing to do with the origination. Also
very happy to claim credit. The three pillars are decidedly not
new. They're already at the heart of a debate around the
effectiveness of voluntary renewable corporate procurement. So
these are not new dynamics we're bringing to the hydrogen debate.
We're actually having the hydrogen debate ride the broader issues
within the market like any other energy resource.


David Roberts


So these three pillars are the idea is if you meet these three
criteria, then you count as truly clean hydrogen. And every one
of these criteria is controversial. Every one of these is being
fought out now between industry that wants lax standards and your
coalition that wants strict standards. So let's go through the
three pillars.


Rachel Fakhry


Great.


David Roberts


The first one is additionality, which I think people probably
have some vague familiarity with. But let's spell out what it
means in this context.


Rachel Fakhry


Before we do that actually, just to step back on a couple of
things. Yes, you're right. There's a lot of contention around at
least two of the three pillars. But it's funny because everyone
is kind of picking and choosing what they like and don't like. So
you have folks who are fine with hourly matching others who are
okay with additionality. So everyone will get to it. But within
the opposition, we're seeing this kind of like cherry picking
within the bouquet of pillars, what works and what doesn't work.
But let's start with why do we even need the pillars? And as you
noted, the pillars are additionality, deliverability, and hourly
matching.


So why do we even need those pillars? As you've alluded to, the
credits entirely hinges on how the lifecycle of hydrogen or
lifecycle emissions of hydrogen are determined, which means that
the Biden administration treasury, in collaboration with the OE,
EPA, and the White House, will essentially determine how this
credit will impact our energy system. But calculating life cycle
greenhouse gas emissions can be quite tricky, and the complexity
really varies from project configuration to another. So, for
example, if you have an AES-Air Products-like project where you
have a big electrolyzer not connected to the grids, only powered
by renewable energy on-site, easy, that's a zero emissions rate.


However, when you move to a different configuration of
electrolyzers that are grid-connected, drawing grid power and
buying credits or offsets to net out those emissions, it becomes
really complicated. And this is the classic kind of complexity of
offset systems.


David Roberts


Yes, anybody familiar with the arguments over offsets will be
somewhat familiar with these concepts.


Rachel Fakhry


Exactly. So we need some parameters and rules around how these
offsets are accounted for since there's so much money at stake
and so much emissions at stake. And this is especially true for
electrolysis. Now, electrolysis is an energy-hungry process,
which means that even if it draws small shares of fossil fuel
electricity, that would have significant emissions. So, for
example, an electrolyzer that is powered by the average grid
today would have twice the emissions of status quo hydrogen and
40 times the threshold of 0.45 threshold to be eligible for the
$3 per kilogram.


David Roberts


Yes. That's so wild that I just want to put an exclamation point
next to it. So everybody understands our starting point here is
if you just make your electrolyzed hydrogen with the average grid
electricity, with the sort of average mix of sources that we have
on the US grid. Not only will you be 40 times more carbon
intensive than the threshold for the subsidy, you'll be twice as
carbon-intensive as making the hydrogen directly from fossil
fuel. So the difference between drawing on, as you say, this
project in Texas has its own renewable energy installation next
to it. so right, it's very clear where that's getting energy.


The difference between that getting clearly clean energy and
getting average grid energy is not a small increment of
greenhouse gases. The average grid electricity is vastly more
carbon intensive than what we're aiming for here. So all of which
is just to say you can't just build an electrolyzer and plug it
into the grid and call it clean because you're not getting clean
power. Basically.


Rachel Fakhry


That's absolutely right. So if we are subsidizing projects that
have twice the emissions of today's status quo hydrogen, then
that's going to increase your emissions of the system as a whole.
And now this is inarguable, what we're seeing coming out of
Princeton. An upcoming study by Energy Innovation, a recent study
by Rhodium Group, all agree that absent the three pillars which
we'll discuss, emissions will increase in this decade, completely
contrary to where we need to go and subsidized by what is a
climate bill.


David Roberts


Yes, it would be wild to spend $100 billion of public money to
substantially raise carbon emissions. That would be a perverse
outcome, let's just say.


Rachel Fakhry


Absolutely an awful story. Let's now dig into the pillars. You
can think of them as parameters around those offsets that will be
used, that are the only ones that will ensure that the offsets
are effective at truly netting out all the emissions being driven
by electrolysis. Happy to dig into it some more, but I should
note from the outset that after a thorough legal analysis, I can
announce with confidence that the three pillars are legally
necessary and that treasury has all the authority it needs to
implement them rigorously.


David Roberts


And I want to get into this a little bit later after we go
through them, but my question is, can they not are they legally
allowed not to use them? Because the industry is encouraging. But
we'll get into that in a minute. First, we've been talking around
the three pillars. Let's go through them. The first one is
additionality, which people, I think energy aware people
understand is if you just plug your electrolyzer into the grid,
you're getting grid power, which is dirty. If you plug your
electrolyzer into the grid and specifically consume renewable
energy from the grid, the way that where you can just buy
renewable energy certificates RECs, and say, I consumed this much
and I bought this many RECs to offset it.


If you're doing that, you're not necessarily using clean energy
because you're drawing from existing renewable energy, which
means whoever else was using that existing renewable energy now
gets bumped to something else, et cetera, et cetera. Bump, bump,
bump down the line until the last person in the line is using
whatever gets turned on when demand exceeds supply, which is
generally fossil fuels. So all of which is just to say you're not
using clean energy unless you're using new clean energy that you
are bringing online to power your project. Is that roughly the
sum of it?


Rachel Fakhry


That's absolutely correct. If you're going to bring new load on
the system as an electrolyzer, you have to support new clean
supply or additionality, although we're starting to move more
towards new clean supply, which is going to be a more
intelligible term for a lot of people. As you said, if you add
demand to the grid, you don't bring new supply with it. As you
say, the marginal generators will turn on to supply the added
demand, and this will be gas. So you're going to end up having
highly emitting hydrogen without supporting nuclear supply. And I
always like to use this kind of visual of a world where
additionality or new clean supply are not required.


This means that technically all existing nuclear generator in the
US can sell their credits for hydrogen production because there's
absolutely no requirement for the credits that will be used to
offset emissions to come from new resources. They can come from
existing resources which could be nuclear generators. There is
enough nuclear generation to supply enough nuclear credits to
dwarf even a high estimate of hydrogen production between now and
2030. So what this means is hydrogen production between now and
2030 where hydrogen electrolyzers could plug to the grid, do
absolutely nothing, draw on grid power, have high emissions and
purchase these cheap nuclear credits without really doing
anything to the grids to really net out their emissions.


David Roberts


Right? And just to reiterate, all that power that is going to the
electrolyzers from the nuclear used to be going somewhere else.
So whoever was using that power before that's now additional
demand on the system. And again, when demand exceeds supply, the
marginal generator gets turned on and that's fossil fuels. So all
those electrolyzers coming online and simply claiming that
nuclear power, you'd get the truly perverse outcome of the
electrolyzers claiming to be clean, but total emissions on that
grid going up substantially.


Rachel Fakhry


That's correct. Absolutely. This is becoming, I think, inarguable
in many sense that additionality is fundamental for the system to
remotely work. And again, this is corroborated by all the studies
that we're seeing here princeton Energy Innovation, Rhodium, and
many, many EU studies which we can glean a lot of things from.


David Roberts


But you say it's clear and fundamental nonetheless. There are
industry players specifically saying that the additionality, I
mean, the additionality pillar is sort of the main axis of
dispute here. This is precisely what big utilities don't want, an
additionality requirement. And they have a lot of arguments for
why. But one of the things they say, one of the arguments they
had, which struck me as at least semi-plausible, is their sort of
thing is you're doing these models like Princeton modeled all
these electric ledgers coming online without the additionality
requirement showing that it raised substantially raised grid
emissions.


The industry's counter is, well, we have all these broad emission
reduction policies. We got like cap-and-trade in Washington and
California. We got the EPA coming out with standards on power
plants and we got blah, blah, blah. So it's just not plausible
that emissions overall are going to go up. It's the broader
economy-wide emission reductions that are going to take care of
emission reductions that shouldn't be our responsibility,
basically, like we should just be able to use the existing clean
energy.


Rachel Fakhry


Let's address that because we always hear this argument, right?
Like why are you adding all these rules when the grid is getting
cleaner and everything's going to be merry and great and we don't
need to think about it? Let's take the IRA because it's always
posited as the reason why we know the grid is going to get
cleaner, so we don't have to worry about anything. The IRA is
historic, right, and we're all very excited about it. And it has
the potential to be a game-changer for the market. However, it's
mostly carrots, very little sticks, so the outcome of it remains
really not guaranteed.


We have a lot of work to do to make sure it's implemented in a
way that actually delivers on all its potential. That's one, two,
no matter how clean the grid gets in the next seven, eight years,
you're still going to have the issue of marginal emissions.
Right. Because marginal generators for the foreseeable futures
will still be gas. So even if the grid is getting on the whole
cleaner, and your electrolyzers are still running during those
evening hours when the sun isn't shining, the wind isn't great,
turning on marginal emissions or marginal generators, that would
still be, on the whole, a very dirty hydrogen resource.


So essentially basing loosening up rules based on the hubris that
everything is going to become clean. So when I have to worry
about it, it's just demonstrably false.


David Roberts


Yes. It seems premature to be making policy premised on the
notion that we're going to succeed in this long term thing of
reducing emissions. It's a little early for that.


Rachel Fakhry


Exactly. And actually, right before I came in, I was doing a
quick back of the napkin envelope calculation. Even if the grid
were to be 80 plus percent cleaner than today, by 2030, you
really still don't have a lot of margin to use grid power. No
more than 10-20%. Again, electrolysis is power hungry, so even
the smallest amount of fossil fuels will blow you right out of
the IRA threshold.


David Roberts


Right. And I'll pause to say this, and I might repeat it a couple
of times throughout the pod. This is not to say that an
electrolyzer can't plug into the grid and start making hydrogen.
It's just to say you're not going to get $3 per kilogram of
subsidy if you do that. Right. These are not like harsh
restrictions. We're talking about whether we're going to give you
tens of billions of dollars. That's not the mean parent.


Rachel Fakhry


Exactly.


David Roberts


It's just some basic rules. We don't want to subsidize increased
emissions. So it sounds simple, right? Like, if I'm I'm going to
bring an electrolyzer online, I just bring a solar farm along
with it. I use the solar farm's energy to run my electrolyzer.
That's clearly additional, right. If I'm building on site
renewable energy next to my electrolyzer at the same time, that's
clearly additional. It's not as clear in some other fuzzy cases.
So, like, let's say I come online and I sign a PPA for power with
a solar and wind farm that was built a year and a half ago.


Right. So it's new-ish, but it's also the case that maybe if my
electrolyzer hadn't come online, that clean power would be going
to someone else, so I'm just displacing existing clean energy. So
what exactly in these edge cases? What are we defining as new and
additional? Is there some sort of threshold like the renewable
energy must be built within six months, or how do we get specific
there?


Rachel Fakhry


Yeah, that's a great question. There are several schools of
thoughts. We haven't settled it. I think everyone agrees that
this has to be the most straightforward way for developers,
because, believe it or not, we're not in the business of
suffocating this industry, Dave. We just want to make sure it's
actually clean and in line with what we need. So you have a
school of thought that says, look, simplify, just say anything
after the IRA, or anything built after the IRA will count as new.


David Roberts


For ten years.


Rachel Fakhry


Yes, exactly. Yes. Pro. It's very easy to administer. I'm not a
big fan of it because you put it well, this would have been built
anyway. So by adding demand to a system that was being built not
for me, something else will turn on the system, and that will
likely be at least a mix of fossil fuels. You have another school
of thought that wants to mirror what the EU did, the Europeans
did. So they adopted a moving vintage, as opposed to that fixed
vintage, and said, okay, additionality counts as a PPA signed
with a new window solar farm that comes online within 36 months
of the electrolyzer.


That is interesting. It's not perfect, but we have to be able to
administer the system. I like this moving vintage. You can add
the condition that additionality could be met by showing, say, in
signing the PPA, that the electrolyzer accounts for much of the
financial risk or helps secure the funding. You could add more
conditions, but I like the moving vintage a lot more than the
fixed vintage. And then you can layer on some PPA conditions to
carve out the incremental financial effect of adding electrolyzer
on the grid to window solar farm.


David Roberts


Right. And we should acknowledge in the end, there's some element
of the arbitrary here because there is no absolute metaphysical
correct answer in a lot of these cases. Right. Like, these are
all about counterfactuals. Would the renewable energy have been
built in the absence of this electrolyzer? And like any
counterfactual, there's no definitive ... there's no way of being
definitive. Right. You're just using heuristics in the end, you
have to define some thresholds somewhere. But this is not an area
where sort of precision and certainty are really possible.


Rachel Fakhry


That's correct. A system that works well, that is rigorous enough
to minimize against the worst, I think, is good enough for us.


David Roberts


And the last thing about additionality is, of course, the big
argument from industry is this will substantially raise costs, it
will wipe out the cost advantage we have against existing gray
hydrogen and it will strangle the industry in the crib and it
will never get going. And in some sense, this is all too about a
counterfactual. We're all arguing about what would happen if we
did x and so no one can really definitively say, but what
evidence do we have that that's wrong?


Rachel Fakhry


The dead on arrival claims obviously are being branded right that
we are going to say ...


David Roberts


Yes, dead on arrival.


Rachel Fakhry


Absolutely. So I would love to talk about the costs for the three
pillars as a package because I think this is the really
interesting one.


David Roberts


Okay, but yeah, let's put the cost off tour through the pillars
then. That's a good idea. The second pillar is much more simple,
we can get through it pretty quick. So the first pillar is
additional. For your electrolyzer to be clean, it has to be
drawing from new renewable energy. The second is regionality,
which means your electrolyzer has to be drawing new clean
electricity from the grid you're on, from the regional grid
you're consuming on. So you can't just buy like if you're on a
super dirty grid and you're buying clean energy, that's made in
California, right?


Like clean energy in California is not displacing nearly as much
carbon as clean energy on your dirty grid where you're operating
would. So grids are not equivalent right, in terms of carbon
emissions. So you need to be displacing carbon on your grid. And
that's pretty straightforward. And as far as I can tell, most
everybody agrees roughly with this idea. I think insofar as
there's any controversy, it's just sort of like where do you draw
the line? What is the same grid? Is there controversies there
worth getting into?


Rachel Fakhry


You're right, this is one of the least contentious pillars.
Everyone agrees that there has to be some geographic bound to the
clean energy you claim is netting out your effect.


David Roberts


Right.


Rachel Fakhry


In terms of how do you define the boundaries, there are several
options that could work. We're still considering which one makes
the most sense. The simplest one is to say, look, as long as the
electrolyzer and the new clean supply are located in the same
load balancing authority, that's good enough for us. That's very
simple. However, it could have some issues because some
load-balancing authorities are very large and streaked with a lot
of congestion. Like for example, MISO is an excellent one, it's
the one load-balancing authority and yet there's a big
transmission constraint between MISO North and MISO south.


Meanwhile, under that system you could still locate your
electrolyzer and your new supply anywhere you want with disregard
to the actual congestion and whether you're actually netting out
your emissions with this clean energy project that you supported
or not. So the other approach, which is a hybrid, quite
interesting, and I'm leaning towards that one. It says, okay,
let's break it out between RTO regions and non-RTO regions.
Within RTO regions like PJM, MISO, ERCOT, so on. We have to look
at the LMPS, which are a good proxy for congestion, locational,
marginal prices, right?


David Roberts


And those are set around a particular node on the grid. And the
node on the grid is what just is there a clear definition of what
counts as a node? Is it just where there's a transformer or what?


Rachel Fakhry


That's a good question. I mean, usually, it's going to be the
place that sets the price. I don't know how to explain it in
engineering terms, unfortunately.


David Roberts


Well, just say it's the atomic unit. Let's say if you're looking
at grids, sort of like a grid is made up of nodes.


Rachel Fakhry


Correct. And it's the excellent, kind of the best proxy. We have
to understand the supply and demand dynamics around a granular
piece of the grid. So I like this because RTOs already report
LMPs they already report them and collect them and so on. So the
notion is that electrolyzers and the clean energy supply that is
netting out their emissions need to be located within a region
where the LMP differential is not bigger than X.


David Roberts


Right?


Rachel Fakhry


That is a very good proxy for okay, there's no congestion between
the two that's roughly deliverable or mostly deliverable
projects. Developers already hedge against LMPS and signing
contracts. This is not new to look at forecast of LMPS. So we
think this is a familiar tool.


David Roberts


Right, so the data and information is there to make these
calculations. Now, we wouldn't have to produce any new data,
right?


Rachel Fakhry


But to continue that for non-RTO regions like the Southeast,
where utilities don't necessarily report those, we're fine
keeping it to the LBA or the load balancing authority because
anyway, those tend to fit nicely with state boundaries. So
congestion will not be unmanageable there.


David Roberts


Okay, so that's additionality got a new clean energy, regionality
it has to be in some definition, local clean energy. And then the
third pillar is another controversial one. This is temporal
granularity, which to put it in a more human-normal way is just
you need to match your consumption to production of renewable
energy or clean energy on an hourly basis rather than the more
conventional yearly basis. So again, Volts listeners who have
been paying attention will be familiar with this general notion.
There are lots of corporate players now like Google. Google wants
to go zero energy.


And the easiest low-impact way to do that is just say we consume
X a year, we're going to go buy renewable energy certificates for
X amount. Boom, we offset our use, we're clean. That's sort of
like step one. But Google realizes that's not really accurately,
that's not accurately about your emissions and how much you're
offsetting. So Google wants to move to an hourly system where
it's measuring how much its consumption is matching up to
renewable energy production on an hour-by-hour basis, so that it
can truly be zero carbon, so that it can truly offset its actual
emissions in the actual world, not just as an accounting
practice, right?


So this notion is out there. So the idea here is that
electrolyzers that want to be counted as clean should be required
to do that. They should be clean on an hourly basis. This is
extremely controversial for a bunch of reasons, but let's start
what industry wants, or what the constellation or next era the
utilities want is just they're like, look, we have this system of
yearly renewable energy certificates, yearly RECs, it works
perfectly well. Why can't we just offset our energy on a yearly
basis like everyone else does? Why are you making us do this
bespoke granular thing?


So just what's wrong with yearly offsetting?


Rachel Fakhry


You've already teed it up really well. This is not a new dynamic,
right? This is where there's much more demand for granular
tracking to really effectively claim that you are powered by
clean energy. Annual matching is just no longer seen as an
effective way of reducing emissions and still sends a signal that
fossil fuels are needed. And this exact same thing applies to
hydrogen, right? So suppose there's a Dave Roberts electrolyzer
contracted with a new solar power project, but you run this
electrolyzer at night or both when the sun is shining, when
there's no sun, turning on the marginal generator and producing
very high emissions.


However, you have the sufficient volumetric amount of solar RECs
that were produced from the solar project you contracted with
that are enough to on paper.


David Roberts


Right. So on an accounting basis ...


Rachel Fakhry


Correct.


David Roberts


I have offset my emissions. But in the real world, the solar is
producing the energy during the day, I'm consuming energy during
night. So in the real world, I consumed dirty power almost that
entire time.


Rachel Fakhry


And there's something perverse here, which is the cleaner the
grid gets, the less your solar power will likely start abating
emissions during the day because you'll have more solar on the
system. And when you turn on at night as an electrolyzer for the
foreseeable future, gas will always be the marginal resource. So
on the whole, you'll be producing a lot more emissions than
you're actually reducing. So it's an interesting perverse effect
that may happen with a cleaner grid. All this to say that hourly
matching is necessary to meet statutory requirements to meet the
IRA threshold of 0.45 kilogram per kilogram to get the $3 per
kilogram.


And this is corroborated by, again, Princeton, upcoming Energy
Innovation study, even Rhodium study, which was not very friendly
to hourly launching in near term, found that without hourly
matching, emissions could increase cumulatively by roughly 100
million metric tons this decade. Enormous, right?


David Roberts


We spent $100 billion to raise emissions. 100 million tons.


Rachel Fakhry


There we go. That's the US scarce system for you. This is why we
absolutely need this. It's corroborated by studies, you cannot
reach the IRA threshold without tracking your consumption on an
hourly basis with the clean energy project that you procured
with.


David Roberts


Right. So there's two big objections to this from industry. The
first is from industry and also is shared by some other analysts,
which is just that the system of hourly matching, basically
producing hourly RECs rather than yearly RECs is just not mature.
It's just not ready. There's not enough people doing it. And
forcing the industry to wait on that, getting stood up and
sophisticated enough to work would delay the industry in these
crucial first few years. So a lot of the argument is just over.
How baked is hourly matching? How ready is it?


Rachel Fakhry


Yeah. I find this to be a little bit of a lazy argument because
it clearly does not look at the state of play on the ground nor
what the experts say could happen within less than two years. So
I think now even for folks who are out there saying this is not
doable in the near term, it needs time. Even those folks agree
that there are no technical challenges to doing this. This is
really not rocket science. Generation is already metered.
Consumption is already metered. You just need a REC in the middle
that can capture the hourly variations.


David Roberts


And people are doing it. It's not just that it's doable now, but
people are doing it.


Rachel Fakhry


Exactly. The two biggest registries in the US. M-RETS and PJM are
now offering hourly tracking. M-RETS has been doing this for
three years, even in places where M-RETS and PJM, I mean PJM is
new. But even in places where M-RETS does not track, there are
third-party tracking mechanisms. There are utilities that are not
sophisticated, necessarily smaller, kind of like Madison Gas and
Electric, for instance, in Wisconsin offering 24/7 tariffs that
require hourly matching. The momentum is in this direction. The
Biden administration put out an executive order now requiring
that the federal government by 2030 hourly amount.


David Roberts


The federal government's going to have to start accounting for
hourly ...


Rachel Fakhry


If the Feds can do it anyone can do it.


David Roberts


Yeah. And let's just pause and stress here that PJM is a big
Midwestern wholesale power market and balancing area that has
developed and implemented hourly matching just in the last year.
So this is like a big industry player. These are not like little
startups or whatever that are doing this.


Rachel Fakhry


And they did that because of customer demand. Right. Again,
everyone tries to blame the pillars on hydrogen. The market is
heading in this direction anyway. This is just about meeting what
the law requires and making sure we're actually consistent with
the direction of the market. So it's already being done. M-RETS
has said multiple times, look, we're willing to track anywhere in
the US or roughly anywhere in the US. But if registries want to
scale themselves from annual to hourly, experts say, look, you
can scale very fast because there are no technical issues here.
You could scale within 12 to 18 months.


That is much less than what electrolyzers will need to scale.
Right. They'll need two years plus. So again, I always say it's a
lazy argument because it doesn't take into account what's already
happening, how long it took for it to happen, and how fast things
can scale if everyone else wants to do it as well.


David Roberts


Yes, and one thing I also point out is right now the big
companies that don't want to mess with it, don't want to mess
with hourly matching are whinging and whining about it. But if
you put it on paper and made it a requirement, all of a sudden
they would be advocates for it and boosters of it and would be
accelerating it. This is the thing. It's like if there's $100
billion pot at the end of the rainbow, of course, utilities are
going to figure out how to hourly match. Like utilities will do a
lot of things for $100 billion, you know what I mean?


So this whole idea that like, oh, thanks for offering the $100
billion, but it's such a hassle, come on guys, if there was $100
billion on the line, I'm pretty sure you all could figure out how
to do this.


Rachel Fakhry


Absolutely. I mean, Hydrogen Europe in the European context was a
big trade group for hydrogen companies and so on, who fought the
European Commission tooth and nail for two years against hourly
branding messages that this is not doable it's. Impossible after
the passage of the European rules requiring hourly starting in
2030 but with no grandfathering. Which means project have to
start doing hourly really effectively today. Anyway, they came
out to say, yeah, this is doable, singing the same song. It's
going to be more expensive, but hey, it's going to be doable. So
it's a really interesting sneak peek into what you were saying of
when there's such a big prize at the end of the tunnel and
something already happening with all the technical elements
already in place, we should not be worried, it should not happen,
it can't happen, it will happen and it can't happen.


David Roberts


Right. Like you say, this whole fight went down in Europe and got
settled and now they're doing it. So it's doable. So you're
confident that if this was made a requirement by the time the
first electrolyzers started coming online, which would be two or
three years out at least, just to get them built, hourly matching
could be ready. You're confident of that?


Rachel Fakhry


Yes, and I'm definitely not the expert about that. I have
listened to the big experts who have done this, who are the ones
who have the biggest stake in doing this. They all agree this
could be done in a very short period of time and it's already
being done. So technically, M-RETS, again, I have to repeat, can
do it almost everywhere in the country. If there needs to be some
nationwide harmonization between various regions and so on. This
could be done really fast.


David Roberts


Right. So the other thing that sometimes comes up in the context
of this hourly idea is that if you are really only going to be
operating your electrolyzer in the actual hours where clean
energy is producing, you are by necessity going to be starting
and stopping your electrolyzer. You're going to be cranking it up
when the clean power comes online and cranking it back down when
the clean power goes offline because there's no point in
producing if you're not getting that big fat subsidy. And the
sort of conventional wisdom is, I think that electrolyzers are
one of these big industrial applications where the finances, the
business case depends on it running constantly and that if you
force it to ramp up and down to matched coming and going power,
you're going to ruin the economics and people won't build them.


What do you say about that flexibility question of electrolyzers?


Rachel Fakhry


Great, let's address that and then definitely want to get to the
cost because the jury is no longer out as to whether it's doable.
Hourly margin is doable. Now the jury is out as to, wow, is it
going to be super costly and suffocate the industry. So I would
love to get to the cost piece, but on the flexibility, false
period. Electrolyzers are designed for intermittency,
specifically PEM electrolyzers. And I know you've had that great
conversation with Electric Hydrogen and Raffi Garabedian. They're
one of the foremost PEM manufacturers. They're designed for
intermittency, so they can absolutely handle that. Now, this is
where kind of okay, from a technical standpoint, there's nothing
that stops electrolyzers from ramping up and down.


Let's get to the cost piece, which is the real big one here. I
think the first question we need to ask is what are the
operational parameters that will make electrolyzer pencil out? Is
it running 24/7 or something less than that? And what we're
seeing is that they don't need to run 24/7 to achieve
cost-competitive economics. It's somewhere closer to 50% to 70%.
And the reason is that the more you operate, that's okay for your
CapEx, that's good, but you're going to start capturing higher
and higher power prices. Electricity prices are the biggest cost
component of electrolyzer.


So at some point you're going to start having diminishing returns
with higher and higher operations. And that is not at all kind of
new information. We've known this for a while. The IEA, IRENA,
even Hydrogen Europe. Again, that industry trade group I
mentioned have all agreed that or shown that really optimal
operations are between 50% to 70%. So we've established it. We
don't need 24/7 operations. We need somewhere between 50% and
70%.


David Roberts


And 70% capacity factor, what they call running 50% to 70% of the
time.


Rachel Fakhry


Correct. Absolutely. The good news is what we're seeing from a
range of analyses being done by developers, OEMs, independent
research groups, is that with hourly matching. You can achieve
those levels in many places in the US. And the winning strategy
is to oversize a wind and solar hybrid in a region with decent
wind and solar, it doesn't have to be best in class and you can
achieve those levels of operation and be very cost competitive.


David Roberts


Right, just to flesh out that picture you just painted, because I
think it's really interesting. So we were talking about how if
you build an electrolysis and you build say, a wind and solar
hybrid power plant next to it, attached to it, not even attached
to the grid, just attached to it, obviously the resulting
hydrogen is clean, right? That's the unambiguous case. Then
there's a second option which is also unambiguously clean, which
is building the same arrangement, connecting it to the grid, but
never drawing power from the grid. Right. Only using the locally
produced power, but then overbuilding that wind and solar power
so that it's producing more than you need.


And then exporting the extra to the grid as another income
stream. So you get a couple of things from that. One, wind and
solar tend to be anti-correlated, right? So like one's on when
the other is not. So you're going to cover more of your get your
capacity factor up and you get extra money from selling your
extra renewable energy to the grid so that's the completely
off-grid and then the sort of one-way connection to the grid.
Both those are viable options where you're only consuming the
local clean energy you generate. But in the second case, you're
also selling excess clean energy, which is improving your
economics.


Rachel Fakhry


Absolutely. And it could be good for the grid too because you're
probably only going to sell that power during high grid hours or
high grid prices.


David Roberts


Right.


Rachel Fakhry


Which means that the grid really needs it, right? So you could
actually be helpful. You don't need to sell that much excess,
right, because some folks are saying, well, what if you don't
have that ability to sell your excess? The economics will still
work. Oversizing a wind and solar hybrid seems to be a really
interesting case for those early electrolyzers that need to run
more than a certain share because they're so expensive.


David Roberts


So you oversize your wind and solar to the point that you get
your electrolyzer up to the capacity factor that you need it to
be economic. And then if you just curtail the rest of that wind
and solar waste, it basically still the economics work out you
say.


Rachel Fakhry


What we're seeing, yes, it would still work. The credits are rich
enough to make things work. And let's translate the credit from a
dollar per kilogram to a dollar per megawatt hour because folks
kind of understand the dollar per megawatt hour a little bit
more.


David Roberts


Right.


Rachel Fakhry


At the current efficiency of electrolyzers, you can generally
produce about 20 kilograms hydrogen per megawatt hour of power
you consume. You're getting $3 per kilogram for every kilogram of
hydrogen you're producing. So that's a total of roughly $60 per
megawatt hour of subsidy, which means that you're willing to pay
power price of up to $60 per megawatt hour and the PTC is still
going to kind of make you whole. Now, things are a little bit
more complicated than that, but this shows you just the
significance of this subsidy in terms of how much it could reduce
the input costs to your system.


David Roberts


Right. Coming back again to the enormous size of this subsidy
relative to the industry. So the industry's sort of complaint, as
is familiar with the proposal for any new regulation of any kind,
is that this regulation will cripple the industry. It's too much,
too restrictive, too much hassle. It's going to strangle the
industry in the crib. It's not affordable. And just to throw a
specific worry in there amidst that, one of the sort of concrete
worries is that if these restrictions raise the price of green
hydrogen in the short term, one perverse effect might be that
more of the market turns to blue hydrogen, which is hydrogen made
with fossil fuels, but then with carbon capture and storage
attached to it.


And that carbon capture and storage is also going to get a big
fat subsidy out of the inflation reduction act. So the worry here
that I've heard articulated is you make truly clean hydrogen more
expensive. You're just going to shift the whole market to blue
hydrogen and then they're going to get sort of locked in. You're
going to get path dependence, you're going to get blue hydrogen
sort of making itself a place in the market, even though
everybody knows in the long, long term we need it all to be
green.


Rachel Fakhry


Right.


David Roberts


Do you think there's anything to those worries?


Rachel Fakhry


I would love to say one more thing before we close up on the
pillars because it kind of is related to this argument that oh,
we're going to suffocate the market so much that blue is going to
win. What is really interesting in what we're seeing from
opposition to the pillars is something I alluded to earlier,
which is we're now seeing the opposition sort of splitting. And
you have renewable developers that do not like any of that
starting to come around to additionality or new supply because
it's like, hey, I could sell more wind turbines.


David Roberts


Right. Why on earth would they be opposed to this? This is a
requirement that a bunch more renewable energy get built.


Rachel Fakhry


Exactly. This is where the hourly matching piece comes in. Right.
So you have a next era in Florida that has very little access to
wind, if any. Well, maybe it can't do hourly matching because
it's going to be pretty low utilization of its electrolyzer if
it's only following solar. Today that may not work. Now, in a few
years, as electrolyzer prices drop and you can run your
electrolyzer much less, hey, let the market be the market. Right?
But today what we're subsidizing, we want to make sure they're
actually clean projects. NextEra may not be able to do that.


So now you have NextEra kind of saying, "Maybe additionality is
fine, hourly matching is out of the picture." Meanwhile, you have
Constellation, the nuclear giant, right? Would love to talk more
about their plans because they're truly incredible. They're
fiercely fighting additionality or new supply because it doesn't
allow them to utilize a lot of their existing nuclear plants. But
they love hourly because nuclear generates 24/7.


David Roberts


Hourly is nothing to nuclear.


Rachel Fakhry


Nothing to nuclear, right? They come on top compared to any other
resource. So you have Constellation fiercely supporting hourly,
fiercely opposing additionality. So it's kind of a bouquet where
everyone just chooses whatever maximizes their own.


David Roberts


Whatever is going to work best for their short-term profits.
Let's just say.


Rachel Fakhry


Emissions be damned. Right. But let's get to the blue hydrogen
question because this is a new argument that I'm truly fascinated
by. I don't see any evidence of that. So the 45Q carbon capture
and storage tax credits are indeed generous and in some pockets
of the US. Yes, indeed. We expect that blue hydrogen could be
competitive and be deployed by utilizing the 45Q credits. But
we're not seeing blue hydrogen projects' levelized cost of
hydrogen dropping to less than $1, which is kind of the threshold
for today's hydrogen, or dropping to even zero and negative,
which we're seeing in some places in the US.


Where renewables are particularly great. We're hovering around
zero, right? So I don't see the huge subsidy that we're seeing in
some pockets for electrolytic hydrogen. And blue deals with its
own challenges. Right. You need to be close to a carbon storage
basin. You may need carbon pipelines.


David Roberts


Well, you need carbon capture.


Rachel Fakhry


Correct.


David Roberts


That works, which is itself. It's not something that's been shown
in the US.


Rachel Fakhry


Exactly. Blue hasn't had a merry, or CCS hasn't had a merry
trajectory so far. I don't know why blue hydrogen is going to
just mushroom all over the place. If you take the one blue
hydrogen project that's been proposed in Louisiana by Air
Products, that's been held up in public opposition for months
now. So besides the fact that CCS has not been easy to deploy,
you have to be close to a carbon storage basin. You may need
pipelines. Public opposition is a real thing here for more gas
infrastructure. So it's one of these illusory scare tactics being
branded that if you actually unpack dynamics, I don't see any
evidence of that.


David Roberts


So no worry about blue hydrogen. And I kind of agree. Everybody
keeps deploying CCS in these theoretical model ways and I keep
kind of thinking like somebody needs to actually go build a
couple of these things and show that they work. Before we
continue any of these conversations.


Rachel Fakhry


Build a couple that work. First yeah.


David Roberts


One way to address the sort of notion that these three pillars
raise costs too much is to point out that there are existing
projects being built that will meet the three pillars that are
penciling out. Talk a little bit about what we're seeing happen
now.


Rachel Fakhry


Sure. The AES-Air Products project that we discussed, that's one
of the bigger projects in the US. That's going to be three-pillar
compliance.


David Roberts


Are they building on-site? They're entirely on-site renewables?


Rachel Fakhry


I believe so, yes. Fully hourly matched. So it will go up and
down with the production of wind and solar. Intersect Power,
historically, big solar developer moving into hydrogen. They have
a bunch of projects in the pipeline that are three pillars
compliant. They're one of the best voices out there demonstrating
this is doable. Right. And I do want to point that I know we've
joked around and there's a lot of industry players that are
trying to steer billions of dollars to maximize their profits.
But there's a subset of industry players have been just
excellent. Right.


Intersect Power, Electric Hydrogen, whom you met with,
Synergetic, others have been really just fantastic at showing
that this is absolutely feasible. And if you look at Europe and
the rest of the world, these three pillars compliant projects are
popping up everywhere.


David Roberts


And the European hydrogen, whatever, body that has more or less
came out and said, "We've looked into this, we believe the three
pillars are doable."


Rachel Fakhry


Absolutely. I mean, everyone keeps pointing to and happy to speak
to the EU case, but everyone keeps saying, look, they pushed
their hourly matching to 2030. That's not doable. It's a wildly
different context. First of all, if you look at, there's no
grandfathering. So projects can start monthly, that's fine, but
they have to switch to hourly by 2030. They sign long-term
contracts. No one's going to sign a contract for 15-20 years
based on first monthly matching and then hourly, they're going to
set themselves up from the outset to be able to hourly match
that's one.


Two, the Europeans have a regulatory barrier to implementing
hourly matching that we don't. They have to pass a federal law
first, have it translated to 27 member state laws.


David Roberts


Yeah.


Rachel Fakhry


That was one of the reasons why the delayed hourly matching,
again, without allowing grandfathering, we don't have any of
that. Right. So just the EU context keeps getting branded left
and right, but the devil is in the details and we can glean a lot
from that. And I'm hoping we can get back to that because it's an
important example.


David Roberts


One of the things you hear industry say is if you force us to
make the hydrogen in close physical proximity to the renewable
energy, we're going to end up like renewable energy far away from
load. And that will mean we'll have to transport the hydrogen, we
make long distances to where it needs to be used and that
transport, the building of that transport infrastructure is going
to sort of offset whatever emission gains you think you're making
by forcing us to be near the renewable energy. You're not taking
hydrogen, the transport of the produced hydrogen into account. So
how do you think about that?


Rachel Fakhry


Well, first of all, no one's opposed to grid-connected projects.
So I don't know where this hypothesis comes from that we're
forcing projects to be very close to renewables.


David Roberts


Hey, if you well, at least in the region, right? The same region.


Rachel Fakhry


Correct. If you can do your three pillars and connect to the
grids and produce your hydrogen closer to your load, that's
great. We support that as long as you do your pillars. The second
kind of comment I have to this is if you look at the map of where
hydrogen demand is today, it's going to be in areas where there's
a good resource of renewable energy. So it's mostly Texas and the
Gulf, but also in the Great Plains midwest region for ammonia and
refineries. And we know that those existing customers will likely
be the biggest source of demand in this decade for clean hydrogen
because they already have existing supply chains, and so on


David Roberts


Making clean fuels.


Rachel Fakhry


Yeah, replacing existing status quo hydrogen with cleaner
hydrogen. Let's put it this way. Yeah, that's going to be the
bulk of demand in this decade. Which means that if you look at
the map, you're not far off from sources of good within solar.
Which means that this transport thing looks pretty manageable. If
you consider where the sources of clean hydrogen in this decade
will likely be, they're in pretty good resource regions. The
third piece that I think is key to keep in mind is that the 45V
tax credits are not the only subsidy on the table.


Right? They can't solve every single industry problem. This is
where it becomes kind of part of a menu of subsidies. So the DOE
Hydrogen hubs, money biggest DOE demonstration project in its
history, is going to help address a lot of these ecosystem
issues.


David Roberts


Yeah, the idea is to build these hubs where you're sort of like
you've got the renewable energy and the electrolysis and the
hydrogen consuming end use basically being built next to one
another. So you eliminate ...


Rachel Fakhry


Absolutely. You have other stuff that you have the hubs. The Doe
hydrogen shot is also spending a lot of money to create a
hydrogen ecosystem. States are now passing and contemplating
hydrogen-specific tax credits for end uses. So all this to say
that we can't burden the tax credits with solving every single
industry question, we can't gut them just because we want to
think about all these things.


David Roberts


And also I'm inclined to say, like, look, guys, we're like we're
subsidizing the crap out of the renewable energy, we're
subsidizing the crap out of the electrolysis to the point that
some of these projects basically the US government is going to be
paying you to do this. You guys can maybe cover transport. It
doesn't seem like a huge ask.


Rachel Fakhry


I have a feeling they'll figure that one out. This feels to me
like a grasping-at-straws kind of thing, but the transport is
going to be impossible. There are options. Do grid connections
just meet your pillars? Essentially.


David Roberts


Let's go back to Constellation for a minute because this is just
a gripe, but I feel like I want to cover it. Constellation is a
utility that is benefiting from recently passed subsidies
designed to keep existing nuclear plants open. Right? There's a
whole separate debate in the energy world. People are familiar
with it. Should we let them close on schedule? Should we pay to
keep them open? A couple of states have passed these huge
subsidies to keep them open, and Constellation is currently
wallowing in those subsidies. And it's worth noting a lot of the
people who it is now criticizing and fighting against in this
hydrogen debate are some of the very people who went to bat for
it to get it those nuclear subsidies, right?


Like it's now badmouthing Princeton's modeling. But of course,
that crew at Princeton has been laying itself on the railroad
tracks trying to get these existing nuclear plants subsidized. So
just to say, like, we're wallowing in nuclear subsidies and now
we want to turn around and be allowed to just plug electrolyzers
into our existing nuclear plants and layer on a whole new giant
subsidy is just like I don't know what the right word is. It's
greedy. It seems crude and greedy if I'm being totally honest.
Maybe you have nicer words.


Rachel Fakhry


Sadly, don't. Well, yeah, of course, they're not very happy with
the Princeton folks who are kind of standing between them and
enormous profits above and beyond what they were already doing.
So fully agree with you. First of all, I think Constellation is
basking in subsidies at this point. They're very well taken care
of. Actually, right before this podcast, I was speaking to a
nuclear lawyer, NRDC, and kind of asking her, hey, could you just
remind me of all the subsidies that the nuclear can now tap into?
She actually had to take a couple of seconds just to see where
she could where to start because there are so many buckets.


David Roberts


Get the calculator out.


Rachel Fakhry


Exactly. So Constellation, as I alluded to earlier, is fiercely
fighting and loving policymakers against requiring additionality
or new clean supply because that would not allow them to utilize
their existing nuclear plants for hydrogen production and maximum
profits. No new clean supply or no additionality would be an
absolute gold mine for Constellation.


Yeah.


They have two very lucrative options. One is to divert their
existing nuclear power to hydrogen projects. So essentially
collocate electrolyzer with their nuclear plant and divert a
share of the output of that nuclear plant to hydrogen production.
And this seems to be Constellation's main plan.


As I mentioned earlier, the tax credits, the hydrogen tax credits
are roughly equivalent to $60 per megawatt hour. Constellation is
not getting that at the market. On the market, power prices are
way lower than that. Maybe 2022 was an off-year, but generally,
they're way lower than that. So they're like, "Light bulb.
There's a huge lucrative opportunity for us to divert our power
away from the grid and utilize this very lucrative opportunity to
produce hydrogen with our power."


David Roberts


Basically changing nothing else, right, like just harvesting a
giant new set of subsidies, having changed operationally almost
nothing.


Rachel Fakhry


Absolutely. And that would be terrible for emissions. Could you
imagine megawatts and gigawatts of diverted nuclear energy from
the grid? That would be terrible for emissions, result in
nefarious grid impacts in terms of prices, reliability, and
emissions be damned. Actually, this is playing out in Illinois
right now. This is Constellation's powerhouse where they have a
lot of their nuclear capacity. They have plans to divert their
power away from the grid. We estimate that emissions in Illinois
could increase by 7% somewhere up to 45%, depending on how much
of the output you're actually diverting and completely torpedoing
over the state's clean energy goals.


David Roberts


Yeah, basically wiping out the gains of their big, hard-fought,
complex clean energy legislation, which they just passed.


Which, by the way, supported Constellation, even if they're not
getting a lot of money from it for multiple reasons. But it
supported Constellation because supposedly it was helping support
that decarbonization. So it's a perilous terrain that's, number
one, it's divert our power, get $60 per megawatt hour. We're not
getting on the market. Hugely lucrative option number two is just
sell large volumes of credits, kind of like Rex, but for nuclear
from their existing nukes, because there's currently no market
for those credits outside of a few states. And this is a huge
volume of credits. Right. As I mentioned to earlier, there's
enough potential nuclear credits to completely cover all hydrogen
production that we could expect between now and 2030.


Rachel Fakhry


So this is the same thing, is you're doing nothing on the grid,
getting paid for generation already very heavily subsidized by
the US taxpayer, and allowing electrolyzers to just plug on the
grid, purchase credits that mean nothing, and increase emissions,
right? So to sum up, this is a gold mine for Constellation
without doing anything.


David Roberts


I mean, it's a gold mine for them, whichever way it turns out.
That's kind of the rub here. Like they're awash in subsidy money
no matter what they do. They're just trying to stack it now.


Rachel Fakhry


Absolutely. And again, emissions, impacts on the grid, so on and
so forth, to be damned. So it is, unfortunately, blatant greed.
And they're out there claiming that nuclear is getting left out
and that this is unlawful. And the best part is that no one wants
to outlaw the use of nuclear for hydrogen. There are options,
right? For instance, if you operate your nuclear plant that can
count as nuclear supply, you could do that. They refuse that, not
lucrative enough.


David Roberts


You could build new nuclear. Everybody keeps saying how great
nuclear is, but why didn't build some new on it and hook that up
to electrolyzer?


Rachel Fakhry


We even gave them the option of, hey, look at what the Europeans
did. They said during low-priced hours, which are a good proxy
for clean grid, we can relax hourly requirements and sell your
credits during those low-priced hours because it's a proxy for
some generator curtailing somewhere. So this kind of can count as
nuclear supply if you spur that generator. Not enough hours for
us. So we are not in the business of suffocating nuclear. We're
in the business of making sure it meets the same requirements as
everyone else.


David Roberts


Right. Or they could just make the hydrogen and not get a giant
subsidy. There's no one telling them they can't do that. Again,
nothing's being prohibited here.


Rachel Fakhry


Correct.


David Roberts


It's just like if we're going to give you a bunch of money, we'd
like to have a few conditions on it.


Rachel Fakhry


Absolutely. That's absolutely right.


David Roberts


So just to review where we've been so far, there's these three
pillars that characterize truly clean hydrogen. It's additional.
It comes from new energy, comes from energy that's on the same
grid you're on and it is matched up hourly with your consumption.
Europe has more or less embraced these conditions. It's different
timing on the hourly for various reasons. But the European
Commission has said these are absolutely doable. This will not
strangle the industry in the crib. So I have two questions about
this. One is one argument you hear is it just stands to reason
that more requirements and tighter requirements are going to slow
the pace of development relative to no requirements.


Right. We'd build more electrolyzers if we could get the subsidy
for any damn thing we do. So it's going to slow the industry. And
what's most important here, and this is the argument I think
appeals to a lot of people and this is the argument Rhodium uses,
I'm sure you're familiar. Their whole thing is, yes, slightly
looser additionality requirements would potentially raise
greenhouse gas emissions in the near term. But that is worth it
because you're radically accelerating the scaling up of
electrolyzers and the scaling up of green hydrogen, which is
going to reduce way more emissions in the long term than whatever
this short-term surge is.


So basically like the short-term surge is worth it because you're
buying huge long-term reductions. So what do you make of that
trade-off is my first question.


Rachel Fakhry


First of all, increasing emissions is against statutory
requirements.


David Roberts


I want to get back to that. But first, on the merits.


Yeah, you're blatantly flouting the law, right? The IRA is meant
to be given to projects that reduce emissions by 95% relative to
today's hydrogen. You are subsidizing projects that have twice as
much. So if you're already flouting statutory requirements by
adopting some sort of a phase-in or transition periods like what
Rhodium suggests. That's one. Two, I have full respect for
Rhodium and we have worked with them a ton, but fully disagree
with this notion of a trade-off. Right. As I mentioned earlier,
what we're seeing from financial analyses, from projects already
being kind of doing the three pillars.


Rachel Fakhry


The three pillars will not harm scale. They will ensure healthy,
durable scale. NRDC has been one of the first big enviros to come
out in support of hydrogen three years ago and say, look, this is
an important tool in the toolbox, we should scale it. However,
this doesn't mean we have to scale it recklessly. Right. We have
to make sure it's actually being done right. So I fully disagree
with this notion of a trade-off between near-term emission
increases against the law and scaling the industry. You could do
both. The third piece, which people tend to forget, what will
slow down this industry is public opposition.


Could you imagine if the US taxpayer knows that they're
subsidizing increased emissions? That's not going to be pretty.
And hydrogen is already a very contentious resource.


David Roberts


Yeah, it's contentious, but also it's still a little bit kind of
undefined, a little bit it's a little bit fuzzy. So like, these
next few years and how it gets treated and how it gets introduced
to the broader public is very important. Right.


Rachel Fakhry


That is the first touch point. I fully agree with you and I love
one of the quotes by Paul Wilkins, I think is the vice president
of Electric Hydrogen in Washington Post. He said, look, if in
five years this tax credit shows that this industry is increasing
emissions, that's going to be terrible for our industry. So that
will slow down scale. It's not the and that always gets just
glossed over.


David Roberts


Right.


Rachel Fakhry


Love to discuss this EU approach because I know that Rhodium
ended up recommending that, but keeping it quite open ended.


David Roberts


Yeah, and I think Rhodium endorsed the idea is just that you
start with yearly accounting and work your way up to hourly. You
start with sort of broad regional requirements and then work your
way up to more specific. It's same like you start with I think
they want to start with monthly RECs and work their way, this
idea of phasing in, so you can get started quickly and then phase
in tighter requirements over time. What do you think is wrong
with that approach?


Rachel Fakhry


It's trying to mirror the EU, and I think this is very misguided.
Right. Because the EU has a wildly different context. First of
all, the EU has sticks. They have their emissions trading system
which will help climb down and really minimize any emissions
increases from loose rules in the near term. We don't have that.
That's one. Two, the EU does not have a production tax credit
like we do. All of their subsidies are more on the demand side.
So creating demand signals. That means that there's going to be a
rush to the cheapest supply. Cheapest supply generally means that
you want to operate during low-priced hours as an electrolyzer
because that's the biggest cost for you.


And this generally means you're going to hover around the cleaner
hours. We don't have that. We have a production tax credit that
is worth $60 per megawatt hour that will incentivize
electrolyzers to keep running as much as they can because ...


David Roberts


They're going to run maximal. When you're paid not for your sort
of CapEx to build, but for your output, you obviously are
incentivized to output as much as possible, as many hours as
possible.


Rachel Fakhry


Absolutely. And then the third piece, which I alluded to earlier,
the hourly matching phase in wildly different contexts in the EU,
again, they have a regulatory barrier we don't, which is one of
the reasons why they delayed it. We don't need to do that. Wildly
different context. We should not be blindly mirroring the EU. So
I think we're open to discuss what a rigorous phase-in period
could look like for the US, but it should not be mirroring the
EU.


David Roberts


Right, well, energy Innovation, and by the way, I should just say
a lot of what I learned about this, I learned by listening to
Chris Nelder's Energy Transition Show where he interviewed Eric
Gimon from Energy Innovation. If you want, like the super nerdy
technical dive into all this, if this isn't giving you enough,
whatever freaks out there who still don't feel like they got
enough from this, there's plenty more there. But one of the
things energy innovation is recommending is a phase-in but sort
of different starting strict but crude, not relying on sort of
sophisticated hourly matching at the beginning but just starting
with sort of rough and ready but relatively strict guidelines.
And then evolving over time to something that's a little bit more
granular and precise and a little bit looser.


Because Eric's point, which makes sense to me, is you don't often
see industry passively agreeing to standards that they've gotten
used to getting tighter. Right. But every industry would welcome
standards that they're getting used to getting looser. Right. So
his sort of thing is like, we don't have the sophistication to do
it precisely. Now let's be strict and crude and then evolve
toward slightly looser and smart. What do you make of that?


Rachel Fakhry


Yeah, I think this is more related to the point they made in
their comments that the most precise way of calculating life
cycle greenhouse gas emissions of hydrogen projects is to adopt
the marginal emissions approach, which I know you hate that term,
Dave, but emissionality essentially you net out. You have to have
a very granular way of accounting for what you're inducing on the
grid and what you're netting out by locating somewhere and kind
of going that way. I know that they're slightly moving away from
that because it's not easily implementable that's something we
flirted with as well a few months ago. And what we're hearing is
like this is elegant and nice, but from a developer standpoint
this may not be very workable.


So the three pillars are very good proxy right, for ensuring that
your emissions are close to zero.


David Roberts


Right. The ideal here is a sort of shimmering ideal in the
distance is that for any given hour of power consumption, you
know, in the end eventually you're going to be able to know
specifically which generators provided it and specifically how
much greenhouse gas were involved. Like just as you can precisely
know how much power you're using, you're eventually going to be
able to precisely know how many greenhouse gases you're producing
or displacing or avoiding. Right? That's all going to be sort of
available in one giant transparent registry and everybody's going
to agree how to calculate it and we're going to be able to base a
lot of policy on that.


I mean, it's going to solve a lot of tricky kind of short-term
accounting and tracking and policy puzzles are going to be solved
once all that information is transparent and available. But as
you say, that's a ways off.


Rachel Fakhry


Absolutely. We strongly support this move to more granularity to
give really the more accurate signals for what to invest in. I
don't think it's necessary for this credit. The three pillars are
straightforward enough for developers. They're rigorous enough to
meet the IOA requirements. I'm supportive of just retaining that.
Now one can create a little bit of exceptions or derogations like
what the EU did. So for example, if the grid gets really clean,
like 90-95% clean, then maybe we can relax the additionality
required. Or if LMPS are extremely low, which indicates renewable
energy curtailment for instance, then maybe we can relax hourly
matching.


We're open to that as long as the rigor of the system is
maintained. So I don't think we need to completely overhaul to a
marginal emissions approach to bake in a little bit more
precisions for the outer years.


David Roberts


Right. And presumably, there'll be a lot of learning as we do
this, how to make it work better. So this might be a dumb
question but so say you're treasury and you read the Rhodium
report and for whatever reason, it strikes you as highly
compelling and you're thinking, yeah, let's set some relatively
loose additionality requirements. Even though we'll get a little
bit more greenhouse gas emissions in the short term, we'll get a
lot more reductions in the long term. My thing is which, as you
said, that's just against the law. The law says very clearly 0.45
threshold for greenhouse life cycle emissions is very clear.


So I guess my question is just isn't some of this kind of an
academic debate? Like the IRS can't just contravene the clear
written intent of the law. It's got to hold whatever details it
puts in, it's got to result in that threshold, or else it doesn't
meet the law. Right. So is a lot of this just an academic debate?
Like, what am I missing? They don't seem to have the latitude
that industry is acting like they have.


Rachel Fakhry


Absolutely fully agree with that. And the treasury has been
pretty tight-lipped about all this, so it's really hard to see
where they're landing. But you're spot on. Weak rules that
clearly flout statutory requirements would be both unlawful and a
complete abdication of responsibility. So I wouldn't be surprised
at all if many groups end up suing, should the rules be very
weak. But let's talk about this legal piece. We have been doing a
bunch of legal analyses with other groups, and look, the case for
the pillars is ironclad, right? Because the way lifecycle
emissions are defined in the law requires that they account for
emissions that projects induce on the system.


So if I'm an electrolyzer and I'm purchasing cheap credits from
the existing nuke or renewable or so on and driving more gas on
the system.


Right, you induce that grid operator to turn on that extra gas.


Correct. There is virtually no project in the US that today will
qualify under this boundary of emissions. If they're not driving
nuclear supply that is hourly match and deliverable, it's
impossible for them to comply with 0.45 without these three
pillars.


David Roberts


Right.


Rachel Fakhry


If you want to make this credit workable, those need to be in. If
you want no projects to qualify unless they're colocated with a
new source of supply, then you can do that. But I don't think
that's the intent of the law. I don't think developers will be
happy with that if it's only the behind-the-meter projects are
able to qualify. So the three pillars are absolutely necessary,
and if they're flouted so blatantly then that's just unlawful in
a sense.


David Roberts


All this feels a little bit pointless to me because the law is
super clear and if they come out with standards that allow higher
threshold they're just going to get sued by a bunch of
environmental groups. I mean that would be a crappy outcome to
have to wait. We don't have a lot of time to wait and mess around
with lawsuits. But surely treasury knows it doesn't have as much
latitude as industry seems to frame it as having.


Rachel Fakhry


Hopefully, Dave, let's send them this little excerpt.


David Roberts


You don't have to; it's crazy. I'm not a lawyer, but the law is
so clearly written that there just doesn't seem to be a lot of
fuzziness here. But who knows what our beloved Supreme Court
could find if it ever finds its way up there. It's just a small
side question in terms of projects built entirely off-grid,
right? One and then projects built with a one-way connection to
the grid. Two and then projects that are just grid connected that
just contract to have new solar and wind added to that grid. Do
you have any sense of what the balance will be like right now?


There's some off-grid projects being built. Right. So clearly,
those are workable. Are people going to gravitate toward
grid-connected over the long term because it's cheaper, or do you
have any sense of what kinds of projects are most likely to get
built?


Rachel Fakhry


Yeah, that's very unclear. What we're seeing is most of the
projects moving now are behind a meter. Indeed.


David Roberts


Do you know why? Is there a clear answer to why?


Rachel Fakhry


If I had to speculate, there's so much less risk.


David Roberts


Yeah, everything's much cleaner. Every answer is much clearer.


Rachel Fakhry


Exactly. There's less risk overall, which I'm sure is very great
for your rate of capital and so on.


David Roberts


Yeah, right.


Rachel Fakhry


But the level of fierce opposition we're seeing for the
grid-connected kind of three-pillar system tells me, oh, there's
a lot of interest in connecting to the grid at some point soon.
So we're seeing mostly behind the meter. But I expect that the
grid-connected projects will certainly start popping up soon.


David Roberts


Be really interesting to see how that plays out. Okay, final
question, and God bless all you listeners for your extraordinary
patience. This is a complicated one. There was really no way to
boil this one down. But final question. This is like everything
in IRA. This is a carrot, right? A big subsidy, a big payout, and
specifically, it's a supply-side subsidy. This is literally a per
kilogram of output subsidy. So it's all about supply. If you are
taking a step back and thinking about, in the long term, how to
construct a robust and effective market for hydrogen in the clean
energy system, are there demand-side policies that you think
would work well to complement this really giant battering ram of
a supply-side subsidy?


What should we be doing on the demand side? Or is supply side is
the battering ram enough?


Rachel Fakhry


Great question. And this really gets to the core of, look, the
tax credits are a big prize. They're not the only one, right? So
we can't burden them and loosen the crap out of them because
we're worried that the industry won't scale otherwise. I disagree
with that. I think there's a good analogy to the renewable energy
growth. The wind and solar tax credits obviously were a big
driver of deployment. They were not the only driver. Right. State
RTS has played an important role, corporate voluntary
procurements played a really big role.


David Roberts


Yeah, demand side was huge all along.


Rachel Fakhry


Absolutely. So that's exactly the same case here. There's this
giant, generous supply side push. It has to be and already is
coupled by subsidies on the other side. What we're seeing
globally, and this applies to the US, is one of the main barriers
of getting hydrogen projects built is the lack of end uses. It's
the lack of demand. Right. That's why only a very small share of
projects go from announcement to FID.


David Roberts


And just to be clear, this is not lack of demand for hydrogen.
There's lots of hydrogen used. It's lack of specifically demand
for the still slightly, somewhat more expensive clean hydrogen.


Rachel Fakhry


Correct. No longer in many places. Yes, spurring end-use is going
to be important, especially since we didn't speak of that, but
maybe that's another episode. Hydrogen should not be used
everywhere. Right. This is a resource that is energy intensive.
It has its place in some important hard-to-electrify sectors like
steel and maybe shipping and so on. Not widespread in the
economy. So focus demand side policies could be really
interesting here to really divert the market to the, quote
unquote, "good uses." Right. So the hydrogen hubs are going to be
really interesting. And again, this is a big subsidy we keep
forgetting.


David Roberts


Yeah. Have they talked about what end uses qualify or what
they're going to put in those hubs as end uses?


Rachel Fakhry


It's very unclear. But the DOE's hydrogen roadmap, which kind of
sets the vision for the department, for how they will go about
their hydrogen deployment, is pretty damn good. It's all focused
on deploying hydrogen in hard-to-electrify applications where
it's actually needed and doesn't have better alternatives. So if
they were to make good on that roadmap, and I really hope they
do, they will select the hubs that actually have the high-value
end uses and not the low-value end uses like blending in pipes.


David Roberts


Yes. Let's just say when we talk about low value, like the idea
of blending hydrogen into natural gas pipelines to marginally
reduce the climate impact of natural gas just seems to me like
the lowest possible use of what is effectively like champagne. Be
like dumping champagne in your water supply or something. I don't
know what the right analogy is. You want to save champagne, it's
expensive and you want to save it for the best highest uses of
it. And this is a big fight with the natural gas industry, of
course, because they want their natural gas pipelines to stay up
and running as long as possible.


They want all that infrastructure, they want themselves to
survive. And so the idea that they could mix in a little hydrogen
and go on, they love it. But as you say, that's a whole separate
fight, a whole separate pod about hydrogen end uses.


Rachel Fakhry


Absolutely. And this has a real implication on the production
because if we recklessly open the floodgates of supply in this
decade with very loose rules, then where is this hydrogen all
going to go? Right. The end uses that are the most primed to go,
unfortunately, today are the ... Barring, replacing existing
hydrogen with cleaner, which is good. It's all these other bad
end-uses, including blending, because steel and other good end
uses aren't quite commercially viable just yet. So all this to
say the hubs are going to be a big end-use driver. Public
procurement tools are really interesting.


So the federal government is one of the largest buyers, for
instance, of steel for public infrastructure projects. There's a
lot of money in the IRA now for the federal government to clean
up some of their cement and steel and so on that they purchase.
If there is a procurement for green steel that is hydrogen
derived, then that's really interesting. Right. You're trying to
create a very strong, stable demand signal, and we're seeing some
states like Colorado, Illinois, Pennsylvania starting to
contemplate state-specific tax credits focused on using hydrogen
in specific end uses. I'm not going to get behind those
proposals.


They're not great, but I think it's the right kind of thinking,
right? Let's start trying to be more targeted with where we're
driving this resource in the economy.


David Roberts


Right. So you're saying if we're going to sort of jam an enormous
amount of supply into the system really quickly, we should also
implement some demand-side policies to guide the hydrogen thusly
produced to its highest and best uses?


Rachel Fakhry


Absolutely. We have to be very cautious about where we're using
it and divert it to the right places, for sure.


David Roberts


Okay. Goodness, that's a lot. It just goes to show in the energy
world, you're like, clean hydrogen. Let's do that. And then so
many devils in the details.


Rachel Fakhry


I'm hoping this was less wonky than Eric Gimon, whom I have
utmost respect to, but even my mind was turned into a pretzel
listening to that episode.


David Roberts


Yeah, I think we hit a nice, good middle spot. This is like the
301 class. More than the 101, but less than the grad seminar.
That's my aspiration.


Rachel Fakhry


That's where students either drop or ...


David Roberts


The ones who can get past this pod. They're definitely headed for
expert expertise. Rachel Fakhry of NRDC, thank you so much for
coming on and talking through this all so plainly and simply and
clearly. I super appreciate it.


Rachel Fakhry


Thanks so much, Dave.


David Roberts


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