The Inflation Reduction Act (IRA) has brought a lot of exciting opportunities to the energy sector. One of the most groundbreaking changes, at least from the perspective of rural electric cooperatives (RECs), was the creation of Direct-Pay incentives. For the first time, electrical cooperatives can reap the same tax-related benefits as for-profit electric companies. However, this financial boon isn’t the only way the IRA can translate to cost-savings in the energy sector. For both RECs and commercial and industrial (C&I) customers who use natural gas in their power generation, the new tax credits for green hydrogen stand to have a big impact.
Natural gas is here to stay
Over 30% of the electricity generated in the United States is produced with natural gas. In 2021 the US used nearly 31 trillion cubic feet (TcF) of natural gas, of which 37% was used toward generating electricity. Whether at large-scale combined-cycle plants or in use at on-site distributed reciprocating engines, natural gas is an essential part of America’s energy portfolio.
Traditionally, natural gas has been the most expensive source of fuel on the market. Since 2023, the US has been the leading international supplier of liquified natural gas (LNG). Exactly what the long-term impact of that on domestic natural gas supply will be remains to be seen. Ultimately, a balance will need to be found between meeting foreign and domestic needs. As that balancing act goes on, it may be worthwhile to look toward natural gas alternatives.
Natural gas-powered turbines and engines aren’t going away anytime soon. If anything, they’re becoming more important. We see natural gas-powered reciprocating internal combustion engine (RICE) units as an attractive distributed option to help energy suppliers address issues like 4CP and supply-disrupting events. Pairing natural gas technologies with renewables can be one way to reduce costs, but what if there was another way? Without reinventing the wheel, one way to lessen natural gas demand is to turn to other fuel sources; Namely, hydrogen.
The hydrogen spectrum
Hydrogen as a fuel for electricity generation can be produced in a variety of ways. A whole color spectrum of different hydrogen types exist, depending on the method of production.
The most common of which uses natural gas through a process called steam methane reforming.
Over 95% of the global hydrogen produced each year comes from fossil fuel sources like natural gas or coal. The main methods of production involve either the gasification of coal or steam methane reforming (SMR) of natural gas. In the SMR process, the natural gas methane is subject to high heat and pressure which splits the gas into hydrogen and carbon dioxide. If the leftover carbon dioxide emissions are not recaptured, this is called grey hydrogen. Blue hydrogen is produced the same way, but the carbon is recaptured. Blue hydrogen can also be created from biogas.
Until recently, there wasn’t much incentive to produce green hydrogen, which can be created by electrolyzing water. Depending on the type of electricity used in electrolysis, other color categories can be applied, like pink for hydrogen created through nuclear energy.
Using grey or blue hydrogen as an alternative to natural gas doesn’t provide many advantages to electricity suppliers. It’s more expensive than natural gas, not as efficient on a 1:1 ratio and the production process can actually create more greenhouse gas emissions than regular natural gas. While prices fluctuate, typically the price for $1.50-2.00 per kg in the United States. In comparison, the green hydrogen cost is anywhere from $4 to $8 per kg. Green hydrogen, which has the benefit of being a low- or zero-emission fuel source, is twice as expensive than blue hydrogen to produce. Yes, it is helpful in achieving net-zero goals, but not financial goals. That is what the IRA is poised to change.
Green hydrogen credit
The credit for the production of clean hydrogen is also known as production credit 45V. In summary, the credit will do the following:
- Create a new incentive with four tiers for clean hydrogen production with four tiers
- A maximum of 4 kg of CO2 can be created per kilogram of hydrogen.
- The credit is valid for projects starting anytime within the next 10 years, including facility retrofits.
What does this mean for electricity suppliers? Should the credit be successful, within the next decade green hydrogen could be an attractive way to lessen natural gas use.
Natural gas and hydrogen: Finding the right blend
To be clear, we’re not suggesting completely replacing natural gas with hydrogen. Instead, hydrogen can be mixed with natural gas in a process called co-firing or blending. This process involves adding hydrogen to the natural gas stream before it is burned to generate electricity.
However, it’s important to note that the amount of hydrogen that can be blended with natural gas is limited by the equipment and infrastructure used in the combustion process. Depending on the technology, most natural gas turbines and engines can handle anywhere from 5-20% hydrogen by volume. Beyond that, modifications to the equipment and infrastructure may be necessary.
The next step toward hydrogen
So what’s the next step for C&Is and RECs? Really, it’s just to wait and see. For now the IRA is still fresh and the hydrogen market is adapting to the recent changes. In the meantime, it can be useful to keep this information in mind when considering the future viability and cost of natural gas-powered technologies. If, in the near future, green hydrogen becomes a cheaper fuel source than natural gas, this could translate to huge savings suppliers who use natural gas-powered turbines and engines, especially during peak load events,
Do you want to talk more about the future impact of green hydrogen? Our team has been closely following the development of the Inflation Reduction Act and the implications new hydrogen production can have on the market. To keep the conversation going, you can fill out our contact form and be connected to our co-founder, Scott Tampke.