Constellation Energy’s hydrogen production could be derailed

Plans by Baltimore-based Constellation Energy to mass-produce carbon-free hydrogen could be jeopardized under proposed federal guidelines that exclude existing nuclear plants from tax subsidies designed to boost a budding clean hydrogen industry.

The newly released rules outline qualifications for clean hydrogen production credits offered through the Biden administration’s Inflation Reduction Act, which, in part, aims to cut greenhouse gas emissions 40% by 2030. Constellation, which produces electricity at power plants, including the nation’s largest fleet of nuclear power plants, had been counting on the credits to help make clean hydrogen production cost-effective.

Constellation said in October it planned to invest $900 million to build the world’s largest nuclear-powered clean hydrogen production facility at its LaSalle Clean Energy Center in Illinois. The project, expected to produce an estimated 33,450 tons of clean hydrogen each year, much of it to be used to decarbonize heavy industries, would be part of The Midwest Alliance for Clean Hydrogen. The U.S. Department of Energy had selected the alliance, among a number of U.S. hydrogen hubs, for up to $1 billion in funding.

Now, it appears Constellation’s piece of the project may be derailed, though the company has not announced any updates.

Guidelines released in December by the U.S. Department of the Treasury and

Internal Revenue Service say tax credits for hydrogen produced using electricity are available only to new sources of clean power. The rules define those sources as clean power generators that have begun operating within three years of the opening of hydrogen facilities.

That would exclude Constellation’s nuclear plants and most others as well. No new nuclear plants are under construction.

In a statement, Constellation said the nation won’t be able to meet its carbon neutrality targets under the proposed rules. Nuclear plant owners would face insurmountable barriers of entry to the new clean-hydrogen market without the tax credits, the company has argued.

“The proposed rule flies in the face of Congress’ clear intent to use America’s nuclear energy to produce hydrogen,” the company said. “If finalized, America will surrender hydrogen and deep decarbonization leadership to China and Europe, both of which have policies that smartly utilize their existing nuclear plants to make hydrogen and speed decarbonization.”

The amount of the credit ranges from 60 cents per kilogram of hydrogen produced to $3 per kilogram.

Proponents of limiting tax credits to new sources of clean power say they want to prevent the diversion of existing clean energy to make hydrogen, which they argue would encourage coal and gas producers to remain on the grid longer to make up the difference. In announcing the proposed rules Dec. 22, the Treasury Department appeared to echo a similar view, saying “safeguards” in the rule will prevent the credit from subsidizing hydrogen production with higher greenhouse gas emissions than allowed by the statute.

The credit, as proposed, “will help build a clean hydrogen industry that will be critical in reducing emissions from harder-to-decarbonize sectors like heavy industry and heavy transportation,” said John Podesta, senior adviser to the president for Clean Energy Innovation and Implementation, in the news release.

The Treasury Department and the IRS said they will consider additional public comments for 60 days before issuing final rules.

While clean hydrogen can help reduce emissions, conventional hydrogen production typically contributes to climate pollution. The tax credit aims to make clean hydrogen production more economically competitive and accelerate the nation’s hydrogen industry.

Constellation, which has positioned itself among an emerging group of players aiming to fill demand for carbon-free hydrogen, has argued tax credits are necessary for nuclear operators to scale up business, drive down clean hydrogen costs for customers and produce the volume needed to sustain business. Otherwise, Constellation has said, upfront costs of investing in and building infrastructure would be too high.

The promise of hydrogen is that once it’s produced, it can be used to generate power in a fuel cell while releasing only water vapor and heat. The challenge is producing the hydrogen, as well as storing, transporting and using it safely. While it’s nontoxic, hydrogen can be highly explosive.

Hydrogen, a common raw material in making other products, is most commonly and cheaply made by an emissions-intensive process in which methane from natural gas is heated with steam to make a mixture of carbon monoxide and hydrogen.

But varying degrees of low-carbon hydrogen can be produced from clean energy sources, including “green” hydrogen made from water via electrolysis, using renewable or nuclear energy.

According to Energy Department estimates, if nuclear plants are excluded from hydrogen production, the amount of clean hydrogen needed by 2030 to meet climate goals for transitioning industry to clean energy would require a doubling of the nation’s current renewable solar and wind sources on the grid.

A number of stakeholders had raised concerns about the way the rules were shaping up in the months before the proposal was announced, asking Biden administration officials to avoid adopting rules that would alter the intent of the legislation.

“Talk of the potential of a hydrogen network in this country has gone on for decades, and now is not the time to deny this dream from becoming a reality,” said Sean McGarvey, president of North America’s Building Trades Unions, in an August letter to Podesta and U.S. Treasury Secretary Janet Yellen.