Cleanly produced hydrogen is becoming increasingly important in the fight against global warming and the development of fuel cell technology. However, federal tax credits for the production of "green" hydrogen are not receiving the warm reception that was anticipated.
The U.S. Treasury and the Internal Revenue Service recently proposed rules for obtaining tax credits for the production of green hydrogen, in line with last year's Inflation Reduction Act. The aim of these production tax credits is to incentivize projects that generate hydrogen using clean energy sources such as solar or wind power, rather than relying on the current fossil-fuel based methods. Green hydrogen can then be used to power heavy-duty vehicles like trucks and ships, which are not suitable for battery-powered solutions.
In a statement on December 22, Energy Secretary Jennifer Granholm expressed her belief that these new rules will lead to significant investments in the American clean energy sector. She stated, "Hydrogen has the potential to transform America's manufacturing industry and revolutionize transportation."
The tax credits were expected to attract investment in new hydrolyzer plants, which produce hydrogen. However, the eligibility criteria for projects are very strict, which may result in many proposed plants struggling to qualify.
The introduction of these rules has not had the game-changing impact that advocates of green hydrogen had hoped for. According to BMO Capital Markets analyst Ameet Thakkar, the strict eligibility standards make it even more difficult for green hydrogen production to expand. In a recent note, Thakkar expressed skepticism about the economic viability of clean hydrogen even with lenient tax credit standards. He also highlighted the potential negative impact on financially strained companies like Plug Power and the associated downside risk for Bloom Energy.
Despite the challenges, the pursuit of clean hydrogen production remains crucial for achieving sustainability goals and driving advancements in the fuel cell industry. The industry will need to navigate these obstacles and develop innovative solutions to realize the full potential of green hydrogen.
Criteria for Hydrogen Plants to Claim Credits
The rules set three prerequisites for hydrogen plants to claim credits. These prerequisites aim to ensure that the production of hydrogen is powered by clean energy sources. According to the regulations, the clean power used for production must come from a new source that is built within three years of the hydrogen plant's start-up. Furthermore, this power source must be located near the hydrogen plant to minimize transmission congestion. Starting in 2028, the power utilized in producing hydrogen must have been generated within the same hour it is used in hydrolysis.
Challenges for Plug Power
The requirement for a new energy supply may pose challenges for Plug Power, as they have planned projects that rely on existing power sources. Citi analysts Vikram Bagri and Theodore Giletti emphasized this concern in a recent report. However, Plug Power hasn't provided any comments on this matter.
Comment Period and Stock Performance
Interested parties within the industry have a period of sixty days to file their comments with the Treasury Department. This comment period began on Wednesday when the draft rules were published in the Federal Register and will last until February 26, 2024.
Currently trading at $4.74, Plug Power shares have seen a significant decline from the $75 level they reached earlier in 2021. The company has faced challenges, including a "going concern" warning from its accountants. In response to the Treasury rules, Plug Power held a phone conference with brokerage-firm analysts.
Plug Power's Project Review and Potential Renewable Sources
RBC Capital Markets analyst Chris Dendrinos reported that Plug Power reviewed its three main projects in a recent note. These projects are expected to be powered by existing nuclear, hydroelectric, or wind power sources. However, Plug Power is hoping to persuade the Treasury to allow these legacy power sources. If that is not possible, the company will seek other renewable sources.
Dendrinos rates Plug Power as a "sector perform," which is equivalent to a Hold, and considers the stock to be fairly valued at $5.
The Need for More Support
While the proposed tax credits aim to provide a hydrogen solution to the climate crisis, it seems that additional help will be necessary.
