From Robert Bryce Substack
Robert Bryce
Hydrogen producers can receive up to $25B in federal tax credits per EJ! That’s 9 times solar, 47 times wind, and 1,800 times hydrocarbons; I’ll be talking about H2 and alternative energy in El Dorado, Texas on Thursday
In 1937, the hydrogen industry was on fire.
The late Charlie Munger was one of the most successful investors of modern times. Munger, who died late last year, was vice chairman of Berkshire Hathaway, the company led by his friend and colleague Warren Buffett. Munger, an Omaha native, had many pithy quotes, but one of the most memorable is: “Show me the incentives and I'll show you the results.”
Remember Munger's line whenever you wonder why the United States doesn't build more nuclear power plants instead of investing hundreds of billions in politically popular alternative forms of energy.
As I noted in H for Hype in May, few areas of the energy industry have received more media hype in recent years than hydrogen. The hype has become excessive due to generous government subsidies. The German government has set aside about $14.2 billion to invest in about two dozen hydrogen projects. I continued:
In the United States, hydrogen production is generously subsidized by the 45V tax credit in the Inflation Reduction Act. Big businesses are lining up to get these subsidies. In February, energy giant ExxonMobil warned that it could cancel a proposed hydrogen project at its Baytown refinery in Texas, depending on how the Treasury Department interprets “clean” hydrogen rules in the IRA. Regardless of tax credits and subsidies, the creation and use of hydrogen is a high-entropy, high-cost process. As a friend in the refining industry told me last year, “If you like gasoline at $6 a gallon, you’ll also like hydrogen at $14 to $20 a gallon.” … From an energy perspective, hydrogen is very expensive. . It takes approximately three units of electrical energy to produce two units of hydrogen energy. In other words, a hydrogen economy requires massive amounts of electricity—a high-quality form of energy—to make tiny molecules that are difficult to process, difficult to store, and expensive to use.
On Thursday, I will be in El Dorado, Texas talking about hydrogen and alternative energy. I was invited to speak in El Dorado by a group of local ranchers concerned about a proposed hydrogen project in Schleicher and Tom Green counties, which is being promoted by Dublin-based ET Fuels. The event is free and open to the public. The title of my talk is: “Money, physics, and the backlash against alternative energy.”
Ranchers are also concerned about other large alternative energy projects proposed for the Edwards Plateau. Two publicly traded companies — Apex Clean Energy (market cap: $44 billion) and NextEra Energy (market cap: $159 billion), subsidiaries of Ares Management Corporation — are also developing hydrogen projects in the region. As I reported before, NextEra has become an expert in subsidized mining. The company's latest 10-K filing shows it has nearly $3.7 billion in tax credit carryforwards that will be used to pay future tax bills. Apex and NextEra reportedly plan to lease and pave hundreds of thousands of acres of land on the Edwards Plateau to install solar panels and wind turbines.
Now, back to hydrogen. It is the most common element in the universe. It is also one of the most difficult to produce and manage. Currently, about 98% of global hydrogen production comes from hydrocarbons, of which about 75% comes from natural gas produced through the steam methane reforming process. Refineries use large amounts of hydrogen to remove sulfur from vehicle fuels. Water electrolysis produces hydrogen by splitting water molecules and accounts for less than 2% of the world's hydrogen production. Why does electrolysis account for such a small proportion? The answer is simple: it requires a lot of power.
Under rules issued earlier this year by the U.S. Treasury Department and the Internal Revenue Service, hydrogen producers can charge $3 per kilogram of hydrogen under a production tax credit if they use electricity from low-carbon or no-carbon sources. (The exact amount is less than 0.45 kilograms of greenhouse gases per kilogram of hydrogen.) According to the latest data from the Treasury Department, the PTC is the most expensive energy-related tax expense under federal regulation. Between 2024 and 2033, PTC is expected to cost approximately $276.6 billion.
In Schleicher County, ET Fuels plans to utilize PTC. It aims to build 600 megawatts of alternative energy capacity, split evenly between wind and solar energy, to fuel electrolysers to produce hydrogen using local groundwater. (The company plans to convert hydrogen into methanol as engine fuel for ocean-going ships.) This means ET Fuels will be eligible for a $3/kg subsidy. How does this compare to other subsidies and market prices for natural gas? These numbers are simply shocking.
Before we start talking about grants, a quick review of SI units and exajoules (EJ) should be helpful. As shown above, 1 EJ is approximately equal to 1 megaBtu. It is also approximately equal to the energy contained in 1 trillion cubic feet of natural gas.
You may recall that I have been tracking federal alternative energy subsidies for some time. I wrote two articles on this topic last year, including this article (priced in EJs) and this article (priced in quads). One kilogram of hydrogen contains approximately 120 megajoules (MJ) of energy. This means that hydrogen producers can receive a tax credit of $0.025 per megajoule of energy produced. As shown above, the investment amount per EJ is $25 billion, which is more than 9 times that of solar energy projects and 1,900 times that of nuclear energy projects.
The figures are equally astounding when comparing hydrogen subsidies to natural gas market prices. Natural gas prices have increased over the past week or two and are currently around $2.17 per million British thermal units. Therefore, the tax credit for “green” hydrogen is 11 times the current market price of natural gas.
I'll end with another quote from Munger: “If you have a stupid incentive system, you're going to get stupid results.” It's hard to imagine a better tax credit for hydrogen producers than for nuclear energy producers. An incentive system with 1,900 times more is even stupider.
In the coming weeks, I’ll be writing more about Texas’ hydrogen push and the backlash against alternative energy in rural areas. If you happen to be in El Dorado Thursday afternoon, stop by the Schleicher County Civic Center. This will be fun.
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