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  • Policy Perspectives

E-Fuels and the Policies that Support Them

For the past decade, there have been limited options for companies that want to purchase, and policymakers that want to promote, the adoption of sustainable aviation fuel (SAF)— until now.





A New Class of Sustainable Aviation Fuel


Power-to-liquid (PtL) fuels, such as Twelve’s E-Jet®, is a new class of SAF that is becoming more widely available, and these new PtL fuels represent one of the lowest carbon and scalable options for producing a drop-in liquid hydrocarbon fuel, with demand expected to exceed 140 million-tonnes by 2050. 


Power-to-Liquid technologies can take a variety of forms, but share in common the use of renewable hydrogen, gaseous carbon dioxide (CO2), and large amounts of renewable energy as the primary input feedstocks. Twelve’s recent Know Your SAF report provides details on many of these pathways. Twelve’s own proprietary CO2 electrolyzer allows our facilities to run almost entirely on renewable energy, providing a cost and carbon intensity score advantage over other sustainable aviation fuel producers.


While incentives have the potential to turbocharge this industry, the current set of incentives for hydrogen, CO2 capture, and sustainable transportation fuels were not designed with PtL as a focal point. This post will be part of a continuing series covering the regulatory landscape as it impacts Twelve and our colleagues in the PtL space.




The Inflation Reduction Act and What Constitutes “Green Hydrogen”


After months of soliciting comments and navigating competing political pressures, the Department of Treasury released draft hydrogen production tax credit rules just before the end of 2023. These regulations have strict renewable electricity sourcing requirements and represent a “Platinum Standard” for sustainability. But as written, they create several challenges for the emerging PtL industry. 


The guidance requires that the power used to produce green hydrogen be matched with Renewable Energy Credits (RECs), provided that those RECs meet a three-part test: 


1. Regionality

The renewable energy project must be located in the same regional grid as the hydrogen facility 


2. Additionality

The renewable energy project must come online no earlier than three years before the hydrogen facility begins operating


3. Time-Matching

The renewable energy production must match, on an hourly basis (annual before 1/1/2028), the energy consumed at the hydrogen facility

 

These rules (and particularly, the Additionality and Time-Matching restrictions) are some of the most stringent green-electricity requirements ever instituted, and they are explicitly designed to ensure that the green hydrogen industry contributes minimally to carbon emissions from new fossil power plants coming onto the grid. However, the draft rules could have the effect of (i) slowing down growth of the green hydrogen industry by limiting hydrogen production to those few regions where it is possible to Time-Match hydrogen production with new renewables, and (ii) increasing the market share of blue hydrogen and encouraging continued reliance on fossil fuels. Increased green hydrogen costs will limit the markets to those where end users are willing to pay this higher price. These impacts on the green hydrogen industry reverberate in turn through the PtL industry which depends on the rapid expansion of green hydrogen as one of the primary feedstocks for PtL fuels. The PtL industry depends upon low-cost green hydrogen in order to ensure the economic viability of PtL fuels that must compete with fossil-based fuels in the marketplace.






PtL Fuels Require a Continuous Flow of Green Hydrogen


PtL processes rely upon clean hydrogen as a critical input for PtL fuels. Taking Twelve's process as an example, green hydrogen is used to produce synthesis gas ("syngas") which is then routed through a chemical process (Fischer-Tropsch) and further upgraded to produce PtL sustainable aviation fuel. These downstream chemical processes require a continuous and consistent stream of hydrogen to maintain sensitive chemical ratio, temperature, and pressure requirements. At scale, Twelve's AirPlant™ facilities are designed to run consistently, 24/7, with occasional outages for maintenance. This is the most efficient, cost-effective way to transform carbon dioxide, water, and renewable electricity into our E-Jet fuel.




Hourly Matching Intermittent Renewable Resources in a 24/7 Hydrogen Production Environment


In order to meet the continuous hydrogen needs described above, a green hydrogen producer requires an unending stream of hourly-matched RECs (Time-Matching) from new (Additionality), nearby (Regionality) intermittent wind and solar resources. In reality, of course, wind and solar energy generation depends on the weather, and this results in variable and unpredictable hydrogen production, as the clean hydrogen production rises and falls to “follow” that renewable electricity generation. Operationally, this requires long-term and short-term weather and renewable electricity generation forecasting, instantaneous communications between multiple wind and solar facilities and hydrogen production technicians, ramp rates at hydrogen production facilities that can match the sudden generation changes at wind and solar projects as wind dies down or a cloud passes across the sun, and a standardized set of protocols to enable all of this communication. This set of technologies does not exist today. These operational hurdles are further magnified for the PtL operators like Twelve that depend upon continuous hydrogen generation for our sensitive chemical processes.

 

Even when we overcome this technical hurdle, intermittent (and unpredictable) hydrogen production reduces the capacity factor and capital efficiency of the clean hydrogen production facility, increasing the cost of clean hydrogen. Those same capacity factors and capital efficiency challenges are further magnified for PtL operators that now must pay a higher green premium for their hydrogen and must operate their own equipment intermittently to account for this intermittent hydrogen generation. This reduced efficiency unnecessarily increases the cost of making PtL fuels, and these increased costs may lead to slower adoption of this new class of low carbon, scalable drop-in fuels.




The IRA Should Apply a Production Tax Credit Based on Each Kilogram of Hydrogen Produced, Instead of an Annual Average for a Hydrogen Facility


The Hourly-Matching challenges are rendered nearly unworkable because the current Treasury guidance specifies that the amount of the tax credit is determined based on all hydrogen produced at a hydrogen production facility during a tax year. As a result of this all-or-nothing rule, a hydrogen producer could find its tax credit amount reduced from $3 per kilogram to $1 per kilogram for all of the hydrogen produced at a facility if, due to a slight forecasting error, its overall hourly matching percentage fell from, say, 97.1 percent to 97 percent (depending upon the grid mix). Given the novelty and inherent operational challenges associated with the real-time matching of hydrogen production to renewable electricity generation, these step changes in the tax credit present an undue risk to the developing clean hydrogen industry, and are likely to prevent hydrogen producers from being able to attract capital because lenders are notoriously reluctant to finance so-called “cliff risks.”

 

As an alternative, Twelve has asked the Department of Treasury to instead grant the tax credit based on the GHG emissions for each kilogram of hydrogen produced, rather than on an annual average for an entire hydrogen production facility. Under the example above, if the hydrogen producer achieved hourly matching for 97.1 percent of all the hydrogen produced during the taxable year, it would be able to claim the full tax credit of $3/kilogram for 97.1 percent of the hours. In this scenario, the producer would only be incrementally worse off if its hourly matching percentage drops from 97.1 to 97 percent. Determining the credit in this manner rather than on an annualized average basis provides an adequate incentive for hydrogen developers to procure hourly-matching RECs, while eliminating the cliff risk of suddenly losing 66% of the tax credit.




The IRA Should Carve-Out Portion of the Existing Carbon-Free Generation Fleet to Support Green Hydrogen Production


The Additionality criteria in draft guidance requires new carbon-free generation to provide all RECs for green hydrogen production. Since almost all of the new carbon-free resources are wind and solar, this precludes the gigawatts of existing minimal emissions power generation sources (solar, wind, hydropower, nuclear, etc.) from contributing to clean hydrogen production. Twelve believes that this is unduly restrictive, and will increase costs, exacerbate transmission bottlenecks as new renewable projects struggle to come online, and delay green hydrogen deployment as producers are forced to wait for the years it takes to bring new renewable projects online.

 

Twelve instead recommends that the Department of Treasury carve-out 10% of existing carbon-free generation to provide qualifying RECs for green hydrogen production. This carve-out will allow some existing carbon-free generating plants that would otherwise have retired to continue to generate clean electrons to support the green hydrogen industry, and would also immediately create a "baseload" of hourly RECs that could support the robust marketplace for hourly RECs that will be needed for any hydrogen facility attempting to operate 24/7.




Conclusion


The Department of Treasury has indeed designed a Platinum Standard for renewable electricity matching, and there is definitely merit to their sustainability-focused approach. However, Twelve would love to see these rules tweaked to ensure that the IRA serves its principal purpose of nurturing the young green hydrogen industry and enabling those industries that depend upon green hydrogen, like PtL fuels, to flourish. By enabling the dramatic expansion of these industries, the IRA can realize its true potential to massively reduce carbon emissions in the US, and, indeed, to support technologies that can reduce carbon emissions across the globe.



1. P. 27 of Clean Skies for Tomorrow, World Economic Forum, May 2022.

 2. “Green hydrogen” is hydrogen produced by splitting water into hydrogen and oxygen using renewable electricity


 

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