From Robert Bryce Substack
Robert Bryce
Hydrogen producers could get up to $25B per EJ in federal tax credits! That’s 9x solar, 47x wind, & 1,800x hydrocarbon; I will say H2 & alt-energy in Eldorado, TX there
The hydrogen sector burned in 1937. Photo: Wikimedia
The late Charlie Munger was one of the most successful investors of modern times. Munger, who died late last year, was vice chairman at Berkshire Hathaway, the conglomerate headed by his friend and colleague, Warren Buffett. Munger, a native of Omaha, had many great sayings, but the one he remembers best was: “Show me the incentive, and I’ll show you the results.”
If you’re wondering why the US isn’t building more nuclear power plants and instead spending hundreds of billions of dollars on a politically popular form of alt-energy, remember Munger’s line.
As I mentioned in May in “The H Stands For Hype,” few parts of the energy sector have gotten more media hype than hydrogen. The hype has gone into overdrive due to government subsidies. The German government has earmarked around $14.2 billion for investments in around two dozen hydrogen projects. I continued:
In the US, the 45V tax credit in the Inflation Reduction Act provides a substantial subsidy for hydrogen production. Big businesses are lining up to get the subsidy. In February, energy giant Exxon Mobil warned that it could cancel a proposed hydrogen project at its Baytown, Texas refinery depending on how the Treasury Department interprets the “clean” hydrogen rules in the IRA. Regardless of tax credits and subsidies, making and using hydrogen is a high-entropy, high-cost process. As a friend in the oil refining business told me last year, “If you love $6-per-gallon gasoline, you’ll love $14-to-$20-per-gallon hydrogen.”…Hydrogen is insanely expensive, in energy terms. , to create. It takes about three units of energy, in the form of electricity, to produce two units of hydrogen energy. In other words, the hydrogen economy requires scads of electricity (a high-quality form of energy) to make small molecules that are difficult to handle, difficult to store, and expensive to use.
On Thursday, I will be speaking about hydrogen and alt-energy in Eldorado, Texas. I was invited to speak in Eldorado by a group of local ranchers who are concerned about a proposed hydrogen project in Schleicher and Tom Green Counties that is being pushed by ET Fuels, a Dublin-based firm. This event is free and open to the public. Caption for my talk: “Money, Physics, & the Backlash against Alt-Energy.”
Ranchers are also concerned about another massive alt-energy project proposed for the Edwards Plateau. Two public companies – Apex Clean Energy, a subsidiary of Ares Management Corporation (market cap: $44 billion), and NextEra Energy (market cap: $159 billion) – are also developing hydrogen projects in the region. As I’ve reported before, NextEra has become an expert in subsidy mining. The company’s most recent 10-K filing shows that it has nearly $3.7 billion in tax credits that it will use to pay future tax bills. Apex and NextEra are reportedly planning to lease and open hundreds of thousands of acres in the Edwards Plateau with 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. About 98% of global hydrogen production today comes from hydrocarbons, and 75% from natural gas through the steam methane reforming process. Oil refiners use a lot of hydrogen to remove sulfur from motor fuel. Water electrolysis, producing hydrogen by splitting water molecules, accounts for less than 2% of the world’s hydrogen output. Why does electrolysis show a small percentage? The answer is simple: it requires a lot of electricity.
Under rules issued earlier this year by the Treasury Department and Internal Revenue Service, hydrogen producers can collect $3 per kilogram of hydrogen in production tax credits if they use electricity from low- or no-carbon sources. (The exact amount is less than 0.45 kilograms of greenhouse gases per kg of hydrogen.) According to the latest figures from the Treasury Department, the PTC is the most expensive energy-related tax expenditure in the federal code. Between 2024 and 2033, PTC is expected to be worth $276.6 billion.
In Schleicher County, ET Fuels plans to capitalize on PTC. The goal is to build 600 megawatts of alt-energy capacity, split evenly between wind and solar, to fuel electrolyzers that will produce hydrogen from the local soil. (The company plans to convert hydrogen into methanol for motor fuel for marine vessels.) That means ET Fuels will be eligible for a $3/kg subsidy. How does it stack up to other subsidies and natural gas market prices? The numbers are simply astounding.
Before jumping into subsidies, a quick refresher on SI units and exajoules (EJ) should be helpful. As seen above, 1 EJ is roughly equal to 1 quadrillion Btu. This is also roughly equivalent to the energy contained in 1 trillion cubic feet of natural gas.
As you may recall, I’ve been tracking federal alt-energy subsidies for some time. I wrote two pieces on the subject last year, including this piece (denominated in EJ) and this one (denominated in quads). One kilogram of hydrogen contains about 120 megajoules (MJ) of energy. That means hydrogen producers can collect a tax credit of $0.025 per MJ of energy produced. As seen above, this could be $25 billion per EJ, which is more than 9 times what is given to solar and 1,900 times the amount given to nuclear.
The numbers are also gobsmacking when comparing hydrogen subsidies to the market price of natural gas. Natural gas prices have been rising over the past week or two and are currently around $2.17 per million Btu. Thus, the tax credit for “green” hydrogen is worth 11 times the current market price of natural gas.
I’ll close with another Munger quote: “If you have a dumb incentive system, you get dumb results.” It would be hard to come up with an incentive system more boring than the one that gives hydrogen producers a tax credit 1,900 times greater than that given to nuclear power producers.
I will write more about the hydrogen push in Texas and the rural backlash against alt-energy over the coming weeks. If you are in Eldorado on Friday afternoon, stop by the Schleicher County Civic Center. It will be fun.
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