Luke Bernstein: Federal rules put Pa.’s hydrogen future at risk

For the past two decades, Pennsylvania has been at the forefront of the shale revolution, which has delivered incredible quantities of affordable natural gas and fundamentally reshaped national and global energy markets.

What’s incredible is not just the sheer scale of production — the gas produced in Pennsylvania’s Marcellus Shale also has the lowest emissions of any basin in the United States, according to environmental group data. As a result, many of the companies here are certified producers of differentiated natural gas (DNG), which validates the ultra-low-methane attributes of natural gas produced here.

Now, a bipartisan coalition of federal and state policymakers, businesses, and labor unions are hoping to leverage our low-methane, abundant natural gas reserves to help spur the development of clean hydrogen.

The Bipartisan Infrastructure Law (BIL) of 2021 established the Regional Clean Hydrogen Hubs (H2Hubs) Program, which would form the foundation of a national clean hydrogen network that could decarbonize some of our state’s highest emitting sectors of the economy, like steel and cement production, and heavy-duty transportation.

In the three years since the BIL’s enactment, the Department of Energy (DOE) selected seven H2Hub applications, including two proposals — the Appalachian Regional Clean Hydrogen Hub (ARCH2) and the Mid-Atlantic Clean Hydrogen Hub (MACH2) — that will benefit Pennsylvania. The state’s western hub in particular will demonstrate the benefits of using Pennsylvania’s low-methane natural gas to produce clean hydrogen.

Despite this progress, the H2Hubs program did not address the fundamental barrier to clean hydrogen use: cost. Before industries even consider switching to clean hydrogen, it has to achieve cost parity with existing fuel sources.

Congress sought to overcome hydrogen’s cost barrier through the Clean Hydrogen Production Tax Credit (45V), which was passed under the Inflation Reduction Act (IRA) of 2022. The 45V tax credit was structured as a tiered incentive based on the carbon intensity of produced clean hydrogen – the lower the carbon emissions, the higher the credit a producer can receive, up to $3 per kilogram.

But D.C. regulators, including the Department of Treasury and Internal Revenue Service (IRS), have issued proposed guidance that would make it harder for clean hydrogen producers using Marcellus Shale gas to qualify for the 45V tax credit, putting at risk the economic and environmental benefits Pennsylvania should see from hydrogen development.

At issue for Pennsylvania is the 45V regulation’s mandate to use a national average for upstream methane emissions within the carbon intensity calculation. The IRS does not allow producers to use project-specific data to be used in place of the national average, even if the hydrogen producer is using certified DNG. This is a major problem; it defies the intent of Congress and will negatively impact Pennsylvania’s ability to deliver a viable clean hydrogen market.

First, enforcing a national average upstream emission rate will lead to inaccurate carbon intensity calculations and potentially alter the level of tax credit a producer earns, which impacts project financing and profitability.

Second, the national average rate creates a market environment where producers like those in Pennsylvania who achieve a lower emissions rate receive no benefit for certified operational excellence, while producers that exceed the national average rate can claim a carbon intensity score they did not earn. The result is one in which other regions producing hydrogen from natural gas receive a benefit they didn’t earn, while Pennsylvania producers are punished for doing the right thing.

In response to this imminent federal policy blunder, Pennsylvania government officials, including Democratic officials like Gov. Josh Shapiro, Sens. Bob Casey and John Fetterman, and Rep. Chris Deluzio, D-Aspinwall, are finding common ground with Republicans, business and labor unions on the 45V issue. In a politically charged environment where it can be difficult to get Democrats and Republicans to agree on the day of the week, this short-sighted proposed guidance has actually brought all sides together.

Specifically, this common cause also includes pushing for final guidance that recognizes coal mine methane as a valid feedstock under the 45V Hydrogen Production Tax Credit, which is essential for the financial viability of projects like CNX Resources’ proposed $1.5 billion hydrogen plant at Pittsburgh International Airport. This project alone could create 3,000 construction jobs and significantly reduce emissions, showcasing Pennsylvania’s robust and diverse energy sector.

For Pennsylvania’s hydrogen hubs to succeed and become a pillar for our region’s economic and energy future, D.C. regulators will need to change course and get the final guidance right by removing the mandate to use a national average for upstream methane emissions and recognizing coal mine methane as a viable feedstock in the clean energy economy.

Luke Bernstein is president and CEO of the Pennsylvania Chamber of Business & Industry.