The subsidies for “inexperienced” hydrogen are 1,900 instances greater than these for nuclear power – what’s the purpose?
From the Robert Bryce Substack
Robert Bryce
Hydrogen producers can receive up to $25 billion per EJ in federal tax credits! That's 9x solar, 47x wind, and 1,800x hydrocarbons. I'll be speaking about H2 and alternative energy on Thursday in Eldorado, Texas.
The hydrogen sector was in turmoil in 1937. Photo: Wikimedia
The late Charlie Munger was among the most successful investors of modern times. Munger, who died late last year, was vice chairman of Berkshire Hathaway, the conglomerate run by his friend and colleague Warren Buffett. Munger, a native of Omaha, had many pithy sayings, but one of his most memorable was, “Show me the incentives and I'll show you the outcome.”
If you're wondering why the U.S. isn't building more nuclear power plants but is instead spending hundreds of billions of dollars on politically popular forms of alternative energy, consider Munger's statement.
As I noted in May in “The H is for Hype,” there has hardly been an area of the energy sector that has received more media hype in recent years than hydrogen. This hype has been in full swing due to lavish government subsidies. The German government has earmarked around $14.2 billion for investment in about two dozen hydrogen projects. I continued:
Here in the U.S., the 45V tax credit in the Inflation Reduction Act provides lucrative subsidies for hydrogen production. Big business is lining up to get those subsidies. In February, energy giant Exxon Mobil warned that it might cancel a planned 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, producing and using hydrogen is a high-entropy, high-cost process. As an oil refinery friend told me last year, “If you like gasoline at $6 a gallon, you’ll love hydrogen at $14 to $20 a gallon.” … Producing hydrogen is insanely expensive in terms of energy. 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 huge amounts of electricity (a high-value form of energy) to produce a tiny molecule that is difficult to handle, difficult to store, and expensive to use.
On Thursday, I will be speaking in Eldorado, Texas, about hydrogen and alternative energy. I have been 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 being pushed by ET Fuels, a Dublin-based company. 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 massive alternative energy projects proposed for the Edwards Plateau. Two publicly traded 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 previously reported, NextEra has become an expert in subsidy mining. The company's recent 10-K filing shows it can carry forward nearly $3.7 billion in tax credits that it will use to pay its future tax bills. Apex and NextEra reportedly plan to lease hundreds of thousands of acres on the Edwards Plateau and develop them with solar panels and wind turbines.
But back to hydrogen. It is the most abundant element in the universe. And it is also one of the most difficult to produce and handle. About 98% of the world's hydrogen production today comes from hydrocarbons, about 75% of which comes from natural gas through the steam reforming process of methane. Oil refineries use a lot of hydrogen to remove sulfur from fuels. Water electrolysis, which produces hydrogen by splitting water molecules, accounts for less than 2% of global hydrogen production. Why does electrolysis make up such a small percentage? The answer is simple: it requires enormous amounts of electricity.
According to regulations released earlier this year by the Treasury Department and the Internal Revenue Service, hydrogen producers can collect $3 per kilogram of hydrogen under the production tax credit when they use electricity from low- or zero-carbon sources. (The exact amount is less than 0.45 kilograms of greenhouse gases per kilogram of hydrogen.) According to the latest Treasury figures, the PTC is the most expensive energy-related tax expenditure in federal law. Between 2024 and 2033, the PTC is expected to cost about $276.6 billion.
In Schleicher County, ET Fuels is looking to take advantage of the PTC. The company plans to build 600 megawatts of alternative energy capacity, half wind and half solar, to power electrolyzers that produce hydrogen from local groundwater. (The company plans to convert the hydrogen into methanol, which will be used as fuel for ocean-going vessels.) That means ET Fuels is eligible for the $3 per kilogram subsidy. How does that compare to other subsidies and the market price of natural gas? The numbers are simply astounding.
Before we dive into the subsidies, a quick refresher on SI units and exajoules (EJ) should be helpful. As shown above, 1 EJ is approximately equal to 1 quadrillion Btu. It is also approximately equal to the energy contained in 1 trillion cubic feet of natural gas.
As you may recall, I have been following government subsidies for alternative energy for some time. Last year I wrote two articles on the subject, including this one (in EJ) and this one (in quads). One kilo of hydrogen contains about 120 megajoules (MJ) of energy. This means that hydrogen producers can receive tax credits of $0.025 per MJ of energy produced. As shown above, this equates to $25 billion per EJ, more than nine times that of solar and a whopping 1,900 times that of nuclear.
The numbers are similarly astonishing when you compare the hydrogen subsidies to the market price of natural gas. Natural gas prices have risen over the past week or two and are now at about $2.17 per million Btu. This makes the tax credit for “green” hydrogen worth 11 times the current market price of natural gas.
I will close with another quote from Munger: “A stupid incentive system leads to stupid results.” It is hard to imagine a stupider incentive system than one that gives hydrogen producers tax breaks 1,900 times higher than those given to nuclear energy producers.
I'll be writing more about the Texas hydrogen push and the rural backlash against alternative energy in the coming weeks. If you happen to be in Eldorado on Thursday afternoon, stop by the Schleicher County Civic Center. It'll be fun.
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