The IRS’ Hourly Time-Matching Provision – A Prescient Boon or A Stymieing Bane?

Electrolytic, or green hydrogen, is being championed as a solution to decarbonise hard-to-abate industrial sectors.

But investments, being considered in green H2, rely heavily on government-sponsored incentives as the nascent sector attempts to take root. To help accelerate the development of green H2, the Inflation Reduction Act (IRA) has established tax incentives, but the eligibility criteria continue to be a source of uncertainty. In December 2023, the Internal Revenue Service (IRS) – the tax authority in the U.S. under the U.S. Department of Treasury – provided guidance on the three main criteria governing eligibility of green H2 to IRA incentives, namely:

Incrementality, also known as additionality
Time-matching, also known as temporal correlation, and
Deliverability, also known as geographic correlation

Among the announced rules, perhaps the most controversial is the requirement for hourly time-matching between renewable power generation and green H2 production. Utilising our analytical hydrogen optimisation tools, AFRY has analysed the impact of time-matching on the overall economics of green H2 production. In this paper, we compare key project features and costs of both annual time-matching and hourly time-matching for a green H2 production facility located in the U.S. Gulf Coast to serve a flat demand profile.

The annual time-matched case consists of an alkaline electrolyser that relies solely on solar power, whilst in the hourly-matched case the optimisation exercise results in wind power being used as an additional renewable power source. For both simulations, the assumed renewable generation profiles are taken from AFRY's knowledge base for solar and wind assets located in Texas. This shift in time-matching from annual to hourly results in a different mix of renewable energy sources (RES) and impacts the optimal sizes of various system components. These changes, in turn, increase costs.

The overall cost implications of the proposed regulations when comparing annual time-matching to hourly time-matching can be summarised into three main points:

An overall capital expenditure (CAPEX) increase of 36%, mainly driven by the need for wind capacity to complement solar, more hydrogen storage capacity, and increased electrolyser capacity.
A decrease of the electrolyser capacity factor - the % of time an electrolyser operates at its maximum potential - from 77% to 53% due to the need for additional H2 generation flexibility during peak generation hours.
An overall increase of the levelized costs of hydrogen production (LCOH) by 15%.

Whilst the IRA is widely seen as a key enabler to develop green H2 at scale in the United States, the increase in LCOH stemming from the hourly time-matching requirement could impact the viability of some proposed projects. It will also likely impact the global cost-competitiveness of H2 produced in the United States. However, despite the cost increases, do the announced rules put the U.S. H2 in a position to gain access to export markets?