Impact of the IRA on Hydrogen and Battery Economies: Spotlight Interview with Shayle Kann

Last year on July 27th, the US Senate announced the Inflation Reduction Act (IRA) as part of the budget reconciliation bill, committing a record-breaking $370 billion towards climate change and energy security. Within the week of the announcement, Shayle Kann, the Partner at Energy Impact Partners, emphasized the bill’s significance in his Catalyst podcast, referring to it as “by far, without question, the most important climate bill ever to have come near passage in the United States. The bill comprises over 700 pages of policies with wide-reaching market impacts, affecting virtually every sector discussed to date.” During TDK Ventures Energy Week 2022 Forum, I had the opportunity to sit down with Shayle and delve deeper into the IRA’s impact on the hydrogen and battery economies. Below are some highlights from that conversation, and full video is available on Youtube.

Hydrogen Production Tax Credit is More Nuanced than It Seems

While the IRA features a breakthrough tax credit for “qualified clean hydrogen” that would pay producers up to $3 per kilogram of hydrogen from 2023, Shayle noted that the clean hydrogen production tax credit is more nuanced than the headlines suggest. To receive the full credit amount, companies must satisfy a range of conditions including meeting prevailing wage and other labor requirements.

“On top of that, the level of the tax credit depends on the calculated lifecycle emissions of the hydrogen,” he said. “The $3 mark is the highest incentive for hydrogen produced with the lowest lifecycle emissions profile, while lower incentives are available for less efficient productions. Although we know the emission threshold, we have yet to determine the emission calculation methods.”

He suggested allowing electrolyzers to purchase annualized renewable-energy credits and use grid electricity at any time would simplify the eligibility process. However, greater positive environmental impact would be gained by requiring electrolyzers to purchase local, additional, and hourly time-matched clean energy.

The Treasury Department’s guidelines will also determine whether hydrogen produced from fossil fuels, such as blue hydrogen from post-combustion carbon capture and turquoise hydrogen from methane pyrolysis, is eligible for any tax incentives. The qualification is likely to depend on the quantity of carbon captured versus the amount that remains emitted.

A key emission counting challenge for natural gas-based hydrogen is “how to account for the upstream emissions embedded in the natural gas from methane leakage,” Shayle noted. “Based on the current calculation model, it is really difficult to get beneath the $3 threshold with any version of natural gas-based hydrogen or any normal grid mix of electricity.”

That uncertainty has led some investors to wait and see which processes and companies can meet the threshold. But companies are not waiting for guidance due to the high demand for hydrogen from existing industries like ammonia plants and petrochemical manufacturers.

“There is a race to get things built,” Shayle said. “This is a market where we will see a rapid scale-up over the next 3–4 years. If you sit back, there is a good possibility that you will get left behind.”

The IRA Lacks Incentive for Hydrogen Storage and Transportation, but the Market Can Step Up

While the IRA does not include support for hydrogen storage and transportation projects, Shayle pointed out that companies qualifying for the clean hydrogen production tax incentives will likely have the ability to manage transportation and storage costs. Furthermore, he believed that the market will determine what is the best way to store and transport hydrogen. “If we’re going to export it, what form should it take? That is a problem the market will solve,” he said. With low-cost hydrogen in abundance and demand for it, the industry will find ways to transport it from its source to where it is required.

This is critical since a significant portion of the demand is anticipated to come from Europe, while the IRA positions the United States to be the primary supplier. Although Europe has a greater focus on hydrogen, more years of development, more companies committed to it, and more actual projects identified, the region is fundamentally lacking in cheap land, natural gas, and electricity when compared to the US. As a result, Europe will likely still need to import half of the hydrogen that it consumes.

The IRA Drives Onshoring of Battery Production, but Constraints Remain

The IRA has accelerated a trend toward domesticating and localizing the battery supply chain in the U.S., Shayle said.

“There was already a movement toward re-onshoring manufacturing capacity for batteries, primarily to serve the electric-vehicle market, but also for stationary energy storage on the grid. The IRA makes the investment decision a whole lot easier.”

Constraints remain, however.

“There are technically enough mineral resources,” he said. “But can we access those resources? How economic is it? What is the timeline? Building a new mine and new refining plants takes a long time.”

The IRA will incentivize the expansion of domestic manufacturing capacity, but the process will not be smooth due to the complexity and requirements of the legislation. Other supply chain congestions, such as permitting backlogs for mining, transportation, and distribution, also pose challenges for the industry. The extension of tax credits for renewables has the potential to expose permitting issues, as it will lead to the building out of generating capacity that may surpass transmission capacity, creating additional bottlenecks.

The IRA is Not a Panacea

Shayle Kann also noted that the IRA is not intended to solve all decarbonization and electrification challenges. The act’s tax breaks are slated to sunset after 10 years. While they could be extended, he said the 2032 deadline “puts the onus on deployment at scale. It advantages those who can move quickly over those who will take seven years to come to market. Ten years is a long time, so if you have a technology you think can get market adoption in scale well within this decade, this bill is potentially really big for you.”

However, some promising technologies, such as next-generation nuclear, may not be in a position to fully take advantage of the incentives, as they are not scheduled to come online until later in the decade. Still, there are other resources provided by the bill that early-stage companies can take advantage of, he added.

“The bill makes everything clean cheaper. So, any early-stage company that has a long-term solution to decarbonize one of these major sectors of the economy that benefits from the bill can assume that when they bring it to market — as long as it’s within the next decade — it will be advantaged relative to the emitting alternative.”

Shayle’s Advice for Impact Scalers

We asked Shayle Kann for his thoughts on scaling and whether he had any suggestions for entrepreneurs looking to scale their businesses under the IRA. Shayle noted there is no single right approach to scaling. While the pace of getting to scale is one of the fundamental challenges in high-tech industries, iteration works in some instances, while in others it may be possible to eliminate some interim steps.

“On one hand, you don’t want to get out over your skis and spend tens of millions of dollars and thousands of hours designing a system that is not going to work or have the specs you need,” he explained. “On the other hand, the historical path to scale-up often takes longer than you want. Depending on what you are trying to do, that path can leave you behind. The traditional thinking is one order of magnitude of scale-up each time. Sometimes that is the right thing to do, but it is always worth probing whether that is necessary. What is the fundamental risk that needs to be retired at each stage and could we skip one of those stages and still retire that risk? What are the tradeoffs in capital intensity? How much would we have to spend? Sometimes a company gets ahead of itself and has to retrench. That’s painful. Other times companies take a couple of years longer than they could have to bring their products to market, because they were focused on a methodical scale-up approach.”

TDK Ventures’ second annual Energy Week assembled some of the greatest minds and brightest lights in the fields of renewable energy, materials science, mobility, storage, and more. Over the course of 13 sessions — fireside chats, panel discussions, spotlight interviews, and in-depth reports — TDK Ventures and the expert businesspeople, researchers, academics, and investors presented their opinions and field notes on the world’s progress in solving some of its most pressing problems. Energy Week 2022 fulfilled TDK Ventures’ mission to spotlight the best ideas and most promising technologies to inspire entrepreneurs, inventors, and investors to redouble their efforts to mitigating climate change, hasten electrification, and develop the solutions that will herald a greener, more equitable planet.

Thanks for taking the time to read, and don’t hesitate to reach me on LinkedIn if you’d like to engage more on this subject, or any other topics related to deep technology innovations for the energy transition. You can also watch a recording of the full session on YouTube.