The Nuclear-Hydrogen Conundrum

After the Inflation Reduction Act was signed into law, and initial excitement about its historic investment in tackling climate change turned to deeper analysis, researchers made an alarming discovery. One of the IRA’s big ticket items, a tax credit for clean hydrogen, risks underwriting a major increase in emissions if not implemented carefully. That finding has erupted into a high-stakes debate over how the Treasury Department should define “clean hydrogen.”

Treasury’s decision, which is expected in the coming weeks, will have many implications, but one that deserves more scrutiny is what it could mean for nuclear power, still the largest and most reliable source of carbon-free energy in the U.S.

Nuclear reactors are uniquely well-suited to power hydrogen production, which in turn holds great promise to clean up some of the hardest parts of the economy to decarbonize.

But there's a trade-off: If any of the existing nuclear fleet pivots to making hydrogen, coal and natural gas plants are likely to fill in for that lost power on the grid. That would drive up emissions in the near term and make it harder for states to achieve their clean energy goals.

The debate boils down to whether it’s more advantageous to use our existing nuclear fleet to kickstart a hydrogen economy — likely sacrificing near-term emission reductions in the process — or to shore up a carbon-free grid.

This is what the Treasury Department must grapple with as it writes the rules for the new tax credit. In an exclusive interview with Heatmap, officials from the Department of Energy, which is advising the Treasury, said they want to see existing nuclear plants qualify. But as Daniel Esposito, a senior policy analyst at the nonprofit Energy Innovation, told me, “There's just a lot of layers to how bad this can get.”

Hydrogen already plays an essential, yet small role in the global economy as an ingredient in the production of fertilizer and oil refining. But as the world looks for alternatives to fossil fuels, hydrogen, which burns without releasing carbon, could play a much bigger role by powering industries that are proving difficult to decarbonize with renewable electricity, like shipping, aviation, and steelmaking. The challenge is that it takes energy to make hydrogen in the first place. Today the vast majority is made in a carbon-intensive process involving natural gas or coal.

There is an alternative method, called electrolysis, which extracts hydrogen from water using electricity and doesn’t directly release emissions. But it’s too expensive to be competitive with the fossil fuel version right now. The tax credit in the Inflation Reduction Act could change that, but to qualify, hydrogen producers would have to prove their electricity is carbon-free, too.

That’s where nuclear power comes in.

There are many reasons nuclear plants are considered a good fit for this process. Electrolyzers, the enabling technology for electrolysis, are still relatively new and expensive. Nuclear reactors could power them 24/7, maximizing production.

Nuclear plants are also well-located. They sit near bodies of water, which is necessary for electrolysis. They’re often adjacent to rail lines that could transport the resulting hydrogen. And many are close to heavy industrial sites that could become customers.

There’s potential for efficiency gains — a lot of nuclear reactors already require a bit of hydrogen for their operations, so they could produce their own instead of shipping it in.

And perhaps most thrillingly, nuclear reactors produce a lot of heat. With a more nascent version of the technology called high temperature electrolysis, that heat could be harnessed to boil water into steam, reducing the amount of energy required to extract hydrogen from it.

Unfortunately, there’s one big drawback. The nation’s existing nuclear plants already run at more than 90% capacity. They supply nearly 20% of total annual electricity generation. They don’t exactly have more energy to give.

Esposito and others warn that the hydrogen tax credit is so lucrative that if the Treasury’s upcoming rules allow existing reactors to qualify as a zero-emissions source of electricity, it would create a perverse incentive for nuclear companies to start diverting their power to hydrogen production. Nuclear plants currently earn about $30 per megawatt-hour from energy markets, but Esposito estimates they could earn $60 to $70 per megawatt-hour by producing hydrogen. Though indirectly, this would almost certainly increase U.S. emissions in the near term.

“You could see a world where all of the U.S. nukes pivot to supplying electrolyzers and just print money that way,” said Esposito. “Then you're pulling off 20% of U.S. power, and fossil fuels would be what fill in for that, because we just can't build clean energy fast enough to replace it.”

But Constellation Energy, the country’s largest owner of nuclear plants, with big plans to produce hydrogen, argues that letting its reactors qualify under the tax credit rules isn’t about printing money, but about making clean hydrogen cheap enough that customers actually buy it.

“By lowering the cost of the hydrogen, the tax credit is going to increase the ability of manufacturers and other hydrogen users to decarbonize their operations,” Mason Emnett, senior vice president of public policy at Constellation, told me. “Without that support, there's just not going to be a market for clean hydrogen.”

Top Department of Energy officials seem to agree. “We're very hopeful that [the tax credit] will be applicable to existing reactors,” Dr. Kathryn Huff, assistant secretary of the Office of Nuclear Energy, told me in an interview.

The Department of Energy has long been excited by the synergies between nuclear plants and hydrogen production. In fact, just a few years ago, the agency saw hydrogen as a new market that could save the nation’s nuclear plants, which were shutting down left and right as they struggled to compete with the cheap natural gas of the fracking boom.

But today, natural gas prices are up. There’s a bevy of new government grants and subsidies from the Bipartisan Infrastructure Law and the Inflation Reduction Act to keep nuclear plants open. Now hydrogen looks more like a great business opportunity than a savior for the industry.

Last September, not long after the Inflation Reduction Act was signed, Morgan Stanley issued a report noting that Constellation was poised to unlock new opportunities for its nuclear plants and “attractive returns for hydrogen facilities,” according to S&PGlobal. If the company dedicated just 5% of its capacity to hydrogen production, the report said, it could increase its annual earnings before taxes by $300 to $350 million.

Constellation made its first big move in February, announcing plans to build a $900 million hydrogen production facility in the Midwest that will use 250 MW of its existing capacity. That’s only about 1% of the company’s total nuclear fleet. But to Esposito, it’s a worrisome sign.

“It’s very likely we’d see many other similar announcements,” he told me. “And crucially, as these clean energy resources switch from powering the grid to producing hydrogen, we’d be losing our cheapest existing sources of clean electricity.”

It’s also concerning to climate advocates in Illinois, where Constellation owns six nuclear plants. The state has an ambitious clean energy goal, and is counting on those reactors to be a source of always-available, carbon-free electricity as it shuts down coal plants and builds more renewables.

“Even if it's small, that's still headed in the wrong direction in a world where we are fighting as hard as we can to quickly decarbonize the power sector,” said JC Kibbey, a clean energy advocate with the Natural Resources Defense Council in Illinois.

Constellation doesn’t see that as the company’s problem. Emnett said that much of its nuclear generation is already contracted out to local utilities for the benefit of customers for the next several years, meaning it can’t be “diverted” to hydrogen, at least until those contracts are up. The rest is theirs to sell to whomever wants to buy it. “There's no diversion of electricity,” he said. “There's electricity that is available for use, and we can sell electricity to power a shopping center or we can sell electricity to power an electrolyzer for hydrogen production.”

Constellation also makes the case that if one of its reactors are powering a hydrogen plant on-site, without using the grid at all, there should be no question that the process is carbon-free.

But Rachel Fakhry, a senior climate and clean energy advocate at the Natural Resources Defense Council, said it doesn’t matter whether a hydrogen facility is connected directly to a clean power source or whether it gets power through the grid. The issue is when no new, clean resources have been built to support this big new source of demand. In either case, less nuclear power will be flowing to other customers, and more coal or gas-fired generation will ramp up to fill in the gap. Electrolysis is so energy-intensive that those indirect emissions would be higher than emissions from current hydrogen production using natural gas. “Treasury must account for those induced emissions,” Fakhry said.

Many climate and energy policy experts agree that the resulting hydrogen should not be subsidized, or considered “clean.”

The law itself sends mixed messages to the Treasury about what Congress intended. It says the Department must account for “lifecycle” greenhouse gas emissions from hydrogen production, but it also includes a clause that explicitly permits existing nuclear plant operators to claim the tax credit.

Fakhry argued this should not be interpreted to mean nuclear companies are entitled to the credit. She said one way existing plants could qualify is if they are modified to increase their power output.

Some experts see a middle ground. Adam Stein, director of the Nuclear Energy Innovation program at the Breakthrough Institute, said those induced emissions are not the full picture.

He cited a number of other factors to consider, like the fact that one of the main obstacles to building new sources of clean energy right now is a clogged electric grid. If diverting some nuclear power to hydrogen frees up some room on the grid, that could be a good thing. “The question does not become, in my view, whether nuclear power plants should be eligible for this,” he said. “It’s at what point in the sliding scale of percentage of the tax credit they should be eligible for.” The tax credit is tiered, such that companies can earn different amounts depending on the carbon intensity of their production process.

In a sense, the debate is also about short-term and long-term priorities.

When I asked Huff, the assistant secretary in the Office of Nuclear Energy, whether she felt there were any risks of pairing nuclear and hydrogen, she only noted the shortcomings of not doing so. “I think there are risks in terms of whether or not we can successfully scale up a hydrogen economy,” she said. “There is this risk that it never materializes.”

Her colleague Jason Tokey, the team lead for reactor optimization and modernization chimed in. “As a country, we're not seeking to just decarbonize the power grid, we're seeking to decarbonize the entire economy,” he said. “Clean hydrogen has a critical role to play in that economy-wide decarbonization, and using clean energy sources like nuclear to produce hydrogen really enables that.”

The agency is also excited about the prospect of innovations that could help decarbonize both the grid and the rest of the economy. There are already hours of the day in some places where nuclear plants aren’t needed because there’s so much solar power being produced, said Huff. She said the “operational vision” is to have nuclear operators learn how to switch back and forth between serving the grid and offloading their power into hydrogen when it’s not needed, which will enable more renewable resources to come online. “It is absolutely imperative that we make sure nuclear plants can flex with the grid.”

Emnett said Constellation is planning to test this out at Nine Mile Point, a nuclear plant in upstate New York that received $5.8 million from the DOE for a hydrogen production pilot project.

“We are excited about the possibility of creating flexibility for nuclear plants,” he said. “You can start to think about a system where nuclear with flexible hydrogen production is pairing with variable wind and solar and batteries in a decarbonized future world. And so we're at a point now where we're proving out those capabilities.”

But without the tax credit, he said, “there's just not any conversation, there's no ability to explore the innovation, because we never get out of the gate.”

Whether that gate should be swung open or shut is now in the hands of the U.S. Department of Treasury.