Clean Energy Tax Break Draws Scrutiny of Natural Gas Plan in New Mexico
WASHINGTON — Blackstone, the New York-based asset manager with nearly $1 trillion of investor funds, is moving rapidly into the clean-energy revolution, driven in part by federal tax incentives that were sweetened this summer by the Biden administration and Congress.
But one of its larger projects — through a subsidiary called Tallgrass Energy — is drawing protests from environmentalists who argue that Blackstone’s effort in New Mexico will not do enough to combat climate change, even if it receives tens of millions of dollars a year in federal subsidies intended to promote efforts to address global warming.
Tallgrass intends to spend $600 million to rebuild a defunct coal-burning power plant in northwest New Mexico into one that uses natural gas converted into hydrogen to create electricity that will be sent to households and businesses in four states in the region.
The project would be eligible for a generous tax break — generating about $30 million a year in federal subsidies for its electricity generation — because the climate-change-causing carbon generated by the plant would be collected and then buried deep underground, in a process called sequestration.
The climate and tax legislation passed this summer by Congress and signed by President Biden, known as the Inflation Reduction Act, increased the carbon capture subsidy by 70 percent, to $85 per ton of carbon that is captured and buried.
The New Mexico project is expected to sequester about 380,000 tons of carbon annually as it creates electricity. The law also created a new subsidy for hydrogen-powered electric plants, meaning there are two generous tax breaks from which it can choose. (It can tap into only one of them.)
These federal tax breaks fundamentally change the economics of hydrogen-based power projects, making them much more attractive to investors like Blackstone and its partners, while in theory also providing benefits to the environment and electricity ratepayers.
“It has helped make the project more viable,” said Justin Campbell, vice president of power at Tallgrass Energy.
But the Tallgrass project, if all goes as planned, would be a first of its kind in the United States: a former coal-burning electric power plant converted into one that burns only hydrogen to create electricity. Construction on the project has not started yet, and a Tallgrass official said the company was still evaluating the finances before moving ahead.
Generating that power requires some complicated steps that have raised questions about the long-term viability of the approach.
In place of coal, Tallgrass would take natural gas drilled from the New Mexico area and convert that gas into hydrogen through a process called methane reforming, which relies on high-pressure steam to separate hydrogen from the gas.
The steam reformer also removes carbon dioxide, which Tallgrass would collect and then send deep underground for permanent storage, eliminating much of the climate change threat that comes from a coal-burning plant or even a traditional natural gas-burning power plant.
When the remaining hydrogen is burned to create electric power, it generates no carbon dioxide, explaining why the backers of the project say it will be “zero emission” power.
Emily Kent, a director at the Clean Air Task Force, an environmental group, said hydrogen projects fueled with natural gas like the one Blackstone was proposing were important because the electricity sector needed to have reliable, carbon-free power sources that could deliver energy when wind or solar power might not be available.
“The concern is that we might have trouble meeting hourly and daily energy demand around the country with solely intermittent resources like wind and solar,” she said, saying the project is a form of what she calls “clean firm” power.
The problem with the plan, according to other energy analysts and environmental engineers, is that the process is extremely inefficient: Using natural gas to create hydrogen is very energy intensive.
Even the U.S. Department of Energy notes that “it takes more energy to produce hydrogen (by separating it from other elements in molecules) than hydrogen provides when it is converted to useful energy.”
Burning hydrogen to create electricity generates nitrogen oxide, another pollutant that can cause asthma and other respiratory ailments. And the process of drilling and transporting natural gas to the site often involves the release of methane, which is an even more potent cause of climate change than carbon dioxide.
Making matters worse, said Bruce Robertson, an energy industry analyst who conducted a study of carbon capture projects worldwide, most of them have failed to live up to promised carbon removal targets, meaning they have not achieved the intended environmental benefits.
“The industry has a history of over-promising and under-delivering,” he said, pointing to less-than-anticipated carbon capture at projects such as Chevron’s Gorgon project in Australia, which also received government subsidies but then fell far short of its carbon removal targets.
All these reasons have led some environmental engineers and energy industry analysts to question why Congress and the Biden administration are offering generous subsidies to so-called blue hydrogen projects that rely on natural gas to produce electricity.
By comparison, green hydrogen projects — which can get even more generous subsidies from the Inflation Reduction Act — use electricity produced by wind or solar projects to produce the hydrogen needed to make power, a more environmentally friendly process.
“Blue hydrogen is largely a creation of the gas industry to try to prolong the natural gas business,” Mr. Robertson said.
Tallgrass Energy, in fact, is primarily a natural gas pipeline company, and many of the biggest backers of the carbon capture technology, such as Exxon, are oil and gas companies.
A spokeswoman at Blackstone, which has a majority stake in Tallgrass via a fund backed by the government of Saudi Arabia, declined to comment on the project. Blackstone is run by Stephen A. Schwarzman, a major Republican donor and support of former President Donald J. Trump.
But executives at Tallgrass said they were confident they could deliver on their promises, which include removing at least 95 percent of the carbon dioxide generated when producing the hydrogen gas, a much higher carbon capture rate than has been achieved in other projects.
The company will also work to ensure that it buys its natural gas from producers and pipeline companies that limit methane leaks, another major source of discharges that contribute to climate change, said Dwayne Phillips, vice president of hydrogen at Tallgrass.
The New Mexico plant, running on hydrogen, would help ensure that the region had a steady supply of electricity. When other renewable sources of power were available, the Tallgrass natural-gas-to-hydrogen plant could create hydrogen for other needs, such as powering trucks or area factories, a spokesman for Tallgrass said.
The project has won praise from Gov. Michelle Lujan Grisham of New Mexico, a Democrat who has been working to turn the state into a center for hydrogen production.
“New Mexico has what it takes to become an international hydrogen hub, furthering our decarbonization and climate efforts while creating quality jobs for New Mexicans,” she said at the time Tallgrass bought a 75 percent stake in Escalante H2Power, which is overseeing the planned conversion of the power plant.
The expanded federal subsidies come with an extra bonus that allows project developers like Blackstone’s Tallgrass to take the tax break almost like it is a federal grant: a so-called direct pay provision that gives the company a payment for five years’ worth of carbon capture credits.
Mr. Campbell, the vice president for power and transmission at Tallgrass, said the primary benefit would be to limit future increases in the cost of the power delivered to households and businesses in the West.
“What the tax credit has done for us is it allows us to have conversations with local utilities and present them an option that’s decarbonized but also protects affordability of rates,” he said. “We think a lot about not just decarbonization, but also reliability and affordability.”