Potential upside for HCC, CNX on coal mine methane sales
A thought piece on a wonky part of the tax code - but there could be a lot of extra revenue in it for a few "gassy" coal mines
The Biden Administration’s signature Inflation Reduction Act (IRA) of 2022 was the largest-ever piece of legislation focused on the climate and one of the biggest pieces of energy legislation in history. We haven’t written about it much on
because the IRA didn’t change a lot for US coal markets. The IRA extended wind and solar tax credits (that’s a big deal, but those tax credits had been eating into coal demand for many years) and the IRA increased tax credits for carbon capture and storage (but those projects will take time, if they materialize). However, there’s an interesting provision in Section 45V of the IRA (which provides clean hydrogen tax credits) that could create a lucrative incremental revenue stream for some US coal mines.
Indulge me a bit here – the following business/investment case is wonky, but represents a very interesting opportunity for a couple publicly-traded US equities. I have heard almost no one talking about how 45V will juice profits from sales of coal mine methane (CMM), and there may still be some questions about how to sell it and to whom. However, we have the opportunity to get in early on a trade where significant value is unlocked.
Background on Section 45V and coal mines
Even though the IRA was released in August of 2022, the US Treasury Department didn’t publish its final interpretation of Section 45V until the beginning of this year. While 45V is a tax credit for hydrogen producers, most hydrogen production in the US is done by converting natural gas to hydrogen through Steam Methane Reforming (SMR) or Autothermal Reforming (ATR). Certain natural gas sources, like CMM that is sold from a few coal mines, are worth a lot of money to the hydrogen producers because they have a negative carbon intensity (CI) that gets rewarded handsomely under 45V.
SMR and ATR are fairly carbon intensive processes, but add in some CMM with a negative CI and the IRA is written such that the hydrogen producers get a massive tax credit for being “low carbon.” The definition of low carbon is based on the overall lifecycle GHG emissions from the hydrogen project (as shown in the table below), and the low-CI gas helps a lot to get the most lucrative 45V credits in the final bucket of the table.
