By Valerie Volcovici

WASHINGTON Ten Senate Democrats will ask President Joe Biden's administration not to include strict rules guiding use of clean hydrogen tax credits that the Treasury Department is due to release by the end of the year, according to a draft of a letter seen by Reuters on Wednesday.

The letter, which the senators planned to send to White House adviser John Podesta, Treasury Secretary Janet Yellen and Energy Secretary Jennifer Granholm, will urge the officials to make the Treasury guidance flexible. It seeks to allow projects fueled by existing energy sources including, gas, hydroelectricity and nuclear to be eligible for the tax credits.

The group is led by Washington Senator Maria Cantwell, whose state was one of 16 to win part of $7 billion in federal funding to build out regional hydrogen hubs. The letter warns that an approach favored by other Democratic lawmakers and environmental groups creating "overly complex eligibility criteria" would hamper the hubs and the growth of the nascent industry.

These other lawmakers and groups have urged Treasury to place strict guard rails on the tax credits, worth up to $100 billion, restricting them to hydrogen producers that use new sources of clean electricity instead of tapping power already on the grid.

"This may hamper the development of a robust clean hydrogen market, undermine volumetric production and price-parity goals, reduce the positive effects of scaling up electrolyzer investment, and prevent clean hydrogen from fulfilling vital roles in hard-to-decarbonize sectors in line with the Administration’s broader decarbonization efforts," the letter says.

It was signed by other Democrats including West Virginia's Joe Manchin, Pennsylvania's John Fetterman and Illinois' Dick Durbin, whose states won hydrogen hub funding to decarbonize heavy industries like steel, heavy vehicles and cement plants.

They are at odds with a another group of eight Senate Democrats led by Rhode Island's Sheldon Whitehouse, Hawaai's Brian Schatz and Oregon's Jeff Merkley who sent a letter to Yellen on Tuesday to ensure that the tax credits be used strict for projects using new clean energy sources.

These other senators, allied with environmental groups, also want projects to source locally produced clean energy, and are seeking something called "time-matching," which will ensure that electrolyzers used to produce hydrogen run at the same time as renewable energy to make sure they are not being powered inadvertently by fossil fuels.

"Without safeguards, 45V risks creating a shell game in power markets, where existing clean generation gets nominally claimed by hydrogen electrolyzers but the resulting gap in grid capacity is backfilled by fossil fuel generation," that group's letter said.

(Reporting by Valerie Volcovici; Editing by David Gregorio)