Treasury Department, IRS Release Final Rules on IRA Tax Credit for Clean Hydrogen Production

The U.S. Department of the Treasury (Treasury) and Internal Revenue Service (IRS) have released final rules for the section 45V Clean Hydrogen Production Tax Credit established by the Inflation Reduction Act.

The final rules consist of changes and flexibilities addressing several key issues to help grow the industry and move projects ahead as part of the Department of Energy’s Regional Clean Hydrogen Hubs program.

Some industry proponents have championed the final rules as a path to bolstering hydrogen production in the U.S. energy sector by clarifying investment implications. Hydrogen itself does not contain carbon in its chain so does not emit carbon dioxide when combusted.

However, hydrogen is not mined naturally so must be generated either by steam reforming of methane gas, which is carbon intensive, or by electrolysis which uses electricity to split the hydrogen out of water. To be classified as truly green hydrogen, those electrolysers must be powered by carbon-free energy resources such as solar, wind, hydro or nuclear.

The final rules clarify the roles of hydrogen producers, including those using electricity from various sources, natural gas with carbon capture, RNG, and coal mine methane, in determining eligibility for the credit. To qualify for the full credit, projects should meet prevailing wage and apprenticeship standards, continuing the Biden-Harris Administration’s aim to place workers at the center of the clean energy economy and ensure clean energy jobs.

Read the Clean Hydrogen Rules in the Federal Register

“These rules incorporate helpful feedback from companies planning investments which will drive significant deployment of clean hydrogen to power heavy industry and help create good-paying jobs,” said U.S. Deputy Secretary of the Treasury, Wally Adeyemo, in a statement. “Scaling the production of low-carbon fuels like hydrogen will be a big boost to difficult-to-transition sectors of our economy like heavy industry.”

The Department of Energy will release an updated version of the 45VH2-GREET model for producers to calculate the section 45V tax credit.

The rules enable pathways for hydrogen produced using both electricity and methane, providing investment certainty while ensuring that clean hydrogen production meets the law’s lifecycle emissions standards. By law, the tax credit’s value is based on the lifecycle GHG emissions of hydrogen production.

To qualify as clean hydrogen under the statute, the lifecycle GHG emissions of the hydrogen production process must not be greater than 4 kg of carbon dioxide equivalent (CO2e) per kilogram of hydrogen produced. Qualifying clean hydrogen falls into four credit tiers, with hydrogen produced with the lowest GHG emissions receiving the maximum credit. Calculation of the lifecycle GHG analysis for the tax credit considers both direct and significant indirect emissions.

For hydrogen production using electricity, or electrolysis, the final rules provide safeguards additional clarity and flexibility to help facilitate clean hydrogen investment, according to the agencies. They require taxpayers seeking to use Energy Attribute Certificates (EACs) to attribute electricity use to a specific generator meet certain criteria for temporal matching, deliverability, and incrementality.

The safeguards help ensure that electricity consumption for hydrogen meets the statutory lifecycle GHG emissions standards. As per the final regulations, additional load on the grid from hydrogen production will result in induced emissions, without the safeguards.

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The final rules define electricity generation as incremental if the generator begins commercial operations within 36 months of the hydrogen facility being placed in service, or to the extent a plant increases its capacity within the period. The final rules provide additional pathways for demonstrating incrementality, including:

o   Nuclear retirement risk: Electricity produced by nuclear plants meeting certain indications of being at risk of retirement and certain indications of co-dependence on hydrogen investment will be considered incremental, up to 200 MW per qualifying reactor. This reflects that certain nuclear reactors are at greater risk of retirement based on certain economic factors, and if a nuclear retirement is averted then the additional demand from hydrogen production will not have induced emissions.

o   State policies. Electricity generated in states with robust GHG emissions caps paired with clean electricity standards or renewable portfolio standards meeting the criteria set forth in the final rules will be considered incremental, given that, together, those policies prevent induced emissions from hydrogen production. In consultation with expert agencies, Treasury has determined that Washington and California’s policies meet these criteria. Additional states are expected to meet the criteria in the future, if they adopt robust policies meeting the criteria.

o   New Carbon Capture and Sequestration (CCS). Electricity from a generator having added CCS within a 36-month window before the hydrogen facility is placed in service will be considered incremental.

• New, deliverable clean power generated annually, with a phase-in to hourly generation (time-matching): The final rules maintain the proposed requirement that EACs meet the temporal matching requirement if the electricity represented by the EAC is generated in the same hour as a hydrogen facility uses electricity to produce hydrogen. The final rules extend the transition allowing annual matching rule two additional years relative to the proposed rules, with hourly matching required starting in 2030 for all facilities.
• Deliverability: The final rules confirm that electricity generated by a facility in the same grid region as the hydrogen facility meets the deliverability requirement, with certain clarifications, including providing a pathway to demonstrate electricity transfers between regions. Grid regions are based on the Department of Energy National Transmission Needs Study.
• Hourly accounting option: The final rules allow hydrogen producers to determine electricity-related lifecycle emissions on an hour-by-hour basis as long as the annual emissions of the hydrogen production process are under section 45V’s limit of 4 kg of CO2e per kg of hydrogen produced. This will provide additional investment certainty as it helps producers avoid losing much of the credit value if they cannot procure EACs for a limited number of hours during the year.

The final regulations provide rules for determining eligibility of hydrogen produced using methane reforming technologies, including with carbon capture and sequestration, as well as with the use of natural gas alternatives such as RNG or coal mine methane.

The final rules aim to enhance the accuracy of upstream methane leakage rates used in determining the credit value. Upstream methane leakage rates will be based on default national values in an upcoming version of 45VH2-GREET.

However, as described in the final regulations, future releases of 45VH2-GREET will incorporate project-specific upstream methane leakage rates, conditional on the availability of appropriate and verified data from the EPA Greenhouse Gas Reporting Program (GHGRP), including under the recently finalized updates to the EPA’s Subpart W rules and rules under Section 111 of the Clean Air Act, regarding oil and gas sector regulations.

For hydrogen production using natural gas alternatives, the final regulations provide rules on calculating lifecycle GHG emissions and claim the credit for alternatives sourced from a wider range of biogas and fugitive methane than the proposed rules allowed, including wastewater, animal manure, and landfill gas, and for coal mine methane.

As the 45V credit requires a lifecycle analysis of each process used to produce hydrogen, the emissions intensities of hydrogen produced using the feedstocks are measured separately.

The final rules aim to enhance development of book-and-claim systems for natural gas alternatives such as RNG or coal mine methane by detailing the information that the systems will have to provide. As the systems will take time to develop, taxpayers will be able to start using book and claim systems in 2027, upon approval by the Secretary of the Treasury.