On January 3, the U.S. Department of the Treasury and Internal Revenue Service (IRS) released highly anticipated final rules for the section 45V Clean Hydrogen Production Tax Credit. Established by the 2022 Inflation Reduction Act, the new tax credit applies to the production of clean hydrogen produced after 2022.
The final rule provides clarity to the previously proposed rules on how hydrogen producers—using primarily electricity and methane—can determine eligibility for the tax credit.
Emission Tiers
To qualify as clean hydrogen under the statute, the lifecycle greenhouse gas (GHG) emissions of the hydrogen production process must be no greater than four kilograms (kg) of carbon dioxide equivalents (CO2e) per kg of hydrogen (H2) produced. Qualifying clean hydrogen falls into four credit tiers, with hydrogen produced with the lowest GHG emissions receiving the largest tax credit.
- 4 to 2.5 kg CO2e/kg H2: 20% of full credit
- 2.5 to 1.5 kg CO2e/kg H2: 25% of full credit
- 1.5 to 0.45 kg CO2e/kg H2: 33.4% of full credit
- Less than 0.45 kg CO2e/kg H2: 100% of full credit
Credit Structure
- 45V is the Clean Hydrogen Production Tax Credit (PTC) which applies to the production of clean hydrogen. This is not the Investment Tax Credit (ITC) which applies the capital infrastructure of a new facility.
- The amount of credit has not been changed with the final rule. The full credit equals $3 (adjusted for inflation) per kg of hydrogen produced if produced with the top tier of lowest CO2e/kg H2 emission. The credit is adjusted down for higher CO2e/kg H2 emission tiers (as shown above). The applicable emission tier is determined through lifecycle analysis using prescribed models and inputs.
- The credit is available for the first 10 years after a hydrogen generation facility is placed in service.
Production Methods
The credit is technology-neutral and enables pathways for hydrogen produced using both electricity and methane, providing investment certainty while ensuring compliance with emissions standards.
Electrolytic Hydrogen
For hydrogen production using electricity, the final rules incorporate criteria proposed in December 2023, with additional clarity and flexibility added in the January 2025 final rule. The rule defines certain tax credit eligibility criteria of generated electricity used for hydrogen production.
Three Pillars
The final rules largely maintain the “Three Pillars” for determining eligibility of renewable electricity for tax credit-qualified electrolytic hydrogen production:
- Incrementality or Additionality: Requires the use of qualified electricity produced at a facility that began (or, in certain cases, expanded) commercial production of electricity no more than 36 months before the hydrogen production facility was placed in service. The new rule added pathways for the eligibility of other generation if not added within 36 months. These are:
- Nuclear: Certain nuclear plants will meet this incrementality criterion. The new rule allow hydrogen made from some nuclear plants that avoid retirement to obtain credits. This change could benefit a significant portion of the merchant nuclear fleet, potentially reviving projects like Constellation’s proposed $900 million hydrogen plant at the LaSalle Clean Energy Center in Illinois.
- Certain Clean Electricity States: Another pathway to meet the incrementality criterion is that electricity generated in states with robust GHG emission caps paired with clean electricity standards or renewable portfolio standards will be considered incremental. Washington and California meet this requirement and additional states may be added.
- New Carbon Capture and Sequestration (CCS). Electricity from a generator that has added CCS within a 36-month window before the hydrogen facility is placed in service will be considered incremental.
- Temporal Matching: Requires hourly matching of qualified electricity usage for clean hydrogen production to clean electricity generation starting in 2030 with a three-year phase-in period of annual matching. The new rule extended this phase-in period by two years.
- Deliverability: Requires that the qualified clean electricity be generated in the same region of the electric grid as the hydrogen production facility.
Methane-Based Hydrogen (aka Blue Hydrogen) and Carbon Capture
The final regulations provide rules for determining the eligibility of “blue hydrogen” produced using methane reforming technologies with CCS. This inclusion opens the door for natural gas producers to participate in the clean hydrogen market. The new rules specify how to calculate lifecycle GHG emissions, particularly from upstream methane production, to determine the level of credit for blue hydrogen production. The rule specifies the use of newer versions of the model “45VH2-GREET.”
Additional Provisions
- Construction of eligible facilities must begin before 2033.
- The credit is reduced by a factor of five if prevailing wage and apprenticeship requirements are not met.
- The Department of Energy will release an updated version of the 45VH2-GREET model for calculating the tax credit. GREET stands for Greenhouse Gases, Regulated Emissions and Energy Use in Transportation (GREET Model)
Future Developments
Several collaborations are underway to further develop and optimize steam methane reforming (SMR) based hydrogen production:
- ULC-Energy, Topsoe, Rolls-Royce SMR and KYOS are jointly investigating hydrogen production using SOEC technology (Solid Oxide Electrolysis Cell) with SMR-generated electricity and heat.
- Rolls-Royce SMR and Sumitomo Corporation conducted a feasibility study showing SMRs’ potential in powering the UK’s hydrogen network.
- NuScale, Shell and others are collaborating to develop an economically optimized integrated energy system for hydrogen production using NuScale’s VOYGR SMR plant
Advantages and Drawbacks
Pros:
- Investment Certainty: The new rules provide some clarity and flexibility for hydrogen producers, helping to grow the industry and move projects forward
- Support for Clean Hydrogen: The tax credit incentivizes the production of low-emission hydrogen, potentially accelerating the U.S. clean energy transition
- Flexibility for Nuclear Plants: The rules allow hydrogen made from some nuclear plants that avoid retirement to obtain credits
- State-Specific Exceptions: An exception to the incrementality rule was created for hydrogen plants in states with robust climate policies and emissions caps, such as Washington and California
- Multiple Production Methods: The rules enable pathways for hydrogen produced using both electricity and methane
Cons:
- Stringent Requirements: The “three pillars” (additionality, deliverability and hourly time-matching) may make it challenging for some producers to qualify for the highest tax credit tiers
- Potential Deployment Slowdown: Mandating additionality could leave deployment dependent on interconnection queue timelines, potentially slowing the scaling-up of hydrogen production
- Incrementality Rule: The requirement for hydrogen plants to source electricity from facilities built in the last 36 months is seen as unrealistic by some industry members
- Complexity: The rules present many compliance challenges for hydrogen producers, potentially making it difficult to finance new hydrogen production facilities
- Potential Disadvantage for Certain Production Methods: Some argue that the added costs imposed by the requirements may disadvantage clean hydrogen compared to other green technologies
Article originally published in POWER Magazine.
