Final Rules for the Production of Clean Hydrogen and Energy Credit

Filed under

Energy & Utilities

Federal Incentives & Tax Credits

The Department of Treasury and the Internal Revenue Service are set to release the final rules for the Credit for Production of Clean Hydrogen and Energy Credit in the Federal Register on January 10, 2025. These rules establish the guidelines for Sections 45V and 48(a)(15) clean hydrogen tax credits provided by the Inflation Reduction Act of 2022 (IRA22).

Like some of the other tax credits offered in IRA22, the rules for the Section 45V credits have been uncertain and have not encouraged much development to this point. These new final rules are intended to remedy this fact, though some experts have noted that hydrogen subsidies in particular could be subject to Congressional and/or Executive pushback and revision under a more conservative administration in the United States; the likelihood, extent and timing of such is certainly unknown.

For our clients, we are excited that the 45V credits can offer an exciting financing tool for hydrogen projects and present some project-structuring flexibility for projects that produce intermediate syngas or harvest methane from landfill and via anaerobic digestion.

A few points:

Tax credit’s value is based on the lifecycle greenhouse gas (GHG) emissions of hydrogen production 4 kilograms of carbon dioxide equivalents (CO2e) per kilogram of hydrogen produced.
Qualifying clean hydrogen falls into four credit tiers, with hydrogen produced with the lowest GHG emissions receiving the largest credit. 45VH2-GREET
Calculation of the lifecycle GHG analysis for the tax credit requires consideration of direct and significant indirect emissions. Like most other credits under IRA22, the projects must meet prevailing wage and apprenticeship standards to qualify for the full H2 credit.
Producers have until 2030 to comply with lower emission energy standards

Green and Pink Hydrogen

The type of H2 produced is defined by its power source and process. The initial technology supported by the 45V credit is electrolysis which uses an exceptional amount of energy to separate H2 from H2O with an electrolyzer (so called “green” hydrogen utilizes renewable energy for electrolysis and “pink” hydrogen produces H2 from water via electrolysis fuels by nuclear fission.

The credit is tied to a specific generator in order to calculate the lifecycle GHG emissions and related credit. This lifecycle assessment using the DOE resources will take into account both direct and indirect emissions from hydrogen production. The final rules also offered the credit to extend the life of a retiring nuclear reactor planning for closure to be adapted to produce hydrogen.

Blue Hydrogen

Traditionally, hydrogen has been produced using natural gas, which is not a low carbon activity. The IRA22 credits seek to promote energy transition, so methane reforming technologies, including with carbon capture and sequestration (so-called, as well as with the use of natural gas alternatives such as renewable natural gas (RNG) or coal mine methane, are also eligible for a tax credit (so-called “blue” hydrogen).

The final rules opened the credit to a broader range of biogas and methane capture systems than originally proposed rules– including wastewater anerobic digestion, livestock waste emissions capture and landfill gas capture as well as coal mine methane capture – assuming that the methane would have otherwise been emitted into the atmosphere.

These credits are long-anticipated and should help some projects proceed. However, the final rules allow for a credit equal to as much as $3 per kilogram, which can still fall short of parity with hydrogen production via natural gas – particularly for some electrolysis systems, without the right partners, project and cost structure and incentives.

As with all credits and incentives, we are actively helping clients evaluate and incorporate these renewable tax credits, along with project debt, mezzanine and equity, in their project financing capital stack.

There are certain technical conditions in these proposed regulations that affect all participants, and we look forward to assisting you with these questions.

The information in this article was intended to provide general information for individuals and companies interested in the subject matter. It may contain opinions and details which may or may not be indisputable and should not be considered fully exacting or comprehensive in nature. The information herein should not be considered tax, legal, investment or any other advice of any kind.