The US Treasury has published proposals on the regulation of hydrogen production tax credits to be offered under the Inflation Reduction Act (IRA).

The proposals end months of speculation over the implementation of IRA in the hydrogen sector. Clarity around the definitions of green hydrogen production projects which can qualify for credits will reassure developers and their financial backers and help bring more projects to FID.

But the proposals also present a reality check. IRA’s hydrogen support regime has dazzled the industry with offers of a top rate of $3/kg tax credit. Project developers and OEMs such as electrolyser manufacturers have flocked to the US market, pledging substantial investment on the back of IRA’s generous support.

In addition to the value of the tax credits, investors have praised the simplicity of IRA compared to subsidy schemes offered in Europe.

The proposed IRA definitions of electrolytic hydrogen are remarkably similar to those implemented by the EU

That view may be about to change. The proposed IRA definitions of electrolytic hydrogen are remarkably similar to those implemented by the EU.

 “The [US] government chose to effectively lift concepts from the EU’s framework for clean hydrogen,” said John Taylor, a partner at law firm King & Spalding.

IRA’s proposed green hydrogen definitions are based on the “three pillars” approach taken by the EU. This requires that power used for electrolytic hydrogen production is drawn from a new or recently built generation source in the same region as the electrolysers. It must also be “temporarily matched” with the hydrogen production. However, on temporal matching–which has cost implications for projects and was strongly opposed by some developers in Europe–IRA looks stricter than the EU’s rule.

Under the US proposals, electricity used by electrolysers up to 2027 must be generated in the same year as the hydrogen production. From 2028 the electricity and hydrogen production must take place in the same hour. Under the EU’s rules, power generation and hydrogen production must be matched monthly until 2029, moving to hourly in 2030.

“The hourly matching from 2028 will draw a lot of attention,” said Taylor. “It is stricter than the EU’s rule.”

Nuclear option

IRA proposals do offer some significant differences to the EU’s approach. For example, they “specifically contemplate” production of green hydrogen from nuclear power, unlike the EU’s framework, Taylor said. The proposals also suggest that projects can be awarded tax credits even if the hydrogen they produce is sold or used outside the US.

The US Treasury appears to be moving at pace on the proposals, with the deadline for initial feedback set for February 26 and a follow-up public hearing set for March 25. The outcome will arguably be the most important development for the global hydrogen sector in 2024.

“As the world’s most generous subsidy for green hydrogen, these regulations are hugely significant,” said industry group Green Hydrogen Association.

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Author: Stuart Penson