The US Treasury has released final rules for the section 45V hydrogen production tax credit established by the 2022 Inflation Reduction Act (IRA).

The long-awaited rules clarify the eligibility of producers of blue, green and pink hydrogen—as well as hydrogen from renewable natural gas (RNG) and coal-mine methane—to receive the credits, which are the nation’s primary financial incentive for supporting low-carbon hydrogen production.

The level of tax incentive received by a project is dependent on the amount of greenhouse gases (GHGs) released during the hydrogen production process, including by the generation of any electricity used to power electrolysers.

There are four tiers to the incentives for the ten-year duration on the programme. Projects that produce more than 4kg CO₂e per kg of hydrogen produced will receive no incentives.

FIG.1: US HYDROGEN TAX CREDIT TIERS

 

Green hydrogen

For green and pink hydrogen there are three pillars of further rules: additionality, temporal correlation and geographic correlation.

Any renewable assets used to generate hydrogen must be additional—meaning they have not been in service more than 36 months before a project’s first hydrogen is produced. Renewable energy assets in states that have mandated renewable portfolio standards for power producers will be exempt from the rule, as these regulations prevent those assets from being displaced by fossil fuels. Currently only the states of California and Washington meet these requirements.

The renewable power must also be generated within the same hour as the hydrogen production from 2030, and in the same year until 2030. This represents a relaxation of the previously proposed rules, which had called for hourly matching from 2028—a deadline that had drawn criticism from the industry.

“The extensive revisions we've made in this final rule provide the certainty that hydrogen producers need to keep their projects moving forward” Podesta, senior adviser to US president

The final rules also state that 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.

Producers may determine emissions on an hour-by-hour basis so that hydrogen produced at different times can qualify for different levels of incentive, as long as the annual emissions of the hydrogen production process are less than the 4kg CO₂e ceiling level.

Finally, renewable power must be generated in the same geographic region as the hydrogen production facility as identified by the National Transmission Needs Study, although there are some flexibilities that allow limited clean electricity transfers between regions.

Pink hydrogen

In a further relaxation compared with the previously proposed rules, nuclear facilities that are at risk of being shut down or retired, and that are co-dependent on hydrogen investment, are exempt from the 36-month additionality rule.

“We are pleased to see that the US Treasury Department has changed course and that the final rule allows a significant portion of the existing merchant nuclear fleet to earn credits for hydrogen production,” said Joe Dominguez, president and CEO of Constellation, one of the largest nuclear power producers in the US. 

Blue hydrogen

Calculations of GHG emissions from steam methane reforming with CCS will be based on a model released by the Department of Energy (DOE). The model contains a flat assumption that upstream methane emissions will be 0.9% of the methane consumed by the reformer.

The DOE noted that later models will likely use different methods to calculate upstream methane emissions as data improves. The rules contain an exemption that means the level of credit attained by a production facility will remain determined by the model in force at the time construction of that facility began.

All CCS equipment must follow the 45Q rules for defining and monitoring CO₂, and capture more than 90% of emissions.

RNG and methane-based hydrogen

The regulations permit the use of RNG and fugitive sources of methane (such as from coal-mine operations) to produce hydrogen eligible for tax credits, and provide rules on how to calculate the lifecycle GHG emissions produced by using these technologies. They also endorse a book-and-claim system for RNG or coal-mine methane from 2027, meaning hydrogen operators do not have to use the actual molecules produced by these sources but instead can use pipeline gas as long as the producer has fed the molecules into the pipeline at some point.

Industry reaction

The rules have been significantly revised following industry consultation, including widespread criticism they would hinder project development in their initial form.

“The extensive revisions we have made in this final rule provide the certainty that hydrogen producers need to keep their projects moving forward and make the US a global leader in truly green hydrogen,” said John Podesta, senior adviser to President Biden on international climate policy. 

$3 – Maximum credit per kg of hydrogen produced

But the rules still fall short, according to some industry associations. The US Chamber of Commerce’s Global Energy Institute said they will leave billions of dollars of announced projects still in limbo.

“The incoming administration will have an opportunity to improve the 45V rules to ensure the industry will attract the investments necessary to scale the hydrogen economy and help the US lead the world in clean manufacturing,” said Marty Durbin, president of the Global Energy Institute.

President Trump has previously promised to overhaul the IRA and its provisions but will face both industry and political opposition in doing so.

House Republicans have already written a letter to the speaker of the House of Representatives noting that a full repeal would create a “worst case scenario”, and that even a partial repeal would undermine existing investments.

In a statement welcoming the latest 45V rules, industry group the American Petroleum Institute (API) noted that “clear, consistent policy” is essential for building a lower-carbon hydrogen industry and strengthening America's energy leadership.

“We look forward to collaborating with the incoming administration to uphold technology-neutral hydrogen policies that position the US as a global leader in innovation,” said Dustin Meyer, the API’s senior vice-president of policy, economics and regulatory affairs.

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Author: Tom Young