8 minute read | January.17.2025
The U.S. Department of the Treasury and Internal Revenue Service (IRS) have released final regulations or tax credits for the production of clean hydrogen under Section 45V of the Internal Revenue Code.
The industry has eagerly awaited the final regulations, which provide more defined guidance and greater investment certainty.
Placed in service: The 45V credits are available for facilities that are placed in service after December 31, 2022, and that begin construction before 2033.
Taxable years: The final regulations are immediately effective and apply to taxable years beginning after December 26, 2023 (when the proposed regulations were published). For taxable years beginning after December 31, 2022, and on or before December 26, 2023, taxpayers may choose to apply the rules of Treasury Regulations Sections 1.45V-1, -2 and -4 through -6 provided taxpayers follow them in their entirety in a consistent manner.
The regulations retain the “three pillars” to ensure that facilities claiming the 45V credit lead to emission reductions, but relax their application as described below.
The final regulations retain requirements that the electricity used to produce the clean hydrogen comes from new, clean sources rather than from existing sources. However, the final regulations added these new options to prove incrementality:
The final regulations push back the hourly matching requirement for EACs from 2028 to 2030, allowing annual matching until 2030.
EACs must come from the region that corresponds to the balancing authority to which the hydrogen facility and the facility the EACs come from are electrically interconnected (rather than geographically located). The balancing authorities are in a table in the final regulations. The regulations permit interregional delivery under certain circumstances.
The regulations clarify that the scope of a facility is the single production line that results in the lifecycle GHG emissions rate used to determine the 45V credit (including any carbon capture equipment or purification equipment located at the facility, if applicable).
Since this definition focuses on the equipment that produces the hydrogen, the facility does not include:
While the updated facility definition refers to equipment that contributes to calculating the lifecycle GHG emissions rate, the lifecycle GHG emissions analysis of the hydrogen production process is not coextensive with the tax definition of a hydrogen production facility. The former includes the production of feedstocks and, in some cases, downstream purification.
The regulations clarify how to determine the percentage for the value of the credit based on the kilograms of CO2e per kilogram of hydrogen. They make clear that taxpayers determine this based on the “process” a facility uses to produce hydrogen using a primary feedstock. If a facility uses multiple processes, taxpayers should determine the kilograms of CO2e used by taking the weighted average of the lifecycle GHG emissions of each process (including feedstock) by which the facility produces hydrogen.
The final regulations differentiate the lifecycle GHG calculations not solely based on the type of hydrogen production (electrolysis or steam methane reforming). They also take into account the attributes of feedstocks used in such process as the emissions characteristics based on the source of such feedstocks is variable.
Accordingly, the regulations include new provisions and definitions to determine when carbon capture and sequestration is used in the production of electricity or a feedstock, for determining the relevant emissions rate for different sources of methane and for defining other processes and feedstocks.
In the final regulations, the Secretary of the Treasury’s authority has been used to adopt the 45VH2-GREET Model as a “successor model” to be used as the only model when determining the well-to-gate GHG emissions. This model has been specifically tailored to the 45V credit and also includes fixed background values that should be consistent across taxpayers (for example regional electricity GHGs or assumed methane leakage). This fixed data is used to make the model more user friendly and systematic while reducing opportunities for abuse in the calculation.
The final regulations clarify that the calculation of lifecycle GHG emissions includes lifecycle GHG emissions from any purification the taxpayer knows or has reason to know is necessary for the hydrogen gas stream to be productively used or sold for productive use. These purification emissions are looped into the calculation whether planned as part of the well-to-gate facility or farther down the distribution stream. The final regulations further clarify that emissions from the liquefaction, storage or transportation of hydrogen are considered beyond the well-to-gate boundary and need not be included in the calculation.
The final regulations provide various safe harbors to lock in certain treatments.
Want to know more? Reach out to a member of our Renewables Tax team.
John Eliason[email protected]
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Mark Christy[email protected]
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Wolf Pohl[email protected]
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Chelsea Munoz-Patchen[email protected]
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Braxton Roam[email protected]
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ThuyMy Do[email protected]
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Mary Kate Murray[email protected] |