Section 45V Clean Hydrogen Tax Credits: Final Regulations Released


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.

Key Dates

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.

Three Pillars

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.

1. Incrementality (to existing power sources).

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 electricity source has added carbon capture and sequestration technology no more than 36 months before the hydrogen production facility for which the energy attribute certificate (EAC) was retired was placed in service.
  • The electricity comes from states with qualifying decarbonization standards and qualifying greenhouse gas (GHG) cap programs that should ensure emissions will not rise with this additional electricity use. Currently only Washington and California are qualifying states.
  • The electricity comes from nuclear facilities with qualities suggesting they would otherwise be retired or have been recommissioned.

2. Temporal Matching (time-matched to the period during which the electrolyzer operates).

The final regulations push back the hourly matching requirement for EACs from 2028 to 2030, allowing annual matching until 2030.

  • Hourly matching is used if the taxpayer chooses to acquire and retire qualifying EACs rather than relying on the average annual lifecycle GHGs for electricity for its region as reflected in the 45VH2-GREET Model.
    • Hourly accounting can only be used if the average annual lifecycle GHG emissions rate for the taxpayer’s process that taxable year is not greater than four kilograms of carbon dioxide equivalent (CO2e) for all hydrogen produced.
    • Once selected, the taxpayer must account for the emissions for each hour of the year. The taxpayer can do that through retiring qualified EACs representing energy generated in the same hour. If no EACs are available for certain hours, the taxpayer can use the annual average GHGs for electricity for its region as reflected in the 45VH2-GREET model.
  • The final regulations also provide that EACs from discharged electricity from energy storage otherwise meeting the three pillars can be used to meet these requirements.

3. Deliverability (being located in the same grid region).

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.

Facility Scope

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:

  • Equipment used to produce electricity or feedstock, including its production, purification, recovery, transportation or transmission.
  • Other commercial equipment at the facility unrelated to hydrogen production.
  • Equipment downstream of the point of production.

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.

Measuring GHG Emissions

Calculating the Credit

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.

GREET Model

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.

Lifecycle GHG Emissions Calculations

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.

Gas EACs

  • Gas EACs are also anticipated to be retired if the taxpayer wants to treat the gas used in its facility as a gas other than fossil natural gas. The Treasury Secretary says the system is not ready to track these and that authorities plan to determine readiness after Jan 1, 2027.
  • The final regulations provide the requirements for qualifying EAC registries for gas.
  • Requires monthly temporal matching and deliverability to be met.
  • Deliverability is met if the gas facility and the hydrogen facility are interconnected to a natural gas pipeline in either the contiguous United States, Alaska, Hawaii or a U.S. territory or via a direct pipeline or exclusive delivery.

New Safe Harbors

The final regulations provide various safe harbors to lock in certain treatments.

GREET model safe harbors

  • An irrevocable election is provided for the remaining years in the credit period. The goal is to treat the latest version of 45VH2-GREET that was publicly available on the date when construction of the qualified clean hydrogen facility began as the 45VH2-GREET Model for the full 45V credit period.
    • This allows the taxpayer to lock in – for the full credit period – the relevant model available when the investment decision was made.
    • For taxpayers that started construction on a project prior to December 26, 2023, the relevant model that is locked in is the first 45VH2-GREET Model, released in December 2023.
  • For taxpayers that need a provisional emissions rate (PER) because their process is not included in the current 45VH2-GREET Model:
    • The taxpayer can make an irrevocable election to treat the first version of the 45VH2-GREET Model that includes its process to apply for the remaining taxable years in the 45V credit period.
    • Taxpayers that receive a PER prior to beginning construction may at their discretion use the PER value to calculate their 45V credit value for the entire credit period.
  • In addition, the Treasury Department and IRS intend to issue a safe harbor that would allow taxpayers to use a modified table of balancing authorities and their corresponding regions instead of the table in the final regulations.

Other Notes of Interest

  • The final regulations clarify that while venting or flaring for safety or maintenance reasons is non-abusive, a taxpayer cannot claim 45V credits on any vented or flared hydrogen. If a taxpayer claims hydrogen credit at a value that does not account for the fact that it will be vented or flared in excess of standard commercial practices, that would be abusive and potentially subject to the anti-abuse rule.
  • Where a man-made chemical is produced using hydrogen and is later cracked to release the hydrogen (for example in the production of ammonia), the regulations say, that would not constitute hydrogen production because the chemical was hydrogen storage from which it is being released.
  • If an EAC is retired for the California Low Carbon Fuel Standard program, it cannot be retired for 45V as that would be double counting.

 



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