Final Section 45V Clean Hydrogen Production Tax Credit Regulations Issued
On January 3, 2025, the Internal Revenue Service (“IRS”) and the Department of the Treasury (“Treasury”) released long-awaited final regulations regarding the clean hydrogen production tax credit under section 45V of the Internal Revenue Code. The credit, enacted by the Inflation Reduction Act of 2022 , is a key component of the Biden Administration’s clean energy initiative and is the primary tax incentive for the production of clean hydrogen.
The IRS and Treasury previously released proposed regulations in December 2023, discussed by us here. The proposed regulations generated a flood of critical comments and testimony at the subsequent IRS hearing, focusing on the restrictions in the regulations which would make access to the credit difficult for the hydrogen industry. A link to the tool we prepared for finding the comment letters by name of filer is here.
Through the final regulations Treasury has addressed some of the concerns raised by hydrogen producers and in a number of respects has provided more flexibility than under the proposed regulations.
Three Pillars: In the final regulations, Treasury has retained the restrictions on the use of energy attribute certificates (“EACs”) referred to as the “three pillars,” although each pillar has been liberalized in certain respects. As background, the amount of the section 45V tax credit varies depending upon the amount of greenhouse gases (“GHGs”), such as carbon dioxide, released during the hydrogen production process, including in the generation of electricity used to produce the hydrogen. Because section 45V as enacted did not specify in detail the methodology to be applied to determine the GHG emissions of production processes, these regulations set the rules for determining the GHG emissions associated with electricity used to produce the hydrogen. The proposed regulations reflected a policy decision from the Biden Administration to enforce strict limits on section 45V credit availability to hydrogen producers using grid power even though these limits will significantly increase costs for the clean hydrogen industry. The proposed regulations limited the ability of hydrogen producers to assert low GHG emissions from use of renewable or clean power by requiring that such clean power sources must be: (i) additional or incremental to existing renewable or clean power sources by disallowing use of power sources that have been in service more than 36 months; (ii) contemporaneous by requiring temporal matching between the time of production of the hydrogen and the time of production of the power; and (iii) geographic or deliverability consistent by requiring that the power source be located in the same geographic area as the hydrogen production.
The final regulations have liberalized these three pillars as follows:
Renewable Natural Gas and Methane-Based Hydrogen:
The proposed regulations did not provide rules regarding how the use of renewable natural gas (“RNG”) or fugitive sources of methane (such as from coal mine operations) to produce hydrogen would be counted in determining the emissions rate of hydrogen production, although Treasury stated that it anticipated requiring that biogas originate from the “first productive use” of such biogas-based RNG or fugitive methane. The hydrogen industry’s position has been that use of RNG or fugitive sources of methane to produce hydrogen should be respected as a means of reducing the GHG emissions of hydrogen production regardless of other prior use of the RNG.
GREET Model Certainty
Because the amount of the credit depends upon the carbon intensity of the production process, there has been considerable focus on the rules that would be applied to determine the lifecycle GHG emissions for the hydrogen production method used. Section 45V is “technology-agnostic” in that it does not specify the nature of the technology that must be used to produce the clean hydrogen, requiring only that lifecycle GHG emissions be measured “well-to-gate” as determined under the Greenhouse gases, Regulated Emissions, and Energy use in Transportation (“GREET”) model developed by the Argonne National Laboratory. Simultaneously with the release of the proposed regulations, the DOE released a new model (“45VH2-GREET 2023”) for determining the lifecycle emissions of hydrogen production through a variety of pathways along with a manual as to use of the model (the manual is available here and the model is downloadable here).
However, the GREET model is subject to change and hydrogen producers have been concerned that the model could change, causing a project developed when the model indicated credit availability to no longer qualify under the changed the model. The final regulations address this concern by allowing hydrogen producers to rely on the version of the GREET model in effect at the time that the hydrogen facility began construction for the lifetime of the facility’s eligibility for the credit. Thus, even if the model is subsequently changed in such a manner that the hydrogen producer would no longer qualify for the credit, the change would not impact a producer that began construction while the model in effect indicated credit availability.
Today’s regulation package consists of over 379 pages of information. We are continuing to study the regulations and will soon provide a more detailed discussion of the regulations in a follow-up alert.
Our Energy Tax Incentives practice group continues to monitor the Inflation Reduction Act guidance initiatives from the IRS and Treasury and will provide further updates as guidance is released. In the meantime, Baker Botts would be pleased to assist you in your analysis of clean hydrogen incentives and other clean energy tax incentive matters.
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