On the doorstep of a second Trump presidency that could cast doubt on their future, the Biden U.S. Treasury Department released final rules for the section 45V Clean Hydrogen Production Tax Credit established by the Inflation Reduction Act (IRA).
The tax credit aims to jumpstart the U.S. clean hydrogen industry, providing clarity and investment certainty for project developers. The credit offers a tiered approach, with the smallest qualified incentive available to projects with an lifecycle emissions intensity of less than 4 kg CO2e/kg H2.
If you remember anything about the 45V tax credit rules when they were first proposed, you know that not everyone would be perfectly happy with the final result.
The primary debate was which way Treasury would fall on the issue of temporal matching.
Under hourly matching emissions accounting, hydrogen producers would have to match their hourly consumption of grid power used for electrolysis with the hourly power generation from a new renewable facility. Electrolysis, which produces hydrogen by splitting water into hydrogen and oxygen, is a very electricity-intensive process.
Groups like the Clean Air Task Force have argued that hourly matching provides the highest degree of confidence that the electricity demand from the electrolyzer isn’t causing increased emissions in the power sector.
Under a less restrictive “annual matching” scenario, a hydrogen producer would sum up the amount of electricity to power the electrolyzer over a year-long period and demonstrate that the total was offset with an equivalent amount of clean generation going to the grid.
Groups like the American Council on Renewable Energy have lobbied for annual matching, at least at the beginning, to avoid impeding the growth of the hydrogen industry. Hourly matching emissions accounting would then be phased in over the coming years.
In the final rules, Treasury chose the less restrictive approach. Hydrogen producers can match electricity usage and generation on an annual basis until 2030 (two additional rules relative to the proposed rules), after which hourly matching is required.
Beginning in 2030, producers can still qualify for the credit if they miss hourly matches a few times, as long as the annual emissions remain under 45V’s limit of 4 kg of CO2e per kg.
In a statement released Friday, the Clean Air task Force said it was “disappointed in Treasury’s decision to push hourly matching from 2028 to 2030, and we worry that this could cause at least some increase in emissions in the short term. Still, we will continue working to ensure that 45V is implemented in a way that allows the clean hydrogen market to grow while protecting against significant indirect emissions from increased hydrogen production.”
The final Treasury rules re-affirmed that electricity sourced within the same grid region as the hydrogen production facility qualifies for the tax credit, with certain clarifications, including clearer paths for inter-region electricity transfers.
A nod to nuclear power and carbon capture
As in the proposed rules, the final rules define electricity generation as incremental if the generator begins commercial operations within 36 months of the hydrogen facility being placed in service, or to the extent a plant increases its capacity within that period.
The final rules expand what qualifies as “incremental” electricity.
This includes added provisions for nuclear plants at risk of retirement, which can now count up to 200 MW as incremental if tied to hydrogen projects. This reflects that some nuclear reactors face a higher risk of retirement due to specific economic factors. If a nuclear reactor’s retirement is prevented, the increased demand from hydrogen production will not result in additional emissions.
“We are pleased to see that the U.S. 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, the largest producer of nuclear power in the U.S.
Constellation said it was carefully reviewing the impact of the final rules on the feasibility of its proposed clean hydrogen project at the LaSalle Clean Energy Center and the company’s role in the MachH2 regional hydrogen hub.
Among other changes in the final rules, clean power from states with strong emissions caps, like Washington state and California, is now considered incremental. Other states may qualify if they adopt similar policies.
Finally, electricity from power plants with carbon capture and sequestration (CCS) retrofits within 36 months before a hydrogen facility’s operation will now be considered incremental.
A hazy future
The Treasury’s guidance on clean hydrogen production has been long-awaited. The tax credit was born out of the IRA, which was signed into law back in 2022.
Overall, the Biden Administration has been supportive of clean hydrogen, which could help decarbonize difficult-to-abate sectors of the U.S. economy, such as heavy manufacturing, chemical production and transportation. In certain power generation use cases, hydrogen can be combusted in natural gas-fired engines or turbines for electricity.
In 2023, the administration announced $7 billion in funding for seven clean hydrogen hubs around the U.S., aimed at spurring billions more in private investment.
However, the trajectory of the U.S. clean hydrogen industry, with President-Elect Donald Trump taking office in less than three weeks, is not clear.
Trump was critical of hydrogen while campaigning for office. As we’ve reported, a Republican-majority Congress could repeal or remove at least some parts of the IRA.
