Treasury Department Releases Final Rules for Section 45V Clean Hydrogen Tax Credit

Highlights

• U.S. Department of the Treasury has released the long-awaited final rules for the Section 45V clean hydrogen production tax credit. They become effective Jan. 10, 2025

• The final rules reflect a careful balancing act between the need to spur investment in emerging hydrogen technologies and preserving high standards for environmental performance

• Whether the changes are too little too late to satisfy stakeholders and how the new administration will react to them remains to be seen

On Jan. 3, 2025, the U.S. Department of the Treasury and the Internal Revenue Service released the long-awaited final rules for the Section 45V clean hydrogen production tax credit. These rules clarify eligibility criteria and compliance requirements for hydrogen producers looking to claim a credit of up to $3 per kilogram of clean hydrogen.

The regulations will be published in the Federal Register on Jan. 10, 2025 and become effective immediately. They reflect a concerted effort to balance environmental integrity with industry feasibility, drawing on stakeholder feedback and aligning with broader climate goals. Whether the changes are too little too late and how the new administration will react to them remains to be seen.

Key Regulatory Framework Retained: Incrementality, Deliverability, and Temporal Matching

The Section 45V credit aims to foster clean hydrogen production while mitigating greenhouse gas (GHG) emissions across the supply chain. The proposed regulations were built around three core pillars - incrementality, deliverability, and temporal matching - all of which have been refined in response to public and industry input.

1. Incrementality requires hydrogen production facilities to demonstrate that the electricity they use originates from sources that would not have otherwise been deployed. Incrementality ensures that real, additional capacity is brought online to serve hydrogen producers and achieve genuine GHG emissions reductions. The final regulations include the following alternatives ways to meet this requirement:

• New Electricity Sources: The original qualification was retained as proposed: electricity sources that begin commercial operations within 36 months of the hydrogen facility's commissioning qualify for credit.
• Inclusion of Nuclear Power: Following extensive comment on the original proposal to exclude it, nuclear power is now an eligible source, with a cap of 200 megawatt-hours per operating hour per reactor.
• Carbon Capture and Sequestration (CCS): Electricity from generators that implement CCS technologies within 36 months before the hydrogen facility's commissioning can qualify.

Notwithstanding substantial comments, the Treasury Department declined to create exemptions for hydropower, emphasizing the need to maintain strict standards for incremental power generation.

2. Deliverability ensures that the electricity used is physically deliverable to the hydrogen production facility.

• In-Grid Electricity: The final rules affirm the proposal that electricity generated within the same grid region automatically meets the requirement.
• Cross-Region Transfers: The final regulations add clear pathways for demonstrating the physical delivery of electricity from other regions, enhancing operational flexibility.

By establishing clearer protocols for proving physical delivery, the final rules encourage a broader geographic distribution of hydrogen projects and ensures that producers in remote areas can still access clean energy supplies.

3. Temporal Matching aligns hydrogen production with the availability of clean electricity and helps minimize indirect emissions.

• Extended Transition Period: The final rules extend allowance of annual matching by two years, allowing facilities to follow these rules until 2030.
• Hourly Matching After 2030: Starting in 2030, hourly matching becomes mandatory, aligning U.S. regulations with European Union standards and mitigating indirect emissions.

The extended transition offers producers time to adopt the necessary technologies, while the final shift to hourly matching ensures a tighter correlation between hydrogen production and clean energy use.

Broadened Eligibility for Hydrogen Sources

The final regulations also expand hydrogen production methods eligible for the credit.

• Methane Reforming with CCS: Details were added confirming how hydrogen produced using methane reforming, coupled with carbon capture technologies ("blue" hydrogen), are eligible under the credit.
• Natural Gas Alternatives: Hydrogen from renewable natural gas and coal mine methane is now eligible. The final rules detail the information that natural gas alternatives systems will need to provide in order to begin using book and claim systems in 2027. Methodologies for calculating lifecycle GHG emissions ensure rigorous accounting for biogas and fugitive methane sources (e.g., wastewater, animal manure, landfill gas).

By recognizing a variety of feedstocks, the rules encourage innovation and diverse clean hydrogen pathways, especially where local resources (e.g., landfills, agricultural operations) can be tapped.

Expanded Flexibilities for Industry Transition

In response to stakeholder feedback, the new rules introduce several measures to support industry growth without compromising environmental objectives:

• Additional CCS Pathways: The final regulations allow hydrogen production facilities to leverage CCS technologies implemented within a specific timeframe, expanding viable options for emissions reductions.
• Grid Integration: By clarifying pathways for regional electricity transfers, the rules promote grid interoperability, crucial for scaling hydrogen production in diverse geographic settings.
• Life Cycle Emissions Adjustments: Broadened methodologies for calculating life cycle GHG emissions support innovations in methane capture and renewable gas use without compromising the overarching goal of reducing emissions.

These expanded flexibilities help producers adapt to evolving technology and regional energy infrastructure, making it easier for both established and emerging hydrogen producers to comply.

Clarification of Life Cycle Boundaries

Responding to concerns about ambiguous definitions, the final regulations provide greater clarity on life cycle boundaries for hydrogen production:

• Comprehensive System Definitions: The rules now define the start and end points of the hydrogen life cycle with greater specificity, including production, transportation, and any intermediate processing steps.
• Refined GREET Methodology: The final rule incorporates updates to the GREET and 45VH2-GREET models, ensuring consistent metrics for established and emerging feedstocks (e.g., renewable natural gas, coal mine methane).
• Regional Variations: Producers can adjust life cycle calculations based on local energy mixes, ensuring that those in cleaner grids are not penalized and that those in carbon-intensive areas have appropriate incentives to decarbonize.

These clarifications keep the Section 45V credit science based, transparent, and adaptable to a rapidly evolving hydrogen marketplace.

Investment Certainty Through the 45VH2-GREET Model

To enhance investment certainty, the final rules permit hydrogen producers to use the version of the 45VH2-GREET model that is current at the time their facility begins construction, and to rely on that version for the entire 10-year tax credit period. This provision ensures that producers are not subject to unexpected changes to lifecycle emissions calculations over the 10-year credit period, fostering stability and predictability for long-term projects.

Stakeholder Reactions

Initial stakeholder reactions have been mixed, highlighting the complexity of shaping regulations that satisfy both environmental and industry priorities. Most praised the added clarity and flexibility of the final rules and expressed some level of optimism that it will help provide a pathway to build a market for and cut climate pollution through hydrogen production.

Industry lauded the addition of nuclear as an electricity source and methane and natural gas blue hydrogen alternatives as eligible for the credit. However, industry is also reportedly expressing concerns that the Treasury Department had not gone far enough to attract the investments needed to launch the hydrogen industry, and is suggesting that they will look to the new administration "to improve the 45V rules to ensure the industry will attract the investments necessary to scale the hydrogen economy and help the U.S. lead the world in clean manufacturing."

While environmental advocates were relieved that the changes did not go further and the three pillars were retained as the core criteria for credit eligibility, they expressed concerns about some of the new additions and exemptions and highlighted the need for heightened vigilance over fossil fuel based blue hydrogen projects.

Takeaways

The Treasury Department's final rules reflect an effort to strike a balance that is "just right" for all stakeholders: spurring investment in emerging hydrogen technologies without compromising environmental goals. By retaining the core pillars from the proposed rules - incrementality, deliverability, and temporal matching - yet expanding eligibility to include nuclear, renewable natural gas, and other alternatives, the Treasury signals its commitment to scalable industry growth while keeping emissions reductions front and center.

Though the new rules aim to address stakeholder tensions, the call for either tighter controls or expanded leeway may persist. With a new approach to energy policy on the horizon under the new administration, it is far from certain that these final provisions will stave off legal challenges or renewed lobbying efforts to reshape the rules.

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