After reviewing over 30,000 comments and a year of fine-tuning, the IRS issued final regs implementing the Code Sec. 45V Clean Hydrogen Production Credit with significant revisions to offer more flexibility than the proposed rules and incorporate additional energy sources. (TD 10023, 1/3/2025)
Background.
The Section 45V credit as enacted by the Inflation Reduction Act (P.L. 117-169) incentivizes the production of clean hydrogen by providing an income tax credit at a base rate of $0.60 per kilogram produced at a qualified facility beginning when the facility is placed in service. Generally, the credit amount increases across multiple tiers the less emissions are created during the hydrogen production process.
As with other Inflation Reduction Act energy provisions, taxpayers who satisfy prevailing wage and apprenticeship requirements are eligible for a higher credit. For the Clean Hydrogen Production Credit, the maximum credit is $3 per kilogram of qualified clean hydrogen.
The IRS issued proposed regs in December 2023 establishing definitions and guidelines for calculating and claiming the Section 45V credit. Additionally, the regs provided guidance on how taxpayers may request an emissions value from the Department of Energy (DOE) used to petition the Treasury Department for a provisional emissions rate (PER).
Final regs released January 3 will be published in the Federal Register on January 10 and will take effect on that date. The final regs set rules for determining lifecycle greenhouse gas emissions rates; petitioning for PERs; verifying production and sale or use of clean hydrogen; modifying or retrofitting existing qualified facilities; and electing to treat part of a specified facility as energy property.
Electricity.
For hydrogen produced using electricity, the regs give much consideration the source of electricity. “Green” hydrogen is made from renewables and “pink” hydrogen is made using nuclear. Despite the source, however, general rules apply for electric generation.
In accordance with lifecycle greenhouse gas emissions standards, for example, taxpayers must meet certain temporal matching, deliverability, and incrementality requirements to use Energy Attribute Certificates (EACs).
As previously proposed, the regs provide that electric power generation is incremental if an applicable generator begins commercial operations within 36 months after a qualified clean hydrogen facility is placed in service. But the final regs add more pathways to satisfy the incrementality requirement.
First, electricity produced by nuclear power plants deemed at risk of retirement or codependent on hydrogen investment will be considered incremental, up to 200 megawatts per qualifying reactor.
Next, electricity produced in states with eligible criteria for capping greenhouse gas emissions and clean electricity standards may meet the incremental requirement. So far, California and Washington have such policies.
Finally, the regs clarify that generators that have added carbon capture and sequestration up to 36 months before the hydrogen facility is placed in service can produce incremental electricity.
The regs add two years to the time-matching transition window for the phase-in to hourly matching from annual matching. Under the final rules, hourly matching is not required until 2030, but the regs allow for an hourly accounting option in which producers can determine electric lifecycle emissions on an hour-by-hour basis.
Other energy sources.
Based on feedback on the proposed regs from industry stakeholders, the final regs clear up how taxpayers that use natural gas and methane to produce “blue” hydrogen at qualified facilities can determine their eligibility to claim the Section 45V credit. Specific details are provided for alternatives like renewable natural gas and coal mine methane.
The IRS advised taxpayers to keep an eye out for an updated version of 45VH2-GREET from the DOE. Fully titled Greenhouse gases, Regulated Emissions, and Energy use in Technologies, GREET is a model adopted by Treasury that “assesses a range of life cycle energy, emissions, and environmental impact challenges” prevalent in research, development, and deployment projects and related regulations. 45VH2 is specific to the Section 45V credit.
According to a Treasury press release issued alongside the final regs, the next update to 45VH2-GREET will provide default national values that the regs will incorporate to “enhance the accuracy of upstream methane leakage rates used in determining the credit value.”
Future updates to 45VH2-GREET “will incorporate project-specific upstream methane leakage rates, conditional on the availability of appropriate and verified data” from the Environmental Protection Agency’s Greenhouse Gas Reporting Program, Treasury added.
Other alternative sources the regs provide lifecycle greenhouse gas emission calculation rules for include wastewater, animal manure, and landfill gas.
The final regs scrap the “first productive use” requirement from the proposed version to avoid administrative challenges, but taxpayers must still conduct a lifecycle analysis of each hydrogen production process used. Emission intensities are tracked separately.
“Clean hydrogen can play a critical role decarbonizing multiple sectors across our economy, from industry to transportation, from energy storage to much more,” said Deputy Energy Secretary David Turk. “The final rules announced today set us on a path to accelerate deployment of clean hydrogen leading to new economic opportunities all across the country.”
For more on the calculation of the Clean Hydrogen Production credit, see Checkpoint’s Federal Tax Coordinator ¶L-18501.
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