On January 3, 2025, the US Department of the Treasury released final Treasury regulations applicable to the hydrogen production tax credit under Section 45V and the investment tax credit for hydrogen production facilities under Section 48(a)(15) (together, the Hydrogen Tax Credits). The Hydrogen Tax Credits, passed as part of the Inflation Reduction Act of 2022, incentivize the production of low-carbon hydrogen.
The amount of the tax credits range depending on the lifecycle greenhouse gas (GHG) emissions rate of the production process utilized. Proposed Treasury regulations for the Hydrogen Tax Credits released in December 2023 (the Proposed Regulations) generated more than 30,000 comment submissions from taxpayers in response.
The Final Regulations make material changes, which we summarize at a high level below (for background and context, please see our prior writings on the Proposed Regulations here and here):
The Three Pillars Generally: The Final Regulations retain a relatively strict form of the so-called “three pillars” approach for tracking the energy sources of hydrogen production facilities using electricity to produce hydrogen, accomplished through a book-and-claim system using energy attribute certificates (EACs). This approach is meant to address the concern over “induced” GHG emissions resulting from the diversion of low-GHG resources to hydrogen projects. Notably, the Final Regulations do not provide for any grandfathering exception for facilities based on “beginning of construction” or “placed in service” dates.
First Pillar – Incrementality: The Final Regulations add certain exceptions to the requirement that electrical power used to produce hydrogen must be from new generation sources. Renewable power generated in states with certain emissions-reduction standards need not be from new facilities. Power from a facility that has added carbon capture and sequestration in the past 36 months may be considered incremental. Nuclear reactors that successfully demonstrate that they are at risk for retirement and dependent on hydrogen production to remain in operation may qualify as incremental up to a maximum of 200 megawatts.
Second Pillar – Temporal Matching: The Final Regulations extend the “yearly matching” transition rule. Beginning January 1, 2030 (previously 2028), reference power must be generated in the same hour as the power used in hydrogen production.
Third Pillar – Deliverability: Certain limited exceptions were granted to the requirement that electrical power used in hydrogen production be sourced from the same geographic region.
Elimination of First Productive Use Requirement: The Final Regulations eliminate the requirement that renewable natural gas (RNG) originate from the “first productive use” of the relevant methane. Instead, the reduction in emissions from the use of RNG is to be determined based on an assumed “alternative fate” of such gas. Relatedly, the Final Regulations establish a gas book-and-claim system—which includes its own deliverability and temporal matching requirements—for establishing sources of RNG and other gasses used in hydrogen production that are taken into account in a lifecycle GHG rate calculation.
GREET Model Safe Harbor: The Final Regulations allow hydrogen producers to rely on the version of the GREET model in effect at the time that the hydrogen production facility began construction (see our prior discussion for a background on the GREET Model).
With the transition to the Trump administration, the future of the Hydrogen Tax Credits is unclear. A full repeal is possible, as is the expansion of the regime through easing of emissions requirements. The Trump administration has signaled a favorable view of an “all of the above” approach to domestic power production, but also a skepticism regarding the tax credits passed as part of the Inflation Reduction Act.