Alert

The IRS and the Department of the Treasury released final regulations concerning the credit for the production of clean hydrogen, established by Internal Revenue Code (IRC) Section 45V, part of the Inflation Reduction Act of 2022, on January 3, 2025.

The regulations provide technical clarity for clean hydrogen producers.

Credit to Produce Clean Hydrogen

IRC Section 45V establishes an income tax credit equal to the number of kilograms of qualified clean hydrogen produced by a taxpayer at a qualified clean hydrogen production facility during the tax year multiplied by a variable dollar rate ranging from $0.12 to $0.60 per kilogram before accounting for inflation adjustments.

Credit Amount per Hydrogen Kilogram

For purposes of the credit, qualified clean hydrogen means hydrogen produced in the United States through a process that results in a lifecycle greenhouse gas emissions rate of not greater than four kilograms of carbon dioxide equivalent (CO2e) per kilogram of hydrogen.

A qualified clean hydrogen production facility means a facility that’s:

• Owned by the taxpayer
• Produces qualified clean hydrogen
• Construction begins before January 1, 2033

Final Regulation Updates for the Section 45V Credit

The final regulations provide key clarifications in three distinct areas:

• How taxpayers might meet the three pillar requirements of energy attribute certificates (EACs)
• Which greenhouse gas (GHG) emissions models taxpayers may use to determine their eligibility for the credit
• What fits within the scope of a qualified facility and how to measure the greenhouse gas emissions of the facility

Three Pillars and Energy Attribute Certificates

When the proposed regulations for the credit were issued, many stakeholders hoped the Treasury would remove the required use of EACs and the related three pillar requirements. Under this approach, taxpayers are required to acquire and retire EACs that meet the three pillar requirements of incrementality, temporal matching, and deliverability.

However, the final regulations retain these requirements. From advice provided to the Treasury by the Department of Energy (DOE) and the Environmental Protection Agency (EPA), these requirements have been retained owing to their importance in ensuring hydrogen producers’ electricity use can be reasonably deemed to reflect the emissions associated with the specific generators from which the EACs were purchased and retired.

If hydrogen producers rely on EACs without attributes that meet these three criteria, there’s a significant risk hydrogen production would significantly increase direct and indirect greenhouse gas emissions beyond the levels required to qualify for the credit.

While the three pillars have been retained, the final regulations have provided additional pathways and important items of clarification for taxpayers to meet the requirements of each of the three pillars.

Incrementality

The incrementality pillar requires that any electricity used to produce the clean hydrogen comes from new, clean sources rather than from existing sources. The final regulations provide three additional pathways to meet the Incrementality requirement.

• Carbon Capture and Sequestration (CCS). Electricity sourced from a facility that has been in operation for more than 36 months may be deemed incremental. The electricity may meet the incrementality requirement if the source production facility utilizes CCS equipment which would qualify for the credit provided by IRC Section 45Q. The CCS equipment must also have been placed in service within the immediately preceding 36-month period.
• Qualifying States. Taxpayers can treat electricity sourced from facilities located in a qualifying state as incremental. A qualifying state is one that has a qualifying electricity decarbonization standard and a qualifying GHG cap program that ensures emissions will not rise with the additional electricity use. At the time the final regulations were issued, only Washington State and California would meet the requirements to be a qualifying state.
• Qualifying Nuclear Reactors. Up to 200 megawatt hours (MWh) of electricity per operating hour sourced from a qualifying nuclear reactor will be considered incremental, regardless of the operating age of that reactor. A qualifying nuclear reactor is a plant located in an unregulated market or a single-unit plant that has met the financial test promulgated under IRC Section 45U for any two years between 2017 and 2021; and either has a behind-the-meter hydrogen production facility or has a 10-year written, binding offtake contract.

Temporality

The temporal matching pillar requires taxpayers to match clean hydrogen power produced with clean power generation. The proposed regulations provided a transition rule that allowed matching to be done on an annual basis until 2028, when it would be required that matching be done on an hourly basis.

However, the final regulations have extended the period during which taxpayers may use the annual matching method. As adopted, taxpayers will be required to match electricity use with hydrogen production on an hourly basis beginning in 2030.

If a taxpayer chooses to acquire and retire qualifying EACs rather than relying on the average annual lifecycle GHGs for electricity for its region, as reflected in the 45VH2-GREET model, then hourly matching must be used.

However, the use of hourly matching also requires that the average annual lifecycle GHG emissions rate for the taxpayer’s process that taxable year isn’t greater than four kilograms of CO2e for all hydrogen produced.

Once selected, the taxpayer must account for the emissions for each hour of the year. The taxpayer can do so through retiring qualified EACs representing energy generated in the same hour. If no EACs are available for certain hours, the taxpayer can use the annual average GHGs for electricity for its region as reflected in the 45VH2-GREET model.

The final regulations also allow a taxpayer to make use of energy storage—such as batteries—to shift its temporal profile if both of the following are true:

• The electricity represented by an EAC is discharged from a storage system in the same hour that the taxpayer’s qualified clean hydrogen production facility uses electricity to produce hydrogen
• The storage system is in the same region as both the qualified clean hydrogen production facility and the facility generating the stored electricity

Put simply, the stored electricity used must also meet the three pillars to meet the EAC requirements of the credit.

Deliverability

The deliverability pillar provides that taxpayers must source their clean electricity generation from a power producer in the same region as the qualified clean hydrogen production facility.

The final regulations define region as a region contained in the DOE’s October 30, 2023, National Transmission Needs Study. The final regulations add a table of balancing authorities and their corresponding regions.

An electricity-generating source and qualified clean hydrogen production facility are considered in the same region if both are electrically interconnected to one or more balancing authorities located in the same region, as identified in the table. Interregional delivery is permitted under certain circumstances.

Greenhouse Gas Emissions Modeling

The final regulations provide that taxpayers determine the lifecycle GHG emissions rate in kilograms of CO2e per kilogram of hydrogen via an analysis of the hydrogen production processes utilized by the facility and the primary feedstocks used. If a facility uses multiple processes, taxpayers determine the kilograms of CO2e by taking the weighted average of the lifecycle GHG emissions of each process used, including feedstock.

The final regulations adopt the 45VH2-GREET model (the model) as the only model when determining the well-to-gate GHG emissions for purposes of the credit. The model has been specifically tailored to the credit, with an emphasis on making it user-friendly while also reducing opportunities for abuse in taxpayer calculations of a facility’s well-to-gate GHG emissions.

The final regulations clarify that the calculation of lifecycle GHG emissions includes lifecycle GHG emissions from any purification the taxpayer knows or has reason to know is necessary for the hydrogen gas stream to be productively used or sold for productive use. These purification emissions are looped into the calculation, whether planned as part of the well-to-gate facility or farther down the distribution stream.

The final regulations further clarify that emissions from the liquefaction, storage, or transportation of hydrogen are considered beyond the well-to-gate boundary and are excluded from the calculation.

Additionally, the final regulations provide an irrevocable election for taxpayers to treat the most recently published version of the model that was publicly available on the date when construction of the qualified clean hydrogen facility began as the applicable model for the full 10-year credit period. Importantly, this means that taxpayers making this election can lock in the version of the model used when the initial investment analysis and decision were made.

If a taxpayer’s production process isn’t included in the current version of the model, the taxpayer may request a provisional emissions rate (PER) from the Secretary.

If a PER is provided before construction has begun, taxpayers may elect to use the PER value to calculate the credit value for the entire credit period. Otherwise, if a taxpayer obtained a PER after construction began, the model must be used to measure the lifecycle GHGs of the facility and process.

Once the pertinent process is included in the model, taxpayers may elect to apply the first version of the model that includes the process to each of the remaining taxable years in the credit period.

Facility Scope

The final regulations clarify the scope of a hydrogen production facility is the single production line that results in the lifecycle GHG emissions rate used to determine the credit. This may include any carbon capture equipment or purification equipment located at the facility. This means that a hydrogen production facility doesn’t include:

• Equipment used to produce electricity or feedstock—including production, purification, recovery, transportation, or transmission
• Other equipment at the facility unrelated to the production of hydrogen
• Any equipment downstream of the point of production

Effective Dates for the Clean Hydrogen Production Final Regulations

The final regulations are intended to be effective upon publication in the Federal Register and apply to taxable years beginning after December 26, 2023. Taxpayers can still rely on the final regulations for earlier taxable years beginning after December 31, 2022, and on or before December 26, 2023, provided the final regulations are applied in their entirety and consistently.

We’re Here to Help

To learn more about the final regulations and implications for your business, contact your Moss Adams professional.

Additional Resources

• Tax Credits & Incentives Services