Hydrogen Tax Credit Rules: Clarity for Startups & Boost for Clean Energy

Hydrogen Tax Credits: U.S. Treasury Finalizes Rules

The potential of hydrogen as a replacement for fossil fuels in sectors like heavy industry and long-distance transport has been widely acknowledged. However, progress has been stalled as companies awaited definitive guidance from the U.S. Treasury regarding substantial tax incentives.

This period of uncertainty concluded today with the Treasury’s announcement of the final regulations for hydrogen producers seeking to qualify for tax credits under section 45V of the Inflation Reduction Act.

“We are pleased to have a conclusive rule established,” stated Beth Deane, Chief Legal Officer at Electric Hydrogen, in an interview with TechCrunch. “Its absence has effectively halted industry advancement.”

Regulations After Two Years of Development

These regulations, developed over a two-year period, offer some concessions compared to initial proposals, providing relief to existing nuclear and fossil fuel power facilities.

The complexity of hydrogen production – with numerous methods available – has resulted in a detailed set of rules. These are designed to prevent producers claiming tax credits from inadvertently increasing pollution levels.

Hydrogen Production Methods and Their Variations

Hydrogen is primarily produced through two main processes: electrolysis, which utilizes electricity to separate water into hydrogen and oxygen, and steam reformation, which employs steam and heat to break down methane, yielding hydrogen and carbon dioxide.

However, each of these methods has several variations. Steam reformation can release carbon dioxide into the atmosphere (creating 'grey hydrogen') or capture and store it ('blue hydrogen'). Electrolyzers can be powered by renewable sources ('green hydrogen') or nuclear energy ('pink hydrogen'). The diverse range of hydrogen production methods is often referred to as the 'hydrogen rainbow'.

Ensuring Emissions Reduction

The core objective of the 45V rules is to guarantee that new hydrogen production does not contribute to increased greenhouse gas emissions on the power grid. The Treasury Department mandates that producers meticulously track the emissions associated with each kilogram of hydrogen throughout its entire lifecycle.

For instance, producers utilizing blue hydrogen must account for potential methane leaks from natural gas pipelines.

Hydrogen producers will be required to procure renewable or clean energy from their respective regions. Furthermore, by 2030, they must demonstrate that this energy was used in hydrogen production within the same hour.

Tax Credit Amounts

Hydrogen production processes with lower lifecycle greenhouse gas emissions will qualify for larger tax credits, reaching up to $3 per kilogram. Considering green hydrogen currently costs between $4.50 and $12 per kilogram (according to BloombergNEF), this maximum credit could make it cost-competitive with hydrogen derived from fossil fuels in certain areas.

Benefits for Existing Power Plants

The revised guidance also benefits existing nuclear and fossil fuel power plants. Previous requirements stipulated that hydrogen producers must source power from new nuclear facilities. Now, existing nuclear plants can supply up to 200 megawatt-hours of electricity.

Additionally, certain fossil fuel plants equipped with recently installed carbon capture technology will now be eligible.

Industry Response and Future Outlook

While the rules are a welcome development, they are not without limitations. Given the diverse interests involved, this outcome is not unexpected.

From Electric Hydrogen’s perspective, Deane expressed a desire for greater flexibility regarding electricity sourcing and the amount of additional clean or renewable energy required.

However, Deane emphasized that the industry’s primary need is stability. “A rule that remains consistent, with potential for future adjustments, is what we seek,” she stated. “We urge the incoming administration to maintain this regulation.”