US Releases Proposed Route to Hydrogen Production Tax Credit

Hydrogen producers hoping to claim tax credits offered in the Inflation Reduction Act (IRA) received long-awaited guidance from the U.S. Treasury Department on Dec. 22 as the wait continues for other missing pieces.

The proposed rules for the hydrogen production tax credit (45V), detailed in a 128-page document were met with an uneven response from industry associations, hydrogen producers and politicians.

Hydrogen producers meeting certain prevailing wage and registered apprenticeship requirements could qualify for a credit ranging from $0.60 per kilogram (kg) of hydrogen produced to $3/kg, depending on the lifecycle greenhouse-gas (GHG) emissions from hydrogen production, including its power source.

However, to capture the credit available for 10 years for facilities that start construction before 2033, hydrogen producers:

• Must have used electricity from a clean power facility built within three years of a hydrogen plant entering service;
• Produce clean power from the same region as the hydrogen producer; and
• Provide proof of purchase of clean power, which comes in the form of an energy attribute certificate (EAC), that must be matched to production on an hourly basis, “meaning that the claimed generation must occur within the same hour that the electrolyzer claiming the credit is operating,” the Treasury Department said, noting the proposed rules include a transition to allow annual matching until 2028.

The proposed requirements are considered the three pillars to building a clean hydrogen industry.

“Incentives in the Inflation Reduction Act are helping to scale production of low-carbon fuels like hydrogen and cut emissions from heavy industry, a difficult-to-transition sector of our economy,” U.S. Secretary of the Treasury Janet L. Yellen said in a press release.

Seeking feedback

Backers are counting on hydrogen to help decarbonize a fossil-fuel dependent society. Hydrogen’s flexibility and its near-zero GHG emissions make it one of the must-haves to hit net-zero targets. Hydrogen, predominately used today in oil refining and ammonia production, has the potential to decarbonize high-emissions sectors such as steel, maritime and aviation; power fuel cells; generate electricity; store energy; and serve as a transportation fuel—displacing carbon-emitting fossil fuels.

While most demand is met today by hydrogen produced with natural gas as feedstock, hydrogen supplies with low carbon intensity are expected to rise. The ability to capture tax credits factor into the economic viability of some projects, including those involved with hydrogen hubs lined up to receive billions of dollars of funding from the U.S. Department of Energy.

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Feedback is still being sought on some aspects of the proposed rules. This includes how generation from existing clean power generators can meet the new clean power rule and how to consider transmission of clean power between regions—which is one of the ultimate goals of the U.S. hydrogen hubs. Clarity is also needed on how to qualify hydrogen production from renewable natural gas and fugitive methane such as coalbed methane.

The industry is also awaiting guidance on the 45Q carbon capture tax credit.

“The safeguards outlined in the proposed rules are critical to preventing the credit from subsidizing hydrogen production with higher lifecycle greenhouse gas emissions than allowed by the statute,” the Treasury Department said.

Leaked details of draft guidance from the Treasury Department were reported earlier this month. Citing anonymous sources, media reports claimed the Treasury Department would issue draft tax credit guidance backed by climate advocates instead of fossil fuel producers. Electrolytic hydrogen, or green hydrogen, produces hydrogen with electricity made from renewable energy resources, while blue hydrogen utilizes natural gas as feedstock with carbon capture and storage

Mixed reactions

The proposed rules were met with mixed reactions on Dec. 22.

U.S. Sen. Joe Manchin, chairman of the Senate Energy and Natural Resources Committee, said the proposal imposes rules that are not included in the IRA and makes it difficult to jumpstart the hydrogen market, as it favors solar and wind.

“For an administration that wants to reduce emissions and fight climate change, it makes no sense to kneecap the hydrogen market before it can even begin,” Manchin said. “Hydrogen has the potential to be the new horsepower of our country and will strengthen our energy security so we are less dependent on foreign adversaries, and crucially, it can be produced carbon-free.”

A so-called lack of flexibility in the proposed rule was of concern to the American Council of Renewable Energy (ACORE), which took issue with hourly matching.

“As our analysis with E3 demonstrated, an annual match accounting approach could help unleash America’s nascent clean hydrogen industry and accelerate our energy transition,” ACORE CEO Ray Long said. “ACORE will continue to work with the Administration throughout this comment period, and we remain hopeful the final rule ultimately released has the needed flexibility to support the scale and role that hydrogen can play in achieving our decarbonization goals.”

Others emphasized that strong rules are needed to reduce emissions.

“As a project developer with laser focus on the promise of renewables-based hydrogen production in the U.S. and globally, stringent rules that channel maximum benefit to projects with the strongest environmental credentials will pave the way for a vibrant and successful new green hydrogen industry,” CWP Global Co-CEO Alex Hewitt said. “Put simply, we can’t get to net zero without it.”

Longtime hydrogen producer Air Products applauded what CEO Seifi Ghasemi called the Biden administration’s “strong three pillar hydrogen tax credit proposed rule.”

“Air Products has made a more than $15 billion commitment to clean hydrogen projects to decarbonize the heavy-duty transportation and industrial sectors of the economy, including in-progress U.S.-based projects that will deliver real and verifiable emissions reductions from day one,” Ghasemi said.

He said the proposed rule will be “essential to delivering real emissions reductions, creating the stimulus for broader investments across the hydrogen value chain and cementing the U.S.’ global climate leadership.”

The proposed rules will be open for public comment for 60 days after they are published in the Federal Register, scheduled for Dec. 26. The Treasury Department said it and the IRS will consider comments before issuing final rules.