U.S. Treasury Finalizes Hydrogen Tax Credit: Summary and Analysis of Clarified Rules

In a significant step forward for clean energy, the U.S. Treasury Department and IRS have released the final rules for the Section 45V Clean Hydrogen Production Tax Credit.

Though initially introduced in 2022, the provision has been embroiled in questions from clean energy advocates, investors, and producers alike. The announced clarifications mark the finalization of updates and changes to the regulations.

Section 45V was designed to further the goal of cutting carbon emissions and advancing clean energy technologies. By clarifying key specifications, these revised guidelines provide much-needed support for the hydrogen industry, with a clarified framework for eligibility and compliance.

This credit stands to offer substantial incentives to hydrogen producers, developers, and innovators. With the potential to accelerate the adoption of clean hydrogen across various sectors, this move is a crucial milestone in the United States’ push toward energy sustainability and carbon neutrality.

What Is the Section 45V Clean Hydrogen Production Tax Credit?

The new tax credit opportunity is best understood through its place in the Inflation Reduction Act (IRA) of 2022. The bipartisan act’s goals include “enabling America to tackle the climate crisis, advancing environmental justice, [and] securing America’s position as a world leader in domestic clean energy manufacturing.”

The IRA dedicated billions in funding to investments and incentives for developments in energy efficiency and renewability. The act also raised caps on loan authority, the maximum total lending amount, for multiple programs.

The IRA’s features include:

• $11.7B for new loans supporting clean energy infrastructure
• $100B more in loan authority for existing energy development programs
• $5B in funding for the new Energy Infrastructure Reinvestment (EIR) program (with $250B in loan authority)

According to the Department of Energy (DOE), this amounts to the largest investment in climate and energy in American history.

Section 45V—more commonly known as the Clean Hydrogen Production Tax Credit—is a provision in the IRA that established a 10-year tax incentive for facilities that produce qualifying hydrogen.

This new incentive aligns with the act’s broader goals for domestic clean energy production. The four-tier system would pay participants up to $3/kg of hydrogen produced, with the price depending on production’s lifecycle emissions.

Section 45V was met with excitement by proponents for clean energy and alternative fuel. However, it also raised many questions regarding the proposal’s regulatory language, definitions, and logistics.

After reviewing approximately 30,000 messages and 100 testimonials from members of the public, the Internal Revenue Service (IRS) and U.S. Treasury released clarifications and final rules for Section 45V.

Key Takeaways from the Finalized Rules

Chief areas of the Clean Hydrogen Tax Credit that needed clarification included term definitions, eligibility requirements, financial processes, and methods for tracking and reporting production lifecycle emissions and volume.

The most common point of contention surrounded the vastly different hydrogen production methods. Hydrogen can’t be mined like other natural resources, but it’s available from an ever-increasing list of sources as scientists and engineers continue developing advanced production technologies.

However, hydrogen’s sustainability as a fuel source is largely dependent on its production. Coal gasification and steam methane reforming, for example, both emit large volumes of greenhouse gases (GHGs) while producing hydrogen.

The leading clean alternative is electrolysis, hydrogen production via electric current. That said, this method requires significant electric energy, leading to more nuances in their carbon lifecycles. Using electricity from the power grid is still cleaner than refining coal or fossil fuels, but not as clean as using electricity generated by wind or solar power. In other words, not all hydrogen is equal.

These concerns, and many others, were heard by the IRS and Treasury Department, which then collaborated with the Department of Energy (DOE) and Environmental Protection Agency (EPA) to finalize Section 45V’s framework.

Here are the main regulatory specifications that were added or changed:

• Pathways are specified for incremental and hourly pricing for carbon produced through methane, electricity, nuclear, and natural renewable energy.
• To qualify as clean hydrogen, production lifecycle emissions per kilogram must be no greater than 4 kilograms of carbon dioxide equivalents (CO2e).
• Tracking and measurement standards are established for hydrogen production to ensure compliance with emission standards, with technical safeguards clarified.
• Deliverability requirements are broadened to specifically include facilities that generate electricity in the same grid region as a hydrogen plant, given the facility demonstrates the electricity-to-plant pathway.
• Lifecycle analysis (LCA) of GHGs must include direct and significant indirect emissions.
• All hydrogen producers may conduct LCA using the GREET model that was most recent at the start of facility construction for the duration of the credit—esuring investment certainty.
• To qualify for the full credit benefit, production projects must meet “prevailing wage and apprenticeship standards” to ensure workers benefit from the clean energy economy.
• Qualifying clean hydrogen falls into four credit tiers, with the lowest-emitting production methods receiving the largest credit.

Industry Impacts and Market Response

The impact of these clarifications began almost immediately.

Within days, shares soared among companies heavily invested in renewable energy technology, including Nikola, Plug Power, and Constellation Energy.

Representatives from the Clean Air Task Force (CATF) largely applauded the new rules for adding much-needed specificity and enabling diverse production methods while ensuring accountability and due diligence.

Criticisms were noted, too. Some pointed out that the Treasury delayed certain transition deadlines and could have established stronger safeguards to ensure accountability for emissions and upstream leakage.

The long-term effects of this regulatory roadmap won’t be known for years, but that doesn’t stop tech innovators like Bosch from advancing research efforts in hydrogen-powered vehicles.

Implications for the Future of Clean Hydrogen

Section 45V is a powerful incentive for private sector investments in hydrogen fuel. The hydrogen industry’s biggest barrier to date is its limited infrastructural development. The lack of hydrogen fueling stations and pipelines has held the alternative fuel from faster development.

The hydrogen production tax credit has the potential to accelerate national adoption of the alternative fuel source along with innovations in its technology.

One possible application of Section 45V funds is hydrogen hubs—combination production, storage, and fueling facilities. Another promising application comes from the Green Port movement to decarbonize international shipping.

New specifications for nuclear integration in the hydrogen production process could even promote the development of more tri-gen power plants, one of the most efficient designs in the energy industry.

Hydrogen energy is a vital component of virtually every roadmap to carbon neutrality. Funding and incentivizing this sector positions the U.S. as a leader in clean hydrogen energy.

How FASTECH Supports Clean Hydrogen Development

A strong infrastructural foundation is essential for the innovations in hydrogen technology to see wider use and reach their fullest potential.

FASTECH plays a leading role in design, construction, and maintenance for the hydrogen energy sector through partnerships with Toyota, Shell, FuelCell Energy, and more. From fueling station development to preventative inspections, FASTECH offers end-to-end alternative energy expertise.

New regulations have paved the way for advanced hydrogen development. Energy providers stand to benefit from investing in hydrogen now more than ever. Capitalize on the opportunity and start earning your Clean Hydrogen Production Tax Credit.

Discuss your hydrogen ambitions with a FASTECH expert today.