IRS Releases Final Section 45V Clean Hydrogen Production Tax Regulations
January 9, 2025
The Clean Hydrogen Production Tax Credit under Section 45V was introduced by the Inflation Reduction Act of 2022 (the “IRA”) to promote the production of low-carbon hydrogen in the United States as part of the Biden Administration’s initiative to transition the United States towards green energy resources.1 The credit provides up to US$3 of credits per kilogram of eligible clean hydrogen generated by a qualified clean hydrogen production facility that began construction before 2033 for a 10-year period after such facility is placed in service.2 The Treasury Department and the IRS issued proposed regulations in December 2023 (the “Proposed Regulations”) to clarify the eligibility requirements to claim the credit, the certification processes and the calculation of credit amounts. The Proposed Regulations spurred significant taxpayer comments, particularly regarding the standards for determining whether hydrogen that uses electricity generated from various technologies for its production is eligible for the credit. On January 3, 2025, the Treasury Department and the IRS released final regulations (the “Final Regulations”) that generally adopt the framework from the Proposed Regulations but that address certain industry requests for additional clarity and certainty on particular issues. The Final Regulations add further guidelines that both shed light on and loosen the requirements to claim the credit. Most notably, the Final Regulations add the following to the Proposed Regulations:
Energy Attribute Certificates
- The amount of credit a taxpayer may claim depends on the amount of greenhouse gases (“GHGs”) released throughout the hydrogen production process, including GHGs produced during the generation of electricity used for the hydrogen production process. For purposes of determining the amount of GHGs generated, the Proposed Regulations allow taxpayers the flexibility of using certain tradeable contractual instruments for energy attributes, defined as energy attribute certificates (“EACs”), for purposes of determining a taxpayer’s emissions rate so long as the energy source for the EAC is (a) an electricity generating facility that has been operational for no more than 36 months before the hydrogen production facility is placed in service (“Incrementality Requirement”), (b) generating electricity in the same hour that the taxpayer’s hydrogen production facility uses electricity to produce hydrogen (“Temporal Matching Requirement”) and (c) physically located in the same region as the relevant hydrogen production facility (“Deliverability Requirement”). The Final Regulations generally retain these requirements except as follows:
- Incrementality Requirement: Electricity produced by certain nuclear facilities at risk of retirement may be permitted to be used for hydrogen production for Section 45V purposes regardless of whether such facility has been operational for more than 36 months. Additionally, electricity generated in states with a robust GHG cap program with a qualifying electricity decarbonization standard will be deemed to satisfy the Incrementality Requirement (currently, California and Washington satisfy such requirements). Finally, electricity from a facility that has been operational prior to the 36-month window but that added carbon capture and sequestration equipment within the 36-month period will also be deemed to satisfy the Incrementality Requirement.
- Temporal Matching Requirement: While the Proposed Regulations included a transition rule for the Temporal Matching Requirement by grandfathering any electricity generated before January 1, 2028, the Final Regulations extend the transition period such that hourly matching is required beginning 2030. Further, beginning 2030, a taxpayer may determine electricity-related lifecycle emissions on an hourly basis as long as the annual emissions of the hydrogen production process is less than four kilograms of CO2 per kilogram of hydrogen produced (i.e., the limit under Section 45V). Thus, a taxpayer will still be able to claim credits for the portion of hydrogen for which the GHG emission requirement was satisfied.
- Deliverability Requirement: While the geographic matching requirements are retained, the Final Regulations introduce additional flexibility by allowing taxpayers to demonstrate that electricity transfer between certain regions should be permissible where deliverability can be tracked and verified or if there is a direct and single-use intraregional connection.
Renewable Natural Gas and Methane-Based Hydrogen
- The Proposed Regulations were silent on how the use of methane reformation technologies (e.g., carbon capture and sequestration—which creates so-called “blue” hydrogen), renewable natural gas (“RNG”) or other fugitive sources of methane used to produce hydrogen would affect the GHG emissions rate of hydrogen production.
- The Final Regulations expand the rules to address hydrogen production with RNG and fugitive methane, such as a phase-in of upstream methane leakage rates based on current default national values included in the 45VH2-GREET3 to project-specific upstream methane leakage rates in future versions of the 45VH2-GREET for purposes of calculating the GHG emissions rate and the development of a “book-and-claim” system for natural gas alternatives that will be able to be used beginning in 2027.
The Final Regulations for the Section 45V clean hydrogen production tax credit provide much clearer guidelines for claiming the credit and thus offer additional certainty and support for investors and developers of clean hydrogen. We expect the issuance of the Final Regulations to mark an important step towards a clean hydrogen energy economy and a transition towards green energy in the United States. We will continue to review the regulations and are available to assist with any questions regarding the clean hydrogen production tax credit or other renewable energy tax incentives from the IRA.
1 Unless otherwise indicated, all references to “Section” herein refer to the Internal Revenue Code of 1986. Our prior client alert describing developments with respect to the clean energy tax credits pursuant to the IRA can be found here.
2 Assuming the satisfaction of certain prevailing wage and apprenticeship requirements set forth in Sections 45V(e)(3)(A) and (4).
3 An updated 45VH2-GREET model is forthcoming and is subject to continuous updates. The final regulations allow taxpayers to rely on the version of the model in effect at the time the hydrogen production facility began construction.
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Arthur V. Hazlitt, an O’Melveny partner licensed to practice law in New York; Jeff Hoffner, an O’Melveny partner licensed to practice law in California; and Junaid Chida, an O’Melveny partner licensed to practice law in California and New York; Alexander Roberts, an O’Melveny partner licensed to practice law in New York; and Dawn Lim, an O’Melveny counsel licensed to practice law in New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
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