Background on 45V: Requirements and Proposed Rules

Released in late December 2023 by the U.S. Department of the Treasury and Internal Revenue Service, proposed regulations on the Clean Hydrogen Production Credit remained open for public comment until February 26, 2024.[1] This new Clean Hydrogen production tax credit, commonly known as 45V, is part of the broader Inflation Reduction Act package of incentives that aims to drastically increase domestic production of clean energy in the next decade.

The heart of the tax credit, and the part that is highly contested, relates to what qualifies as clean hydrogen, how manageable it is to produce it, and the monitoring required to qualify for the credit. At present, most domestic production of hydrogen utilizes natural gas, which results in greenhouse gas emissions and would not qualify for the 45V credit as “green hydrogen” as written. The cost to produce hydrogen in this way is approximately $1 to $3 per kilogram.[2] 45V, as it is currently proposed, offers up to $3 of tax credits per kilogram for the cleanest tier of hydrogen production.

The technology required to produce clean hydrogen, as defined by these proposed regulations, involves electrolyzer technology that is significantly more expensive than the natural-gas driven counterpart, about $5 per kilogram.[3] This $3 clean hydrogen credit it is intended to make clean production competitive with fossil-fuel based production. As the technology to cleanly produce hydrogen becomes more widely available, costs will continue to decrease and this credit will allow for wider profit margins on the cleaner fuel alternatives.

For a refresher of what currently qualifies, Treasury’s proposed rules explain the three criteria that must be met by producers that are claiming the 45V credit [4]:

1. Producers must be considered new sources of clean power. Clean power generators that began commercial operations within three years of a hydrogen facility being placed into service are considered new sources of clean power. Generation resulting from a generator’s newly added capacity are also considered new sources of clean power. Treasury and IRS requested comments on approaches by which generation from existing clean power generators could be considered to meet the requirements for new clean power, signaling that additional sources may be considered for the credit before finalization.
2. Clean power must be sourced from the same region as the hydrogen producer, as derived from the Department of Energy’s National Transmission Needs Study.[5] Again, the proposed rules request comments, this time on how to consider transmission of clean power between regions.
3. Lastly, and somewhat controversially due to the current lack of adequate technology to comply with the requirement, tax credits will generally be required to be matched to production on an hourly basis. This means that the claimed generation must occur within the same hour that the generator claiming the credit operates. The proposed rules currently includes a transition to allow annual matching, signaling that hourly matching will not be enforced until such systems are expected to be more widely available in 2028.

Recent Publications: Advocates, Critics, and Feedback.

Due to how 45V’s construction and implementation can impact both newer, low carbon producers, and older, carbon intensive producers, proponents and opponents are widespread. Comments on the proposed rule have come from all sides. For example, the comments made by the Institute for Policy Integrity commend, and build upon, the current proposed approach.[6]  The Institute for Policy Integrity notes that it is exactly the incrementality, time matching, and deliverability, that “would work together to help ensure that electrolyzers’ purchases of energy attribute certificates serve as an accurate proxy for their grid emissions.” Overall, the Institute for Policy Integrity concludes these regulations will help 45V to better subsidize hydrogen based on its emissions intensity.

A recent critique comes from U.S. Senator Shelley Moore Capito, Ranking Member of the Environment and Public Works Committee who sent a letter to Treasury’s Secretary Janet Yellen on February 26, 2024, the day that comments on 45V closed.[7] Capito claims the requirements under the regulations impose too high of an economic burden on those seeking to comply with such requirements.

What’s Next?

Truly clean hydrogen, in the eyes of many, is an important tool in the decarbonization toolbox. While 45V is still in its early stages, federal interest as well as bipartisan support for this bill has created a clear path for implementation. The question remaining is in the final form 45V will take. With the public hearing set to occur on March 25, 2024, there should be a clearer indication of the path forward, and more answers should shortly follow.

[1] https://www.federalregister.gov/documents/2023/12/26/2023-28359/section-45v-credit-for-production-of-clean-hydrogen-section-48a15-election-to-treat-clean-hydrogen

[2] https://about.bnef.com/blog/green-hydrogen-to-undercut-gray-sibling-by-end-of-decade/#:~:text=%E2%80%9CGray%20hydrogen%2C%20which%20comes%20from,%241.8%2D%244.7%20per%20kilogram.

[3] https://www.energy.gov/eere/fuelcells/hydrogen-shot#:~:text=Industries%20are%20beginning%20to%20implement,costs%20about%20%245%20per%20kilogram.

[4] https://home.treasury.gov/news/press-releases/jy2010

[5] https://www.energy.gov/sites/default/files/2023-12/National%20Transmission%20Needs%20Study%20-%20Final_2023.12.1.pdf

[6] https://policyintegrity.org/projects/update/comments-to-treasury-on-45v-clean-hydrogen-production-tax-credit

[7] https://www.epw.senate.gov/public/index.cfm/2024/2/capito-urges-treasury-department-to-reverse-course-on-45v-hydrogen-tax-credit-guidance

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