Treasury and IRS Issue Final Regulations Implementing Section 45V Clean Hydrogen Production Tax Credit

On January 3, 2025, the IRS and Treasury issued long-awaited final regulations (the “45V Final Regulations”) implementing the clean hydrogen production tax credit (the “45V Credit”) under Section 45V of the Internal Revenue Code of 1986, as amended (the “Code”).

The 45V Final Regulations follow proposed regulations issued on December 22, 2023, on which more than 30,000 comments were submitted during a comment period that closed on February 26, 2024. As discussed in our Client Alert Field Guide to Clean Hydrogen, Section 45V was by far the most intensely debated energy tax credit provision of the Inflation Reduction Act of 2022 (the “IRA”) because the trajectory of the hydrogen sector in the United States hinges on a critical question: what criteria will be used to define the term “clean hydrogen” for tax purposes?

This Client Alert summarizes the key elements of the 45V Final Regulations and will be followed by further Client Alerts, including in-depth analysis and summary of the final rules relating to methane-, renewable natural gas (“RNG”)- and differentiated natural gas (“DNG”)-based hydrogen. In order to provide such an in-depth overview it will be necessary to have reviewed an updated version of the so-called 45VH2-GREET model, which will detail how greenhouse gas emissions calculations must be made – but this is not expected to be available until later in January 2025.

KEY TAKEAWAYS

The 45V Final Regulations, while retaining the qualifying Energy Attribute Certificate (“EAC”) requirement, relaxed the requirements of incrementality, temporal matching, and deliverability for hydrogen producing using electrolysis (and non-electrolytic hydrogen for whose production the producer wishes to claim a lower electricity carbon intensity than the grid average).

• Incrementality: The 45V Final Regulations adopt three pathways through which hydrogen projects may meet the incrementality requirement: (i) use of electricity produced by a generation facility using carbon capture and sequestration (“CCS”) technology placed in service within 36 months of the hydrogen production facility being placed in service, (ii) use of electricity produced from qualifying nuclear power plants, and (iii) use of clean electricity produced in existing generating facilities located in qualifying States (i.e., California and Washington).
• Temporal matching: The 45V Final Regulations extend the transition period for annual matching between the time of electricity generation and corresponding hydrogen production by two years before requiring a move to hourly matching starting in 2030, but do not grandfather existing hydrogen production facilities.
• Deliverability: The 45V Final Regulations retain the general framework for drawing the regional boundaries defining areas from which electricity may be sourced, but allow flexibility for demonstrating the viability of electricity transfers between regions, including imports from Canada and Mexico.

Furthermore, once hourly matching is required, the 45V Final Regulations allow hydrogen producers to determine lifecycle GHG emissions associated with their hydrogen production process on an hourly basis as long as the annual emissions are under 4 kg of carbon dioxide equivalent (“CO2e”) per kg of hydrogen produced. This effectively allows for limited averaging of lifecycle GHG emissions.

The 45V Final Regulations also provide a “beginning of construction” safe harbor for determining a hydrogen production facility’s lifecycle GHG emissions rate. Under the beginning of construction safe harbor, taxpayers are allowed to use the latest version of the 45VH2-GREET that was available on the date the hydrogen production facility was placed in service or the date when construction of the facility began for tax purposes. Additionally, for production pathways not covered by any version of the 45VH2-GREET model, a taxpayer is allowed to use a specific provisional emissions rate (“PER”) obtained from the Department of Energy (“DOE”) via its Emissions Value Request Process (“EVRP”) process as at the start of its construction, subject to certain conditions.

Changes in the 45V Final Regulations addressing methane- and RNG (and DNG)-based hydrogen are beyond the scope of this Client Alert; they will be addressed in a separate Client Alert.  Nevertheless, we note the following key takeaways:

• The 45V Final Regulations provide for a phase-in of upstream methane leakage rates which will be based on default national values in a forthcoming version of the 45VH2-GREET model for purposes of calculating the lifecycle GHG emissions rate.
• The 45V Final Regulations do not implement the “first productive use” requirement (i.e., natural gas alternatives used during the hydrogen production process must originate from the first productive use of the relevant methane). Under this requirement, RNG produced from any source of methane, where the methane had been productively used in a taxable year prior to the taxable year in which the relevant hydrogen production facility was placed in service, would have received an emission value consistent with fossil natural gas.
• The 45V Final Regulations adopt a “book-and-claim” framework for natural gas alternatives, such as RNG and coal mine methane, but defer implementation until 2027. The framework would allow hydrogen producers to claim use of attributes of RNG or coal mine methane that is used in hydrogen production, even though certificates that are acquired and retired in a book-and-claim system may not necessarily reflect the feedstocks in fact used in the production process.

The 45V Final Regulations apply to taxable years beginning after December 26, 2023, the date the proposed Section 45V regulations were published in the Federal Register. While the rules under Section 45V of the Code have been finalized, uncertainty and many questions still remain as to the implementation of the 45V Final Regulations under the incoming administration and new Congress, which we will address in a future Client Alert.

BACKGROUND

Section 45V of the Code provides a production tax credit of up to $3.00 for each kg of “qualified clean hydrogen” produced by a taxpayer. Under Section 45V four tiers of credits are available, depending on the lifecycle greenhouse gas (“GHG”) emissions rate of the process used to produce clean hydrogen. The 45V Credit is available for clean hydrogen produced from qualifying facilities placed in service after January 1, 2023, and before January 1, 2033. The 45V Credit is available for 10 years from the date a qualifying clean hydrogen production facility is placed in service.

On December 22, 2023, the IRS and Treasury issued proposed regulations to implement Section 45V. The proposed regulations (i) provided rules for determining lifecycle GHG emissions resulting from eight identified hydrogen production pathways, (ii) set forth rules requiring that producers acquire and retire EACs that document compliance with the “three pillars” of incrementality, temporal matching, and deliverability of electricity for the purpose of quantifying indirect emissions associated with the production of electrolytic hydrogen and other processes that use electricity in the production of hydrogen, and (iii) introduced the 45VH2-GREET model as the means by which hydrogen producers generally must calculate lifecycle GHG emissions associated with hydrogen production.

Please see our Client Alert Guidance on Section 45V Clean Hydrogen Production Tax Credit for a summary of the statutory background on the 45V Credit and detailed discussion of the key elements of the proposed 45V Credit regulations.

LIBERALIZATION OF THE THREE PILLARS

1. Incrementality

The proposed Section 45V Credit regulations required electrolytic hydrogen producers to document (through the acquisition and retirement of EACs) that the electricity used in their production process was procured from an electricity generating facility that commenced commercial operations no more than 36 months before the hydrogen production facility was placed in service. The 45V Final Regulations keep this general rule but adopt several new pathways for hydrogen projects to satisfy the incrementality requirement.

First, the 45V Final Regulations allow electricity generating facilities (e.g. gas-fired facilities) that have placed in service carbon capture equipment within 36 months before the hydrogen production facility was placed in service to meet the incrementality requirement.¹Treas. Reg. §1.45V- 4(d)(3)(i)(A). CCS may be taken into account only if the carbon is captured and disposed of in secure geological storage or utilized in a manner described in Section 45Q of the Code and Treasury Regulations promulgated thereunder.²Treas. Reg. §1.45V-4(e). Eligible utilization of captured carbon under Section 45Q includes chemical conversion into a compound in which carbon is stored, fixation through photosynthesis or chemosynthesis, and using captured carbon for any other purpose for which a commercial market exists. ³IRC § 45Q(f)(5).

Second, the 45V Final Regulations provide that electricity represented by an EAC that is produced by certain existing nuclear reactors that have a limited risk of induced grid emissions (“qualifying nuclear reactors”) will meet the incrementality requirement.⁴Treas. Reg. §1.45V- 4(d)(3)(i)(D). This would allow electricity produced by facilities eligible for the zero-emissions nuclear power production credit under Section 45U of the Code to be treated as zero-emissions electricity in the production of clean hydrogen. A “qualifying nuclear reactor” is, with respect to an EAC, a nuclear reactor that satisfies the following requirements: ⁵Treas. Reg. §1.45V-4(d)(2)(x).

• it is a “merchant nuclear reactor”⁶“Merchant nuclear reactors” are nuclear reactors that compete in a competitive electricity market through the sale of energy and, in some cases, other services, and for which over 50 percent of the reactor and its electricity production does not receive cost recovery through rate regulation or public ownership with related retail rate recovery. Treas. Reg. §1.45V-4(d)(2)(vi). or is a nuclear reactor that is not co-located with any other operating nuclear reactor (that is, the nuclear reactor is a single unit plant);
• it meets a financial test related to that used for purposes of Section 45U credit for any two of the calendar years 2017 through 2021, as determined with respect to any one owner of the reactor; ⁷A nuclear reactor meets the financial test if the average annual gross receipts (as defined under Section 45U) of the reactor were less than 4.375 cents per kilowatt hour for any two of the calendar years from 2017 through 2021. The Treasury and IRS note that they anticipate releasing guidance under Section 45U in the future which among other things will address the definition of gross receipts.and
• it either (A) has a behind-the-meter physical electric connection with the hydrogen production facility that acquires and retires the EAC or (B) it is the subject of a written binding contract, for a fixed term of at least 10 years beginning on the first date on which qualified EACs are acquired, under which the owner of the hydrogen production facility agrees to acquire and retire EACs from the nuclear reactor, and which manages the qualifying nuclear reactor’s risk of price changes with respect to EACs or electricity.

To the extent the nuclear reactor satisfies the definition of a qualifying nuclear reactor because it is the subject of a written binding contract referred to in (iii)(B) above, only up to 200 megawatt hours (MWh) of electricity per operating hour per qualifying nuclear reactor may be considered incremental (but note that multiple reactors in the same plant are each separately able to deploy up to 200 MWh for clean hydrogen production).

Third, the 45V Final Regulations allow electricity represented by an EAC that is produced by an electricity generation facility in a “qualifying State” to meet the requirement.⁸Treas. Reg. §1.45V- 4(d)(3)(i)(C). A qualifying State must have a qualifying GHG cap program and qualifying electricity decarbonization standard, both of which are intended to identify circumstances under which new electricity load is highly unlikely to induce additional grid emissions.⁹Treas. Reg. §1.45V- 4(d)(2), (iv), (v), (xii).In consultation with the DOE, the Treasury and IRS have determined that, as of the date of publication of the 45V Final Regulations, California and Washington are qualifying States. Facilities in those qualifying States, however, must still meet the temporal matching and deliverability requirements.

Notably, the 45V Final Regulations do not adopt a formulaic approach to incrementality described in the proposed Section 45V regulations and on which the Treasury and IRS sought comments.¹⁰For example, one approach supported by some commentators would have deemed a certain percentage of the hourly generation from minimal-emitting electricity generators as satisfying the incrementality requirement. Under an alternative formulaic approach, a deemed amount of incrementality would have been determined based on market factors or average.The Treasury and IRS explain that curtailment is very region and time dependent, and the precise timing of curtailment is hard to predict, and as such, a formulaic approach is an inadequate proxy for incrementality. However, the Treasury and IRS note that they will continue to study the issue, in consultation with the DOE and the Environmental Protection Agency.

2. Temporal Matching

The proposed regulations required electricity represented by an EAC to be generated in the same year through 2027 and, from 2028, in the same hour, in which a hydrogen production facility uses electricity to produce hydrogen.

The 45V Final Regulations delay the implementation of hourly matching until 2030. While the Treasury and IRS maintain the position that an hourly matching requirement best mitigates the risk of induced grid emissions, they also acknowledge that hourly tracking of EACs is not yet widely available on a standardized basis. The transition rule, therefore, is intended to provide time for the EAC market to develop the hourly tracking capability necessary to verify compliance with the hourly matching requirement, and for associated hourly EAC markets to develop. Under the 45V Final Regulations the hourly matching requirement applies to all production of clean hydrogen represented by EACs starting on January 1, 2030. ¹¹Treas. Reg. §1.45V-4(a)(2).

Furthermore, the 45V Final Regulations also allow electricity storage to be used to shift the temporal profile of clean electricity supply based on the period of time in which the corresponding electricity is discharged from storage. ¹²Treas. Reg. §1.45V-4(d)(3)(ii)(C).  Electricity represented by the EAC must be discharged from a storage system in the same hour that the taxpayer’s hydrogen production facility uses electricity to produce hydrogen. The storage system must also be located in the same region as both the hydrogen production facility and the facility generating the electricity to be stored. The ability of taxpayers to claim and verify the use of energy storage is therefore contingent on whether and when EAC registries can substantiate the effective tracking of electricity through that storage.

Finally, the 45V Final Regulations allow taxpayers to determine the lifecycle GHG emissions associated with the use of electricity on an hourly basis, but only if the annual average lifecycle GHG emissions rate of the hydrogen production process during the taxable year is not greater than 4 kg CO2e per kg of hydrogen for all hydrogen produced pursuant to that process during the taxable year.¹³Treas. Reg. §1.45V-4(a)(2). In other words, the facility must meet the 4kg CO2e annual average test before it becomes eligible to claim the tax credit on an hourly matching basis.

3. Deliverability

The proposed regulations required that electricity represented by an EAC must be generated by a facility that is in the same grid region (identified in the DOE’s National Transmission Needs Study) as the hydrogen production facility.

The 45V Final Regulations retain the proposed regulations’ general framework for drawing the regional boundaries and clarify that whether the electricity generating source and the hydrogen production facility are located in the same region is determined by the balancing authority to which each is electrically interconnected, not the geographic location.¹⁴Treas. Reg. §1.45V-4(d)(3)(iii)(A). To clarify the foregoing rule, the 45V Final Regulations include a table of balancing authorities and their corresponding regions.¹⁵Treas. Reg. §1.45V-4(d)(2)(ix).The Treasury and IRS note that, while the table is the definitive source for identifying the regions for purposes of this requirement, it may be appropriate to revise the regions in the future. To allow for reasonable changes to geographic regions, the Treasury and IRS, in consultation with the DOE, may revise (at most once a year, and likely less frequently) the regions in future safe harbor administrative guidance.

Furthermore, the 45V Final Regulations allow an eligible EAC to meet the deliverability requirement as to electricity that is transferred between regions where the deliverability of such generation can be tracked and verified. More specifically, the following requirements must be satisfied:¹⁶Treas. Reg. §1.45V-4(d)(3)(iii)(B).

• The underlying electricity generation has transmission rights from the generator location to the region of the clean hydrogen producer and generation is delivered to (that is, scheduled and then dispatched and settled in) such producer’s region.
• Tracking of transmission rights and electricity delivery must occur via the relevant EAC registry. If the relevant EAC registry lacks this capability, such gross-region transactions are not allowed.
• Imports from Canada and Mexico must additionally include an attestation from the generator that the attributes included in the eligible EACs are not being used for any other purpose, with that attestation included as an attachment to the verification report submitted with the taxpayer’s return.

The Treasury and IRS explain that these requirements collectively ensure delivery of qualifying EACs and electricity to the importing region, thus ensuring local displacement of other generation consistent with the producer’s load, accurate verification of delivery through EAC registries, and reducing the risk of double counting or multiple use of EACs and their generation attributes.

GREET MODEL SAFE HARBOR AND EVRP-PER SPECIAL RULE

The 45V Final Regulations provide relief from the requirement to use the latest version of the 45VH2-GREET model, responding to taxpayers’ (and investors’) request for an approach that provides certainty about the lifecycle GHG emissions rate to be established for a given hydrogen project throughout the credit period. Specifically, the 45V Final Regulations provide taxpayers the option to make an irrevocable election to use the version of the 45VH2-GREET model that was in effect on the date when construction of their hydrogen production facility began for the remaining taxable years within the 10-year credit period. ¹⁷Treas. Reg. §1.45V-4(b)(2)(i).For purposes of determining when construction began for tax purposes, taxpayers may rely upon the guidance provided in IRS Notice 2022-61, as well as the guidance issued under Sections 45, 45Q, and 48.

In the case of a hydrogen production facility that began construction prior to December 26, 2023, the 45V Final Regulations provide taxpayers with the option to make an irrevocable election to use the first publicly available version of 45VH2-GREET model (i.e., the version released in December 2023) for the remaining taxable years within the credit period. ¹⁸Id.

For facilities that are modified to produce qualified clean hydrogen or retrofitted in manner that entitled the facility to a new placed in service date, the date the facility began construction is the date construction of the modification or retrofit began. ¹⁹ Id.

The election must be made separately for each hydrogen production process and must be made on IRS Form 7210 by no later than the due date (including extensions) for filing of the taxpayer’s federal income tax return for a taxable year ending no later than December 31, 2025, or for the taxable year in which such facility is placed in service, whichever taxable year is later. ²⁰Treas. Reg. §1.45V-4(b)(2)(ii).

Additionally, the 45V Final Regulations provide that for production pathways not covered by any version of the 45VH2-GREET model, a taxpayer who received an emissions value from the DOE prior to beginning construction of its hydrogen production facility (and who began construction in reliance on the PER) may continue relying on its PER, despite the rate having been determined under the 45VH2-GREET model.²¹Treas. Reg. §1.45V-4(c)(6)(iv).This special rule is limited to taxpayers who obtain an emissions value before beginning construction of their respective facilities. Furthermore, the following conditions apply: (i) there must not have been any material changes to the information about the taxpayer’s hydrogen production process from the information provided to the DOE to obtain an emissions value and (ii) all other requirements of Section 45V of the Code must be satisfied. ²²A “material change” means any change that would cause a qualified verifier to be unable to complete a production attestation under Section 45V(c)(2)(B)(ii) of the Code and Treas. Reg. Section 1.45V-5(c). Treas. Reg. §1.45V-4(c)(6)(ii).

FACILITY DEFINITION

The proposed regulations defined “facility” as a single production line that is used to produce qualified clean hydrogen.  A “single production line” include all components of property that function interdependently to produce qualified clean hydrogen.

The 45V Final Regulations maintain the single production line and functional interdependence concepts but add to the definition the phrase “through a process that results in the lifecycle GHG emissions rate used to determine the credit.”²³Treas. Reg. §1.45V-1(a)(7).The Treasury and IRS explain that this phrase is intended to clarify that all equipment used to produce the qualified clean hydrogen for which the 45V Credit is determined is included as part of the qualified clean hydrogen facility. For example, carbon capture equipment is part of the facility if it contributes to the lifecycle GHG emissions rate of the process by which the qualified clean hydrogen for which the 45V Credit is determined is produced.

Furthermore, the 45V Final Regulations reiterate the rule in the proposed regulations that any components of the facility that function interdependently to produce qualified clean hydrogen—regardless of whether they serve a purpose in addition to the production of clean hydrogen—are part of the qualified clean hydrogen production facility. In allocating lifecycle GHG emissions attributed to multipurpose components, taxpayers must use a reasonable method to allocate the inputs used to determine such emissions. The 45V Final Regulations, however, do not specify what method is “reasonable.”

The 45V Final Regulations also provide that “feedstock-related equipment, including production, purification, recovery, transportation, or transmission equipment” are excluded from the definition of Facility.²⁴Treas. Reg. §1.45V-1(a)(7)(ii). However, note that lifecycle GHG emissions associated with feedstock growth, gathering, extraction, processing, and delivery to a hydrogen production facility are still treated as emissions through the point of production (i.e., are determined on a “well-to-gate” basis) and included in the lifecycle GHG emissions analysis, which is separate from the definition of facility.

Similarly, the 45V Final Regulations clarify that purification equipment that is used downstream of the facility’s clean hydrogen production process is not part of the facility. The Treasury and IRS note that in certain circumstances emissions from such purification equipment downstream of the facility’s clean hydrogen production process are within the well-to-gate system boundary for purposes of the lifecycle GHG emissions rate analysis. Specifically, the 45V Final Regulations provide that if the taxpayer knows or has reason to know the purification of a hydrogen gas stream is necessary for a hydrogen gas stream to be productively used, or to be sold for productive use, any lifecycle GHG emissions relating to such purification (e.g., emissions from electricity used in purification, or carbon dioxide that is separated from a hydrogen gas stream and then vented) are treated as emissions through the point of production. ²⁵Treas. Reg. §1.45V-1(a)(9)(iv).Additionally, if the taxpayer knows or has reason to know that a hydrogen gas stream contains less than 99 percent hydrogen and will be combusted without purification, any lifecycle GHG emissions relating to the process needed to purify the hydrogen gas stream to contain 99 percent hydrogen are treated as emissions through the point of production. 

VERIFICATION

Section 45V requires the production and sale or use of hydrogen to be verified by an unrelated party. The 45V Final Regulations adopt the proposed rules relating to verification, with the following modifications:

• Verification Report. The 45V Final Regulations include an additional requirement that a verification report must include any other information required by IRS forms and instructions. ²⁶Treas. Reg. §1.45V-5(b)(7).This additional requirement ensures that the IRS is able to effectively administer the 45V Credit and meet the applicable statutory requirement.
• Production Attestation within the Verification Report. The 45V Final Regulations provide that a verification report must reflect “reasonable assurance” in the operation of the hydrogen production facility and any EACs applied.²⁷Treas. Reg. §1.45V-5(c)(1).The “reasonable assurance” standard is defined within the International Organization for Standardization (“ISO”) document specifying principles and requirements and providing guidance for verifying and validating GHG statements (ISO 14064-3), and is reflected in other greenhouse gas regulations, such as the California Low Carbon Fuel Standard (“CA LCFS”). Furthermore, verifiers must confirm that the electricity generator or generators associated with such EACs are not registered on multiple qualifying EAC registries, or, in the event such generators are registered on multiple qualifying EAC registries, each EAC undergoing verification from each such generator registered on multiple qualifying EAC registries is being issues by only one qualifying EAC registry. ²⁸Treas. Reg. §1.45V-5(c)(2).
• Sale or User Attestation. The 45V Final Regulations clarify that the “verifiable use” requirement (i.e., qualified clean hydrogen specified in the production attestation has been sold or used by a person who makes a verifiable use of such hydrogen) does not apply to the use to which byproducts of hydrogen use are put.²⁹Treas. Reg. §1.45V-5(d)(2)(i).
• Conflict Attestation. The proposed regulations provided a special rule in the case of taxpayers making an election to transfer the credit under Section 6418 to require conflict attestation to attest that the verifier is independent of both the eligible taxpayer and the transferee. Because the identity of the transferee might not be known in time for the verifier to complete the conflict attestation, the 45V Final Regulations remove this special rule.
• Qualified Verifier. The 45V Final Regulations clarify that accreditation from the American National Standards Institute National Accreditation Board (“ANAB”) is limited to those accredited under the ANAB accreditation Program for Greenhouse Gas Validation and Verification Bodies (i.e., in accordance with the requirements of ISO 14065:2020 and ISO 14064-3:2019).³⁰Treas. Reg. §1.45V-5(h).

EFFECTIVE DATE

The 45V Final Regulations apply to taxable years beginning after December 26, 2023, the date the proposed regulations were published in the Federal Register.

For taxable years beginning after December 31, 2022, and on or before December 26, 2023, taxpayers may choose to apply the rules of Sections 1.45V-1, -2, and -4 through -6 of the 45V Final Regulations, provided that the rules are applied in their entirety and in a consistent manner.

Taxpayers may choose to rely upon the proposed regulations for taxable years beginning after December 31, 2022, and before the date these final regulations are published in the Federal Register, provided that the proposed regulations are applied in their entirety and in a consistent manner.

CONCLUSION

Although the definition of “clean hydrogen” finally adopted by the Treasury and IRS may be challenged in courts, the delegation of authority under Section 45V of the Code to write regulations is broad and, in practice, regulations of this type are rarely challenged and even more rarely overturned. As discussed in the Client Alert A Brief Overview of the Federal Rulemaking Process in the United States, Congress also can play a role at the end of the rulemaking process, for example through action under the Congressional Review Act or through legislation.

As noted above, this Client Alert will be followed by future Client Alerts, including one providing an in-depth summary and analysis of the rules in the 45V Final Regulations regarding DNG- and RNG-based hydrogen. In addition, future Client Alerts will discuss the issues arising from the outcome of the November 2024 elections as well as practical points arising from the interplay among the 45V Final Regulations and other recently published final regulations.