‘Clean Hydrogen’ tax credit rules released

In the waning days of the Biden administration, the U.S. Department of the Treasury released the final rules of its tax credit for companies that produce “clean hydrogen.”

The clean hydrogen credit eligibility rules have received a somewhat mixed response among industries, and whether the Trump administration attempts to sweep aside the tax credit – at least in its current form – remained to be seen as of the time of this writing. 

The 45V tax credit, said to be worth billions of dollars, comes out of the 2022 Inflation Reduction Act. The aim of the credit was to incentivize industries to use clean hydrogen instead of fossil fuels, with the goal of reducing greenhouse gas emissions.

The final rules, unveiled on January 3, seek to clarify how producers of hydrogen, including those using electricity from various sources, or natural gas with carbon capture, renewable natural gas (RNG), and coal mine methane, can determine eligibility for the credit.

What makes hydrogen “clean” depends on a number of factors, such as the source of the electricity used to make the hydrogen. For example, electricity from renewable sources like wind or solar can be used to power electrolyzers that split water into its hydrogen and oxygen components. The final rules define eligible electricity generation as a source of “new clean power” for hydrogen production if the generator begins commercial operations within 36 months of the hydrogen facility being placed in service.

To qualify as clean hydrogen, the greenhouse gas emissions of the hydrogen production process must be no greater than 4 kilograms of carbon dioxide equivalents (CO2e) per kilogram of hydrogen produced. The tax credit would be worth up to $3 per kilogram of hydrogen produced.

Projects that pair natural gas with carbon capture to produce hydrogen would be eligible for the tax credits, as well as with the use of natural gas alternatives such as RNG or coal mine methane.

A number of nuclear plants at that power hydrogen production also would be eligible for the tax credit under the final rules, if those plants are at risk of retirement due to economic reasons.

Under the final rules, hydrogen producers would have until 2030 before they are required to match their consumption of clean energy with their hydrogen output on an hourly basis.

The Treasury Department released the proposed rules in 2023 but took a year to revise and finalize them after receiving extensive feedback from industries, environmental groups and lawmakers. Many had criticized the initial proposal as being too restrictive.

“The final rules include significant changes and flexibilities that address several key issues to help grow the industry and move projects forward, while adhering to the law’s emissions requirements for qualifying clean hydrogen,” the Treasury Department said.

“Clean hydrogen can play a critical role decarbonizing multiple sectors across our economy, from industry to transportation, from energy storage to much more,” said U.S. Deputy Energy Secretary David M. Turk.

The American Petroleum Institute (API) Senior Vice President of Policy, Economics and Regulatory Affairs Dustin Meyer said the Treasury Department’s “guidance marks a meaningful step forward, encouraging innovation while driving progress on emissions. This framework offers an opportunity for natural gas, when paired with carbon capture and storage, to compete more fairly in new markets and meet growing demand for affordable, reliable, lower-carbon energy. We look forward to collaborating with the incoming administration to uphold technology-neutral hydrogen policies that position the U.S. as a global leader in innovation.”

Joe Dominguez, president and chief executive officer of Constellation, which operates the largest fleet of nuclear plants in the United States, said he was pleased with the final rules.

“Our customers need access to reliable nuclear energy in order to transition to clean hydrogen and other sustainable technologies as they reliably power their businesses and drive economic growth for our nation,” he said.

On the other hand, the U.S. Chamber of Commerce was less favorable.

“Hydrogen has the potential to accelerate the clean energy transition while creating jobs and economic growth, but launching an entirely new industry won’t happen without government policy that attracts the necessary investment. The final 45V rule falls short,” said Marty Durbin, president of the U.S. Chamber’s Global Energy Institute.

“While the rule provides some of the additional flexibility we sought, especially in recognizing the importance of natural gas as a cornerstone of a hydrogen economy, we believe that it still will leave billions of dollars of announced projects in limbo,” Durbin continued. “The incoming administration will have an opportunity to improve the 45V rules to ensure the industry will attract the investments necessary to scale the hydrogen economy and help the U.S. lead the world in clean manufacturing.”

Whether the tax credit survives the Trump administration and the new Congress was up in the air at the time of this writing. Rolling back at least parts of the 2022 Inflation Reduction Act was almost certain to be on the agenda.

In January, Trump blasted the construction of new wind farms for energy production. “The only people that want them are the people getting rich off windmills, getting massive subsidies from the U.S. government,” he added. “You don’t want energy that needs subsidy.”