The Treasury Department has defined the qualifications that hydrogen facility developers must meet before claiming tax credits or other incentives that are now available under various sections of the IRA. Though the proposed regulations are not yet finalized, they set a number of benchmarks that hydrogen developers and investors should be considering in evaluating the credits available under Section 45V and other sections of the IRA. Here are seven key takeaways from the proposed regulations that will help inform plans and strategies:

1. Be aware that some newer hydrogen facilities will be ineligible. According to the draft guidance, if a facility currently produces hydrogen with a well-to-gate life cycle greenhouse gas (GHG) emission rate of greater than 4 kilograms of CO2 per kilogram of hydrogen, the facility can be modified to produce hydrogen at or below the 4-kilogram threshold and qualify for credits under 45V. However, this facility must have been placed in service (PIS) before January 1, 2023. This means that any facilities that were placed in service after Jan. 1, 2023, and do not meet the 4-kilogram threshold, will never qualify for 45V.
2. Despite the in-service-date exclusions, some existing clean hydrogen facilities still are eligible for 45V. A highly desirable incentive, 45V may be claimed for up to 10 years after a facility is placed in service. If a facility has been generating clean hydrogen at or below 4-kilograms of GHG for several years, it is now eligible to claim the credit even if it has not claimed a tax credit in the past. The 45V credit can be claimed each year for up to 10 years beyond its original PIS date. That means, for example, that a facility that started producing clean hydrogen in 2018 would be eligible to claim the credit through 2028.
3. There are specific rules to qualify for 45V as a retrofitted facility. Facilities that intend to make modifications to meet the 4-kilogram GHG threshold must abide by the so-called 80/20 rule. This rule requires that a facility make substantial modifications such that 80% of the value of the retrofitted facility is the result of the new investment. Only 20% of the final value of the facility may be derived from prior assets. Facilities that only require minor modifications in order to meet the 4-kilogram threshold will be limited or possibly excluded from qualifying for the 45V credits because the modifications may not account for 80% of the new plant value. Furthermore, changing the type of fuel used to generate hydrogen does not qualify as a facility modification. It should be noted, however, that once a facility is retrofitted, the IRS considers the facility’s new PIS date to be the date at which the retrofit was completed, as opposed to the original PIS date of the facility prior to retrofits. This revision of the PIS date enables retrofitted facilities to capture a full 10 years of 45V tax credit benefits.
4. Several credits cannot be stacked with 45V. Receipt of 45V tax credits prohibits the ability to claim at least five other tax credits available under IRA. Though many of these restrictions are likely to be inconsequential, some may play significantly in the potential financial success of a hydrogen production project. Those stipulations are as follows:

45Q

Facilities that produce clean hydrogen and capture carbon in that process, must choose between two available credits. The 45Q tax credit is available for carbon oxide sequestration, but cannot be claimed along with a hydrogen production credit under 45V. Even if the facility qualifies for credits under both 45Q and 45V, it can only choose one.

An important feature of this rule is that it applies no matter when 45Q was claimed. This means that if a 45Q credit was claimed at any point in the facility’s lifetime, it cannot flip and claim the 45V credit. These facilities are permanently prevented from receipt of 45V credits. It’s possible this rule may dissuade some clean hydrogen development. Facilities that used carbon capture during hydrogen production and did not meet the 4-kilogram threshold, but then were retrofitted so that it met the threshold — thus qualifying for 45V credits — still cannot claim those credits if they had previously claimed the 45Q credit.

45Z

The 45Z IRA tax credit provides incentive opportunities for non-hydrogen clean fuel production, but cannot be combined with 45V. We believe this mutually exclusive relationship occurs within the boundaries of the hydrogen production equipment, not the entire facility. This distinction may enable a single facility producing hydrogen for use in sustainable aviation fuel (SAF), for example, to qualify for both 45V and 45Z, so long as equipment used for hydrogen or clean fuel production is distinct and separate.

48

IRA tax credit 48 enables eligibility of certain energy properties for an investment tax credit for the energy property placed in service during that taxable year. This investment tax credit is a one-time direct payment based on the amount of the investment allocation for that facility. This is opposed to a production tax credit that applies for each unit of generation over the applicable period. Though a clean hydrogen production facility may be eligible for an investment tax credit as an energy property, claiming this credit, however, prohibits any future claims for credits under 45V. This means that if a hydrogen facility claimed a Section 48 credit upon completion of facility installation, it is permanently ineligible for 45V.

48C

The 48C tax credit provides a financial incentive to advanced energy projects as an investment credit. 48C guidance explains that if hydrogen production equipment generates clean hydrogen — and production meets the 4-kilogram GHG requirement — it is eligible for credit under 48C. However, if a 48C credit is received for this project, 45V may not be claimed.

5. The guidance includes stipulations for Incrementality, Deliverability and Temporal Matching. Electricity used in the hydrogen production process will count towards the 4-kilogram threshold but as such, the IRS, in consultation with the EPA and DOE, has developed the energy attribute certificate (EAC) process for assessing impacts of electricity inputs. The primary difference between an EAC and the more common renewable energy credit (REC) is that EACs are technology agnostic but must be zero-emitting sources for GHG. Furthermore, they must abide by three main criteria:
• Incrementality: An EAC facility must have been placed in service no more than 36 months prior to the hydrogen production facility purchasing the credits. The IRS and DOE encouraged this rule to prevent long-existing renewable or clean power from being re-directed to hydrogen from an alternate demand source. This re-direction would ultimately require increased fossil generation to meet the demand of the source that lost the clean power allocation.
• Deliverability (regionality): EACs must be located within the same region as the hydrogen production facility. These regions were determined by the DOE’s National Transmission Needs Study from October 2023.
• Temporal Matching (time matching): EACs must match the time of electricity use annually through 2027. In 2028, the time matching provision changes so that it must be done hourly.

6. In April 2024, the IRS released the process for claiming 45V credits for hydrogen production that does not use electrolysis. The DOE has established emissions values for the following hydrogen production pathways:
• Steam methane reforming of natural gas or landfill gas with potential carbon sequestration.
• Autothermal reforming of natural gas or landfill gas with potential carbon sequestration.
• Coal gasification with potential carbon capture.
• Biomass gasification of corn stover and/or logging residue that have no significant market value with potential carbon capture.
• Low-temperature electrolysis using electricity.
• High temperature water electrolysis using electricity and potential heat from nuclear power plants.

For these pathways, the 45VH2-GREET (Greenhouse gases, Regulated Emissions, and Energy use in Transportation) model may be used to determine the life-cycle greenhouse gas emissions of the project. For alternative pathways, the IRS and DOE will formalize a petition process to obtain a provisional emissions rate (PER) for the unique process. Once approved, that PER is then valid for the 10-year 45V period. Note that the PER process is not available for pathways already defined in 45VH2-GREET, even if a taxpayer disagrees with the underlying assumptions of that pathway.

In April 2024, the DOE and IRS released proposed guidance on the PER process stating that a FEED (front-end engineering design) study and Class 3 cost estimate will be required. This addendum estimated that the PER process will take approximately 40 hours to complete.

7. IRS is still gathering key feedback that will dictate the reach and impact of 45V on the market. The IRS has solicited feedback on several specific guidance measures including:
• Use of newly created 45Vh2-GREET model versus an alternative successor model.
• Circumstances under which an existing electricity generating facility dedicated to hydrogen production may qualify for incrementality.
• Mechanisms to accurately verify GHG emissions such for origin of feedstock or efficacy/rate of CCS.
• Many other factors, including boundaries of well-to-gate analysis, the PER process, recordkeeping and verification by unrelated parties among other factors.

Other Considerations of Note

We have determined three additional areas of significance we believe need to be clearly resolved to accurately assess the impact of 45V:

• What will be the emissions rate for minimal-emitting generation sources, specifically nuclear, fossil + CCS, and biomass?
• If a renewable asset goes through an approved retrofit that abides by the 80/20 rule, has a new in-service date and now qualifies for the renewable ITC/PTC, will that new in-service date enable this asset to also qualify under 45V’s incrementality rules?
• Can part of a production facility qualify for 45V? In other words, how will this guidance interplay with 45Q and 45Z if recipients are able to draw lines around equipment rather than facilities?

Many industry players are closely watching the development of the hydrogen industry, particularly since the Treasury guidance was issued and the late 2023 announcement of approved hydrogen hubs. It is clear that tax incentives will play a big role in moving the industry forward, and additional clarification will be forthcoming.