US finalizes 45V clean hydrogen subsidy scheme

The US Department of the Treasury’s final rules for hydrogen production credits under section 45V of the federal tax code are generating reactions from industry and environmental groups. The 45V program, part of the Inflation Reduction Act of 2022, offers a tax credit for hydrogen if the total greenhouse gas (GHG) generated in its production is less than or equal to 4 kg of carbon dioxide per 1 kg of hydrogen.

That simple benchmark sits on top of almost 400 pages detailing what hydrogen producers have to demonstrate to qualify for the tax credit, which can be worth up to $3 per kilogram. The Treasury released the rules on Jan 3. Compared with a draft published in late 2023, the final rules give producers more time to get their technologies and feedstocks into compliance. They retain tough requirements meant to ensure that electrolytic hydrogen production doesn’t just take renewable energy from other uses.

The rules won measured praise from both environmental groups and industry. “We appreciate Treasury moving toward better hydrogen policy in its final rule for clean hydrogen production,” Conrad Schneider, a senior director at the Clean Air Task Force (CATF), an environmental group, says in a statement. “Hydrogen production must be decarbonized across the supply chain, 99% of which currently uses highly polluting fossil-fuel-based production.”

In a statement, Kim Hedegaard, a cleantech executive at the chemical process technology firm Topsoe, calls the final guidance “a critical milestone in growing the clean hydrogen economy in the US. With this added clarity, many projects that have been delayed may move forward, which can help unlock billions of dollars in investments across the country.” Topsoe is building a $400 million factory in Virginia that will make solid oxide electrolyzer cells for electrolytic hydrogen production.

Most projects angling for 45V subsidies make low-carbon hydrogen by using electricity to split water molecules or by using heat to split methane. To qualify, the electrolysis route requires a supply of low-carbon electricity, and the methane approach requires a way to prevent methane’s carbon component from reaching the atmosphere.

If low-carbon hydrogen makers can scale up, the molecule could become a vector to decarbonize chemical production, other industrial processes, and some forms of transportation.

One change from the draft concerns hourly matching, a requirement that electrolytic hydrogen must be produced in the same hour that the corresponding electricity is generated. The requirement, advocates say, ensures that the underlying energy is meaningfully low carbon. Chemical and energy companies lobbied against hourly matching, saying compliance would cost too much and be too complicated.

The final rules have a compromise: 45V will use hourly matching, but not until 2 years later than originally planned. Schneider says CATF is “disappointed in Treasury’s decision to push hourly matching from 2028 to 2030, and we worry that this could cause at least some increase in emissions in the short term.”

Similar rules will be in place to require that new hydrogen capacity is matched by new low-carbon energy, not by increased fossil-fuel consumption—a concept known as incrementality.

Nuclear power got a boost from new provisions saying that if an electrolytic hydrogen project keeps a nuclear power plant running, the power plant can count as new clean energy for the purposes of 45V. “Nuclear energy is uniquely positioned to help achieve US clean hydrogen production targets, and existing nuclear energy plants are uniquely positioned to be early movers,” writes the Nuclear Innovation Alliance, a nonprofit promoting nuclear power.

The final rules around fossil-based clean hydrogen, in contrast, got tighter compared with the draft on the subject of methane emissions. Such projects convert methane and other hydrocarbons into hydrogen and capture the resulting carbon. Though 45V will start by assuming all methane projects leak at the same rate, the program will shift over time to detailed site-by-site analysis that rewards successful reduction of methane leakage.

The Department of the Treasury will calculate the carbon footprints of hydrogen plants using the Greenhouse Gases, Regulated Emissions, and Energy Use in Transport (GREET) lifecycle analysis model developed by the US Department of Energy. Tax credits for each individual plant will use the version of GREET that is current when construction starts. This approach gives project developers enough certainty now to woo investors while incentivizing better technology down the line, says Katie Ellet, CEO of the methane pyrolysis start-up ETCH. “It’s a clever piece of policy.”

The next policy milestone to watch will be updates to the GREET model, Ellet says. ETCH’s technology, which catalytically converts methane into gaseous hydrogen and elemental carbon, should qualify for 45V support, she says.

Salem Esber, an energy market expert at PA Consulting Group, says the final rules balance what the industry says it needs to advance low-carbon hydrogen with the accountability that climate change advocates want. If the incoming Donald J. Trump administration leaves the rules in place, he says, they will “provide the clarity needed for clean hydrogen development for existing hydrogen applications, for some emerging industries and foreign offtakers, and eventually at larger scale for harder-to-decarbonize industries.”

Climate advocates will be watching 45V implementation as tax credit applications start rolling in. “Successfully making hydrogen a part of the climate solution requires accuracy and transparency for emissions of greenhouse gases from upstream supply chains,” says Veronica Saltzman, an attorney at CATF. “Anything less risks making hydrogen part of the climate problem.”