Final Hydrogen Regulations Provide Multiple Paths for Production, But The Three Pillars and Other Obstacles Remain

On January 10, 2024, the Department of the Treasury (“Treasury”) published the final regulations governing the section 45V Clean Hydrogen Production Tax Credit (“Final Regulations”). The Final Regulations tackle many of the issues facing taxpayers¹ and provide helpful examples.  Many of the remaining gaps were filled on January 15, 2025 with the release of the revised 45VH2-GREET model and ancillary documents.

BACKGROUND

The Inflation Reduction Act of 2022 created the section 45V credit for the production of qualified clean hydrogen. The section 45V credit amount is based on a sliding scale; the section 45V credit increases as the lifecycle greenhouse gas emissions rate (“emissions rate”) decreases (i.e., $0.12 to $0.60 per kg of hydrogen or $0.60 to $3.00, if applicable prevailing wage and apprenticeship requirements² are satisfied (before adjustment for inflation)); however, the emissions rate cannot exceed more than 4.00 kg CO2e/kg H2.

The emissions rate of hydrogen is determined, under the Final Regulations, using the most recently released 45VH2-GREET model or a Provisional Emissions Rate, if the “production pathway” or feedstock for such hydrogen is not described in the 45VH2-GREET model.³ Broadly, direct emissions and indirect emissions (attributable to electricity and feedstocks) determine the emissions rate of hydrogen with regard to each “production process.” The bulk of the text of the Final Regulations and the published comments relate to the calculation of the emissions rate of hydrogen and how taxpayers can substantiate such rate — specifically through the use of Energy Attribute Certificates (“EACs”) or similar book-and-claim approaches.

As described further below, some key takeaways from the Final Regulations include:

• The 45VH2-GREET model can be locked-in upon beginning of construction for the duration of the credit period.
• The “Three Pillars” for electricity EACs were slightly softened but left largely intact:
  • Hourly-matching pushed back to 2030 (at which point hourly emission rates may be determined under certain circumstances);
  • Certain nuclear generators can now generate qualifying EACs; and
  • EACs sourced from generation facilities in California and Washington are exempt from incrementality requirements for hydrogen production facilities in such states.
• Averaging feedstock carbon intensities (including when blending renewable natural gas (“RNG”) and fossil natural gas) was disallowed.
• Gas EACs for RNG and coal mine methane (“CMM”) may be taken into account beginning in 2027 if permitted by Treasury, but RNG and CMM will likely receive a higher carbon intensity score than expected in forthcoming 45VH2-GREET models.
• A clarified definition of “facility” suggests that co-located carbon capture equipment and hydrogen production property may be eligible for section 45V and section 45Q credits, respectively.
• Taxpayers received additional clarity around the definition of “productive use” and other anti-abuse provisions.

GREET LOCK-IN

The Final Regulations permit taxpayers to make an irrevocable election to “lock-in” the 45VH2-GREET model in effect when construction of the relevant hydrogen production facility (or the qualifying modification thereto) began (unless otherwise specified in the Final Regulations).⁴ Taxpayers are permitted to rely on their locked-in model for the 10-year credit period. Electing taxpayers are not exposed to the risk of unfavorable subsequent 45VH2-GREET model updates.⁵ For example, the 45VH2-GREET model released on January 15, 2025 removes forest residues as a feedstock for biomass gasification. This opens the possibility that the subsequent 45VH2-GREET models may remove and reevaluate other feedstocks, exposing taxpayers to periods where the 45VH2-GREET model does not describe their production process or feedstocks.

“WELL TO GATE” BOUNDARIES

Section 45V calculates emissions rates based on a well-to-gate scope. The Final Regulations clarify that the well-to-gate scope includes all emissions associated with the hydrogen production “process” from feedstock growth through delivery of feedstock, and all emissions associated through the point of hydrogen production, but excluding emissions from liquefaction, storage or transport of hydrogen. Although hydrogen does not need to reach a certain level of purity to be eligible for the section 45V credit, if a taxpayer knows or has reason to know that the purification of a hydrogen gas stream is necessary for the hydrogen gas stream to be productively used or that the impure hydrogen gas stream will be combusted without purification, the emissions associated with purification will be imputed to the emission rate of such hydrogen.

FEEDSTOCK BLENDING NOT ALLOWED

Treasury created new definitions for “process”⁶ and “primary feedstock”⁷ to prohibit blending feedstocks. Because RNG has a negative carbon intensity score, many taxpayers planned to blend RNG and natural gas to lower their aggregate carbon intensity score. Depending on the assumptions used, relatively little RNG could make an SMR or ATR eligible for the highest tier of the section 45V credit, even without carbon capture equipment (“CCE”). The Final Regulations prohibit this practice, sometimes called “splash blending,” and require taxpayers to determine the emissions rate of each hydrogen production process.⁸

Example – an SMR facility that uses RNG derived from animal waste and natural gas to produce hydrogen would model two processes: one using RNG derived from animal waste and one using natural gas.

CO-LOCATING 45V AND 45Q

The Final Regulations clarified that a “facility” means a “single production line” or all components of property that function interdependently to produce qualified clean hydrogen. A facility includes CCE if such CCE contributes to the emissions rate of the qualified clean hydrogen for which the credit is determined, so if CCE does not contribute to the emissions rate of the qualified clean hydrogen, it is not considered part of the “facility.” This suggests that a facility may be able to qualify for the section 45V credit despite being co-located with CCE equipment that has claimed the section 45Q credit.

ELECTRICITY AND THE THREE PILLARS

Under the Final Regulations, the 45VH2-GREET model assumes that hydrogen is produced using “grid-mix” electricity associated with the facility’s region, unless qualifying EACs are acquired and retired for such electricity.  EACs are tradable instruments that represent the attributes of a unit of electricity (commonly known as “RECs”). Qualifying EACs are “eligible EACs”⁹ that satisfy the Three Pillars of “Deliverability,” “Time Matching,” and “Incrementality” with respect to such taxpayer’s hydrogen production facility.¹⁰

• Deliverability: The electricity must be generated by a facility within the same “region” based on groups of balancing authorities (derived from the National Transmission Needs Study released by DOE on October 30, 2023 (with Alaska, Hawaii, and each US territory being treated as separate regions)).
  • Interregional – The Final Regulations permit interregional deliveries, including from Mexico and Canada, in certain limited circumstances.
  • Regions defined – Taxpayers may rely on the regions described in the Final Regulations, but Treasury anticipates publishing a modified list to the extent there are future modifications to balancing authorities. Notably, regions do not always follow state-lines.
• Time Matching: Prior to January 1, 2030 (extended from January 1, 2028, in the Proposed Regulations), EACs must be generated and retired with respect to the same calendar year the hydrogen is produced; after December 31, 2029, EACs must be generated and retired with respect to the same hour that the hydrogen is produced.
  • Batteries – Energy storage systems can shift the temporal profile of energy from the time of generation to the time of discharge, if, among other things, round-trip efficiency losses are accounted for and the underlying electricity generation facilities otherwise comply with the Three Pillars.
  • Hourly Calculations – After January 1, 2030, Taxpayers may elect to calculate emissions on an hourly, rather than aggregate annual basis, provided the aggregate annual emissions rate is not more than 4 kg CO2e/kg H2. This creates substantial flexibility for taxpayers and potentially higher credit amounts: in an example in the Final Regulations, a taxpayer using the aggregate annual approach would be eligible for approximately 1 million dollars in credits, but would be eligible for approximately 6 million dollars using the hourly calculation to determine emission rates.¹¹
• Incrementality: EACs must be generated by facilities with Commercial Operation Dates (“COD”) occurring no more than 36 months before the placed in service date of the hydrogen production facility.¹²
  • CCE – Under the Final Regulations, for generation facilities that have had CCE added, the Incrementality pillar is determined based on the COD of the CCE.
  • Uprates – EACs from facilities that were modified to generate additional energy (measured on rated nameplate capacity in megawatts or certain other approved measurement standards) no more than 36 months before the hydrogen production facility’s COD may also satisfy Incrementality with regard to the uprated capacity of the facility.
  • Restarted facilities – The Final Regulations also provide special rules for facilities that restart after a shutdown period of at least a year. These facilities can treat their initial capacity as zero, and thus treat their entire capacity as their uprated capacity. These provisions are especially relevant to recommissioned nuclear facilities.
  • Existing nuclear facilities – Certain existing nuclear reactors can satisfy the Incrementality pillar regardless of their COD. Up to 200 MWh of electricity per operating hour of a nuclear reactor that (a) is a merchant nuclear reactor (i.e., one that competes in a competitive electricity market) or comprises a single-unit facility, (b) satisfies the economic test in Section 45U, and (c) enters into an at least 10-year offtake agreement with the relevant hydrogen producer can be treated as satisfying the incrementality requirement.
  • California and Washington – If a state has a “qualifying electricity decarbonization standard” and a “qualifying GHG cap program,” then EACs produced by resources in the state and sold to hydrogen production facilities in such state are deemed to satisfy the Incrementality pillar regardless of the generation facility’s COD. Currently, only California and Washington have both a qualifying electricity decarbonization standard and a qualifying greenhouse gas cap program.

METHANE

Gas EACs – The Final Regulations note that after January 1, 2027, Treasury may permit the use of “gas EACs” by taxpayers to substantiate their use of RNG and CMM, instead of requiring a direct connection to substantiate such use, if Treasury determines that there is a qualified registry for gas EACs. The gas EACs will be similar to electricity EACs but are not subject to any Incrementality requirements (notably, the Final Regulations did not adopt the first productive use requirement described in the Proposed Regulations), the continental U.S. is treated as a single region for Deliverability, and gas EACs are matched on a monthly basis for Time Matching.

RNG and CMM carbon intensity – RNG and CMM received a higher carbon intensity score than expected. The carbon intensity of RNG and CMM are calculated using an “alternative fate” that represents the emissions avoided by capturing the methane and using it for RNG. For all RNG and CMM, other than RNG derived from animal waste, the Final Regulations require flaring, not unabated release, to be used as the alternative fate. This will most likely result in a higher carbon intensity score for RNG and CMM. For RNG derived from animal waste, the alternative fate is based on the national average of all manure management practices and yields a carbon intensity of -51g CO2e per megajoule (“MJ”) for biomethane, or -31g CO2e per MJ of RNG derived from animal wastes.¹³

ANTI-ABUSE

The Final Regulations include an anti-abuse provision that disallows the section 45V credit for hydrogen that the taxpayer knows or has reason to know will, in excess of commercial practices, be vented or flared, or is used to produce hydrogen (e.g., by generating heat or power directly used in a hydrogen production process). The Final Regulations also define “productive use” to mean a consumption of hydrogen in “a manner that generates positive economic value,” but declines to provide additional guidance on the calculation of economic value.

CONGRESSIONAL REVIEW ACT

As of the writing of this alert, a “Congressional Review Act” challenge of the Final Regulations has not been introduced in Congress. But, given the impending change in administration and the beginning of the 119th Congress, we will be anxiously paying attention to potential challenges to these final regulations, updates to the 45VH2-GREET model, or other changes in tax law. Stay tuned for updates.

¹ See our prior coverage here.

² For our previous coverage of the prevailing wage and apprenticeship rules, see here.

³ A “Provisional Emissions Rate” is acquired by first making an emission value request to the Department of Energy (“DOE”). Generally, taxpayers may rely on the emission value provided by the DOE until the pathway and feedstock is included in a subsequent 45VH2-GREET model or until there is a “material change” that renders the Provisional Emissions Rate unverifiable.

⁴ For facilities that began construction prior to December 26, 2023, the relevant taxpayer may make an irrevocable election to treat the first publicly available version of 45VH2-GREET as its model for the credit period. For facilities not described in the 45VH2-GREET model, if construction begins after receipt of an emission value from DOE, the relevant taxpayer may elect to “lock-in” the emission value for the credit period.

⁵ Ordinarily, taxpayers must use the latest 45VH2-GREET model at the start of the applicable taxable year or a model released in such year.

⁶ Regulation § 1.45V-1(a)(11) (“The term process means the operations conducted by a facility to produce hydrogen (for example, electrolysis or steam methane reforming) during a taxable year using a primary feedstock.”)

⁷ Id. (“The term primary feedstock means a hydrogen-containing chemical that is transformed to produce hydrogen at a hydrogen production facility and has uniform or similar attributes distinguished by the source from which it is derived, if such source materially affects the lifecycle GHG emissions associated with use of the chemical to produce hydrogen.”)

⁸ Under section 48(a)(15), taxpayers are permitted to make an irrevocable election to claim an investment tax credit for a hydrogen production facility rather than the section 45V production credit. Under the Final Regulations, the amount of the investment credit depends on the weighted average of the lifecycle emissions rates of all hydrogen production processes of such facility. Thus, feedstock blending is not permitted for purposes of the section 45V credit but appears required for the hydrogen investment tax credit.

⁹ An “eligible EAC” is an EAC that contains certain information (the location and type of facility, amounts and units of electricity, the facility’s commercial operations date, placed in service date of any carbon capture equipment, the time the energy was produced (the year, prior to January 1, 2030; the date and hour, after December 31, 2029)) and is tracked on only one qualified EAC registry or accounting system, including ERCOT, MIRECS, M-RETS, NAR, NEPOOL-GIS, NYGATS, NC-RETS, PJM-GATS, and WREGIS.

¹⁰ Notably, behind-the-meter resources must still comply with the Three Pillars and be tracked using EACs.

¹¹ See Regulation § 1.45V-4(a), Examples 1 and 2.

¹² The use of the term “COD” rather than “placed in service” appears to intentionally exclude “repowered” wind facilities from satisfying the Incrementality requirement, except with respect to uprates from such repowered wind facilities.

¹³ DOE, “A Generic Counterfactual Greenhouse Gas Emission Factor for Life-Cycle Assessment of Manure-Derived Biogas and Renewable Natural Gas” (January 2025). While the carbon intensity of biomethane is fixed in the Final Regulations, the carbon intensity of RNG derived from animal waste may change in future 45VH2-GREET models.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.