Final Regulations for Clean Hydrogen: Making Tax Credits More Accessible

_{Michael Sykes (White & Case, Partner, Washington DC) contributed to the development of this publication.}

I. Overview

On January 3, 2025, the U.S. Internal Revenue Service ("IRS") and U.S. Department of the Treasury ("Treasury") issued final regulations for the clean hydrogen production tax credit ("PTC") under § 45V of the Internal Revenue Code of 1986, as amended (the "Code") and the clean hydrogen production facility investment tax credit ("ITC") under § 48(a)(15) of the Code.

The final regulations were issued in the wake of roughly 30,000 comment letters submitted to Treasury in response to proposed regulations issued on December 22, 2023. Many of the comment letters were directed at the methodology that would be required to determine whether hydrogen produced was "clean", and others were directed at the additional requirements that would be imposed on taxpayers to curb or offset potential negative impacts on emissions that may result from increased hydrogen production activities. The methodology included utilizing a comprehensive/complex lifecycle greenhouse gas ("GHG") emissions model ("45VH2-GREET"¹), and the additional requirements included, among other things, a somewhat impractical verification requirement and the "three pillars" of incrementality, temporal matching and deliverability (discussed in greater detail below).

Despite many of the comments urging different standards, the final regulations largely retain the methodology and verification requirements and crystalize the three pillars from the proposed regulations, although there are some key changes, additions and clarifications intended to ease the transition into the new regime. Some of the key changes and additional clarifications are discussed below, followed by a more general discussion of the clean hydrogen tax credit regimes.

II. Key Changes

Incrementality

Energy Attribute Certificates ("EACs") were previously limited to electricity generating facilities that began commercial operations no more than 36 months prior to the hydrogen production facility with respect to which the EACs are retired is placed in service and uprates. The regulations open the rules to include EACs from:

• (1) facilities with carbon capture technology placed in service during the 36-month period before the hydrogen production facility is placed in service;
• (2) certain "restarted" facilities that can meet "uprate" requirements and are restarted during the 36-month period before the hydrogen facility is placed in service, provided the restarted facility did not cease operations for the purpose qualifying under the new rule;
• (3) facilities physically located in "qualifying states" if the hydrogen facility is in the same state; and
• (4) "qualifying nuclear reactors" which, as well as the facilities in qualifying states, are not subject to the 36-month period.

To be a "qualifying state", the state must have enacted certain laws or regulations regarding decarbonization and GHG cap programs that promote renewable energy production. (Currently only California and Washington have been identified as meeting this requirement.)

For electricity from a "qualifying nuclear reactor", up to 200 megawatt hours of electricity per operating hour per qualifying nuclear reactor may be considered incremental subject to certain considerations. A "qualifying nuclear reactor" is one that competes in a competitive electricity market and does not receive more than 50 percent cost recovery through rate regulation or public ownership, had average annual gross receipts of less than 4.375 cents per kilowatt hour for any two calendar years 2017 through 2021, and either has a physical electrical connection with the hydrogen production facility which acquires and retires the EACs or is the subject of a written contract under which the owner of a hydrogen production facility agrees to acquire and retire EACs from such nuclear reactor for a fixed term of at least 10 years beginning on the first date on which qualified EACs are acquired.

Temporal Matching

The deadline to transition from annual matching to hourly matching is now January 1, 2030, rather than January 1, 2028.

Stored electricity can be used to meet the temporal matching requirement, provided that (i) the electricity represented by the EAC is discharged from a storage system in the same hour as the taxpayer's hydrogen production facility uses electricity to produce hydrogen, (ii) the storage system must be located in the same region as the hydrogen production facility and the electricity generating facility and (iii) the volume of electricity use substantiated by each EAC for stored electricity must account for storage-related efficiency losses.

Deliverability

The standard of deliverability can be satisfied by interregional delivery. An EAC meets such requirements if the electricity generation represented by the EAC has transmission rights from the generator location to the region in which the hydrogen production facility is located and that generation is delivered to such facility's region.

Use of methane from certain sources to produce hydrogen

The final regulations introduce § 1.45V-4(f), which addresses application of the § 45V credit to methane derived from biogas, renewable natural gas (RNG) derived from biogas, and fugitive sources of methane. This subsection also introduces the concept of a gas energy attribute certificate (gas EAC) and the requirements for an eligible gas EAC. A qualifying gas EAC will allow a taxpayer to treat a hydrogen production facility's use of RNG or coal mine methane as being from a specific source of gas rather than fossil natural gas only if the taxpayer acquires and retires qualifying gas EACs for each unit of such gas that the taxpayer claims from such source.

The requirements of a qualifying gas EAC are similar in structure to that of an EAC yet distinct. A qualifying gas EAC has no incrementality requirement, and the requirements for temporal matching and deliverability are different.

Temporal matching requires that the RNG or coal mine methane represented by the eligible EAC was injected into a pipeline that satisfies the requirements of deliverability in the same calendar month that the hydrogen production facility used the RNG or coal mine methane to produce hydrogen, or if the RNG or coal mine methane represented by the eligible gas EAC was delivered to the hydrogen production facility from the RNG or coal mine methane producer, through a direct pipeline connection or other physical method of exclusive delivery.

Deliverability requires that the RNG or coal mine methane represented by the eligible gas EAC is injected into a natural gas pipeline in the contiguous United States and the hydrogen production facility is also located and connected to a natural gas pipeline in the contiguous United States. Alaska, Hawaii and each U.S. territory are separate regions. An eligible gas EAC meets the requirements of deliverability if the RNG or coal mine methane represented by the eligible gas EAC is injected into a natural gas pipeline in one of these regions and the hydrogen production facility is located in and connected to a natural gas pipeline in the same region. An eligible gas EAC also meets the requirements of deliverability if the RNG or coal mine methane represented by the eligible gas EAC was delivered to the hydrogen production facility from the RNG or coal mine methane producer through a direct pipeline connection or other physical method of exclusive delivery.

Observation: The standards for a qualifying gas EAC are more lenient than those of a qualifying EAC. Instead of the three pillars, the taxpayer must satisfy two. Rather than hourly matching, a qualifying gas EAC has monthly matching. Rather than the contiguous United States being divided into several smaller regions, as is the case for a qualifying EAC, deliverability for a qualifying gas EAC treats the contiguous United States as one region. The final regulations have afforded producers of RNG and coal mine methane to generate and sell gas EACs with looser restrictions than exist for EACs.

III. Additions and Clarifications

Definition of "Facility"

The final regulations expanded the definition to include "all components of property that function interdependently to produce qualified clean hydrogen through a process that results in the lifecycle GHG emissions rate used to determine the credit (emphasis added)."

Observation: A taxpayer will not be able to "double stack" § 45V and § 45Q credits if the carbon capture sequestration equipment on which the § 45Q was claimed is used in the process by which the qualified clean hydrogen is produced. Note that this does not preclude a taxpayer from claiming a § 45Q on electricity production and then using that electricity for qualified clean hydrogen production in a separate facility on which a § 45V can be claimed.

Lifecycle GHG emissions rate of hourly electricity consumption

The final regulations explain that the applicable percentage for qualified clean hydrogen produced in any particular hour on or after January 1, 2030 will be determined with regard to the attributes of the qualifying EAC retired for such qualified clean hydrogen. However, this includes the caveat that in order for any hour of production of a facility to be eligible for the § 45V credit, the annual average lifecycle GHG emissions rate must be not greater than four kilograms of carbon dioxide equivalent per kilogram of hydrogen for all hydrogen produced.

Observation: A facility that produces hydrogen that, depending on the hour, is eligible for one of the four applicable percentages of § 45V or ineligible for any of them, may claim a credit applicable to that hour of production if the annual average emissions is below the threshold.

IV. General Summaries

Clean Hydrogen PTC and ITC

Section 45V provides annual PTCs up to $3/kg of qualified clean hydrogen produced by a taxpayer at a qualified facility during the 10-year period after the facility is first placed in service. The facility must generally be owned by the taxpayer claiming the credits, construction of the facility must have begun before January 1, 2033, and the hydrogen production must result in a lifecycle emissions rate not greater than four kilograms of CO2e per kilogram of hydrogen. Additionally, the production must (i) occur in the United States or a possession of the United States, (ii) occur in the ordinary course of a trade or business of the taxpayer, (iii) be for sale or use (rather than, e.g., venting or flaring) and (iv) be verified by a qualified verifier who must certify the production, the sale or use and the amount of the credit under penalty of perjury.

The amount of PTC is based on sliding scale tied to the emissions associated with the production as shown in the table below, calculated as: (a) $0.60 per kilogram (kg) of QCH produced at a QCH production facility, multiplied by (b) the "applicable percentage" based on the resulting lifecycle GHG emissions rate, equals (c) the amount of PTC. The amount is increased by five times if construction began before January 29, 2023, or PWA requirements are met.

As an alternative to claiming the PTC, a taxpayer can elect to treat the hydrogen production facility as "energy property" and claim the ITC under § 48(a)(15). The election is irrevocable, precludes claiming any credits under § 45V (or § 45Q for carbon capture at the facility), and must be made in the year the facility is placed in service. The ITC credit amount is the energy percentage—which is based on a sliding scale tied to the emissions rate at which the facility is designed and reasonably expected to produce clean hydrogen—multiplied by the eligible costs of the facility. The energy percentage multiplied by five if construction began before January 29, 2023, or PWA requirements are met.

The ITC credit is subject to recapture during the five-year period after the facility is placed in service. Recapture may be triggered by dispositions of the facility or if the facility ceases to be energy property; additionally, the ITC is subject to an emissions-based recapture up to 20% each year for any year in which the verified emissions rate would have resulted in a lower ITC than was initially claimed.

Lifecycle GHG Emissions Rate

Lifecycle GHG emissions include emissions through the point of production (well-to-gate) for the purposes of the clean hydrogen tax credit regimes. Well-to-gate emissions include emissions associated with feedstock growth, gathering, extraction, processing and delivery to a hydrogen production facility, as well as the emissions associated with the hydrogen production process, inclusive of the electricity used by the hydrogen production facility and any capture and sequestration of carbon dioxide generated by the hydrogen production facility. These emissions are determined under the 45VH2-GREET Model. To claim either the PTC or the ITC, a taxpayer must either determine the lifecycle GHG emissions rate using the 45VH2-GREET Model, or, in the case of hydrogen for which a lifecycle GHG emissions rate has not yet been determined, file a petition for a provisional emissions rate ("PER").

These determinations require emissions data regarding the generation of the specific units of electricity used by the hydrogen production facility. These data are determinable in a behind the meter system, in which the hydrogen production facility is connected directly to the electricity generating facility, such as solar panels or wind turbines. However, it is unclear how a taxpayer could determine data regarding electricity drawn from the grid. With EACs, a taxpayer does not have to determine data regarding the actual electricity used in hydrogen production.

An EAC is a tradeable contractual instrument that represents the energy attributes of a specific unit of energy produced. It may be traded with or separately from (i.e., unbundled) the underlying energy it represents. An EAC can be retired by or on behalf of its owner, which is the party that has the right to claim the underlying attributes represented by an EAC. That party may assign those attributes to electricity used to produce hydrogen and then calculate the lifecycle GHG emissions rate of that hydrogen production as though the electricity used came from the same facility as the electricity represented by the EACs, even if the electricity used is from the grid, for the purposes of § 45V. 

An EAC is issued through a qualified EAC registry or accounting system. The registry ensures that only one EAC is associated with each unit of electricity and verifies that each EAC is claimed and retired only once. Renewable energy certificates ("RECs") and other similar energy certificates issued through a registry or accounting system are forms of EACs.

Only a qualifying EAC may be acquired and retired for the purposes of § 45V. To qualify, the EAC must meet the requirements of eligibility, incrementality, temporal matching, deliverability, and verification by a qualified verifier. An eligible EAC (a) represents electricity that is produced by an electricity generating facility that is registered on only one qualified EAC registry or accounting system, (b) provides information that would enable a taxpayer to determine a lifecycle GHG emissions rate for hydrogen production, such as the technology and feedstock used to generate the electricity and the amount of electricity, (c) provides information regarding timing, such as the commercial operations date of the facility that generated the electricity and when that electricity was generated, (d) provides other attributes required by 45VH2-GREET or in the determination of a PER and (e) for electricity generating sources that use carbon capture equipment, provides the placed in service date of such equipment to accurately determine the emissions associated with such electricity, among other requirements.

Acquisition and retirement must be verified by a qualified verifier, which is any individual or organization with active accreditation from the American National Standards Institute National Accreditation Board or as a verifier, lead verifier or verification body under the CA LCFS.

Three Pillars

For purposes of hydrogen production that relies on electricity to power the production process, the rules generally require the taxpayer to account for the associated lifecycle GHG emissions based on the emissions rates from the regional electricity grid where the hydrogen facility is located; however, a taxpayer can rely on certain electricity generation from facilities with lower lifecycle GHG emissions provided the electricity is associated with an EAC that meets the requirements of the three pillars of § 45V: incrementality, temporal matching and deliverability. The three pillars are intended to minimize lifecycle GHG emissions attributable to hydrogen production.

Incrementality

Incrementality increases the likelihood that power used by a hydrogen production facility is power that would not otherwise have existed without some procurement by the facility. Without it, the concern is that new hydrogen production facilities seeking PTCs would "cannibalize" the existing renewable energy that would otherwise have been used by existing facilities, and those facilities would have to resort to electricity derived from fossil fuels.

An EAC meets the requirements of incrementality if the EAC relates to electricity generated at an electricity generating facility that began commercial operations no more than 36 months before the hydrogen facility retiring the EAC was placed in service or, if the electricity represented by the EAC is produced by an electricity generating facility that uses carbon capture and sequestration technology, such technology has a placed in service date that is no more than 36 months before the hydrogen production facility for which the EAC is retired was placed in service.

Alternatively, an EAC meets the requirements if it relates to electricity generated at an electricity generating facility that had an increase in its rated nameplate capacity no more than 36 months before the hydrogen facility retiring the EAC was placed in service. In that case, the electricity generation facility is granted EACs reflecting the increased generation only. However, certain facilities that are decommissioned or in the process of becoming decommissioned, if restarted, qualify as being uprated and therefore as having satisfied the standard of incrementality. This qualification is subject to certain conditions, such as that the facility must have ceased operations, must have been shut down for at least one year pursuant to the standards of the relevant regulatory body, must be eligible to restart according to the same body, and the facility must not have ceased operations for the purpose of qualifying under this rule.

Temporal Matching

Temporal matching, specifically hourly matching, limits the ability of hydrogen production facilities to claim a credit on hydrogen produced using nonrenewable electricity. Without it, hydrogen production facilities could use nonrenewable power when EACs are not available for the same hour in which hydrogen is produced, and still claim a credit on all hydrogen produced in a calendar year so long as the facility acquires enough EACs from that same year.

An EAC meets the requirements of temporal matching if the electricity represented by the EAC is generated in the same specified time window that the taxpayer's hydrogen production facility uses electricity to produce hydrogen. Before January 1, 2030, it must be in the same calendar year. After December 31, 2029, it must be in the same hour. This transition from annual to hourly matching restricts the hydrogen production for which the taxpayer can claim a credit. Solar and wind powered renewable electricity are not available every hour of every day.

Deliverability

Deliverability increases the potential that a hydrogen production facility retiring an EAC could use the electricity represented by that EAC. Without it, a hydrogen production facility could retire an EAC that represents electricity generated on the other side of the country to claim a credit on hydrogen produced with electricity drawn from a local high emissions intensity grid. Meanwhile, the clean electricity represented by that retired EAC could be sent to a grid that does not need additional power.

An EAC meets the requirements of deliverability if the electricity represented by the EAC is generated by an electricity generating facility that is in the same region as the hydrogen production facility. Those regions are derived from the chart provided in § 1.45V-4(d)(2)(ix) of the final regulations. Future versions of this table may be provided as a safe harbor in guidance published in the Internal Revenue Bulletin.

The standard of deliverability can also be satisfied by interregional delivery. An EAC meets such requirements if the electricity generation represented by the EAC has transmission rights from the generator location to the region in which the hydrogen production facility is located and that generation is delivered to such facility's region.

Observation

Under the final regulations, a taxpayer can claim a credit on hydrogen produced with electricity generated from any source so long as that taxpayer acquires and retires enough qualifying EACs to match the amount of electricity used in that hydrogen production. That taxpayer will calculate the lifecycle GHG emissions rate for the credit based on the emissions data in the qualifying EACs rather than that of the actual electricity used, assuming those data are determinable. Electricity generation facilities can produce clean electricity, sell it to the grid and then sell EACs representing that electricity to a distinct third party. Facilities that both generate electricity and produce hydrogen can sell their electricity to the grid, keep the EACs, later buy electricity from the grid, produce hydrogen with the bought electricity, retire the EACs and claim a credit.

Gas

A gas EAC is a tradeable contractual instrument, issued through and retired within a qualified gas EAC registry or accounting system, that represents the attributes of a specific unit of RNG or coal mine methane. A gas EAC may be traded with or separately from the underlying gas it represents. A gas EAC can be retired by or on behalf of its owner, which is the party that has the right to claim the underlying attributes represented by a gas EAC.

A qualified gas EAC registry or accounting system is a tracking system that performs the same duty as a qualified EAC registry or accounting system, yet with additional requirements. A qualified gas EAC registry or accounting system also (a) requires independent verification of the source or sources of the gas that comprises the RNG or coal mine methane and any other factual considerations relevant to the lifecycle GHG emissions assessment for purposes of § 45V for tracking and verification purposes (self-reported data without independent verification are not allowed), (b) requires use of a revenue grade meter, with production volumes reported to the registry via an application programming interface or with independent reporting to ensure accurate accounting for production volumes (self-reported data are not allowed), (c) provides for documentation of the chain-of-custody of any transfers of certificates, (d) requires an attestation that a producer has not registered the RNG or coal mine methane with other registries and (e) requires verification of pipeline interconnection, if applicable.

RNG is biogas that has been upgraded to remove water, CO2, and other impurities such that it is interchangeable with fossil natural gas. Biogas is gas containing methane that results from the decomposition of organic matter under anaerobic conditions. Coal mine methane is methane that is stored within coal seams and is liberated as a result of current or past mining activities. Liberated coal mine methane can be released intentionally by the mine for safety purposes, such as through mine degasification boreholes or underground mine ventilation systems, or it may leak out of the mine through vents, fissures or boreholes. For the purposes of gas EACs, coal mine methane does not include methane removed from virgin coal seams (for example, coal bed methane).

A qualifying gas EAC is an eligible gas EAC that meets the requirements of temporal matching and deliverability and has been verified by a qualified verifier. For these purposes, a qualified verifier has the same requirements here as for a qualifying EAC.

An eligible gas EAC has some of the same requirements as an eligible EAC, while omitting some and adding others. An eligible gas EAC also provides (a) the month and year in which the RNG or coal mine methane is produced (rather than the hour), (b) the location at which the RNG or coal mine methane is injected into a natural gas pipeline (or the location of the production facility if directly used without injection into a natural gas pipeline), (c) the source or sources of the gas that comprises the RNG or coal mine methane associated with each certificate, as well as other attributes required by 45VH2-GREET, or in the determination of a PER, to determine the emissions associated with such RNG or coal mine methane. An eligible gas EAC does not require the commercial operations date of the facility that produced the RNG or coal mine methane.

Subject to the existence of a qualified gas EAC or registry tracking system, if a taxpayer determines a lifecycle GHG emissions rate for hydrogen produced at a hydrogen production facility using the 45VH2-GREET model or a PER for hydrogen produced at a hydrogen production facility subject to a PER petition, then the taxpayer may treat such hydrogen production facility's use of RNG or coal mine methane as being from a specific source of such gas rather than fossil natural gas only if the taxpayer acquires and retires qualifying gas EACs for each unit of such gas that the taxpayer claims from such source.

Two Pillars for Purposes of Blue Hydrogen

The requirements for a qualifying gas EAC are fewer and broader than those of a qualifying EAC. Most notably, the requirement of incrementality is absent.

Monthly Temporal Matching

An eligible gas EAC meets the requirements of temporal matching if the RNG or coal mine methane represented by the eligible gas EAC was injected into a pipeline that meets the requirements of deliverability in the same calendar month that the hydrogen production facility uses the RNG or coal mine methane in the production of hydrogen or, if the RNG or coal mine methane represented by the eligible gas EAC was delivered to the hydrogen production facility from the RNG or coal mine methane producer, through a direct pipeline connection or other physical method of exclusive delivery.

Deliverability with Fewer and Larger Regions

An eligible gas EAC meets the requirements of deliverability if the RNG or coal mine methane represented by the eligible gas EAC is injected into a natural gas pipeline in the contiguous United States and the hydrogen production facility is also located in and connected to a natural gas pipeline in the contiguous United States. Alaska, Hawaii and each U.S. territory are separate regions, such that an eligible gas EAC meets the requirements of deliverability if the RNG or coal mine methane represented by the eligible gas EAC is injected into a natural gas pipeline in one of these regions and the hydrogen production facility is located in and connected to a natural gas pipeline in the same region. An eligible gas EAC also meets the requirements of deliverability if the RNG or coal mine methane represented by the eligible gas EAC was delivered to the hydrogen production facility from the RNG or coal mine methane producer through a direct pipeline connection or other physical method of exclusive delivery.

Observation

The distinction made between qualifying EACs and qualifying gas EACs liberalizes the RNG and coal mine methane industries to generate and sell qualifying gas EACs similar to the system in place for EACs. Hydrogen producers may draw gas from a gas pipeline and treat it for the purposes of § 45V as having come from a specific source without directly acquiring such gas from such source or independently determining the energy attributes of such gas.

_{¹ The Department of Energy intends to release a new version of VH2-GREET with an accompanying user manual in January 2025.}

_{White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.}

_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

_{© 2025 White & Case LLP}