Treasury and IRS Issue Final Regulations on the Credit for Production of Clean Hydrogen Under Section 45V of the Internal Revenue Code

On December 22, 2023, the IRS published proposed regulations (Prior Regulations) [REG-117631-23] in the Federal Register providing guidance on the CHPC. Significantly, the Prior Regulations introduced requirements closely tied to the three pillars of “incrementality” (or “additionality”), temporal matching and deliverability, which were met with opposition from many industry members. On January 3, 2025, Treasury and the IRS released final regulations (Final Regulations) [RIN 1545-BQ97], after reviewing approximately 30,000 comments on the Prior Regulations and consulting with the Department of Energy (DOE) and the U.S. Environmental Protection Agency (EPA). The Final Regulations retain the general framework of the Prior Regulations but make some helpful modifications in response to submitted comments.

Three Pillars/Energy Attribute Certificates
The Prior Regulations provided for the use of energy attribute certificates (EACs) as the means of documenting where taxpayers purchased electricity inputs and the emissions impacts of the use of such electricity in hydrogen production. Under this approach, taxpayers would be required to acquire and retire EACs that meet the three pillar requirements of incrementality, temporal matching and deliverability. Despite considerable pushback from industry members, Treasury and the IRS felt the use of EACs, along with the associated three pillar requirements, were needed to (i) avoid double counting of environmental attributes and (ii) mitigate risk of significant indirect emissions in connection with the production of clean hydrogen. Thus, the acquisition and retirement of EACs continue as a critical aspect of the Final Regulations, although with some flexibility added for taxpayers seeking to comply with the three pillar requirements, as further described below.

Incrementality
The incrementality pillar is the requirement that the clean electricity used to produce hydrogen must come from sources that are additive to existing sources, which have been commercially operated for more than 36 months. The Final Regulations adopt three additional pathways to comply with the incrementality requirement; specifically, electricity that is produced by (i) qualifying nuclear reactors, (ii) an electricity generating facility that has placed in service carbon capture and sequestration technology (within certain time constraints) (CCS Retrofit Rule) and (iii) an electricity generation facility in a qualifying state.

-  Qualifying Nuclear Reactor. Up to 200 megawatt hours (MWh) of electricity per operating hour sourced from a “qualifying nuclear reactor” will be considered incremental, regardless of the operating age of that reactor. A “qualifying nuclear reactor” is a plant located in an unregulated market or a single-unit plant that (a) has met the section 45U credit financial test for any two years between 2017 – 2021, as determined with respect to any one owner of the reactor; and (b) either (i) has a behind-the-meter hydrogen production facility or (ii) has a 10-year written binding offtake contract. A written binding contract is one that is enforceable under state law against the taxpayer or a predecessor and does not limit damages to a specified amount (for example, by use of a liquidated damages provision).

-  The CCS Retrofit Rule treats electricity sourced from a facility that has been operational for more than 36 months as incremental so long as such facility has carbon capture and sequestration equipment that qualifies under section 45Q (i.e., carbon is captured and disposed of in secure geological storage and utilized in a manner described in section 45Q(f) and/or implementing regulations) that has been placed in service within the 36-month period.

-  Qualifying States. Taxpayers can treat electricity sourced from facilities in a qualifying state as incremental. A qualifying state is one that has a qualifying electricity decarbonization standard and a qualifying GHG cap program. A qualifying electricity decarbonization standard is defined as a standard that (i) contains a 100% clean retail electricity or equivalent GHG emissions target by 2050 that applies to the large majority of eligible electricity supplied to the state and (ii) includes policies or a requirement that would achieve that target, such as a renewable portfolio or clean energy standard. A qualifying GHG cap program is a legally binding program with annual obligations with a cap that declines over time and which applies to the large majority of in-state power sector sources of emissions above 25,000 metric tons of CO2e and to emissions associated with those imports and ensures that (a) the prices of allowances sold in a state-run auction cannot fall below $25 per metric ton of CO2e and (b) the cap on GHG emissions cannot be exceeded for less than $90 per metric ton of CO2e ( both amounts as adjusted for inflation). Currently, only California and the State of Washington meet these requirements.

Temporal Matching
The temporal matching pillar is the requirement that taxpayers match the clean hydrogen power being produced as the CHPF with clean power generation. The Prior Regulations adopted an hourly matching requirement, with a transition rule based on annual matching until 2028. Here, Treasury and the IRS acknowledged that hourly tracking currently is not widely available and, as such, extended the transition period from the Prior Regulations to 2030. Additionally, recognizing that energy storage technology is growing, the Final Regulations allow a taxpayer to make use of energy storage to shift its temporal profile if (i) the electricity represented by an EAC is discharged from a storage system in the same hour that the taxpayer’s CHPF facility uses electricity to produce hydrogen and (ii) the storage system is located in the same region as both the CHPF and the facility generating the stored electricity.

Deliverability
Under the deliverability pillar a taxpayer must source its clean electricity generation from a power producer in the same region as the CHPF. The Prior Regulations defined region as a region contained in the DOE’s October 30, 2023, National Transmission Needs Study (DOE Needs Study). The Final Regulations retain the DOE Needs Study and add a table of balancing authorities and their corresponding regions, which is intended to be the definitive source for identifying regions. As such, under the Final Regulations, an electricity generating source and CHPF are located in the same region if both are electrically interconnected to a balancing authority (or balancing authorities) located in the same region, as identified in the table. Treasury and the IRS anticipate that the table would be periodically updated, but no more frequently than annually, through administration guidance published in the Internal Revenue Bulletin. The Final Regulations also adopt a special rule for cross-region deliveries under which an eligible EAC will meet the deliverability requirement when the deliverability can be tracked and verified, subject to additional requirements.

Methane and Other Renewable Natural Gas Projects
The Prior Regulations did not provide for draft regulations for the tracking of methane or renewable nature gas (RNG) used in the production of clean hydrogen; instead, Treasury and the IRS promised future guidance that would be “logically consistent with, but not identical to” the three pillar requirements for tracking electricity. To that end, the Final Regulations introduce the “gas EAC,” which is defined as 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. To establish that RNG was used in the production of clean hydrogen, a taxpayer would acquire and retire qualifying gas EACs for each unit of gas that the taxpayer claims from a methane or RNG source, with the acquisition and retirement being recorded in the relevant registry or accounting system and subject to verification requirements. In this regard, Treasury and the IRS acknowledged that a book and claim system would be an acceptable mechanism for the acquisition and retirement of gas EACs, but did not expect to recognize suitable registries until 2027, at the earliest, due to the need to put safeguards in place that meet the requirements of the Final Regulations.

The Final Regulations adopt monthly matching of use of methane or RNG in hydrogen production to injection of methane or RNG in a pipeline for purposes of the temporal matching requirement and treat the contiguous United States as a single region (with Hawaii, Alaska and each U.S. territory as separate regions) for purposes of the deliverability requirement. Despite being previewed in the preamble to the Prior Regulations, the Final Regulations do not include a “first productive use” requirement as an attempt at addressing incrementality. Under the proposal for first productive use, RNG produced from any source of methane, where the methane had been productively used in a taxable year prior to the taxable year in which the relevant CHPF was placed in service, would not obtain an emission value consistent with biogas-based RNG, and would be deemed to have a value consistent with fossil natural gas. In lieu of a first productive use requirement, the Final Regulations contemplate that other productive uses would be considered an alternative fate in determining the life cycle GHG emissions rate for the relevant gas.

Other Notable Highlights

• For purposes of IRC section 45V, life cycle GHG emissions are determined using the most recent Greenhouse Gases, Regulated Emissions and Energy use in Transportation model (the GREET Model), but the Final Regulations provide a safe harbor allowing a taxpayer to elect to rely on the version of the GREET Model in effect when construction of the CHPF begins to provide greater certainty as to CHPC eligibility. The DOE will soon be releasing an updated version of the 45VH2-GREET model that producers can use to calculate their section 45V tax credit.
• Despite some requests from commenters, the Final Regulations do not contain any Foreign Entity of Concern restrictions given the absence of a statutory prohibition.
• For facilities being modified to allow for clean hydrogen production, Treasury and the IRS clarified that there is no monetary threshold for capital expenditures relating to the modifications in order to qualify for the CHPC.
• For purposes of the incrementality requirement, a decommissioned facility that restarts operations can obtain a base of zero in determining increased capacity if the facility was shut down for at least a year during which it was not authorized to operate by a federal regulatory authority.
• The Final Regulations allow taxpayers to use EACs for non-zero emitting facilities due to a change in definition to require accurate reflection of emissions.
• The Final Regulations also include an anti-abuse rule under which the section 45V credit will not be allowed if the primary purpose of the sale or use of qualified clean hydrogen is to obtain the benefit of the section 45V credit in a wasteful manner.

Final Points
While the Final Regulations did not abandon the use of EACs and the three pillars requirements as many industry members had hoped, the modifications provided by the Final Regulations can be viewed as improvements from the Prior Regulations. The Final Regulations are intended to be effective upon publication in the Federal Register and apply to taxable years beginning after December 26, 2023. Taxpayers nevertheless may rely upon Final Regulations for earlier taxable years provided that the Final Regulations are applied in their entirety and in a consistent manner. Please reach out to a Pillsbury team member if you would like to discuss how the Final Regulations impact your hydrogen projects.