The U.S. Treasury Department and IRS released final rules Jan. 3 for a hydrogen production tax credit that enables producers to use electricity from various sources, including natural gas with carbon capture.

Hydrogen made from renewable natural gas (RNG) and coal mine methane are also eligible for the 45V credit, Treasury said. The rules additionally provide more leeway for the use of nuclear power to produce hydrogen.

“With the inclusion of these changes, the final rules provide clarity, investment certainty and flexibility, including for participants in projects planned as part of the Department of Energy’s Regional Clean Hydrogen Hubs program,” the department said in announcing its final rules.

The rules come as the Biden administration heads to the exits on Jan. 20—and roughly a year after the department and the IRS first released proposed rules for the 45V credit offered in the Inflation Reduction Act. The lack of final regulations has created uncertainty among producers reliant on incentives to make projects economically viable. 

Majors, including Exxon Mobil, have said the 45V tax credit policy would help determine the company’s plans to produce up to 1 Bcf/d of hydrogen using Permian Basin natural gas as a feedstock. But a final investment decision on the project in 2025 would be subject to “translation of the IRA 45V policy into actionable technology,” company officials said.

Dustin Meyer, American Petroleum Institute senior vice president of policy, economics and regulatory affairs, said clear and consistent policy is essential for building a lower-carbon hydrogen industry and strengthening America's energy leadership.

“Treasury's 45V guidance marks a meaningful step forward, encouraging innovation while driving progress on emissions,” Meyer said. “This framework offers an opportunity for natural gas, when paired with carbon capture and storage, to compete more fairly in new markets and meet growing demand for affordable, reliable, lower-carbon energy. We look forward to collaborating with the incoming administration to uphold technology-neutral hydrogen policies that position the U.S. as a global leader in innovation.”

The new rules create pathways for hydrogen produced using both electricity and methane, providing investment certainty while ensuring that clean hydrogen production meets the law’s lifecycle emissions standards, the department said.

“By law, the tax credit’s value is based on the lifecycle greenhouse gas (GHG) emissions of hydrogen production. To qualify as clean hydrogen under the statute, the lifecycle GHG emissions of the hydrogen production process must be no greater than 4 kilograms of carbon dioxide equivalents (CO2e) per kilogram of hydrogen produced. Qualifying clean hydrogen falls into four credit tiers, with hydrogen produced with the lowest GHG emissions receiving the largest credit.” 

The amount of the clean hydrogen production credit for any taxable year is $0.12, $0.15, $0.20 or $0.60 per kg of qualified clean hydrogen produced, depending on the lifecycle GHG emissions rate associated with the facility's hydrogen production process, according to the final rules. To qualify for the full credit, projects must also meet prevailing wage and apprenticeship standards, which effectively multiply the credits by five.

The final regulations also provide rules for determining the eligibility of so-called blue hydrogen using methane reforming technologies, including with carbon capture and sequestration (CCS).

“The final rules aim to enhance the accuracy of upstream methane leakage rates used in determining the credit value,” the department said.

The rules also reverse initial guidance on using nuclear power, said Durgesh Chopra, an analyst at Evercore ISI, in a Jan. 3 commentary.

“Importantly, the final rules announced provide incremental clarity and flexibility that should help facilitate investments within clean hydrogen that have been largely put on pause,” Chopra said. “The final rules differ from the proposed rules in several respects, however arguably the two most meaningful changes relate to instrumentality and time-matching.”

The rules provide additional pathways for demonstrating instrumentality including nuclear retirement risk, states policies and new CCS.

“As it pertains to nuclear, electricity produced by nuclear plants meeting certain bright-line indications of retirement risk and certain indications of co-dependence on hydrogen investment will be considered incremental up to 200MW per qualifying reactor, which reverses the proposed rules which prohibited existing nuclear plants from qualifying,” Chopra said.

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