Cheri Abels, Author at CFO Services

We want to highlight the timely release of the final Section 45V Clean Hydrogen Production Tax Credit regulations, issued on January 3, 2025. These long-awaited rules bring much-needed clarity and investment certainty to the hydrogen industry. With significant changes and flexibility, the regulations address key issues to help grow the industry and move projects forward.

Background

The Section 45V Clean Hydrogen Production Tax Credit was introduced under the Inflation Reduction Act (IRA) of 2022. This tax credit aims to incentivize the production of clean hydrogen by providing financial benefits to producers who meet specific environmental standards. The regulations address hydrogen production using various electricity sources, including renewables (“green” hydrogen) and nuclear (“pink” hydrogen), with specific rules for lifecycle greenhouse gas emissions and incrementality requirements. The credit is designed to reduce greenhouse gas emissions, encourage energy diversification, and promote domestic clean energy production[1].

Key Dates

August 2022: The Inflation Reduction Act was signed into law, establishing the Section 45V Clean Hydrogen Production Tax Credit.
December 2023: The IRS released proposed regulations for the Section 45V tax credit, outlining definitions, eligibility criteria, and guidelines for calculating and claiming the credit[1].
January 3, 2025: The IRS and the Department of the Treasury issued the final regulations for the Section 45V tax credit. These final rules incorporated feedback from public comments and provided significant changes and the flexibility to address key issues and help grow the industry[1].
January 10, 2025: The final regulations are set to be published in the Federal Register and will take effect on this date[1]. IRS advised taxpayers to look out for future updates to the 45VH2-GREET (Greenhouse gases, Regulated Emissions, and Energy use in Technologies) model will enhance accuracy and incorporate project-specific data.

These regulations provide clarity and investment certainty for hydrogen producers, ensuring that projects can move forward while adhering to emissions requirements

Eligibility and Compliance

The final rules clarify that hydrogen producers can claim a credit of up to $3 per kilogram of clean hydrogen. Eligible hydrogen production methods include using electricity from various sources, natural gas with carbon capture, renewable natural gas (RNG), and coal mine methane. This broadens the scope of eligible production methods, encouraging diverse clean hydrogen production pathways.

Prevailing Wage and Apprenticeship Standards

To qualify for the full credit, projects must meet prevailing wage and apprenticeship standards. This ensures that workers involved in clean hydrogen projects are paid prevailing wages and have access to training opportunities. This was in the proposed regulations and continues to be part of the overall IRA credits for the bonus credits.

Incrementality Requirement

Hydrogen production facilities must demonstrate that the electricity they use comes from sources that would not have been deployed otherwise. This requirement ensures that the clean hydrogen production leads to real, additional capacity and genuine reductions in greenhouse gas emissions. It prevents the credit from being claimed for hydrogen produced using existing electricity capacity that would have been used regardless.

Inclusion of Nuclear Power

Nuclear power is now an eligible source for the credit, with a cap of 200 megawatt-hours per operating hour per reactor. This inclusion recognizes the low-carbon nature of nuclear energy and its potential to contribute to clean hydrogen production. It also provides a pathway for existing nuclear plants to participate in the clean hydrogen economy.

Carbon Capture and Sequestration (CCS)

Electricity from generators that implement CCS technologies within 36 months before the hydrogen facility’s commissioning can qualify for the credit. This provision supports the integration of CCS technologies in hydrogen production, helping to reduce the carbon footprint of hydrogen produced from natural gas and other fossil fuels.

Flexibility and Investment Certainty

The final rules provide significant changes and the flexibility to address key issues, helping to grow the industry and move projects forward while adhering to emissions requirements. These changes include clarifications on eligibility, compliance, and the calculation of lifecycle greenhouse gas emissions. The goal is to provide clarity and certainty for investors and project developers, encouraging investment in clean hydrogen projects.

If you have questions or want to discuss, please don’t hesitate to reach out to CFO Services.

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The IRS has issued the final regulations for Code Section 45X under the Inflation Reduction Act, aimed at enhancing domestic clean energy manufacturing. The Advanced Manufacturing Production Credit incentivizes the production and sale of clean energy components such as solar panels, wind parts, inverters, battery components, and critical minerals, provided they are manufactured in the U.S. or its territories.

Key Updates:

The credit is based on the eligible components produced and sold within the tax year and works in conjunction with the Section 48C credit for advanced energy projects.
Earlier this year, the IRS released initial guidance and proposed regulations. Following extensive feedback and a public hearing, the final rules have been refined.
Material costs for critical minerals and electrode active materials are now included in the credit calculation, and the use of recycled materials is permitted.

To qualify, the property must be produced at a Section 45X facility, which cannot also be a Section 48C facility. A Section 45X facility is defined as independently functioning tangible property necessary for the taxpayer to be considered the producer of the qualified components.

To prevent duplication, fraud, or improper credit amounts, the anti-abuse rule disallows the Related Person Election if the required information is not provided or if the components are improperly used or defective. However, defects arising after the sale are usually acceptable.

Since the start of the Biden-Harris administration, $450 billion in new clean energy investments have been announced, with $275 billion occurring post-Inflation Reduction Act. This includes significant investments in batteries, critical minerals, solar, and wind. The regulations aim to level the playing field for U.S. companies and boost domestic production of clean energy technologies.

Key Changes to Section 45X

Inclusion of Material Costs:
- Material costs for critical minerals and electrode active materials are now included in the credit calculation.
- Mining and extraction costs are also considered in the credit calculation.
Use of Recycled Materials:
- The final regulations clarify that eligible components can be produced using recycled materials. This was not explicitly stated in the proposed regulations but was included in the final regulations based on stakeholder feedback.
Definitions and Clarifications:
- The definition of “produced by the taxpayer” was refined to mean a process that substantially transforms constituent elements, materials, or subcomponents into a complete and distinct eligible component.
- The final regulations specify that both primary and secondary production (including using recycled materials) are included in the definition of “produced by the taxpayer.”
Facility Requirements
- Property must be produced at a Section 45X facility, which cannot also be a Section 48C facility. A Section 45X facility is defined as independently functioning tangible property necessary for the taxpayer to be considered the producer of the qualified components.
Anti-Abuse Rule:
- The anti-abuse rule disallows the Related Person Election if the required information is not provided or if the components are improperly used or defective. However, defects arising after the sale are generally acceptable.
Interaction with Section 48C:
- The final regulations further clarify the interaction between Sections 45X and 48C, ensuring that property qualifying for the Section 45X credit must be produced at a Section 45X facility and not at a Section 48C facility.