45V Green Hydrogen Tax Credit: What to Know
The U.S. Treasury Department has issued its long-anticipated guidanceon IRA 45V – the section of the Inflation Reduction act that deals with the green hydrogen tax credit.
In the quest for a cleaner and sustainable energy future, green hydrogen has emerged as a promising solution. Hydrogen, when produced using emissions-free energy, becomes “green hydrogen” — a versatile, carbon-neutral source of energy. Governments worldwide are establishing regulations to promote the production of green hydrogen. But to qualify as green hydrogen, the production process must meet specific requirements.
Here’s what U.S. green hydrogen companies need to know about how the proposed rules will impact companies’ clean energy procurement strategies and monetization of the tax credit.
What Qualifies for a Green Hydrogen Tax Credit in the U.S.?
For hydrogen to be considered “green” (and qualify for the up to $3 per kilogram of tax credits under the IRA), it must be produced using emissions-free energy sources such as wind or solar. Companies are allowed to use on-site renewable generation (e.g., they could install solar panels at their hydrogen production facility) AND/OR use virtual power purchase agreements (vPPA) to purchase emissions-free electricity from renewable generation in a different location (e.g., from a solar farm that is not adjacent to their facility).
According to the Treasury, the tax credit will be available for “10 years starting on the date that a hydrogen production facility is placed into service for projects that begin construction before 2033.” If you are a green hydrogen producer using on-site or vPPAs to source renewable energy to power your production and you want to monetize the tax credit, your clean energy needs to meet several critical parameters (what climate advocates are referring to as the “three pillars” of clean electricity supply).
1. Green Hydrogen Production Requires Hourly Time Matching
The Treasury’s proposed rules require hourly time matching, or temporal correlation, of renewable energy to green hydrogen production. That means green hydrogen companies will have to match their energy consumption every hour (their hourly load) with clean power supply (e.g., if they use 1MWh from 10-11am on October 1, 2028, they will procure 1MWh of clean power in that same hour).
This requirement will not be immediate. Until the end of 2027, hydrogen companies can match their energy consumption on an annual basis (e.g., if they use 100,000 MWh of energy between January 1, 2027 and December 31, 2027, they match that by procuring 100,000 MWh of emissions-free energy in that same time frame.) Hourly time matching will begin in 2028 and will be required for everyone (e.g., no grandfathered annual matching allowed).
KEY TAKEAWAY: PLAN AHEAD! Although the time-matching condition will be phased in over several years, companies procuring clean power today must plan NOW for hourly time-matching or risk being ineligible in the future (vPPA contract terms are typically 10-20 years) and the lead time from contract execution to delivery is typically 2-3 years.
2. Green Hydrogen Production Requires “Additionality,” or “Incrementality”
The new proposed production tax credit rules require renewable energy used in green hydrogen production to be “additional,” or “incremental.” That means the energy must come from new renewable projects, not existing ones, explicitly built to serve hydrogen production facilities. The Treasury defines new projects as those that began commercial operation no earlier than 3 years prior to the commercial operation date of the green hydrogen facility. So, if you want to purchase power from a wind farm that commenced commercial operations in 2020 for a green hydrogen facility that begins operating in 2024, that wouldn’t qualify.
That said, the Treasury is requesting comments on alternative approaches that would allow energy from existing clean power generators to meet the requirements for new clean power under certain circumstances.
KEY TAKEAWAY: START NOW on your clean power procurement. There is a large backlog of renewable energy projects in the U.S. waiting for permits or interconnection. If you want to begin operations in 2025, you need to contract for clean power as soon as possible.
3. Green Hydrogen Production Requires Geographic Correlation (“Deliverability”)
The IRS requires that green hydrogen producers’ clean energy be generated and consumed in the same region as the production. If you are producing hydrogen in Louisiana, for instance, you will need to procure your clean energy in the MISO (Midcontinent Independent System Operator) power grid. If you are producing in Texas, you’ll need to procure your energy in the ERCOT grid (Electric Reliability Council of Texas). The Treasury is also requesting comments on possible options for transmission of clean power between regions, which might alter this requirement.
KEY TAKEAWAY: The regionality principle of the proposed rules will almost certainly affect your clean energy supply options. If you’ve already sited your production facility, you will need to procure clean power from plants located in the same electric grid, which narrows your options. If you haven’t sited your production facility, THINK CAREFULLY about where you could site it to take maximum advantage of the production tax credit.
How to Maximize the Green Hydrogen Tax Credit
With the EU and the US providing clear regulations and financial incentives, green hydrogen companies are poised for both growth and positive environmental impact. The new U.S. rule will help deliver on the promise of green hydrogen – that it can replace polluting fossil fuels without significant additional production-related carbon emissions. But it adds complexity for hydrogen producers, particularly those unfamiliar with clean power procurement. It will be crucial to work with experts and tools that can provide a holistic, data-driven assessment of possible scenarios to deliver the optimal, future-proofed clean power strategy.
By planning ahead, acting now, and thinking carefully about their clean energy procurement strategies, green hydrogen producers can maximize the 45V production tax credit, secure a reliable supply of renewable energy, and manage long-term costs and risk.