What renewable energy developers need to know about the US Treasury’s proposed hydrogen tax credits
The U.S. Department of the Treasury recently published its proposed 45V guidance for developers to claim clean hydrogen production tax credits, aiming to guarantee that only zero-carbon electricity powers its creation. With the U.S. hydrogen industry in its infancy, this guidance comes at a crucial time and could shape the future of the industry for decades to come.
In this article, we outline key factors that renewable energy developers need to understand about the draft guidance, as well as items for stakeholders to consider as they prepare comments to help shape the final rules.
The proposed guidance includes four key items to ensure that clean power is used in the production of the hydrogen:
- The guidance proposes the use of energy attribute certificates (EACs) to document the carbon intensity of power that is sourced from the power grid and not directly connected to the hydrogen facility. EACs are registered and verified to document the CO2 emissions of the electricity, time and date generated, and the location where it was injected into the grid.
- Temporal Matching, commonly referred to as hourly matching, is the principle that low carbon electricity be generated concurrently with the electricity consumed by the electrolyzer. Applying this principle at an hourly level would prevent the use of solar EACs for nighttime electricity consumed by the electrolyzers.
- Deliverability requirements call for locating an electrolyzer close enough, both geographically and within the same grid, such that low- or zero-carbon electricity from the generation source can feasibly be delivered to the electrolyzer using existing electricity transfer practices.
- Incrementality, also called additionality, is the principle that electrolyzer electricity should be sourced from new, low-carbon generation so that hydrogen production does not negatively impact current grid decarbonization efforts.
US draft more aggressive than European rules
The proposed U.S. guidance for hydrogen tax credits is stricter than the European regulations. However, the proposed U.S. guidance largely aligns with early drafts of the European Commission's regulations prior to modifications to address stakeholder concerns.
One of the key changes in Europe was the addition of a grandfather clause to waive the requirement for hourly matching on early facilities for 10 years after the start of production. This was a necessary provision to protect first movers, many of whom have already spent development money. Notably, the draft U.S. rules lack grandfather provisions, which could impact projects that may no longer be financially viable under the proposed U.S. rules.
Additionally, the proposed U.S. guidance requires hourly matching to align with the European date for renewable energy facilities that receive subsidies (i.e. 2028), but the U.S. regulations do not include matching exemptions for clean grids with high renewable energy or nuclear penetration that were included in the EU final rules.
A brief summary of the proposed U.S. guidance compared to the final European regulations is included below for reference.
The temporal matching provisions and the incrementality provisions could impact the U.S. power grid. During evening hours, the principal clean electricity sources of EACs in the near- to medium-term is expected to be hydroelectric and nuclear power plants. As it stands, the proposed rules would exclude these as eligible sources to power electrolyzers, leaving facilities unable to operate on a 24/7 basis with intermittent renewables. This increases the capital cost of hydrogen facilities and may also contribute to the retirement of nuclear and hydroelectric assets.
Hourly matching reveals new opportunities
Effective hourly matching with EACs could have implications beyond hydrogen, specifically by creating a system for tracking clean electricity 24/7. While the timeline for implementing EACs is aggressive, it’s at least technically possible by expanding the functionality of existing registries.
Existing renewable energy certificate registries could be modified to meet hourly matching requirements, especially where sub 1-hour granular reporting is already in play. As an example, M-RETS, a renewable energy tracking platform, facilitated the first-ever hourly Renewable Energy Certificate (“REC”) claim with Google in 2021. With the data already there, hourly tracking may only require additional cloud storage to house all the data required for hourly EACs.
Uncertainty with induced emissions
The proposed guidance noted that U.S. Treasury, the Environmental Protection Agency, and the U.S. Department of Energy have collectively agreed that wide-scale deployment of electrolyzers would increase emissions from the U.S. electricity system without the regulation’s proposed EAC requirements. The increased emissions in the power generation sector is called “induced grid emissions” within the proposed guidance.
There are two principal approaches to GHG accounting, an inventory basis where GHG emissions and sinks are accounted by entity (i.e., nation, industry, or company) and lifecycle basis is a product-based analysis that includes all of the emissions regardless of which entity or sector emitted the GHGs. The induced grid emissions concept addresses emissions within the power generation system on an inventory basis but does not address lifecycle reductions of GHG emissions achievable when downstream consumption is accounted for (i.e., displacement of diesel in heavy duty trucks with hydrogen).
Finally, the draft guidance references the U.S. Renewable Fuel Standard, a lifecycle basis standard, as its reasoning to include induced grid emissions on an inventory basis. It may be prudent for the U.S. Treasury to further explore this analysis using either a lifecycle or an inventory basis to determine the GHG reduction potential of clean hydrogen.
The time is now
With final rules anticipated in mid-2024, hydrogen stakeholders have a limited time to engage with Treasury on its draft guidance. Written or electronic comments must be received by February 26, 2024 to be included in the official public consultation process.
The next several decades will be a transformative era for clean energy, and hydrogen is expected by many to be a key tool to achieve net-zero emissions. The manner in which the Section 45V hydrogen tax credits are implemented is likely to have a major impact on how fast and how much the U.S. reduces its GHG emissions. For hydrogen stakeholders as well as those striving to meet the U.S. Paris agreement goals, the time is now.
