Navigating the Green Hydrogen 45V Tax Credits
The long-awaited proposed regulations for the 45V hydrogen tax credits were finally released on December 22, 2023. These tax credits are available for producers of “green” hydrogen - hydrogen whose production entails minimal greenhouse gas emissions over its entire lifecycle. In addition to setting out important rules around how facilities can calculate and verify their emissions with third parties, the guidance also placed heightened requirements on those wishing to reduce their emissions numbers using grid electricity supplemented with renewable energy certificates, or “RECs.” These new regulations require that these RECs satisfy three “pillars”: additionality, deliverability, and time-matching.
Why RECs matter for green hydrogen
Today, most hydrogen in the world is produced using “gray” hydrogen technologies, such as gas-fired steam methane recovery (“SMR”). “Gray” in this case (as well as “blue”, a variant of gray production where carbon capture technology is also employed to reduce emissions) denotes a state between “green” and “brown” - it is hydrogen produced using fossil fuels but which use cleaner feedstocks than, for example, coal.
The hope behind the new 45V tax credit is that it will help spur the addition of significant new hydrogen production capacity that is truly green in nature. The structure of the credit supports this goal by providing tax credits for new or significantly retrofitted hydrogen facilities, and giving more credits to hydrogen produced by cleaner facilities. Sources with carbon dioxide equivalent emissions (CO2e) of 4 kg per kg of hydrogen (as determined by a tailored version of Argonne National Laboratory’s GREET model) qualify for the credit, but only at $0.60 per kg of hydrogen, or 20% of the maximum credit value. To qualify for the highest credit ($3 per kg of hydrogen, or 30% of the value of the facility if the credit is taken as an investment tax credit), hydrogen must be produced with emissions at less than 0.5 kg of CO2e per kg of hydrogen.
Achieving the highest level of credit under 45V, however, may well require looking beyond the dominant production technologies to cleaner alternatives, such as electrolysis. Electrolysis is in fact already being used to create hydrogen, frequently as a byproduct of production of other chemicals (for example, in the chlor-alkali process, which uses brine to produce industrial chlorine and soda ash). The catch is that the frequent need for grid-supplied electricity to power the process, and the fact that the relevant grid almost always includes fossil fuel resources in its generation mix, can prevent electrolysis from minimizing its carbon footprint and achieving the full benefit of 45V.
This changes if the electrolyzer can use minimal emissions technologies, such as renewable energy, to power its operations. And this can be done in one of two ways - by using on-site co-located renewable power, or by continuing to use the grid but also purchasing RECs and having the IRS respect those purchases in emissions calculations. The number of producers who will be able to use on-site power will be limited by geographic and other constraints. The ability of hydrogen producers to use RECs, therefore, is essential to the development of electrolyzing green hydrogen plants, and by extension to the existence of a robust green hydrogen industry as a whole, in the United States.
What the rules say about RECs
The good news is that the rules specifically allow the use of RECs (and all similar “environmental attribute certificates,” to use the IRS’s term of art) to reduce the emissions produced by a kilogram of hydrogen using grid electricity. In fact, the rules put grid and on-site power on the same footing in this regard, to the extent that producers with an on-site power source must retire any RECs they generate without re-selling them to the market (or else will be deemed to have used grid electricity).
But this permission comes with a catch - any REC used in the emissions calculation must satisfy three “pillars” referenced above and outlined below - incrementality, deliverability and time-matching. The stated purpose of the IRS in adopting these three pillars is to avoid the RECs being used to mask real greenhouse gas emissions induced by, and that should be attributable to, a plant’s hydrogen production, by ensuring that each REC represents a MWh of renewable energy (1) added by the hydrogen producer (incrementality), (2) to the grid used by the hydrogen producer (deliverability), (3) at the time the hydrogen producer needs it (time-matching).
Incrementality appears related to “additionality,” which is one of Ever.green’s core tenets - our Impact Scorecard requires that the RECs we sell make a difference to bringing new renewable energy on-line, or keeping existing sources in operation. Initially, incrementality is focused on new sources of renewable power, requiring that RECs used in emissions calculations come from sources that either (1) have a commercial operation date no more than 36 months prior to the date on which the hydrogen plant is placed in service or (2) have been “uprated” (i.e., increased in capacity) during that same timeframe. If uprated, only the uprated portion of the plant counts as “new” under the regulations - for example, a 100 MW solar array uprated to 200MW would effectively only be a 100MW facility for purposes of the rules.
As described below, this pillar in particular may be subject to change as the IRS has solicited further comment regarding potential exceptions.
The rules also require that the RECs be sourced from the same region in which the electricity is being used. It should be noted here that the regions used for this purpose are defined by the Department of Energy’s 2023 National Transmission Needs Study, which are generally significantly smaller than, for example, the regions defined by NERC. The NERC regions, however, are still being used to calculate baseline grid emissions.
Starting immediately, RECs must be produced in the same year in which the hydrogen is produced. In 2028, the matching requirement becomes much more strict - the electricity will need to be matched hour-by-hour to hydrogen production. This will not only require strict record-keeping of actual hydrogen production; as the IRS notes in describing its reason for providing a transition period, RECs themselves currently often do not carry the information as to the exact hour in which they were produced.
Even with the transition period, complying with this requirement will be a heavy lift for the existing REC market. The IRS has admitted that it may have to reexamine the 2028 compliance date if widespread systems are not in place to allow for hourly tracking by then.
What we expect to happen next
The rules outlined above, for now, remain proposals, and interested parties can submit comments until February 26, 2024. A public hearing on the proposed rules has been set for March 25, 2024, with final rules to be issued in the following months. We expect a lively comment period given industry reaction to the rules and since, somewhat unusually for proposed regulations, the IRS has sought input on specific changes that it may include in the final rules. In particular, the IRS has described additional potential modifications of the incrementality pillar - allowing hydrogen producers to satisfy incrementality by showing that their REC purchases helped an existing renewable generation facility avoid retirement, for example (something that aligns well with our own definition of additionality) or by demonstrating that their plant will not induce emissions through advanced modeling. The IRS has also suggested it may allow a formulaic exception, deeming between five to ten percent of all renewable energy production in a region to be incremental. We would love to hear from our customers as to the feasibility and advisability of these or further exceptions.
That said, we expect that most changes will be around the edges, and the final rules will retain the three pillars in much the same form they are currently outlined. As such, the green hydrogen industry, if it is to achieve its potential, must find solutions to the challenges posed by the new rules: the need to have dedicated, new renewable energy facilities supporting the hydrogen production to qualify for the credits; and following 2028, and given the 24/7 nature of hydrogen production, the need for these facilities to provide around the clock coverage, likely from more than one facility to avoid intermittency issues. Given the complexities still to be resolved as the industry gets off the ground, these production facilities may also need to get financing through less traditional routes. These challenges are real, and their solutions will take hard work.
Ever.green, as the creator and operator of a marketplace for both high-impact RECs and transferable tax credits, is uniquely positioned to develop and provide solutions to hydrogen producers looking to take advantage of the 45V tax credits. We have been a market leader in REC additionality. Our vast network of developer relationships allows us to provide RECs across all geographies, ensuring compliance with deliverability requirements. And all of the RECs we sell are already required to be provided with information as to the hour of their production, which helps enable compliance with time-matching requirements. In addition, since 45V credits (as well as related 45Q credits for carbon capture) are transferable and also eligible for five years of elective (or “direct”) pay, we have the ability to assist these projects by helping them assess the value of their credits and by bringing non-traditional buyers of transferable credits to the table.
We view it as a natural extension of our business to bring our solution set to the hydrogen market. We would welcome engagement on the proposed rules and commercial solutions that can address them. If you are a hydrogen player, feel free to reach out to Alan Cordova at firstname.lastname@example.org and we can talk on how best to support your facility.
Thanks for reading Ever.green's Insights! Subscribe for free to receive new posts.