US hydrogen tax rules draw mixed reviews from industry, climate groups

The Biden administration's revised hydrogen standard for the US drew mixed reviews from industry watchers, drawing praise from American Petroleum Institute, partial acceptance from "green hydrogen" developers and some relief from environmentalists worried about more far-reaching changes.

Industry stakeholders said they were pleased with the added flexibility in the US Treasury Department's clean hydrogen tax credit rules, which dictate how producers must minimize their emissions to qualify for the federal subsidy.

With the new clarity of the final rules, "many projects that have been delayed may move forward," electrolyzer developer Topsoe said.

The guidance, finalized on Jan. 3, came more than 12 months after the agency proposed rules that were widely panned by industry members.

"Blue" hydrogen stakeholders were especially pleased with the final version's revised accounting rules for alternative methane sources, which could help producers that use natural gas qualify for a higher credit value.

The rules offer "an opportunity for natural gas, when compared with carbon capture and storage, to compete more fairly in new markets," American Petroleum Institute, which strongly criticized Treasury's earlier draft, said.

But developers of electrolytic hydrogen projects -- which use renewable or nuclear power -- stopped short of giving the rule their full praise.

Incrementality

One point of contention is the "incrementality" rule, also known as additionality, which requires hydrogen plants to source their electricity from facilities built in the last 36 months. Academics and climate groups say the rule is needed to prevent the diversion of scarce clean energy resources, but industry members argued it is unrealistic.

The Section 45V hydrogen production tax credit rules "mark significant progress," Andy Marsh, President and CEO of green hydrogen company Plug Power, said in a statement. "While these updates are encouraging, we look forward to collaborating with the new administration to refine the regulations in a way that aligns with congressional intent, supports their goal of reducing overregulation, and ensures national energy security."

Along with other industry members, Marsh praised Treasury for creating an exception to the incrementality rule for hydrogen plants in states with "robust" climate policies and emissions caps.

So far, Washington state and California meet the department's criteria.

"If you want states that really have very binding cap-and-trade, those are the two," said Aaron Bergman, a fellow at Resources for the Future, a research nonprofit.

Nuclear reaction

Industry members were also pleased with the exception for financially struggling nuclear power plants, which may count up to 200 MW per qualifying reactor as "incremental."

Joe Dominguez, president and CEO of Constellation, called the revisions "an important step in the right direction" that could allow a significant portion of the merchant nuclear fleet to earn credits for hydrogen production.

The nuclear power producer has proposed to invest $900 million in a hydrogen plant at the LaSalle Clean Energy Center in Illinois. In 2023, Dominguez said the project would only proceed if it could earn tax credits.

The Nuclear Energy Institute is reviewing the final rules, spokesperson Alyssa Gill said in a Jan. 3 email. The industry group was one of the harshest critics of Treasury's initial plan for effectively blocking existing nuclear plants from the credit.

The Clean Air Task Force, a major proponent of the draft guidance, praised Treasury for preserving its core rules around electricity use but expressed disappointment at some of the changes in the final version. The department had originally proposed to require grid-powered hydrogen plants to match their operations with clean electricity generation on an hour-by-hour basis. The agency kept the rule but pushed the implementation deadline from 2028 to 2030.

"We worry that this could cause at least some increase in emissions in the short term," Conrad Schneider, the advocacy group's US senior director, said in a statement.

State of transportation

Some officials heralded 45V as a boon for the hydrogen transportation industry in California. Democratic senator from California Alex Padilla said the credit will "and help decarbonize hard-to-reach sectors like ports and heavy-duty transportation."

The California Governor's Office of Business and Economic Development said the rules will "further expedite our efforts to replace diesel in transportation."

The hydrogen transportation and refueling market in California is currently fueled almost entirely by gray hydrogen, and logistical woes are stalling the market's overall growth. Light-duty hydrogen fuel costs are almost three times the price of gasoline and are the highest in the world, averaging $34.65/kg in December. High costs, development delays and ongoing midstream disruptions caused the state to cut its forecasts for refueling stations and vehicles.

Regional pricing

Platts, part of S&P Global Commodity Insights, assessments found the US Gulf Coast on average was the cheapest US region for hydrogen alkaline electrolysis costs in 2024, including capital expenditures. Green hydrogen production through this pathway cost $2.85/kg on average in the region in 2024, Commodity Insights data shows.

In Southern California, the Upper Midwest and Appalachia, 2024 annual average production costs including capex were assessed at $3.21/kg, $3.14/kg and $3.28/kg, respectively.

Hydrogen producers must reduce emissions by at least 95% to qualify for the full tax credit at $3/kg.