US hydrogen tax rules offer flexibility to electrolytic hydrogen in energy procurement, certification

The US Treasury's final 45V guidance on renewable energy-powered electrolytic "green hydrogen" has been praised for encouraging clean hydrogen investment, reaffirming the three pillar guardrails, and reducing risks in hydrogen development amid rising renewable energy demand, according to sources.

Green hydrogen developers in the US were anxiously awaiting the final rules regarding the "three pillars" of hourly renewable energy matching, incremental energy supply, and regional sourcing. These requirements are designed to ensure that energy usage does not detract from current energy needs and contribute to emissions.

The Inflation Reduction Act's section 45V final guidance was released on Jan. 3 for hydrogen producers seeking federal tax credits under the 2022 IRA, allowing projects to utilize nuclear energy, biogas, and certain states' grid power, extending the deadline for the time-matching rule to 2030, from 2028, and making exceptions for struggling nuclear plants.

"Matching clean electricity production with load is critical for future standards, policies, and regulations for electricity emissions accounting," Alex Piper, head of US Policy and Markets at EnergyTag, a London-based carbon granular certificate tracker and provider, said on LinkedIn.

The three pillars are essential for preventing some of the most significant high-emission impacts associated with grid-connected hydrogen production, Piper added.

"The additional flexibilities included on hourly matching and incrementality are expected to reduce project development risk for electrolytic hydrogen production without jeopardizing the need to decarbonize the global economy," an official of EDP Renewables, a Houston-based renewable energy producer, told S&P Global Commodity Insights. "The alignment with European Regulation is also a positive sign, facilitating international trading, namely by increasing the value of US-based projects aiming to export green products."

Incrementality waived to states with strong emission policies

The "incrementality" rule requiring new energy sources remains contentious. While maintained to prevent grid overload, it exempts hydrogen projects in states with strong renewable portfolios and clean energy standards with greenhouse gas cap programs to limit emissions from major power sources, like Washington and California, from procuring new clean power.

"Big wins for California and Washington -- the carve-out for states seems designed with a foot in the door from the DOE H2hubs there -- but both states have shortages of clean energy owing to data centers and AI," Jason Munster, former director analysis at the US Department of Energy, said on LinkedIn.

Some sources criticized the rules and delay in implementing hourly matching for grid-powered hydrogen plants, fearing short-term emission increases, despite others arguing that allowing the use of some grid power outside of the exempted states, enhances electrolyzer utilization through a mix of solar and wind energy from the earlier limitations.

"Many of Novo's projects co-develop behind the meter or BTM renewables that physically power our electrolyzers in order to avoid both timing and cost constraints when connecting to the grid and, therefore, do not compete with other grid-connected loads like AI data centers," Matt McMonagle, CEO and founder of Colorado-based NovoHydrogen said.

Nuclear power producers are pleased with exceptions for struggling plants, allowing them to earn credits compared to the earlier draft rules.

"Qualifying nuclear must also be co-located with the hydrogen production facility or sign a 10-year contract in which the hydrogen production facility agrees to acquire and retire EACs from the nuclear reactor," Piper said with regard to the conditions ensuring that these credits are contingent upon the nuclear plant remaining operational.

"Additionality with nuclear going away is a big deal," Munster said, adding that if 20% of the around 90 reactors in the US sold their EACs, it would contribute about 4 GW, significantly advancing us towards 10-GW target, which I estimated would lower costs enough for islanded electrolysis to enable cost-effective hydrogen deliveries.

Platts, part of Commodity Insights, last assessed renewable-derived green hydrogen costs using electrolysis alkaline technology and including capital expenditures in the US Gulf Coast at $3.72/kg on Jan. 7.

Extended hourly matching in renewable energy tracking

The final rules state that deliverability requires proof of physical renewable energy delivery, ensuring the electricity generation linked to the EAC has transmission rights to the hydrogen production facility's region. This delivery must be demonstrated hourly, without reverse transactions, and verified using NERC E-tags or equivalent validation from an EAC registry.

The extended deadline until 2030 for hourly matching gives renewable energy tracking systems more time to include this hourly tracking and trading functionality. Currently, only PJM's Generation Attribute Tracking System allows for hourly EAC, or renewable energy certificate trading, according to Commodity Insights data.

"We have clients that are already looking for hourly matching, so we track the generation from our renewable assets and the client's energy consumption to develop deals that match them on an hourly basis," a Texas-based electricity provider told Commodity Insights. "Since ERCOT does not generate hourly certificates, after we have done the consumption-generation matching, we redeem conventional monthly certificates that represent the consumed renewable electricity."

"The rule reaffirms that requiring qualifying EACs be used for compliance is necessary to prevent double counting of the energy and emissions attributes represented by EACs and to mitigate the risk of significant indirect emissions," Piper said.