45V tax credit: Long-anticipated Treasury guidance creates more market certainty for hydrogen ecosystem

The long-awaited and highly contested guidance on the 45V tax credit has been issued by the Treasury Department. The 45V tax credit, which details the ways that the US government will evaluate the carbon-intensity of hydrogen production and what levels of carbon intensity achieve tax credits, is at the center of shaping the US clean hydrogen market. The newly announced rules confine the $3/kg credit to hydrogen production meeting the three pillars of additionality, temporal matching, and geographical correlation for electrolytic hydrogen.

The Biden Administration chose strict interpretations of these pillars to mitigate the substantial risk of hydrogen projects contributing to emissions growth. Clean hydrogen from other pathways is not impacted by these energy attribute certificate (EAC) requirements, and additional guidance is expected on hydrogen production using renewable natural gas (RNG).

While the guidance is likely to be contested by groups of market participants hoping for looser requirements around additionality and temporal matching, these transparent standards will help provide a more certain market environment. Ultimately, they will empower enterprises to make well-informed decisions and invest in clean hydrogen projects. While we expect the guidance to significantly impact the makeup of the US hydrogen ecosystem, overall, we anticipate growth of a robust and sustainable clean hydrogen industry aligned with the proposed rules.

The guidance follows “the three pillars” for EACs

The 45V tax credit for hydrogen production, initially introduced under the Inflation Reduction Act, is categorized into four rates determined by emissions intensity. The highest rate, set at $3/kg, applies to carbon emissions below 0.45 kgCO2e/kgH2. The Treasury guidance released on December 22^nd includes three rules concerning the utilization of zero-carbon electricity to qualify for this credit: additionality, geographical correlation, and hourly matching.

Producers of hydrogen must use new renewable electricity added to the grid within three years of the hydrogen facility commissioning, which can include an increase in capacity at an existing facility through expansion and system modification. Renewable generation must be in the same region, defined as being in the territory of the same balancing authority for both renewable energy generation and hydrogen production. Starting in 2028, producers will need to demonstrate hourly matching of renewable energy to hydrogen production.

Impact on business models and project costs

The 45V tax credit will play a crucial role in shaping the financials of hydrogen projects. The guidance will significantly shift the economics of potential projects by both affecting the financials of projects that no longer qualify (but were hoping to) and increasing the costs for those that qualify. Additionality, temporal and geographic correlation requirements are expected to, on net, increase CAPEX and OPEX relative to looser interpretations in an environment where expenditures have already come in higher than predicted based on recent Ramboll analysis.

Building new renewable energy projects onsite, engaging in more stringent VPPAs, leveraging more granular temporal energy attribute certifications, adding energy storage, and adjusting electrolyzer run times to when renewable energy is available are the primary factors that are expected to contribute to additional costs relative to the status quo of renewable energy procurement.

The guidance will likely encourage projects to:

1. Build near offtakers in industrial clusters to meet deliverability requirements. Building in industrial clusters generally allows projects to reduce costs and de-risk, which will be even more important in helping developers simplify and manage risk in their renewable energy procurement.
2. Build in areas with large, relatively untapped, renewables potential for wind and solar energy. Locating projects in areas of ample renewable energy potential will allow projects to meet new requirements for geographic correlation and maximize hydrogen production relative to the hourly matching requirement.
3. Incorporate energy storage into project development. Fast-response and long duration energy storage will enable producers to smooth out their production profile and uncouple it from peak renewable energy generation while meeting hourly matching requirements.
4. Explore off-grid applications. The marginal electricity producer for a green hydrogen plant will be additional, deliverable, and time-matched. In developing projects that meet the criteria above, project developers may find that the resources (both material and time) to interconnect large-scale load and large-scale renewables may not provide additional value to the project compared to direct, off-grid connection between electricity source and use.

Impact on electrolyzer types that market might favor

The guidance is expected to shape market preferences when it comes to electrolyzer types, encouraging the use of electrolyzer technologies that offer more flexibility in operations. The guidelines associated with the tax credit are likely to encourage a shift in favor of electrolyzers that can quickly start up in response to grid price signals and renewable energy production. Specifically, the Proton Exchange Membrane (PEM) electrolyzers, known for their quick startup benefits, could be favored to meet hourly matching requirements. Given their quick startup, this technology would be most able to maximize production windows when renewable energy is available. The minimum load factor of PEM electrolyzers is also lower than other competing technologies. However, as of now there is no technology on the market that can drop below 5% of its full load requirement.

Despite PEM advantages in the context of the guidance, AEC and SOEC electrolyzers are expected to remain competitive. Depending on how projects are built in terms of renewable energy procurement and energy storage, different electrolyzer choices will be made based on a variety of parameters. AEC electrolyzers offer significant price advantages despite longer startup. Meanwhile, SOEC electrolyzers, once commercialized, can offer higher efficiencies and are well-suited for coupling with high heat in industrial processes.

Comparison to EU regulations

The EU requires that all subsidy-eligible green hydrogen meet requirements on additionality, temporality, and deliverability outlines in EU Renewable Energy Directives (RED) Delegated Acts on Renewable Fuels of Non-Biological Origins (RFNBO). Both the EU and US Guidance require hydrogen projects to use clean energy from the same regional grid that has come online within three years of hydrogen production. Unlike the EU, which allows matching renewable power to electrolysis within a calendar month until 2030, the Treasury has stricter rules, with annual matching up to 2027 and hourly matching from 2028 onward.

This guidance creates a relatively even regulatory playing field for clean hydrogen production across the EU and the US, given that the US guidance is broadly aligned with the EU requirements. With the recent launch of the first auction under the European Hydrogen Bank in November 2023, both regions now offer incentives for clean hydrogen production under similar rules. For investors and companies this ensures ample opportunity for investment in both regions without significant advantage to one over the other.