Decoding Treasury's Proposed Guidance for the Clean Hydrogen Production Tax Credit

Infrastructure, permitting, and tracking systems key to success

On December 22, 2023, the U.S. Department of the Treasury released proposed rulemaking for the clean hydrogen production tax credit under the Inflation Reduction Act (IRA). The IRA offers a production tax credit of up to $3 per kg of hydrogen produced based on carbon intensity. Electrolytic hydrogen, produced by using electricity to split water into hydrogen and oxygen, could be eligible for the highest-level tax credit if zero-carbon electricity (i.e. electricity produced from renewable sources or by nuclear power) is used. The average cost to produce green hydrogen, renewable-based electrolytic hydrogen, before the tax credit is approximately $5-6/kg. This means that the tax credit has the potential to significantly lower the production cost of green hydrogen.

Green hydrogen is a versatile and critical decarbonization solution for hard-to-electrify sectors like heavy industries (e.g. chemical and steel) and long-haul heavy-duty transportation. It could also play an important role in enhancing grid resilience and reducing renewable curtailment in the power sector.

The main issues to look for in the proposed guidance are the “three pillars” related to the electricity used to produce hydrogen: temporal matching, incrementality, and deliverability. Together these create a framework environmental groups and many in the hydrogen industry have advocated for to ensure that green hydrogen delivers genuine climate benefits and contributes to greening the electric grid. The hydrogen industry has been anxiously awaiting detailed guidance as it will have significant implications for their project siting, design, and profitability.

Here's where the proposed guidance stands on these critical issues:

• Temporal matching refers to the requirement to match the amount of electricity being used in hydrogen production to the amount of zero-carbon electricity being produced within a specified time period. The key question is how granular that time period is—for example, annually, monthly, or hourly. Treasury’s proposed guidance requires annual matching up to 2027 and phases-in hourly matching from 2028 onwards. Grandfathering will not be permitted. All hydrogen projects, including those built before 2028, will be required to meet hourly matching requirements to be eligible for the highest-level credits from 2028 onwards.
• Incrementality requires that electricity used for green hydrogen production is new and explicitly dedicated to hydrogen production. The proposed guidance requires new renewable generation or new carbon capture and storage (CCS) installed at existing fossil fuel power plants within three years of hydrogen production. Most hydropower and nuclear power plants in the U.S. were built more than three years ago. Therefore, the Treasury is also seeking comments on the eligibility of hydropower and nuclear power that avoid retirement or demonstrate other evidence of emissions benefits for possible inclusion under the final guidance.
• Deliverability focuses on the geographic boundaries – how close hydrogen production needs to be to renewable electricity generation. The guidance requires them to be in the same region as defined by DOE’s National Transmission Needs Study, which is mapped to balancing authorities.

This proposed guidance marks a significant step towards ensuring the IRA clean hydrogen production tax credit meaningfully contributes to emissions reduction, enhances U.S. leadership in clean and competitive manufacturing, supports decarbonization of the U.S. electricity grid, and provides U.S. taxpayers the best value for their tax dollars. It also provides much-needed certainty to jump-start the hydrogen investments that have been waiting for a clear standard.

Increasing the production of green hydrogen alone doesn’t guarantee emissions reductions. Without these requirements, the tax credit will incentivize not only new renewable electricity generation for hydrogen production but also coal and natural gas generation when the wind isn’t blowing or the sun isn’t shining. Without hourly-matching, local, and additional renewable electricity, grid-connected electrolytic hydrogen could generate more emissions than its fossil fuel alternative.

However, meeting these requirements is still challenging for green hydrogen producers, and getting the highest level of tax credit is essential for them to compete with the fossil alternative. The phase-in period until 2028 offers a critical window for addressing key barriers to ensure that this significant tax credit supports the growth of green hydrogen at the speed needed to meet national climate goals.

To ensure hydrogen producers can successfully meet these requirements:

• Policymakers need to scale support for hydrogen transportation and storage infrastructure. Treasury's guidance on hourly matching of local, additional renewable electricity will initially create a competitive edge for renewable-abundant regions. However, those regions are not always where the large hydrogen demand is located. Therefore, accelerating the development of hydrogen transportation and storage infrastructure will be critical in delivering green hydrogen to end users at a competitive price.
• Regulatory agencies need to streamline permitting and approval processes. The Treasury guidance will drive demand for new renewable generation. However, the long permitting and approval processes, as well as interconnection queues for new renewable projects, are by far the biggest barrier to green hydrogen projects. Streamlining the permitting and approval projects to get more renewable generation built faster and accelerate the overall decarbonization of the grid will make compliance with these requirements significantly easier and less costly.
• Utilities, registries, and policymakers should take this opportunity for systemic improvement. These requirements will also create demand for more sophisticated tracking and trading markets. The “three pillars” are not unique to hydrogen production. More corporate energy users are also pivoting to more granular matching of local and additional renewable electricity. Registries and utilities should take this opportunity to upgrade their systems to allow more granular tracking of electricity load, while ensuring costs associated with system upgrades will not be borne by residential customers, especially those in low-income communities.

There’s a 60-day comment period for this proposed rule. Green hydrogen producers and end-users should proactively work with industrial associations such as the Renewable Thermal Collaborative to ensure that the final guidance will support green hydrogen that effectively reduces GHG emissions and supports a viable and timely transition to hourly-matched, additional, and local renewable electricity sourcing.

Cihang Yuan is Senior Program Officer, International Corporate Climate Partnerships at World Wildlife Fund.