Treasury Issues Regulations for 45V Clean Hydrogen Production Tax Credit

As part of an ongoing Blog series, Arnold & Porter’s cross-practice Energy and Energy Transition team is highlighting key legal and regulatory developments for clients across economic sectors navigating all aspects of the energy transition.

On January 10, 2025, the Internal Revenue Service (IRS) and the U.S. Department of the Treasury (Treasury Department) published in the Federal Register highly anticipated final regulations for the section 45V Clean Hydrogen Production Tax Credit. The final regulations provide guidance on eligibility for producers of hydrogen seeking to obtain the credit, which was established as part of the Inflation Reduction Act of 2022.

The final regulations come one year after the publication of the 2023 proposed regulations, following review of over 30,000 comments from companies investing in the hydrogen industry and collaboration between the Treasury Department, the IRS, the U.S. Department of Energy (DOE), and the Environmental Protection Agency (EPA). The Treasury Department made several changes between the proposed and final regulations to increase flexibility for hydrogen producers, but retained many of the proposal’s requirements, including incrementality, hourly matching, and deliverability requirements for energy attribute certificates (EACs), more commonly referred to as Renewable Energy Certificates. The rule finalizes a number of elements of the proposed regulations that make access to the 45V credit more difficult.

Given the timing of the final rule, the Congressional Review Act could be used to overturn the regulations.

The 45VH2-GREET Model

The 45V credit’s value is determined by the hydrogen production’s greenhouse gas (GHG) emissions. To meet the definition of “clean hydrogen,” the lifecycle GHG emissions must not exceed 4 kilograms of carbon dioxide equivalent per kilogram of hydrogen, with tiered credit value depending on the lifecycle GHG emissions reduction.

The final regulations designate the 45VH2-GREET model as a “successor model” under 45V(c)(1)(B) and require hydrogen producers to use the most recent version of the 45VH2-GREET model when calculating the clean hydrogen production tax credit. The final model was not, however, released concurrent with the regulations so uncertainty remains regarding 45V’s incentives and how taxpayers will claim the credit. DOE is expected to release the model along with an updated manual explaining its use later this month.

Electrolytic Hydrogen Production

To qualify for the 45V credit, hydrogen producers that use electricity in the production process must demonstrate that the electricity is generated from clean sources. This demonstration can be done using EACs, though the proposed regulations established strict incrementality, time-matching, and deliverability requirements for when EACs may be used. The final regulations provide some enhanced flexibilities to these requirements, but largely maintain the same framework as the proposal.

• Incrementality. Incrementality requires that electricity used for hydrogen production be sourced from new, clean electricity generation that is not currently meeting the electrical grid’s energy needs, with no grandfathering for construction of hydrogen facilities already underway. Under the proposed regulations, an EAC would meet the requirements for incrementality if the facility producing the unit of electricity has a commercial operations date of no more than 36 months before the facility was placed into service. The final guidelines maintain the proposed 36-month period, and also adopt three additional ways to demonstrate incrementality, including:
  • CCS retrofit rule: A facility can meet the incrementality requirement if the electricity is produced by that facility that has implemented carbon capture and sequestration (CCS) technology, provided that the carbon capture equipment has been added to a generator within 36 months before the hydrogen facility is placed in service.
  • Qualifying nuclear: For nuclear plants demonstrating risk of retirement and indications of co-dependence on hydrogen investment, electricity generation will be considered incremental up to 200 megawatt hours per qualifying reactor.
  • Qualifying states: In states with robust GHG emissions caps and clean electricity standards, electricity generated will be considered incremental. A qualifying state is one which has a qualifying electricity decarbonization standard and a qualifying GHG cap program within its state law or regulations. The final regulations identify Washington and California as qualifying states, but note that more states could be added if they implement policies that meet the criteria.
• Hourly matching and accounting. The regulations include a temporal matching obligation for EACs, requiring that hydrogen production occur in the same hour that the clean electricity is generated. The proposed regulations provided a phased-in approach with hourly time-matching beginning in 2028. The final regulations extended the transition time by two years, allowing producers to use annual matching until January 1, 2030. After that date, all producers must switch to hourly matching. Once hourly matching is required, qualified clean hydrogen facilities may perform hourly accounting of electricity-related lifecycle GHG emissions. This approach allows producers to determine emissions on an hour-by-hour basis, provided that the emissions are under the 4-kilogram limit to qualify. This alternative is intended to give more investment assurance by avoiding a large credit value loss in the event a producer is unable to source EACs for a portion of the year. The final regulations also note that producers may voluntarily implement hourly matching prior to the phase-in date.
• Deliverability. The proposed regulations provided that an EAC meets deliverability requirements if the electricity represented by the EAC is generated by a facility within the same grid region as the hydrogen production facility. “Region” would be defined according to the DOE’s 2023 National Transmission Needs. The final regulations adopt the proposed deliverability requirements and clarify that the electricity generating source and the hydrogen facility are within the same region if they are both electrically interconnected to a balancing authority located in the same region. The final regulations also introduce an interregional deliverability requirement in certain circumstances:
  • Interregional deliverability. An eligible EAC may also meet the deliverability requirement for certain cases of interregional delivery, provided that the deliverability can be tracked and verified. An EAC will only meet the requirements for interregional deliverability if the underlying electricity generation has the right to transmit from its location to the clean hydrogen producer’s region and if that generation is delivered to that producer’s region.

Methane-Based Hydrogen Production

The final regulations also include several key provisions relevant to hydrogen produced from methane, including renewable natural gas (RNG).

• Book-and-claim. The final regulations enhance “book-and-claim” systems for natural gas alternatives, including renewable natural gas and coal mine methane. For qualified clean hydrogen production claims, EACs are required to document the RNG or fugitive methane procurement and guarantee that the environmental characteristics of the RNG or fugitive methane being used are not sold to other parties or utilized for compliance with other policies or programs. Producers can begin using book-and-claim systems in 2027, following the Secretary of the Treasury’s determination that a system meets the requirements set out in these regulations. Until book-and-claim accounting is available, producers must substantiate their use of RNG and coal mine methane in hydrogen production via a direct pipeline connection to a natural gas alternative supplier or documentation of other physical methods of exclusive delivery.
• Removal of “first productive use” for natural gas alternatives. The final regulations removed the proposed regulations’ limitation that natural gas alternatives used in hydrogen production must be derived from the “first productive use” of the relevant methane, a feature of the proposal that was controversial and could have posed substantial limitations on 45V claimants. IRS removed this limitation noting the challenges associated with producers’ ability to substantiate and to verify this information independently.
• Methane leakage rate calculations. The final guidelines also modify the use of upstream methane leakage rates to calculate credit value. Upstream methane leakage rates will be based on default national values in a future version of 45VH2-GREET, which will include project-specific upstream methane leakage rates subject to the availability of appropriate and verified data from the EPA Greenhouse Gas Reporting Program.

Producers should also note that the final regulations contain an “anti-abuse” rule, providing that the 45V credit cannot be granted if the sale or use of qualified clean hydrogen is primarily done for the purpose of obtaining the credit in a wasteful manner, rather than for the production, sale, or use of qualified clean hydrogen.

Please contact any member of your Arnold & Porter team for additional information on the final regulations and their implications for industry. 

© Arnold & Porter Kaye Scholer LLP 2025 All Rights Reserved. This Blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.