The Impact of New US Treasury Regulations on Hydrogen Incentives: Controversy and Challenges

The US Treasury Department is on the brink of issuing new regulations that will govern Inflation Reduction Act-related hydrogen incentives. This move has sparked a storm of controversy within the industry, especially among those engaged in green hydrogen projects. The draft regulation, released in December, has been widely criticized due to the economic complications it presents for green hydrogen projects. The guidance is also set to impact companies in the planning stages of their projects.

What is the Inflation Reduction Act?

On August 16, 2022, President Biden signed the Inflation Reduction Act (IRA) into law. This legislation includes tax incentives for clean energy and manufacturing, healthcare cost reduction, corporate tax code reforms, and IRS efforts to enhance customer service and ensure that wealthy corporations pay their taxes. The U.S. Department of the Treasury is tasked with implementing major elements of the law, which includes developing tax regulations and providing guidance to implement energy credits and other tax law changes.

The Controversial Draft Regulation

The controversy centers around a draft regulation governing the implementation of expanded tax credits in Section 45V of the IRA. This regulation could significantly impact the economics of hydrogen projects. The main point of contention is the requirement for green hydrogen projects to directly source their energy from wind or solar projects to access full tax credits. The guidance update is currently an interim measure, and the Treasury Department will consider input from stakeholders before issuing a final regulation.

Debate and Lobbying amidst Industry Stakeholders

The proposed framework measures hydrogen's carbon emissions and eligibility for tax credits, which are worth up to 3 per kilogram of hydrogen produced. The additionality rule, which would prevent green hydrogen plants from relying on existing grid power, has been a significant point of contention. Various industry stakeholders and environmental groups are lobbying for exemptions and deferrals to these proposed rules. The IRS has been contemplating circumstances that might warrant a relaxation of this rule, including exemptions for regions with 100% clean electricity and power plants facing retirement without selling electricity to hydrogen producers.

Implications for the Nuclear Power Industry

The proposed rules have also been met with criticism from the nuclear power industry, which claims that the additionality rule excludes nuclear power plants from the fight against climate change. The proposed rules require hydrogen to come from newly built resources, which presents a major obstacle for legacy nuclear sites. However, it also provides further incentive to deploy new reactors and permits the use of natural gas if employed with carbon capture and sequestration.

Public Hearing and Future Considerations

A public hearing on the regulations is scheduled for March 25, 2024. Stakeholders have two weeks to provide public comments on the proposed language in the new federal rules proposed for hydrogen production tax credits. While the proposal is popular among environmentalists and some pro-nuclear advocates, others express concern that it would limit opportunities for existing legacy nuclear plants well equipped to convert part of their operations to hydrogen production.

As the US Treasury Department works towards finalizing these regulations, stakeholders will continue to lobby for amendments that can accommodate the diverse interests within the hydrogen industry. The outcome of this process will have significant implications not only for the future of hydrogen production but also for the broader clean energy landscape in the United States.