A Closer Look at the 45V Final Rule

For electrolytic hydrogen production, the final rule reaffirms the three pillar guardrails, which are similar to those already finalized in Europe. Requiring hourly matching, deliverability, and incrementality is critical to avoiding some of the worst high-emissions consequences of grid-connected hydrogen production. Furthermore, the precedence of a three pillar approach to matching clean electricity production with load is critical for future standards, policies, and regulations for electricity emissions accounting.

The final rule also includes new flexibilities that differ from the proposed rule. These include two more years of annual matching (the transition to hourly matching now happens in 2030), incrementality flexibilities for retiring nuclear and states with rigorous clean energy policies, and a pathway to prove electricity deliverability across regions.

The topline can be found in Treasury’s press release here, but the details are important. Here are some finer points, and responses to comments from the proposed rule, that I think are worth highlighting and understanding when considering how this final rule will impact project deployment and the development of a three-pillar electricity accounting system. Page numbers included based on the unpublished version of the rule here.

The use of EACs and granular EAC registries is reaffirmed

• 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. (p. 100)
• Treasury states confidence that existing registries will develop hourly EAC tracking capabilities in advance of the 2030 deadline to begin hourly matching for 45V compliance. (p. 160)

Temporal matching pillar

• The transition to hourly matching shifts back two years to 2030, and maintains no legacy exemptions for existing projects as included in the proposed rule. (p. 333)
• The ability for projects to claim the top tier of the tax credit for individual hours, as opposed to an all-in or all-out scenario as described in the proposed rule, provides greater certainty and flexibility for projects. This flexibility is hemmed in by a requirement to be under an annual emissions cap of 4kg CO2/kg H2 for all hydrogen produced throughout the year. (p. 322)

Incrementality pillar

Avoided nuclear can qualify, but there are guardrails here too

• The 45U economic test is required for proving avoiding nuclear retirement. This test is backwards looking and attempts to identify merchant nuclear plants at economic risk of retirement. The backwards looking nature of identification provides greater certainty for projects, but will not help identify which plants are actually economically distressed during the life of the tax credit. (p. 338)
• 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. This provision further tightens the causation between the hydrogen production and tax credit revenue and the ongoing operation of the existing nuclear plant. (p. 339)

Some states will get a pass on incrementality due to rigorous climate policy – this echoes the European exemptions for highly decarbonized countries

• States exempted from the incrementality pillar must have an RPS/CES going to 100% and a legally binding GHG cap on electricity sector emissions that declines over time, applies to imports of electricity, and ensures allowances do not fall below $25/ton CO2 and that the emissions cap cannot be exceeded for less than $90/ton CO2. (p. 134-35 & 334-35)

New carbon capture and sequestration (CCS) equipment will count

• An existing fossil fuel plant can qualify as incremental if new CCS equipment meets the 36-month placed in service incrementality threshold. (p. 126, 340) Without an adjustment to upstream methane leakage assumptions in the GREET model, which is unlikely to happen in the next 45VH2-GREET update, there is risk that emissions will be underrepresented for these projects. (p. 187)

Deliverability pillar

Deliverability across regions can be considered compliant under a specific set of circumstances

• Deliverability requires proof of physical delivery, transmission rights, the use of NERC E-Tags, and validation by an EAC registry. (p. 179, 345)
• While deliverability regions can be updated, at most yearly, projects can rely on current deliverability regions for compliance and would not be negatively affected by a change in regional boundaries. (p. 176)

GREET Model certainty

• The GREET Model will continue to be updated, but projects will be able to safe harbor the version of GREET that was in use at the time project construction begins. (p. 326)

Potential risks in the final rule

• Consideration of each electrolyzer within a balance of plant as its own “facility” does open up the opportunity that EACs could be shifted to have one significantly “clean” electrolyzer and one “dirty” electrolyzer. (p. 21-22, 311)
• Unmatched electricity consumption must use the grid average emissions rate. Without the use of a fossil-only or residual mix emissions rate, this will lead to double counting of clean electricity used for compliance with 45V and captured within the grid average. (p. 322)

Storage is included. But it needs further guardrails to be high integrity

• If electricity, represented by a 45V compliant EAC, is used to charge a storage device, then that same EAC can be transferred upon discharge to hydrogen production as long as the electricity backed by the compliant EAC is discharging during the same hour as the hydrogen production. (p. 344)
• EACs generated by discharging electricity from storage must satisfy the three pillar requirements and be substantiated by an EAC registry. (p. 166-67)
• As it stands, this provision may open the door to more gaming than many other provisions within this final rule. Granular EAC registries should adopt more stringent standards around how storage can time-shift clean electricity, EACs are responsibly allocated, and integrity is maintained for the final rule.

This was a specific look at the rules governing electrolytic hydrogen production tax credit compliance, and from that vantage point this should be considered a rigorous, fair, and thoughtful final rule.

Huge thank you to the public servants who worked tirelessly on this for years and to everyone who has spent time researching, writing, advocating, and thinking about this monumental topic. Much more to come on this rule as the deep dive continues.