The final version of rules governing which hydrogen projects can qualify for the 45V tax credit leave the controversial “three pillars” for electrolysis — hourly matching, incrementality, and deliverability — largely intact.
But the outgoing Biden administration made a number of other key tweaks compared to the proposed guidance released in December 2023, including pushing the hourly matching requirement out by several years, expanding the use of biogas and carbon capture, and adding in a provision for the use of existing nuclear power.
Those changes are far from the full rollback of the incrementality pillar and the exemption of early projects from hourly matching that many in the industry were pitching. But nonetheless, the softening may just be enough to forestall many of the legal challenges being prepared in the wake of the proposed guidance.
There is some lingering industry frustration with the mostly unchanged three pillars, said Steptoe partner Hunter Johnston, but the final rules have a lot of flexibility when compared to the proposed regulations. And given the popularity of many of those changes, Johnston explained, the industry is less likely to make use of “blunt instruments” — like lawsuits or the Congressional Review Act — that could result in wholesale rollback of the guidance.
“I think industry in general will be very reluctant to throw out the entirety of the tax credit, because it provides certainty for investment,” Johnston told Latitude Media.
That doesn’t mean there won’t be pushes to further amend the rules — just that it may now be a less risky and more constructive strategy to lobby for changes through administrative procedure, he added.
Jacob Susman, who heads green hydrogen developer Ambient Fuels, agreed that for many in the industry, the benefit of finally having certainty may outweigh the risk of filing legal challenges that could end up mired in court proceedings for months or years.
“I’d be lying if I didn’t say the industry is feeling a certain degree of exhaustion from having had to wait this long for certainty,” Susman added. “But moving from a state of uncertainty and very little clarity into one where we now have those things is hugely beneficial to the green hydrogen sector and to our ability to advance projects.”
Lawsuits, if filed, would either come from environmental groups seeking a purer form of green hydrogen, or from “someone in the industry who feels wronged by the rules,” Susman said. But given the changes, “I’m struggling to see who would be motivated to take a shot.”
Final draft changes
There are several key changes to the final rules that, while not meeting all industry demands, have served to make the guidance more palatable.
For example, the rules allow projects to calculate emissions using the version of the “Greenhouse gasses, regulated emissions and energy use in transportation” (or GREET) model that’s in place when they begin construction. Projects can rely on that version of the model for the 10-year duration of the credit.
Another key change is the addition of several new pathways for projects to satisfy the incrementality requirement, which states that power generation must come online within 36 months of the hydrogen facility. The final rules allow for projects to use up to 200 megawatts from existing nuclear reactors “that might otherwise retire,” as well as electricity from projects that have added carbon capture and sequestration in the last 36 months.
They can also use electricity produced in states that have both strict electricity decarbonization standards and legal limits on greenhouse gas emissions; only California and Washington currently qualify, Treasury said.
The administration appears to have gone to great lengths to explain the legal justification for the final rules. The majority of the nearly 400-page document is dedicated to detailed explanations of the agency’s logic behind various elements of the rules, and responses to the more than 30,000 comments submitted by industry in the last year.
Jason Munster, who led the 45V analysis for DOE’s Office of Clean Energy Demonstrations and who now runs a hydrogen consultancy, told Latitude Media that a chunk of the final document was specifically meant for the courts — not laypeople.
“The defense [of the rules] is put together inside the document, and I suspect that is because the document will have to defend itself,” he said. “The incoming executive branch will not be telling their staff to bring their best defense here.” And, as Munster noted in an August interview with Latitude Media, that attempt to lawsuit-proof the rules could be at least partially responsible for the delay in their publication.
The incoming executive branch will not be telling their staff to bring their best defense here.
This final-hour timing also means that critics have other means of pursuing changes, Johnston said, as opposed to filing lawsuits. He pointed to language from groups like the Chamber of Commerce which, while arguing that the final version “falls short” of what’s needed to build a new industry, points specifically to the incoming administration’s “opportunity to improve the 45V rules.”
“The same [notice and comment] process that was done to create the regulation could be done again by the Treasury Department,” he explained, meaning that the incoming administration would have to articulate the basis for engaging in additional processes, take comments, and issue a proposal.
“It’s not a short road,” Johnston said. “But these projects take years to develop, and it’s a new administration. The timing just happens to allow for this potential to possibly occur.”
Lingering litigation potential
Munster, for his part, said there will likely still be some legal challenge to the final rules. Now, however, they may be more likely to come from companies that make hydrogen from natural gas (the reformation process), rather than from companies that make hydrogen by splitting water with electricity (the electrolysis process).
The final rules don’t allow producers to blend natural gas from different sources to calculate an average emissions rate for their tax credits.
Without blending, reformation projects won’t be able to achieve the top, $3-per-kilogram credit tier, Munster said. “The credit was never meant to get $3 per kilogram on the reformation side,” he clarified. That said, “I think it was a surprise to a lot of people that blending is disallowed. And I wouldn’t be surprised if someone ended up taking this to the courts.”
On the electrolytic side, the incrementality pillar remains the most vulnerable to challenges.
In its immense final 45V draft, Treasury explains that the legal basis for the incrementality pillar comes from the Clean Air Act’s requirement that projects consider “significant indirect emissions.” But that law doesn’t specifically require hourly matching, leaving room for legal challenges arguing that mandating that approach to incrementality exceeds Treasury’s authority, Johnston said.
It’s not clear though, who specifically would opt to file that hypothetical challenge. As Munster put it: “Who in the renewables space has time and patience to litigate something that’s going to take two to five years to resolve?”
And the risk litigation could pose to projects is lessened by the additional carveouts in the final rules, he added. “For a lot of the projects that are going to move forward now because of the changes that were made, a lot of them are shielded in case the restrictions fall away,” he said. “And on that note, it re-raises the question…who’s going to sue?”
Susman, who had hoped for significantly more flexibility on hourly matching and incrementality, is less concerned about the uncertainty that could be posed by a legal quagmire than he was about the uncertainty of having no final rules.
“Whether the final rules end up being enough to drive a high volume of long-term, credit-worthy, customers remains to be seen,” he said. But the outstanding questions are now about scale and timing, rather than whether investments will happen at all.
“There was probably, at one point, risk that the industry might not even happen in the U.S. because we were in that state of uncertainty and lack of clarity,” he added. “The on/off switch risk is over now, and we’ve moved on to a question of how much appetite there will be and how quickly it can scale.”
