Colorado bill could provide a template for federal green hydrogen tax credits

Colorado legislation poised for enactment establishes a green hydrogen definition and tax incentive policy that could serve as a template for federal tax credit guidelines and is crafted to support the state’s participation in a bid for US Department of Energy (DOE) hydrogen hub funding, according to a news report.

Colorado House Bill (HB) 23-1281, titled “Advance the Use of Clean Hydrogen”, has passed in both the state House of Representatives and Senate and is expected to be signed by Governor Jared Polis. The bill defines clean hydrogen as derived from water using clean energy and producing under 1.5 kilograms of greenhouse gases per kilogram of hydrogen. Clean hydrogen used to decarbonize hard-to-abate applications such as heavy-duty vehicles and aviation operations will be eligible for a per-kilogram state income tax credit.

Additional measures in the bill that would place further clean energy requirements on hydrogen production have been mitigated in response to concerns from industry investors, offtakers and developers that policies might hinder the advancement of clean hydrogen projects. Bill terms aimed at encouraging hydrogen production using nearby, new wind and solar power facilities and only when that power is available would only apply after 2028 or if Colorado’s hydrogen production reaches the point of 200 MW of electrolyzers. Furthermore, the terms would apply only to investor-owned utilities or hydrogen developers seeking the state tax credit, the report said.

The report cited interest group the National Resource Defense Council’s (NRDC) Rachel Fakhry, who expressed the hope the legislation would guide the US Treasury Department’s formulation of federal tax credit for hydrogen production. The credit would be provided under the terms of the 2022 Inflation Reduction Act (IRA) and could potentially generate over USD 100bn in value for hydrogen producers, according to NRDC estimates.

HB 23-1281 also mandates the Colorado Public Utilities Commission (PUC) to develop a public interest-focused process to establish requirements and a review and approval process for a clean hydrogen production project on a timeline that would be coordinated with the DOE’s hydrogen hub funding. Colorado has joined New Mexico, Utah and Wyoming to jointly propose their Western Inter-State Hydrogen Hub as a candidate for a portion of USD 8bn the DOE is offering to support the development of six to 10 regional hydrogen hubs. The report asserted Colorado’s share of the funding could amount to USD 600m.

The Inflation Reduction Act incentivizes green hydrogen development through two key tax credits—a Clean Hydrogen Credit (Section 45V)—which allows you to claim up to USD 3/kg or qualified clean hydrogen if certain labor and wage requirements are satisfied or an amount of credit-based carbon intensity reduction based on lifecycle greenhouse gas emission (GHG) contracts. The second—an ITC credit (section 48)—has a 6% base and up to 30% phased down based on lifecycle GHG rates.

However, the IRS has not issued any formal guidance on this aspect of the bill yet as it issued guidance on wage and apprenticeship requirements first and then adders for energy communities and domestic content in recent weeks.

*This story was originally published exclusively for NPM subscribers.


New Project Media (NPM) is a leading data, intelligence and events company dedicated to providing origination led coverage of the renewable energy market for the development, finance, advisory & corporate community.