The Biden administration’s new restrictions on accessing incentives for hydrogen investment have relieved Australian officials, who had been worried easily available tax credits in the United States would have diverted local capital overseas.

The new rules were released one working day before the Christmas holiday and detail the requirements to access tax credits for green hydrogen projects under the Inflation Reduction Act, the Biden administration’s key emission reduction policy.

The rules require a renewable energy source located in the same power grid region – and operated at the same time – as the green hydrogen project, for the developer to access tax credits. Treasury, which is running the consultation project, has given stakeholders two months to comment before the rules are finalised.

But there has already been significant criticism that the rules are too strict, and too onerous to allow developers of green hydrogen projects to access credits. Andrew Forrest, the Fortescue billionaire who is expanding his iron ore empire into energy, is one investor who is concerned the new rules will stymie developments in the US.

“We appreciate the work of the Biden administration to give clarity around the hydrogen tax credits. It is critical that the tax system does not slow that momentum by imposing additional barriers to green hydrogen production. We look forward to reviewing the proposal released and engaging with all the key stakeholders,” a spokeswoman said.

Fortescue in November said it would proceed with three energy projects – an investment worth $US750 million ($1.14 billion) – in the US and Australia. Fortescue, at the time, said it was allocating $US550 million to the Phoenix Hydrogen Hub in the US where it plans to build an 80-megawatt electrolyser and liquefaction plant with production capacity of up to 11,000 tonnes a year of liquid green hydrogen.

While the rules disappointed green hydrogen developers in the US – where they have been criticised by the Chamber of Commerce and renewable energy development lobby groups – Australian officials said they were relieved because they would probably mean less potential investment was diverted away from Australia. The federal government’s own hydrogen investment program, known as Hydrogen Headstart, is capped at $2 billion.

One senior government official who lobbied the White House, speaking on condition of anonymity as they were not permitted to comment publicly, said it now appeared that the subsidies would “have less impact on possible investment in green hydrogen in Australia”. “At first glance, it appears as if these IRA subsidies will not be as widely accessed as first feared,” the official told The Australian Financial Review.

Other Australian companies have accessed subsidies available under the IRA, a sweeping $US360 billion program.

But Mary Burke Baker, the head of Washington-based K&L Gates’ tax policy practice, told the Financial Review that the Biden administration’s new rules for accessing the so-called 45V tax credit for green hydrogen would set investment back in the US.

“For one, it’s going to have a chilling effect on the development of clean hydrogen and, two, it’s not necessarily going to give the United States an advantage in producing hydrogen,” Ms Burke Baker said. “If you look at the proposed regulations with all of their restrictions and administrative requirements, including the extent of necessary third-party verification, they are just extremely onerous.”

David Wochner, the law firm’s Washington office managing partner, said some projects in the US were now likely to fall over, making other countries such as Australia more favourable.

“I think that it is inevitable that there are projects across the US that are in varying stages of development, including some that are well past the drawing board stage, that are going to be, shall we say, less economic because they cannot take advantage of [the tax credit], and perhaps not bankable as a result,” Mr Wochner said.

“I really do believe there will be non-US energy industry participants who, at least in the hydrogen space, will make the decision to invest elsewhere, to the extent that the elsewhere has a more favourable regime, or perhaps a regime that is less onerous.

“I expect there are rational tax regimes that Australia could look to that actually would incentivise clean hydrogen.”

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