The Inflation Reduction Act of 2022 created a new tax credit opportunity for the production and sale of clean hydrogen under Section 45V (hydrogen PTC). On Dec. 22, 2023, the IRS and U.S. Department of the Treasury released guidance detailing proposed rules to qualify for and claim this new credit. This alert summarizes the key points of the hydrogen PTC proposed regulations.
The hydrogen PTC offers taxpayers a credit for a period of 10 years. Notably, the hydrogen PTC is technology-neutral and a taxpayer’s credit is a percentage of the base value of $0.60 per kilogram of hydrogen produced subject to two major adjustments (excluding regular adjustments for inflation):
- The emissions rate, a measure of how much carbon the hydrogen may emit as “life cycle greenhouse gas emissions” (GHG) measured through the greenhouse gases, regulated emissions and energy use in technologies model (GREET model).
- Whether prevailing wage and apprenticeship requirements were met in construction, alteration or repair of the qualified hydrogen production facility, which, if met, increases the credit 5x to $3.00 per kg. (For details on prevailing wage and apprenticeship guidance, see a prior McGuireWoods legal alert.)
The life cycle GHG emissions adjustment amounts to five levels of credit reduction from maximum:
- No credit for production that results in greater than 4 kg of carbon dioxide equivalent (CO2e) per kg of hydrogen.
- An 80% reduction for CO2e between 4 kg and 2.5 kg.
- A 75% reduction for CO2e between less than 2.5 kg and 1.5 kg.
- A 66.6% reduction for CO2e between less than 1.5 kg and 0.45 kg.
- No reduction for CO2e less than 0.45 kg (i.e., full credit value).
The credit applies to hydrogen produced at a qualified facility placed in service after Dec. 31, 2022 (and for which construction begins before Jan. 1, 2033).
Defining a Qualified Hydrogen Production Facility
The proposed regulations define a “facility” as a singular production line comprising all the interconnected components necessary for producing qualified clean hydrogen. This definition relies on components being functionally interdependent, in that each one relies on the others being operational to produce the hydrogen. If components serve additional purposes beyond hydrogen production, they can still be part of the facility as long as they pass the functional interdependent standard.
A facility is specifically defined to exclude equipment used for hydrogen conditioning or transportation post-production. It also excludes equipment used in generating electricity for powering the hydrogen production process and carbon capture equipment used in the electricity generation phase — although these may be entitled to their own separate tax credits.
Life Cycle GHG Emissions and the GREET Model
The adjustment for life cycle GHG emissions accounts for the hydrogen PTC’s neutrality in use of technology by rewarding production methods that have fewer emissions byproducts. The proposed regulations specify that the term life cycle GHG emissions takes its definition from the Clean Air Act (42 U.S.C. § 7545(o)(1)(H)) as it stood on Aug. 16, 2022. The life cycle GHG emissions are considered on a “well-to-gate” basis, encompassing the total GHG emissions linked to the production of hydrogen at a facility during a taxable year, up to the point of its production.
This covers all emissions associated with the growth, gathering, extraction and processing of feedstock, as well as its delivery to the qualified hydrogen production facility. It also covers GHG emissions stemming from the hydrogen production process itself, including the electricity used by the hydrogen production facility and any carbon dioxide generated by the facility that is captured and sequestered, providing a taxpayer with an incentive to simultaneously deploy less carbon-intensive electricity generation, such as wind and solar (which can be eligible for their own income tax credits). Essentially, this definition comprehensively accounts for all GHG emissions related to producing hydrogen, right from the initial stages of feedstock handling to the final production stage at the facility.
Life cycle GHG emissions must be calculated using the latest GREET model, which, per the proposed regulations, is the latest version of the “45VH2-GREET model” that is publicly available and listed in the instructions of the most current Form 7210, Clean Hydrogen Production Credit (available from the Department of Energy’s website) on the first day of the taxpayer’s taxable year in which it produced hydrogen claiming the Section 45V credit. Taxpayers have some flexibility to use newer versions of the GREET model that are released to the public within the same taxable year.
Sourcing Electricity Used and Verifying the Production
For the purpose of verifying the emissions from electricity used in hydrogen production, the proposed regulations introduce three new criteria, referred to as the “three pillars” for Energy Attribute Certificates, which also apply to Renewable Energy Certificates and other zero-emission attribute certificates:
- Incrementality — essentially, demonstrating that a clean power source was new or incremental, based on the generation facility having begun commercial operation (or an increase in nameplate capacity) no more than 36 months before the hydrogen production facility was placed in service.
- Deliverability — the electricity is generated by a source that is in the same region (as defined by the Department of Energy) as the hydrogen production facility.
- Temporal Matching — (i) for electricity generated before Jan. 1, 2028, it must be produced within the same calendar year as it is used by the hydrogen production facility, but (ii) for electricity generated after Dec. 31, 2027, the generation must occur within the same hour as its use in the hydrogen production facility.
Hydrogen will not be considered as qualified clean hydrogen unless its production and subsequent sale or use is authenticated by an independent third party and included with the taxpayer’s annual federal income tax return or information return. A qualified third party includes individuals or organizations that hold current accreditation either as a validation and verification body from the American National Standards Institute National Accreditation Board or as a verifier, lead verifier or verification body under the California Air Resources Board’s Low Carbon Fuel Standard program.
Election for an Investment Tax Credit Under Section 48(a)(15)
A facility that qualifies for the hydrogen PTC may irrevocably elect to claim an investment tax credit based on the tax basis in the facility. This hydrogen ITC is equal to a percentage that ranges from 1.2% to 6% of the facility’s basis. This percentage depends on the expected life cycle GHG emissions rate of the facility.
Section 6417 Direct Pay for the Section 45V Clean Hydrogen Production Tax Credit
The Clean Hydrogen Production Tax Credit is one of the federal credits eligible for Direct Pay through Section 6417. This applies for Section 45V even if the potential claimant is a taxpayer and not in the select group of non-taxable entities that may broadly seek direct payments for essentially all energy tax credits. This opportunity is available for a taxpayer for a five-year period that may begin in any taxable year after Dec. 31, 2022, in which the electing taxpayer has placed a qualified hydrogen facility in service, and for each of the four subsequent taxable years ending before Jan. 1, 2033.
Notice and Comment on These Proposed and Temporary Regulations
The proposed regulations were published in the Federal Register on Dec. 26, 2023, and may be relied upon for taxable years beginning after Dec. 31, 2022. They are subject to a notice and comment period before they will be made final, and interested parties are requested to submit comments by Feb. 26, 2024.
- IRS Refreshes and Codifies Energy Property Tax Credit Guidance in Proposed Section 48 Regulations
- Treasury and IRS Issue Guidance for Section 45X Advanced Manufacturing Production Credit
- IRS Opens Portal to Register Credits for Direct Payments or Transfers
- IRS and Treasury Seek Comments on Direct Pay and Domestic Content Overlap