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Section 45V Clean Hydrogen Production Tax Credit - IRS Releases Proposed Regulations

Client Updates

Prepared by the Baker Botts Hydrogen Practice Group, including Barbara de Marigny, Mike BressonRob ButlerMona DajaniMichael DidriksenGeorge FibbeEllen FriedmanEli HinckleyTom HolmbergSteve MarcusRenn NeilsonShailesh SahayKatie McEvillyJared MeierChad SillmanJanie Kilgore

On December 22, 2023, the Internal Revenue Service (“IRS”) and the Department of the Treasury (“Treasury”) published much-anticipated and long-delayed guidance in the form of proposed regulations regarding the clean hydrogen production tax credit under section 45V of the Internal Revenue Code. The credit, enacted by the Inflation Reduction Act of 2022 (the “IRA”), is a key component of the Biden Administration’s clean energy initiative and is the primary tax incentive for the production of clean hydrogen.

Simultaneously, the Department of Energy (“DOE”) released a White Paper that supports Treasury’s analysis and describes how to assess lifecycle greenhouse gas emissions associated with the use of electricity in hydrogen production. DOE also released a new model (“45VH2-GREET 2023”) for determining the lifecycle emissions of hydrogen production through a variety of pathways along with a manual as to use of the model (the manual is available here and the model is downloadable here).

The amount of the section 45V tax credit varies depending upon the amount of greenhouse gases (“GHGs”), such as carbon dioxide, released during the hydrogen production process, including in the generation of electricity used to produce the hydrogen. Because section 45V as enacted did not specify in detail the methodology to be applied to determine the GHG emissions of production processes, IRS guidance has been expected to provide the specifics and, in particular, rules for determining the GHG emissions associated with electricity used to produce the hydrogen.

In anticipation of such guidance, there has been intense lobbying and public debate over the rules that will govern the determination of the amount of emissions from a hydrogen production process, thus setting the amount of the available tax credit. Proponents of stricter rules advocate limiting the ability of the hydrogen industry to use existing renewable power sources to produce clean hydrogen. Proponents of more permissive rules want to foster development of the fledgling clean hydrogen industry and are concerned that strict standards will make clean hydrogen expensive to produce and hinder the growth of the industry the credit was intended to incentivize.

The proposed regulations reflect the Biden Administration’s policy choices in response to this debate and generally adhere to the stricter view embodied in the so-called three “pillars” of clean power (each described further below): (1) additionality (or “incrementality” in the language of the proposed regulations), (2) temporal matching and (3) geographic correlation (or “deliverability” in the language of the proposed regulations).

Under the proposed regulations, power used in clean hydrogen production:

  • must be sourced from power facilities that began commercial operations no more than 36 months before the hydrogen plant is placed in service;
  • must be matched with the clean power generation hourly starting January 1, 2028 and annually before then; and
  • must be sourced from a power producer in the same region as the hydrogen production facility.

The proposed regulations reflect a policy decision from the Biden Administration to enforce strict limits on section 45V credit availability to hydrogen producers using grid power even though these limits will significantly increase costs for the clean hydrogen industry.

Background on Section 45V

Section 45V provides a tax credit that is a dollar amount per kilogram of clean hydrogen produced during a 10-year time period. The credit does not specify the manner in which clean hydrogen must be produced. Rather, the amount of the credit turns on the lifecycle greenhouse gas emissions of the production process and whether the construction of the facility complies with certain prevailing wage and apprenticeship requirements. The “cleanest” hydrogen receives a credit of $3.00 per kilogram if the lifecycle GHG emissions are less than 0.45 kilograms of CO2e (CO2 equivalent) per kilogram of hydrogen produced. Hydrogen that has lifecycle GHG emissions in excess of 4 kilograms of CO2e per kilogram of hydrogen cannot receive a credit. The table below presents each tier of credit value for the section 45V credit:


Emissions Intensity (kg of CO2e per kg of H2) Maximum credit ($/kgH2, assuming prevailing wage and apprenticeship requirements are met)
 0 - .45kg $3.00 
 .45 -1.5kg $1.00 
 1.5 - 2.5kg $0.75 
 2.5 - 4kg $0.60 

Hydrogen Production Methods

By industry custom, the various methods for producing hydrogen are categorized by a designated color ease of reference. The most common method of producing hydrogen, the reformation of natural gas, produces significant carbon dioxide emissions and is categorized as "gray." “Green” hydrogen is produced by an electrolyzer that uses electric power to split water (H2O) into its components (hydrogen and oxygen). If the power input is from a zero-emission source, such as wind or solar power, the production of green hydrogen will have very low or zero emissions. “Blue” hydrogen is produced by the reformation of natural gas or other hydrocarbons, with the associated carbon dioxide by-product being captured and sequestered rather than allowing it to escape into the atmosphere.

How to Determine Greenhouse Gas Emissions?

Because the amount of the credit depends upon the carbon intensity of the production process, there has been considerable focus on the rules that would be applied to determine the lifecycle GHG emissions for the hydrogen production method used. Section 45V is “technology-agnostic” in that it does not specify the nature of the technology that must be used to produce the clean hydrogen, requiring only that lifecycle GHG emissions be measured “well-to-gate” as determined under the Greenhouse gases, Regulated Emissions, and Energy use in Transportation (“GREET”) model developed by the Argonne National Laboratory. Especially for hydrogen produced using electric power (e.g., green hydrogen produced with electrolyzers), the source of the power for the facility and the emissions associated with the generation of that power is key in determining the carbon intensity of the hydrogen production process.

Season’s GREETings: Determining an Emission Rate with a New GREET Model

The proposed regulations require that taxpayers use DOE’s newly-released 45VH2-GREET model to determine lifecycle GHG emissions of a hydrogen production process. This GREET model includes emissions associated with feedstock growth, extraction, processing and delivery to the hydrogen production facility together with emissions associated with the power used by the hydrogen production facility, and any capture and sequestration of carbon dioxide generated by the hydrogen production facility.

New 45VH2-GREET includes modeling methodology for eight hydrogen production pathways: steam methane reforming (SMR), with potential carbon capture and sequestration (CCS), autothermal (ATR) reforming of natural gas, with potential CCS, SMR of landfill gas with potential CCS, ATR of landfill gas with potential CCS, coal gasification with potential CCS, biomass gasification with corn stover and logging residue, low-temperature water electrolysis using electricity, high-temperature water electrolysis using electricity and potential heat from nuclear power plants.

Proposed Treas. Reg. section 1.45V-1(a)(8) requires that taxpayers determine lifecycle GHG emissions under “the most recent” GREET model, which the regulation defines as the latest version that is publicly available on the first day of the taxable year during which the qualified clean hydrogen for which the taxpayer is claiming the section 45V credit was produced. Therefore, under the proposed regulations, the emissions rate of a hydrogen facility may be changed (despite continuous production using the same process) if and to the extent that the GREET model changes.

The proposed regulations also offer an alternative process pursuant to which a hydrogen producer may petition for a provisional emissions rate (“PER”) if the hydrogen production technology or feedstock used by a taxpayer is not included in the DOE’s 45VH2-GREET model.

What Electricity Sources Count as Low-Emission?

The key input in the lifecycle analysis of green hydrogen is the amount of GHG emissions associated with the generation of power that is an input to the production process. Some have asserted that, without restrictions, a boom in green hydrogen projects drawing zero-emission power will mean an indirect increase in emissions as fossil fuel-fired power plants burn extra coal or gas to replace renewable energy being directed to electrolyzers. Others have pointed out that restrictive rules regarding the source of power will increase the cost of hydrogen production by reducing the number of hours an electrolyzer can be operational if it has limited power sources to draw upon, thus increasing the cost of green hydrogen to the point that it may be non-economic. No other clean energy technology that draws power from the grid, such as the technology that has led to the electrification of vehicles, is subject to a similar set of restrictive rules.

Purchase of Certain Energy Attribute Certificates (“EACs”) Will Count

If a hydrogen facility has a dedicated source of clean or renewable power, such as its own purpose-built wind farm, the determination of the GHG emissions associated with the generation of power that is an input to the production process will be straightforward. More commonly, however, producers will use grid power but purchase renewable energy certificates (“RECs”) so that, although using grid power, they are credited with the input of renewable energy. A key question for application of the GHG emissions calculation has been the circumstances in which RECs could be used to reduce the carbon intensity of a hydrogen production process for purposes of section 45V.

In response, the proposed regulations have introduced a new term, “Energy Attribute Certificates” (“EACs”), defined as tradeable contractual instruments, issued through a qualified EAC registry or accounting system that represents the energy attributes of a specific unit of energy produced. The proposed regulations provide that RECs are forms of EACs. The DOE explains that EACs are legal instruments that represent an exclusive claim to the attributes of an energy unit and that, while RECs relate exclusively to renewable power, EACs can be used for energy sources other than renewable power such as, for example, renewable natural gas or nuclear power. The proposed regulations address solely EACs with respect to electricity, however.

An eligible EAC with respect to electricity must provide information regarding the generating facility and technology and its feedstock, the amount of electricity, the commercial operation date of the facility, and the year (pre-2028) or the date and hour (post-2028) that the electricity was generated. The qualified EAC registry or accounting system must assign a unique identification number to each EAC, enable verification that only one EAC is associated with each unit of electricity, verify that each EAC is claimed or retired only once, identify the owner of each EAC, and provide a publicly accessible view of currently registered generators.

Three “Pillars” of Zero-Carbon Power

The debate over what sources of zero-carbon power may be used for purposes of calculating the section 45V credit has centered on three “pillars” of zero-carbon electricity: (1) incrementality (also known as additionality), (2) temporal matching and (3) deliverability (also known as geographic correlation). All three standards would restrict the extent to which a hydrogen producer may claim to be using low-carbon grid power for purposes of calculating the carbon intensity of its production process which, in turn, determines its section 45V credit amount. The proposed regulations provide that EACs for power having the following characteristics may be counted for purposes of determining the emissions rate of clean hydrogen production:

Incrementality (also known as additionality). “Incrementality” means that the hydrogen producer would have to use power from new renewables projects, so that it does not utilize existing clean electricity facilities that would otherwise help decarbonize the power grid. The proposed regulations require strict additionality, i.e., that the power counted for determining the lifecycle GHG emissions of a clean hydrogen facility must be from a facility that is new or that had a commercial operation date no earlier than 36 months prior to the date the hydrogen facility was placed in service. The proposed regulations also provide that if the capacity of an older power facility is increased (“uprated”) within 36 months before the hydrogen facility was placed in service, then the power may be counted but only to the extent of the increase in capacity. The test for incrementality is applied once based on the placed-in-service date of the hydrogen facility and does not require re-testing during the 10-year credit period.

Further, Treasury requests comments on whether to also use an “avoided retirements” approach pursuant to which minimal-emitting generators (for example, wind, solar, nuclear, and hydropower facilities) that wish to provide EACs to hydrogen producers could demonstrate incrementality by submitting information to support a conclusion that the generator is at risk of retirement that could be mitigated by sales to hydrogen producers. In the Preamble to the proposed regulations, Treasury also describes consideration of, and requests comments on, a formulaic approach to addressing incrementality pursuant to which, for example, five percent of the hourly generation from generators placed in service before 2023 would be deemed to satisfy the incrementality requirement. In support of this approach, Treasury references a variety of studies that show at least a five percent curtailment rate for power in general and renewable power in particular, along with a projected five percent of the existing nuclear fleet being at risk of retirement. Such an approach would provide a path for nuclear power to satisfy incrementality, albeit only to the extent of five percent of its power generation.

Temporal Matching. “Temporal matching” relates to how tight the correlation must be between the time at which the power covered by the relevant EAC is generated and the time at which power from the grid is consumed by the hydrogen facility -- hourly, weekly, monthly or annually -- and therefore to what extent taxpayers can qualify for the credit using grid electricity at times when the wind is not blowing and the sun is not shining.

The proposed regulations provide that an EAC may be counted if the electricity represented by the EAC is generated in the same hour that the taxpayer’s hydrogen production facility uses grid electricity to produce hydrogen. A transition rule is provided, however, pursuant to which an EAC that represents electricity generated before January 1, 2028, will be considered generated in the same hour that the hydrogen facility uses power if the electricity represented by the EAC is generated in the same calendar year that the facility uses the electricity. In other words, annual matching is permissible under the proposed regulations until 2028.

In the Preamble to the proposed regulations, Treasury acknowledges that no reliable tracking system for hourly matching is widely available at the present time. In transitioning to hourly matching in 2028, Treasury is proposing to require hourly matching two years earlier than the 2030 date set by the European Union for moving to hourly matching for purposes of designating hydrogen as clean hydrogen.

Deliverability (also known as geographic correlation). “Deliverability” refers to the geographic distance between the hydrogen production facility and the source of renewable energy it claims for purposes of the credit. Distances can be set to ensure that a producer in, say, Texas, is not powered by solar panels in California, which in practice could mean that green power is sent to a grid that does not need it.

The proposed regulations provide that an EAC may be counted if the electricity represented by the EAC is generated by a facility that is in the same region as the hydrogen production facility. “Regions” are defined in the proposed regulations as those identified in the National Transmission Needs Study that was released by the DOE on October 30, 2023, identifying the following regions:

In sum, with respect to each of the three pillars of clean power generation, the proposed regulations reflect a policy decision from the Biden Administration to enforce strict limits on section 45V credit availability to hydrogen producers using grid power even though these limits will significantly increase costs for the clean hydrogen industry.

Hydrogen Produced Using Renewable Natural Gas

The proposed regulations do not provide rules regarding how the use of renewable natural gas (“RNG”) or fugitive sources of methane (such as from coal mine operations) to produce hydrogen would be counted in determining the emissions rate of hydrogen production. Treasury asks for comments on the conditions that should be imposed on the use of certificates for RNG and fugitive methane to reduce the hydrogen producer’s emission rate. The Preamble to the proposed regulations states that Treasury anticipates that for biogas to receive a low emissions value for section 45V purposes it would need to originate from the first productive use of such biogas and biogas-based RNG or fugitive methane.

Hydrogen Must Be “Sold or Used”

Section 45V requires the clean hydrogen to be produced “for sale or use.” The proposed regulations provide that storage of hydrogen following production does not disqualify such hydrogen from being considered produced for sale or use. The proposed regulations confirm that sale or use may occur outside the United States. The proposed regulations contain extensive provisions regarding the preparation of a verification report that must be attached to the credit claim form. The report must be prepared by a qualified verifier and must attest as to the production, the data entered in the GREET model, the lifecycle GHG emissions rate, the amount, the sale or use (excluding use to generate power to produce more hydrogen or venting/flaring of the hydrogen), the absence of conflict on the part of the verifier as to both the producer and the transferee taxpayer in the event of a credit transfer, among others. A qualified verifier means any individual with accreditation from the American National Standards Institute National Accreditation Board or as a verifier under the California Air Resources Board Low Carbon Fuel Standard program.

Making Old New Again

Under section 45V(d)(4), if a facility originally placed in service before 2023 that does not produce qualified clean hydrogen is modified to produce qualified clean hydrogen, the facility will be deemed to have been placed in service as of the date the modification property is placed in service. Proposed Treas. Reg. section 1.45V-6 requires that the modification be made for the purpose of enabling the facility to produce qualified clean hydrogen, which will be considered the purpose if the facility previously could not produce hydrogen with a lifecycle GHG emissions rate of less than 4 kilograms of CO2e per kilogram of hydrogen. Merely changing fuel inputs to the hydrogen production process, such as switching from conventional natural gas to renewable natural gas, however, would not qualify as a modification for this purpose.

Proposed Treas. Reg. section 1.45V-6 would also provide that any existing facility may establish a new date on which it is considered originally placed in service for purposes of section 45V, thereby starting a new 10-year credit period, even though the facility contains some used property, provided the fair market value of the used property is not more than 20 percent of the facility’s total value (the “80/20 rule”). The proposed regulations also provide that the 80/20 rule applies to any existing facility, regardless of whether the facility previously produced qualified clean hydrogen and regardless of when the facility was originally placed in service.

An Anti-Abuse Rule

In the Preamble to the proposed regulations, Treasury states that it is concerned that, if the cost of producing qualified clean hydrogen is less than the amount of the section 45V credit available, then taxpayers may have an incentive to produce qualified clean hydrogen solely for the purpose of exploiting the section 45V credit in a manner that is inconsistent with the purpose of incentivizing the production of qualified clean hydrogen for productive use. Therefore, the proposed regulations contain an anti-abuse rule that would make the credit unavailable if the hydrogen is produced in a manner that is wasteful, such as production that the taxpayer knows or has reason to know will be vented or flared.

Stacking Section 45V and Section 45Q Credits

The production of “blue” hydrogen involves capture and sequestration of the carbon dioxide emitted during the hydrocarbon reformation process. Such sequestration is generally eligible for the section 45Q tax credit for carbon capture and sequestration. Section 45V allows no credit with respect to hydrogen produced at a facility that includes carbon capture equipment for which a credit is allowed to any taxpayer under section 45Q for the taxable year or any prior taxable year. It has been unclear, however, whether mere co-location of carbon capture equipment with a hydrogen facility prevents a section 45V claim even if the carbon capture is not part of the clean hydrogen production process train.

The proposed regulations reiterate the statutory provision that precludes claiming both section 45V and section 45Q with respect to the same facility. The proposed regulation’s definition of “facility,” however, excludes certain carbon capture operations, indicating that both credits could be available in certain circumstances.

Prop. Treas. Reg. section 1.45V-1(a)(7) defines the term “facility” to mean “a single production line that is used to produce qualified clean hydrogen” and states that a single production line “includes all components of property that function interdependently to produce qualified clean hydrogen.” Further, the proposed regulation provides that the term “facility” does not include “any carbon capture equipment associated with the electricity production process.”

Therefore, carbon capture equipment that is used to reduce the GHG emissions rate of the hydrogen production process would be included in the definition of the facility and a taxpayer could not claim both a section 45Q and 45V credit with respect to such production. However, carbon capture equipment that is unrelated to the hydrogen production process is eligible for a section 45Q credit even while a section 45V credit is claimed for the hydrogen production. Thus, a section 45Q credit could be claimed for a co-located natural gas-fired power plant that captures and sequesters its carbon dioxide emissions even though power from the plant is used to produce hydrogen for which a section 45V credit is claimed.

Investment Tax Credit for Clean Hydrogen Facilities

As an alternative to claiming the section 45V clean hydrogen production credit, taxpayers may elect under section 48(a)(15) to claim an investment tax credit with respect to their investment in clean hydrogen facilities placed in service after December 31, 2022. Proposed Treas. Reg. section 1.48-15 would provide the energy percentage that is used to calculate the amount of the section 48 credit for a clean hydrogen facility that is “designed and reasonably expected to produce” qualified clean hydrogen through a process that results in a lifecycle GHG emissions rate of not greater than 4 kilograms of CO2e per kilogram of hydrogen. The proposed regulations provide that “designed and reasonably expected to produce” means hydrogen produced through a process that results in the GHG emissions rate specified in the verification report for the taxable year in which the investment tax credit is claimed. Thereafter, an annual verification report would be required to be filed for each year during the 5-year recapture period and if the report resulted in a reduced energy percentage with respect to the facility, an emissions tier recapture event will occur.

Effective Date

The regulations are proposed to apply to taxable years beginning after December 26, 2023. While the final regulations can be expected to be different in certain respects than the proposed regulations, taxpayers are entitled to rely on the proposed regulations for taxable years beginning after December 31, 2022, and before the regulations are published in final form, provided the taxpayers follow the proposed regulations in their entirety and in a consistent manner.

Comment Period

The comment period for this set of proposed regulations is set for 60 days from the date of publication in the Federal Register (December 26. 2023); the deadline for submission of comments is February 26, 2024. A public hearing is scheduled for 10:00 AM on March 25, 2024.

Given the interest in and importance of these proposed regulations to the clean hydrogen industry, as well as the number of unresolved issues with respect to which Treasury has requested comments, we expect that there will be an extraordinary volume of submissions. We would be pleased to assist you in your analysis of the proposed regulations and in the preparation of any comments you might wish to submit in response.

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