Overview
The Inflation Reduction Act of 2022 introduced various clean energy tax credits, including the credit for the production of clean hydrogen under section 45V. Qualified clean hydrogen produced after Dec. 31, 2022, at a qualified clean hydrogen production facility may be eligible for the section 45V credit. Taxpayers compute a section 45V credit based on the quantity of qualified clean hydrogen produced, accounting for the carbon dioxide equivalent (“CO2e”) of the hydrogen, with a maximum of $3 per kilogram. Taxpayers may claim the section 45V credit over the 10-year period beginning on the date the eligible facility is placed in service. Alternatively, taxpayers may be eligible to elect treat qualified clean hydrogen production facilities as energy property eligible for the investment credit under section 48.
On Dec. 26, 2023, Treasury and the IRS published proposed regulations under section 45V, addressing general rules, procedures for determining and verifying GHG emissions rates of qualified clean hydrogen, and other special rules. Stakeholders submitted more than 30,000 written comments in response to the proposed regulations. In response to the comments received and in consideration of testimony at the public hearing held over three days in March 2024, the final regulations adopt the proposed regulations with modifications. While the final regulations do address concerns for specific industries (e.g., the renewable natural gas (RNG) industry) there are overarching modifications that impact all taxpayers under section 45V.
Qualified clean hydrogen production facility
One requirement of the section 45V credit is that qualified clean hydrogen must be produced at a qualified clean hydrogen production facility. The proposed regulations defined such a facility as a single production line that includes all functionally interdependent components of property used to produce qualified clean hydrogen. The final regulations generally adopt this definition but clarify that equipment not used in producing hydrogen, including for example feedstock-related equipment, is excluded.
Emissions rates and the GREET model
Section 45V defines qualified clean hydrogen as hydrogen that is produced through a process that results in a lifecycle GHG emissions rates of 4 kilograms or less of CO2e per kilogram of hydrogen. Taxpayers will generally use the GREET model available on the first day of the taxable year to determine the hydrogen’s GHG emissions rate. However, the final regulations provide a safe harbor allowing taxpayers to irrevocably elect to use the GREET model that was publicly available on the date construction of the facility began as the GREET model for each taxable year of 10-year credit period. For taxpayers that began construction of their facility prior to Dec. 26, 2023, the irrevocable election would treat the first publicly available version of the GREET model as the GREET model for each taxable year.
If unable to determine the GHG emissions rate through the GREET model, a taxpayer may request a provisional emissions rate (“PER”) from the Department of Energy and may file a PER petition with the IRS if certain requirements are met.
EACs
Statutorily section 45V does not specify the methodology to be used in determining the GHG emissions of production processes. Taxpayers may offset certain emissions resulting from the production of qualified clean hydrogen by retiring qualifying EACs that represent either electricity or gas use. For hydrogen produced using grid-connecting electricity, the proposed regulations introduced restrictions on the use of EACs to offset emissions. Commonly referred to as the “three pillars”, the restrictions include requirements for temporal matching, deliverability, and incrementality. EACs must meet the tests of incrementality, deliverability, and temporal matching to be considered qualifying EACs.
EACs must be retired for each unit of electricity the taxpayer claims from that source - one megawatt-hour of electricity used to produce hydrogen would need to be matched with one megawatt-hour of qualifying EACs. The acquition and retirement of EAC's must be recorded in a qualified EAC registry or accounting system.
Temporal matching
Under the proposed regulations, clean electricity used to make clean hydrogen must be produced in the same year through 2027 and starting in 2028 in the same hour. The final regulations extended the hourly matching requirement to 2030 but do not permit a grandfathering exception for the qualified clean hydrogen production facilities that are placed in service before the transition to the hourly matching.
Deliverability
Under the proposed regulations, clean electricity must be from the same geographic region of the qualified clean hydrogen production facility. In general, the final regulations adopt the proposed regulations but do provide some flexibility for transfers and imports between regions.
Incrementality
Under the proposed regulations, the qualified clean hydrogen production facility may not draw clean electricity from generating facilities that are more than 36 months older that the qualified clean hydrogen production facility. While this requirement has generally been retained under the final regulations there are certain exceptions for certain nuclear facilities, clean power that is generated in states (California and Washington) that have mandated renewable portfolio standards and an electricity generation facility that has added carbon capture and sequestration equipment.
Similar to EACs for clean electricity, eligible gas EACs can serve a similar purpose in offsetting emissions from fossil fuels used in the production of hydrogen. Gas EACs represent the quantity of RNG or coal mine methane produced by a facility registered in a qualified gas EAC registry or accounting system. Gas EACs must provide certain preliminary information to verify their authenticity. Gas EACs must meet the tests of temporal matching and deliverability.
Verification
To be eligible for the section 45V credit, the IRS requires a verification report to be attached to a taxpayer’s Form 7210 when claiming the credit. Verification reports must contain several attestations: a production attestation, sale or use attestation, conflict attestation, qualified verifier statement, general information about the hydrogen production facility, and documentation necessary to substantiate the verification process. The verification process involves the use of a third-party verifier to authenticate that the hydrogen production process meets the various requirements of the regulations. The final regulations expand on the proposed regulations with detailed requirements for each of the various attestations to be attached to the taxpayer’s Form 7210 with their income tax return.
Washington National Tax takeaways
The final regulations contain developments that will be useful to taxpayers evaluating their options for determining the GHG emissions rate of qualified clean hydrogen production facilities. For example, developments regarding the definition of a facility will be useful for considering the section 45V credit’s coordination with the section 45Q credit for carbon oxide sequestration. These developments may also assist taxpayers considering the coordination of the section 45V credit with the section 45Z clean fuel production credit.
The final rules include considerations for the use of biogas and renewable natural gas in the production of qualified clean hydrogen. The expansion of EACs beyond EACs from electric generating facilities to include gas EACs is a favorable change as it gives taxpayers more options to reduce their production emissions and qualify as producers of qualified clean hydrogen.
Under the Congressional Review Act, Congress may review and overturn certain federal regulations. With a unified Republican Congress and the change in Administration, statutory and regulatory changes to the section 45V credit in the foreseeable future are possible.
