Treasury Releases Long Awaited Hydrogen Guidance
Just in time for the Christmas holiday, early this morning the U.S. Internal Revenue Service (“IRS”) and Department of Treasury (“Treasury”) released highly anticipated regulations governing the Section 45V Clean Hydrogen Tax Credit.1 These regulations came out after a great deal of publicity and controversy and, undoubtedly, some stakeholders will be wishing the drafters coal in their stockings.
We will continue to review and analyze the regulations and developments, so stay tuned. In the meantime, notable provisions include:
- Three-Pillars: Imposes strict application of the “three-pillars” and permits a taxpayer to treat use of electricity from a specific electricity generating facility (rather than the regional electricity grid) in the greenhouse gas (“GHG”) emissions rate determination only if the taxpayer acquires and retires “qualifying energy attribute certificates” (defined in detail in the regulations) for “each unit of electricity that the taxpayer claims from such source.”
- Regionality: The electricity must be generated by a facility within the same region (derived from the National Transmission Needs Study released by Department of Energy on October 30, 2023 (with Alaska, Hawaii, and each US territory being treated as separate regions))
- Additionality: The electricity-generating facility must have achieved commercial operation no more than 36 months before the hydrogen facility is placed in service, or for facilities that have been “uprated,” the uprate must have occurred within 36 months of the date the hydrogen facility is placed in service (and then only the “uprate production” may be taken into account)
- Time Matching: Prior to January 1, 2028, the regulations permit annual time matching, but after December 31, 2027, hourly time matching is required
- Determination of GHG emissions:
- Confirming that lifecycle GHG emissions only include well-to-gate production during the taxable year (and includes emissions associated with the hydrogen production process, inclusive of electricity used and any capture and sequestration of carbon dioxide, as well as feedstock growth, gathering, extraction, processing, and delivery to a hydrogen production process)
- Generally require that taxpayers rely on the Greenhouse gases, Regulated Emissions, and Energy use in Transportation model developed by Argonne National Laboratory (the “GREET model”) available as of the first day of each taxable year of production. In other words, it does not appear that there is any ability to “lock-in” use of a GREET model earlier in development or operation (which undoubtedly will create uncertainty for financing of hydrogen facilities)
- Requires determination of GHG emissions based on “all hydrogen production during the taxable year” (arguably, limiting the ability to qualify for a section 45V credit for facilities that produce “green hydrogen” during the day, but “grey hydrogen” at night)
- Detailed provisions for obtaining a provisional emissions rate
- Permits taxpayers to file a petition to the Department of Energy for a provisional emissions rate ONLY if a lifecycle GHG emissions rate has not been determined under the most recent GREET model with respect to hydrogen produced by the taxpayer (e.g., if the relevant feedstock or production technology used by the facility is not included)
- Includes a definition of the term “facility” (including for investment tax credit (“ITC”) purposes) as a single production line; however, equipment used to condition or transport hydrogen beyond the point of production, electricity production equipment used to power the hydrogen process, and carbon capture equipment associated with the electricity production process would not be included in the “facility.”
- Provides anti-abuse rules for production of hydrogen in a manner that is wasteful, such as production of hydrogen to the extent that it vented or flared, or re-used to produce hydrogen. Also requires extensive documentation and verification of production and sale or use (including annual verification – and potential recapture of up to 20% of the credit for each year of the recapture period – for facilities that elect to claim the ITC).
- Clarifies that hydrogen may be used within or outside the United States
- Explicitly permits production of hydrogen through a tolling arrangement
- Clarifies that storage of hydrogen is a permitted use for purposes of the credit
- Provides rules for modifications and 80/20 Rule retrofits of hydrogen production facilities. Clarifies that the taint of a prior 45Q credit taken on a facility may be extinguished if the facility is treated as newly placed in service as determined by the “80/20 Rule.”
- Provides rules for the election to take the ITC for clean hydrogen facilities (in lieu of the section 45V production tax credit), including:
- Imposes annual verification and reporting requirement during the “recapture period”
- Describes specific recapture rules for scenarios in which taxpayers fail to verify and report, suffer an “emissions tier recapture event,” or would fail to qualify for the ITC
- Notably, the recapture amount would generally be 20% of the credit originally claimed for each year in which one of these recapture events occurs
- Provides mechanics for making the election
- Incorporates recapture rules for failure to satisfy the “labor requirements” in section 48
- The preamble to the regulations indicates that Treasury and IRS will release future rules on hydrogen production pathways using biogas and renewable natural gas and invites stakeholder comment on a number of specific issues.
1 Concurrently, a new GREET model and other related publications were released by Department of Energy.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.