January 5, 2024
Proposed regulations on IRC Section 45V clean hydrogen production credit give details on new requirements
Proposed regulations (REG-117631-23) on the IRC Section 45V clean hydrogen production credit give taxpayers guidance on the requirements they must fulfill to claim the credit, which is based on the amount of lifecycle greenhouse gases emitted during the hydrogen production process and whether the taxpayer meets the prevailing wage and apprenticeship requirements. The proposed regulations provide guidance on how taxpayers can:
The Department of Energy (DOE) also released a white paper on assessing lifecycle GHG emissions in regards to the IRC Section 45V credit.
Comments on the proposed regulations are due by February 26, 2024. A hearing is scheduled for March 25, 2024, and requests to speak and outlines of topics to be discussed must be received by March 4, 2024.
Taxpayers may rely on the proposed regulations for tax years beginning after December 31, 2022, and before the date the final regulations are published in the Federal Register, as long as they follow the proposed regulations in their entirety and in a consistent manner.
The Inflation Reduction Act created IRC Section 45V, which provides a new production tax credit (PTC) for hydrogen produced in the United States after December 31, 2022, and has a 10-year term beginning on the date a qualified clean hydrogen production facility is placed in service. To qualify, the qualified facility must begin construction before January 1, 2033. To be eligible for the hydrogen PTC, the lifecycle GHG emissions rate cannot exceed 4 kilograms of carbon dioxide equivalent (CO2e) per kilogram of hydrogen produced.
The IRC Section 45V credit is subject to a two-tiered credit regime, with a base credit rate and a higher, top rate. The base credit rate is $0.60 per kilogram of qualified clean hydrogen, which would be adjusted for inflation, multiplied by an applicable percentage (which would vary based on the lifecycle GHG emissions rate). The applicable percentage is as follows:
The top rate is five times the amount of the base credit, which tops out at $3.00 per kilogram of qualified clean hydrogen produced. To achieve the top rate, taxpayers must also comply with the prevailing wage and apprenticeship rules (see Tax Alert 2023-1469).
To prevent credit stacking, IRC Section 45V prohibits taxpayers from claiming credits for any qualified clean hydrogen produced at a facility with carbon capture equipment if a credit was claimed by any taxpayer under IRC Section 45Q for the tax year or any prior tax year.
Taxpayers may elect the ITC instead of the new IRC Section 45V credit for clean hydrogen production facilities.
The proposed regulations outline the requirements for qualifying for the credit, some of which are unexpected.
Prop. Treas. Reg. Section 1.45V-1 defines the key terms used in the IRC Section 45V credit process.
Prop. Treas. Reg. Section 1.45V-1(a)(7)(i) defines the term "facility" to mean a single production line that is used to produce qualified clean hydrogen. A "single production line" includes all components of property that function interdependently to produce qualified clean hydrogen. The components would be considered to function interdependently if placing each component in service depended on placing each of the other components in service for the purpose of producing qualified clean hydrogen, including components that have a purpose in addition to producing qualified hydrogen.
The term "facility" does not include (1) equipment used to condition or transport hydrogen beyond the point of production, or (2) electricity production equipment used to power the hydrogen production process, including any carbon capture equipment associated with the electricity production process. In an example of an exception, however, the carbon capture equipment in the hydrogen production facility is necessary to make the lifecycle gas emissions rate fall within the required range. Because the carbon capture equipment is functionally interdependent with other components, the carbon capture equipment, in this case, would be part of the facility for purposes of IRC Section 45V(c)(3).
Lifecycle GHG emissions
Prop. Treas. Reg. Section 1.45V-1(a)(8)(i) defines "lifecycle GHG emissions" to include emissions only through the point of production (well-to-gate) as determined under the "most recent GREET model" that is publicly available on the first day of the taxpayer's tax year in which the qualified clean hydrogen was produced. As of the time of the proposed regulations, the latest version of the GREET model is 45VH2-GREET, developed by the Argonne National Laboratory. If a version of 45VH2-GREET becomes publicly available after the first day of the tax year of production (but still within that year), then the taxpayer could choose to use the later version.
Prop. Treas. Reg. Section 1.45V-1(a)(8)(iii) defines "emissions through the point of production (well-to-gate)" to mean the aggregate lifecycle gas emissions related to hydrogen produced at a hydrogen production facility during the tax year through the point of production, including emissions associated with use of feedstock, electricity, and any capture and sequestration of carbon dioxide generated by the hydrogen production facility.
Under Prop. Treas. Reg. Section 1.45V-1(b)(13)(2), the "taxpayer" would own the qualified clean hydrogen production facility at the time the facility produces the qualified clean hydrogen for which the IRC Section 45V credit is claimed (regardless of whether IRC Section 263A treats the taxpayer as a producer).
Amount of credit
Under Prop. Treas. Reg. Section 1.45V-1(c), the amount of the IRC Section 45V credit would be based on the qualified clean hydrogen produced by the taxpayer during that tax year, although verifying the production and sale or use may occur in a later year. If verification occurs after the due date of the tax year in which the hydrogen is produced, the taxpayer will need to file an amended return or administrative adjustment request (AAR) to claim the credit.
Prop. Treas. Reg. Section 1.45V-2 contains an anti-abuse rule and a rule regarding coordination with the IRC Section 45Q credit.
Coordination with credit for carbon oxide sequestration
"Blue" hydrogen projects involve, in part, the capture and sequestration of the carbon dioxide that is emitted through the natural gas reformation process. Assuming all requirements are met, the capture and sequestration of carbon dioxide may be eligible for an IRC Section 45Q tax credit; however, IRC Section 45V(d)(2) prohibits an IRC Section 45V credit with respect to any qualified clean hydrogen produced at a facility that includes carbon capture equipment for which a credit is allowed to any taxpayer under IRC Section 45Q for the tax year or any prior tax year. Prior to the proposed regulations, some uncertainty existed as to the scope of a "facility" and whether it would be possible (in any circumstance) to "stack" the IRC Sections 45V and 45Q credits.
As noted above, the proposed regulations reiterate the IRC Section 45V statutory requirement that IRC Section 45V and IRC Section 45Q may not be claimed with respect to the same facility (regardless of who owns the various pieces of the value chain). As also noted above, the proposed regulations define the term facility to include a functional interdependence test — including all components of property that function interdependently to produce qualified clean hydrogen. Thus, carbon capture equipment that is used to reduce the lifecycle GHG emissions rate of the produced hydrogen would be included in the definition of a "facility," with the result that the credit under IRC Section 45V and the credit under IRC Section 45Q tax credits cannot be both claimed on such facility.
In the case of upgraded or retrofitted carbon capture equipment, however, an IRC Section 45V credit may be allowed if certain conditions are met.
Carbon capture equipment that is installed and used outside of the "facility," however may result in both the IRC Section 45Q and IRC Section 45V credits being available. For example, Prop. Treas. Reg. Section 1.45V-1(a)(7)(ii)(B) excludes from the definition of a facility any "electricity production equipment used to power the hydrogen production process, including any carbon capture equipment associated with the electricity production process."
The IRC Section 45V credit would be denied if the primary purpose of the clean hydrogen's production and sale or use is to benefit from the IRC Section 45V credit in a manner that is wasteful, such as producing qualified clean hydrogen that the taxpayer knows or has reason to know will be vented, flared or used to produce hydrogen.
Procedures for determining lifecycle gas emissions rates
Prop. Treas. Reg. Section 1.45V-4 contains the procedures for determining the lifecycle gas emissions rates from producing clean hydrogen. The determination would be made following the close of each tax year and would have to include all hydrogen production from that year.
The most recent GREET model under which the lifecycle gas emissions rate would be determined, currently 45VH2-GREET, includes different hydrogen production pathways, including:
A lifecycle GHG emissions rate may not have been determined under the GREET model because it is produced via a production pathway that is not listed in the proposed regulations. In this case, the taxpayer could petition the Treasury Secretary to determine a provisional emissions rate (PER). If the production pathway is subsequently included in the GREET model, the taxpayer cannot file a petition.
Energy attribute certificates
The proposed regulations would require taxpayers to use EACs to track and verify how specific units of energy are produced. Prop. Treas. Reg. 1.45V-4(d)(2)(ii) defines an EAC as a tradeable contractual instrument that is issued through a qualified EAC registry or accounting system. According to the DOE's white paper, EACs can be used to verify that a certain unit of electricity was generated by a specific entity and has specific associated attributes. EAC purchasers can retire them to claim that their electricity use was generated with specific attributes associated with the EAC.
The EAC would have to provide specific information about the energy being produced, such as the technology used to generate the electricity, when the electricity was generated and a project identification number. In addition, the proposed regulations contain the requirements for a "qualified EAC registry or accounting system," which would have to assign an identification number to each EAC, verify that only one EAC is associated with each unit of electricity and provide a publicly accessible view of all currently registered generators in the tracking system.
Under Prop. Treas. Reg. Section 1.45V-4(d)(3), a qualifying EAC would have to show the production process meets three requirements: incrementality (also referred to as additionality), temporal matching and deliverability (also referred to as geographic or regional matching).
Incrementality: The EAC would have to represent that electricity from an incremental source (an electricity-generating facility with low-GHG emissions) has a commercial operations date (COD) within 36 months of when the hydrogen production facility was placed in service. If the electricity-generating facility undergoes an uprate, which means an increase in the facility's rated nameplate capacity (in nameplate megawatts) within 36 months of the hydrogen production facility being placed in service, then the power may be counted at a pro-rated amount. The IRS and Treasury are seeking comments on a wide variety of topics on the incrementality factor.
Temporal matching: The EAC would have to represent that electricity is generated in the same hour that the taxpayer's hydrogen production facility uses electricity to produce the hydrogen. Under the transition rule, an EAC can represent, until 2028, that electricity is generated in the same calendar year that the taxpayer's facility uses electricity to produce hydrogen.
Deliverability: The EAC would have to represent that electricity was produced by an electricity-generating facility in the same region as the relevant hydrogen production facility.
Procedures for verifying qualified clean hydrogen production and sale or use
IRC Section 45V requires the clean hydrogen to be produced for sale or use. Prop. Treas. Reg. Section 1.45V-1(a)(9)(ii) defines "sale or use" to mean for the primary purpose of making such hydrogen ready and available for sale or use. Storage of hydrogen before its sale or use would not disqualify the hydrogen from being considered produced for sale or use. Further, sale or use may occur outside the United States.
Prop. Treas. Reg. Section 1.45V-5 provides procedures for verifying qualified clean hydrogen production and sale or use.
The verification report would have to be prepared by a qualified verifier, attached to the taxpayer's Form 7210, Clean Hydrogen Production Credit (or successor form), and included with the taxpayer's federal income tax return or information return for each qualified clean hydrogen production facility and for each tax year in which the taxpayer claims the IRC Section 45V credit.
The sale-or-use attestation would have to made under penalties of perjury. Verifiable use could occur within or outside the United States, and could be made by the taxpayer or someone else. It does not include the use of hydrogen to generate electricity that is then directly or indirectly used in the production of more hydrogen or venting or flaring hydrogen.
The proposed regulations also specify the requirements for conflict attestation, the qualified verifier statement, the general information that must be included in the verification report, definitions related to verifications, rules and requirements for taxpayers claiming both the IRC Section 45V credit and the IRC Sections 45 or 45U credit for the electricity generation, and the required timing for filing a verification report.
Rules for determining the placed-in-service date for an existing facility that is modified or retrofitted
Prop. Treas. Reg. Section 1.45V-6 provides rules for determining the placed-in-service date for an existing facility that is modified or retrofitted to produce qualified clean hydrogen.
The proposed rule would apply to modifications made after December 31, 2022. Under Prop. Treas. Reg. Section 1.45V-6(a)(2), a modification would qualify if the facility could not otherwise produce hydrogen with a lifecycle GHG emissions rate of 4 kg of CO2e per kilogram of hydrogen or less. Changing fuel inputs to the production process (i.e., switching from natural gas to renewable natural gas (RNG)) would not qualify as a facility modification.
Under Prop. Treas. Reg. Section 1.45V-6(b), the 80/20 Rule would expressly apply to hydrogen projects.
Election to treat clean hydrogen production facility as energy property
Under Prop. Treas. Reg. Section 1.48-15, a taxpayer could elect to claim the IRC Section 48 investment tax credit in lieu of the IRC Section 45V credit for property placed in service after December 31, 2022. The proposed rules would specify details on determining the energy percentage, third-party verification, recapture, methods and procedures of electing, recordkeeping requirements.
RNG and fugitive sources of methane
The Treasury and IRS said in the regulations' Preamble that they intend to address hydrogen production pathways that use RNG or other fugitive sources of methane (i.e., coal mine operations) for purposes of IRC Section 45V. RNG is biogas that has been upgraded to the equivalent of fossil natural gas. Fugitive methane is the release of methane through, for example, equipment leaks, or venting during the extraction, processing, transformation and delivery of fossil fuels to the point of final use, such as coal mine methane or coal bed methane.
For purposes of IRC Section 45V, Treasury and the IRS anticipate requiring that the RNG used during the hydrogen production process must originate from the first productive use of the relevant methane. For purposes of the 45V credit, hydrogen producers using RNG or fugitive methane would be required to:
The IRS requests comments on a several items related to the RNG interplay.
The proposed regulations provide much-needed clarity related to the qualification and recordkeeping for the IRC Section 45V tax credit, although such guidance may not be well received by market participants. For "green" hydrogen projects, the proposed regulations provide a stricter approach than what many taxpayers and market participants had hoped for. The temporal matching requirement, along with the regionality requirement (i.e., deliverability) and the additionality requirement (i.e., incrementality), may increase the costs for certain green hydrogen projects. Further, the reporting and recordkeeping requirements are not insubstantial.
Many unanswered questions, including how the temporal requirement will be satisfied when hydrogen is stored, along with the numerous items that the IRS has asked for comments on (i.e., in connection with the use of RNG and others), ought to be carefully monitored.