On December 22, 2023, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) issued a highly anticipated notice of proposed rulemaking (“proposed regulations”) on the Section 45V Clean Hydrogen Production Tax Credit, a new tiered incentive under the Inflation Reduction Act (IRA) awarding up to $3 per kilogram of hydrogen produced per an evaluation of lifecycle GHG emissions.1
Clean hydrogen can play a critical role in decarbonizing hard-to-abate sectors, including heavy industry and transportation, and other applications, such as its use as a chemical feedstock and as a clean energy storage and generation technology. The IRA established a 10-year tax credit (45V) for “clean hydrogen” production, which is defined as producing a lifecycle greenhouse gas (GHG) emissions rate of not greater than 4 kilograms of CO2e per kilogram of hydrogen. The tax credit is intended to help hydrogen sourced from clean energy become cost competitive with fossil fuel alternatives.
The exact value of the 45V credit depends on the lifecycle GHG emissions of the production pathway, as shown in the chart below. To receive any of these credits, the IRA’s prevailing wage and apprenticeship (PWA) requirements must be satisfied, otherwise facilities are only eligible to receive 20% of the above credits.
Figure 1. Section 45V Tiered Credit Amounts
|Lifecycle GHG Emissions (kgs of Co2e per kg of clean H2 produced)
|Credit amount per kg of clean H2 produced (without PWA / with PWA)
|$0.60 / $3.00
|0.45 to < 1.5
|$0.20 / $1.00
|1.5 to < 2.5
|$0.15 / $0.75
|2.5 ≤ 4
|$0.12 / $0.60
Since the enactment of the IRA in August 2022, stakeholders have been focused on potential implementation scenarios for the Section 45V credit.2 This discussion has centered on whether or not to adopt three stringent standards, commonly referred to as the “three pillars” approach, which advocates say could help ensure that qualifying hydrogen production maintains a low GHG emissions rate. These pillars contain restrictions around the sourcing of clean energy generation for hydrogen production, including:
- Sourcing from “new” renewable energy sources (“Incrementality or Additionality”)
- Time-matching clean energy generation to the operation of the hydrogen electrolyzer (“Temporality or Time Matching”)
- Sourcing clean energy from the same region as the taxpayer or producer (“Deliverability or Regionality”)
Stakeholders, including top government officials, have taken disparate views on the early implementation of these strict requirements and their basis in the statute’s intent. U.S. Senator and Chair of the Senate Environment and Public Works Committee, Tom Carper (D-DE), who wrote legislation that helped inform the 45V credit, recently advocated for flexible guidelines, including eligibility of carbon-free resources such as nuclear and hydropower in a letter to the administration. U.S. Senator and Chair of the Senate Commerce, Science, and Transportation Committee Maria Cantwell (D-WA) led 10 Senate Democratic colleagues in a letter expressing concerns about stringent requirements on the success of the U.S. Department of Energy’s (DOE) regional clean hydrogen hubs, while U.S. Senator and Chair of the Senate Energy and Natural Resources Committee, Joe Manchin (D-WV), also expressed concerns about a guidance approach that is too inflexible for an emerging industry. Conversely, separate cohorts of House and Senate Democrats also sent letters to the administration pushing for strict adherence to the “three pillars” approach. Within the administration, the Treasury Department has closely consulted officials at DOE and the Environmental Protection Agency (EPA), whose input on 45V was also featured alongside the proposed regulations.3
More recently, Chairs Carper and Manchin publicly speculated that the final rules by the Treasury Department will ultimately provide less strict qualification standards that are more favorable to some clean hydrogen producers.
- Legal Insight: McDermott Will & Emery suggests that, for some market actors, “a deeper read of the remaining unanswered questions suggests that the final regulations may be more favorable in some of the details.” (See the Treasury and IRS Requests for Comments section).
As part of ongoing advocacy with these three agencies, Congress, and the White House, a 2023 ACORE analysis, in partnership with E3, focused on the temporality pillar, comparing an hourly versus annual matching accounting approach. The analysis concludes that a stringent hourly matching requirement would not guarantee, and in many cases fails to achieve, lower emissions outcomes than an annual approach, while resulting in significantly higher production costs. The ACORE and E3 analysis also addresses important concepts surrounding the role of Renewable Energy Certificates (RECs), including their critical emissions value through ensuring additional market demand for renewable energy procurement.4
While the proposed regulations were hailed by some stakeholders, many clean hydrogen market participants have warned about their inconsistency with the cost imperatives associated with maturation of the sector over the long term. Some producers have signaled plans to exit the market barring significant adjustments, following Treasury’s adoption of the “three pillars” approach. In particular, some industry participants are concerned that overly stringent standards could heighten the price advantage already enjoyed by hydrogen produced using natural gas, and could advantage some regions of the country over others.
These issues will likely remain a focal point of the open rulemaking process and IRA implementation efforts more broadly, in which ACORE will remain closely engaged.
ACORE intends to submit comments on the proposed regulations, which Treasury and the IRS have requested by no later than February 26, 2024. Treasury will also host a public hearing on March 25, 2024 at 10 a.m. (ET), for which requests to speak and topics to be discussed must be received by March 4, 2024, while requests to attend must be received by March 18, 2024.
The proposed regulations apply to taxable years beginning after December 26, 2023, the date of their publication in the Federal Register, though taxpayers may rely on the proposed regulations for taxable years beginning after December 31, 2022, and until the date that the final regulations are published.
In addition to long-awaited details concerning the “three pillars” approach, the proposed regulations provide important details including the definitions of key terms, description of how clean hydrogen producers should calculate lifecycle GHG emissions using a new iteration of the DOE Greenhouse Gases, Regulated Emissions, and Energy Use in Transportation (GREET) model (i.e., “45VH2-GREET”), introduction of qualified “energy attribute certificates” (EACs) to assess and document qualification for a particular credit tier, and verification of the production and sale of clean hydrogen, among other elements.
Facility. The proposed regulations provide that the term “facility” means a single production line that is used to produce qualified clean hydrogen. This includes all components of property that function interdependently to produce qualified clean hydrogen. “Facility” does not include equipment used to condition or transport hydrogen beyond the point of production nor electricity production equipment used to power the hydrogen production process, including any carbon capture equipment associated with the electricity production process.
Lifecycle GHG Emissions. The proposed regulations incorporate the statutory definition of the term “lifecycle greenhouse gas emissions” under 45V(C)(1)(A) and (B) within the meaning of the Clean Air Act in effect on August 16, 2022, the date of IRA enactment. The proposed regulations confirmed that lifecycle GHG emissions include only emissions through the point of production (well-to-gate) as determined under the most recent GREET model.
Well-To-Gate Emissions. For purposes of the 45V credit, well-to-gate emissions encompasses aggregate lifecycle GHG emissions related to hydrogen produced at a hydrogen production facility during the taxable year through the point of production, including emissions associated with feedstock growth, gathering, extraction, processing, and delivery to a hydrogen production facility. It also includes emissions associated with the hydrogen production process, including the electricity used by the facility and any capture and sequestration of carbon dioxide the facility generates.
Most Recent GREET Model. The proposed regulations defined the most recent GREET model as the latest version of 45VH2-GREET developed by Argonne National Laboratory that is publicly available on the first day of the taxable year in which the 45V credit is claimed.
Qualified Clean Hydrogen. The proposed regulations incorporate the statutory definition of the term “qualified clean hydrogen,” including the requirement that hydrogen be produced: (1) in the United States or a U.S. territory, (2) in the ordinary course of trade or business of the taxpayer, and (3) for sale or use. The proposed regulations further provide that the term “sale or use” means for the primary purpose of making such hydrogen ready and available for sale or use. Storage of hydrogen before its sale or use is not a disqualifier under this term.
Taxpayer. For purposes of the 45V credit, a “taxpayer” is the entity that owns the qualified clean hydrogen production facility that the time of the facility’s production of qualified clean hydrogen for which the credit is claimed regardless of whether such taxpayer is treated as a producer under section 263A of the Internal Revenue Code (IRC) or any other provision of law. This is intended to avoid unintended consequences that could arise with respect to contract manufacturing and tolling arrangements under section 263A and streamline compliance generally.
Procedures for Determining Lifecycle GHG Emissions
General. Taxpayers who claim the 45V credit must separately determine the credit rate for each hydrogen production facility owned by the taxpayer for each taxable year. This determination must be made at the close of each taxable year, based upon the lifecycle GHG emissions rate of all hydrogen produced at a qualified facility during the taxable year.
GREET Model. Taxpayers claiming the 45V credit must accurately enter all information requested about their qualified clean hydrogen production facility within the 45VH2-GREET interface in compliance with the most recent GREET User Manual, which contemplates eight hydrogen production pathways:
- Steam methane reforming (SMR) of natural gas with potential CCS
- Autothermal reforming (ATR) 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 with no significant market value with potential CCS
- Low-temperature water electrolysis using electricity, and
- High-temperature water electrolysis using electricity and potential heat from nuclear power plants.
The proposed regulations note that certain parameters within 45VH2-GREET are fixed assumptions, referred to as “background data,” which users may not change, including the emissions factors laid out in Figure 2 below. The 45VH2-GREET model also allows users to input the quantity of “valorized” co-products (i.e., co-products from the hydrogen production process that are productively utilized or sold) and allocate emissions to those co-products rather than to the hydrogen production.
Figure 2. 2023 GREET Model Emissions Factors for Primary Energy Sources
|Primary Energy Source
|kgCO2e/kWhe (rounded two places)
|Combustion of Logging Residue
Provisional Emissions Rates. If lifecycle GHG emissions cannot be determined using the most recent GREET model (i.e., hydrogen production pathway not included), the proposed regulations authorize the taxpayer to petition Treasury for provisional emissions rate (PER) determination. The proposed regulations note that additional hydrogen production pathways, such as geologic hydrogen, may be incorporated under future versions of 45VH2-GREET.
Two-Step Process for Petitioning PERs. To successfully petition a PER, taxpayers must attach a PER petition to their federal income tax return for the first taxable year of hydrogen production that the 45V credit is claimed. The PER petition must contain two elements: (1) an emissions value obtained from the DOE setting forth the DOE’s analytical lifecycle GHG emissions assessment of the production pathway used by the hydrogen facility, and (2) a copy of the taxpayer’s request to the DOE for an emissions value, including any information provided by the taxpayer.
- Legal Insight: The proposed regulations provide that renewable energy credits (RECs) will be taken into account when determining PERs though, as Norton Rose Fulbright notes, “it is unclear how this will work unless the producer has made a full forward purchase.”
DOE Emissions Value Request Process. The process for receiving DOE emissions values is slated to become available on April 1, 2024. DOE will specify procedures to petition for emissions values before that date.5 The emissions values will be evaluated using the same well-to-gate boundary employed and background data in 45VH2-GREET. The emissions value request process is also subject to any guidance issued under section 45V.
Use of Energy Attribute Certificates
General. As an outcome of Treasury consultation with DOE and EPA, the proposed regulations state that RECs and other similar “energy attribute certificates” (EACs) meeting certain criteria must be used to substantiate electricity generation from zero GHG-emitting resources during the hydrogen production process. To satisfy this requirement, a taxpayer’s acquisition and retirement of qualifying EACs must also be recorded in a qualified EAC registry or accounting system for verification by a qualified verifier.
Qualified EAC Registry or Accounting System. The proposed regulations define the term “qualified EAC registry or accounting system” to mean a tracking system that (1) assigns a unique identification number to each EAC tracked by such system (2) enables verification that only one EAC is associated with each unit of electricity, (3) verifies that underlying attributes of each EAC is claimed and retired only once (4), identifies the EAC owner, and (5) provides a publicly accessible view of all currently registered electricity generators in the tracking system. Qualified EAC registries currently include but are not limited to:
- Electric Reliability Council of Texas (ERCOT),
- Michigan Renewable Energy Certification System (MIRECS),
- Midwest Renewable Energy Tracking System, Inc. (M–RETS),
- North American Registry (NAR),
- New England Power Pool Generation Information System (NEPOOL–GIS),
- New York Generation Attribute Tracking System (NYGATS),
- North Carolina Renewable Energy Tracking System (NC–RETS),
- PJM Generation Attribute Tracking System (PJM–GATS), and
- Western Electric Coordinating Council (WREGIS).
Eligible EACs. The proposed regulations provide that an EAC qualifies if it meets the requirements for incrementality, temporality, and deliverability (“three pillars”). Specifically, the proposed regulations define the term “eligible EAC” to mean an EAC that, with respect to the electricity to which the EAC relates, provides: (1) a description of the electricity generating facility, including the technology and feedstock used to generate the electricity, (2) the amount and units of electricity, (3) the date on which the facility that generated the electricity first began commercial operations or commercial operations date (COD), (4) for electricity generated before January 1, 2028, the calendar year in which such electricity was generated, (5) for electricity that is generated after December 31, 2027, the date and hour in which such electricity was generated, and (6) a unique project identification number or assigned identifier for each EAC to cross reference any additional electricity generation facility that may be needed, such as location.
- Incrementality or Additionality The proposed regulations provide that an EAC meets the incrementality requirement if the electricity generating facility to which the EAC relates is new or “uprated” (i.e., increase in nameplate generating capacity) with a COD that is no more than 36 months before the hydrogen production facility associated with the EAC was placed in service.
- Legal Insight: Pillsbury contrasts the proposed regulations from the approach taken under rules adopted by the European Commission (EC), which do not require additionality until 2028 and exclude markets with a low-carbon electricity mix.
- Temporality or Time Matching. The proposed regulations provide that an EAC meets the temporality requirement if the electricity represented by the EAC is generated in the same hour that the taxpayer’s hydrogen production facility uses electricity to produce hydrogen (i.e., “hourly matching” standard). The proposed regulations include a transition rule in effect until January 1, 2028, allowing an EAC to meet the requirement if the electricity generated before that date is matched to hydrogen output in the same calendar year (i.e., “annual matching” standard). However, this transition rule does not include a grandfather exception, meaning that all qualified facilities must comply with an hourly matching standard beginning in 2028. The proposed regulations acknowledge that hourly tracking systems for EACs “are not yet broadly available across the country and will take some time to develop,” noting that additional time may be needed for the development of transactional structures and hourly EAC markets.
- Deliverability. The proposed regulations provide that an EAC meets the deliverability requirement if electricity represented by the EAC is generated by a source that is in the same region as the hydrogen production facility. The term “region” is defined as a U.S. region from the DOE National Transmission Needs Study, depicted in Figure 3 below.
Verification Procedures for Clean Hydrogen Production, Sale, or Use.
Requirements for Verification Reports. Section 45V provides that clean hydrogen is qualified only if “the production and sale or use of such hydrogen is verified by an unrelated party.” The proposed regulations clarify further that a verification report must be attached to the taxpayer’s Form 7210, Clean Hydrogen Production Credit, included with their federal income tax return for each qualified facility and taxable year during which the 45V credit is claimed.
Figure 3. DOE National Transmission Needs Study Regions
Verification reports must contain the following six elements, requirements for which are described more comprehensively under the proposed regulations: (1) production attestation, (2) sale or use attestation, (3) conflict attestation, (4) qualified verifier statement, (5) general information about the hydrogen production facility, (6) and any other documentation necessary to substantiate the verification process prescribed by the qualified verifier’s accrediting body.
Qualified Verifier and Required Time to File. The proposed regulations provide that verification reports must be prepared by a “qualified verifier,” defined as any individual or organization actively accredited by (1) the American National Standards Institute National Accreditation Board or (2) the California Air Resources Board low-carbon fuel standards program. Verification reports must be signed and dated by the qualified verifier no later than (1) the due date, including extensions, of the taxpayer’s federal income tax return or information return for the taxable year during which the hydrogen undergoing verification is produced or (2) the filing date of an amended return or administrative adjustment request (AAR) for which a 45V credit is first claimed.
Other Rules and Procedures
Placed-in-Service Date for “Modified” or “Retrofitted” Existing Facilities. The proposed regulations provide a pathway to adjust the placed-in-service date for certain existing facilities that are modified or retrofitter to produce clean hydrogen. In the case of a modification, an existing facility originally placed in service before January 1, 2023 that is later modified will not be deemed as originally placed in service until the required modification has been made and the taxpayer pays or incurs a related amount that is properly chargeable to the taxpayer’s capital account for the facility. The proposed regulations also provide that a modification is made for the purpose of enabling the facility to produce qualified clean hydrogen if the facility could not produce hydrogen with a lifecycle GHG emissions rate at or below the lowest credit tier (4 kg of CO2e per kg of hydrogen). In the case of a retrofit, the proposed regulations apply the “80/20” test, whereby the existing facility may establish a new original placed-in-service date provided that the used property is not more than 20%of the facility’s total value.
Election to Treat Clean Hydrogen Facility as §48 Energy Property. The proposed regulations provide that a taxpayer that owns and places in service a specified clean hydrogen production facility can make an irrevocable election for the Investment Tax Credit (ITC) under Section 48, available for property with a placed in service date after December 31, 2022 and, for property that began construction before January 1, 2023, only with respect to the basis of such property that is attributable to construction, reconstruction, or erection occurring after December 31, 2022. The ITC is subject to recapture if certain events occur during the applicable five-year period, namely (1) failure to obtain a timely annual verification report or (2) the lifecycle GHG emissions rate is higher than that which is used to determine the ITC and would have otherwise resulted in a lower credit amount. The recapture amount is equivalent to 20% of the excess of the ITC claimed for the facility over the credit that would otherwise been allowed.
Coordination with Credit for Carbon Sequestration. The proposed regulations incorporate the statutory prohibition on stacking the Section 45V credit and Section 45Q credit for carbon sequestration. However, if the 80/20 rule is satisfied with respect to carbon capture equipment included at a hydrogen production facility, and no new section 45Q credit has been allowed to any taxpayer for such carbon capture equipment, then taxpayers are eligible to claim the 45V credit for retrofitted carbon capture equipment deemed as an “independently functioning process train.”6
Treasury and IRS Requests for Comments
Numerous requests for comment by Treasury and the IRS within the proposed regulations are indicative of a robust stakeholder feedback process over the coming months. Relevant areas of desired input include the following:
- Most Recent GREET Model. Rather than define the “most recent GREET model” to be the latest version of 45VH2-GREET that is publicly available on the first day of the taxpayer’s taxable year, Treasury and the IRS request comment on alternative approaches, such as determining that the latest version is an appropriate “successor model.”
- Timing of Verification. Treasury and the IRS request comment on the ability of taxpayers to comply with the proposed regulations at § 1.45V–1(c), providing that taxpayers are not eligible to claim the section 45V credit until all relevant verification requirements, and the verification itself, have been completed. Treasury and IRS also request proposed alternatives.
- Underlying Verification Mechanisms. With respect to the fixed assumptions under the 45VH2-GREET model, Treasury and the IRS request comment on the readiness of verification mechanisms that could be utilized for certain background data in 45VH2-GREET if it were reverted to foreground data in future releases.
- Readiness Indicators. Treasury and IRS seek comments on appropriate indicators of project readiness concerning the proposed regulations at § 1.45V–4(c)(5), which provide that an applicable may request a DOE emissions study only after a FEED study or similar indication or project maturity has been completed.
- 1:1 EAC Ratio. Using an example under the proposed regulations at § 1.45V–4(d)(1), Treasury and the IRS provide that one megawatt-hour (MWh) of electricity used to produce hydrogen would need to be matched with one MWh of qualifying EACs, and request comment on whether such an approach is sufficient to account for transmission and distribution line losses.
- Incrementality Requirement. Treasury and the IRS generally request comment on whether and under what circumstances electricity generated by an existing electricity generating facility dedicated to hydrogen production may satisfy the incrementality requirement, including the possibility of an avoided retirements approach, a mechanism to demonstrate zero or minimal induced grid emissions through modeling or other evidence under specific circumstances, and 5 percent threshold for electricity from existing power plants to count as incremental.
- Legal Insight: As Norton Rose Fulbright observes, hydrogen producers proximate to nuclear and hydroelectric power facilities, especially in the U.S. Pacific Northwest region, are concerned that the current incrementality requirement proposed by Treasury and the IRS disallows such producers from filling supply intermittencies with existing renewable energy assets or surplus nuclear and hydroelectric generation, a concern also raised in the letter by Chairman Carper.
- Temporality Requirement. Treasury and the IRS acknowledge “uncertainty in the timing of implementing an hourly matching requirement” and request comment on the appropriate duration of this transition rule to hourly matching, including specific data regarding current industry practices, the predicted timelines for development of hourly tracking mechanisms, and the predicted timeline for market development for hourly EACs.
- Legal Insight: Norton Rose Fulbright references a Treasury survey of nine existing regional tracking systems in June 2023, finding that, while two systems claimed to have hourly matching capabilities, “software functionality in these two systems remains limited” and “full functionality will remain time.” Timelines for the other systems to reach hourly tracking ranged from one to five years, with two declining to offer a prediction. Wilson Sonsini notes that WREGIS, encompassing California and other western states, provides the longest runway of three to five years, and only three U.S. systems (M-RETS, NAR, PJM-GATS) provide hourly capabilities, which are limited.
- Deliverability Requirement. Acknowledging the widespread existence of transmission limitations within and between U.S. grid regions, Treasury and the IRS request comments on whether there are additional ways to establish deliverability, such as circumstances indicating that electricity is actually deliverable from an electricity generating facility to a hydrogen production facility, even if the two are not located in the same region or if the clean electricity generator is located outside of the United States.
- Eligibility of Minimal-Emitting Resources. Treasury the IRS acknowledge that additional considerations may be necessary to verify the full range of direct and indirect emissions for purposes of the EAC requirements, and request comment on what information is needed to document and verify GHG emissions related to minimal-emitting electricity generation that is purchased and used for clean hydrogen production under the 45V credit.
1 See Figure 1.
2 See DOE “National Clean Hydrogen Strategy and Roadmap” (June 2023).
3 See DOE White Paper, Assessing Lifecycle Greenhouse Emissions Associated with Electricity Use for the Section 45V Clean Hydrogen Production Tax Credit (December 2023). See also EPA Letter to Treasury on the Definition of Lifecycle Greenhouse Gas Emissions Under the Clean Air Act to Support Treasury’s Interpretation and Implementation of Internal Revenue Code Section 45V (December 2023).
4 ACORE and E3, Analysis of Hourly and Annual GHG Emissions from Hydrogen Production, p. 26-27 (April 2023).
5 While these procedures have yet to be formulated by DOE, the proposed regulations note that an applicant may only request an emissions value from DOE after a front-end engineering and design (FEED) study or similar indication of project maturity, such as project specification and cost estimation sufficient to inform a final investment decision, has been completed for the hydrogen production facility.
6 Treas. Reg. § 1.45Q–2(g)(5). See also Treas. Reg. 1.45Q–2(c)(3).