Environment & Energy Insights

Treasury Department/Internal Revenue Service Delay in Issuing Guidance Means Hydrogen Producers Remain Uncertain About Tax Credit Eligibility Under the Inflation Reduction Act

Posted by Jeffrey Karp on 9/15/23 12:53 PM
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Written by Jeffrey Karp and Jennifer Schultz

Overview of the federal Inflation Reduction Act

The Inflation Reduction Act (IRA or Act), signed by President Biden on August 16, 2022, includes the largest Congressional investment in U.S. history to facilitate the development, manufacturing, and application of clean energy technologies; effectuate broader use of energy efficient and renewable energy products; and seek to stem the climate change crisis by achieving a significant reduction in nation-wide greenhouse gas (GHG) emissions.

To that end, among the Biden Administration’s overarching goals in obtaining passage of and effectuating the IRA is to achieve decarbonization of the U.S. economy by 1) reducing GHG emissions by 50-52% below 2005 levels by 2030;[1] and 2) reaching a net-zero economy by 2050.

Nearly three-quarters of the IRA’s financial investment is provided through tax credits and deductions, totaling about $216 billion. In addition to the tax incentives, the Act includes programs to benefit working families and historically overlooked and underserved communities that often are burdened by legacy pollution and lacking in critical infrastructure.

The IRA introduces new clean hydrogen production and investment tax credits.[2] For purposes of determining eligibility for these tax credits, the IRA defines “clean hydrogen” as hydrogen produced through a process using a machine called an electrolyzer that results in lifecycle GHG emissions of up to 4 kilograms of CO2e per kilogram of hydrogen. The IRA is being hyped as a potential game changer for the production of such “green” hydrogen. Tax credits of as much as $3/kilogram for 10 years could make producing green hydrogen quite financially lucrative, as well as assisting in decarbonizing the U.S. economy.

     1. What are the IRA's tax credits for the production of hydrogen

The IRA amends the Internal Revenue Code (IRC) to create both a new green hydrogen production (PTC) and investment tax credit (ITC) to subsidize the production of clean energy hydrogen. Hydrogen producers have the option of either receiving:

  • a credit calculated at an amount equal to $0.60/kilogram (kg) of “qualified clean hydrogen” produced multiplied by an applicable percentage based on the resulting lifecycle GHG emissions rate during a 10-year period starting on the date the qualified clean hydrogen facility is placed in service (PTC); or
  • a credit equal to the energy percentage of the cost basis of a clean hydrogen production facility placed in service during the taxable year (ITC).

See our previous Energy, Infrastructure & Climate Change Briefing, Table 1, p. 4. Each of these tax credits can reduce the price differential between the production of clean hydrogen and more carbon-intensive alternatives, depending on the lifecycle GHG emissions associated with the method of hydrogen production.

Also, the amount of the PTC in IRC Section 45V and the ITC in IRC Section 48 potentially are enhanced by the availability of bonus “adders.” The PTC is increased by a multiple of five if the qualified clean hydrogen facility meets the prevailing wage and apprenticeship requirements. Another significant aspect of the provision is that taxpayers may claim the value of the clean hydrogen PTC through a tax refund (known as “direct pay”) as if it were a tax overpayment. For most credits under the IRA, direct pay only is available to specified non-taxable entities; however, it is available for all taxpayers who are eligible to receive the PTC for the production of clean energy. Under IRC Section 45V, these hydrogen-related credits also would be eligible, alternatively, for transfer by taxpayers to unrelated third parties in a non-taxable cash sale.

The amount of the ITC in IRC Section 48 also is increased by a multiple of five if the qualified clean hydrogen facility meets the prevailing wage and apprenticeship requirements. Moreover, a multiplier of five is applied if the clean energy project has a maximum output of less than one megawatt of electrical or thermal energy. Further, such energy projects are eligible under the ITC for the 10% domestic content bonus credit and the 10% adder for placing hydrogen production facilities in energy communities, resulting in potentially sizable incentives for clean hydrogen projects under IRC Section 48.

     2. What is at stake with the impending Treasury Department (Treasury) and IRS guidance for calculating the lifecycle GHG emissions associated with the method of hydrogen production

     a) Placing the Guidance in the Context of the Act

As noted, the IRA creates a tax credit for producing “qualified clean hydrogen,” which it defines as “hydrogen which is produced through a process that results in a lifecycle greenhouse gas emissions rate of not greater than 4 kilograms of CO2e per kilogram of hydrogen.” This definition necessitates a mechanism by which lifecycle GHG emissions can be calculated for each of the various hydrogen production methods.

For example, the measurement system must account for upstream fugitive emissions associated with the production method, such as leaking of methane from natural gas pipelines that occurs in producing “blue” hydrogen.[3]

The statutory definition also requires that the lifecycle emissions analysis consider the carbon intensity of the power used in the hydrogen production process. For example, the production of “green” hydrogen does not release carbon at the production site; it is created by electrolysis, the process of using electricity to split water (H2O) into hydrogen and oxygen. However, the carbon intensity of the power used to generate that electricity also must be considered in a lifecycle analysis.

In applying this aspect of the statutory definition, the level of difficulty in measuring carbon intensity depends, in part, on the hydrogen production pathways. The analysis can be straightforward, such as when an electrolyzer is not connected to the grid, but rather is powered by separate renewable resources.

However, ensuring that hydrogen resources actually are “clean” can be quite complex; for example, when an electrolyzer draws its power to produce hydrogen from a regional grid, it uses a large volume of electricity whose carbon intensity varies with time as a blend of clean renewable energy and fossil fuels. In this context, accurately determining the intensity of the hydrogen resource can be difficult. The complexity of this task is further heightened because the statute requires that “qualified clean hydrogen” be evaluated in the context of the producer’s lifecycle GHG emissions. This statutory approach requires the use of a broader field for analyzing associated emissions than a definition of carbon intensity based solely on the quantity of CO2e produced at the hydrogen production location; in other words, the quantity of carbon released at the time and location that the hydrogen production occurs.

     b) Implications of Treasury/IRS’s Failure to Issue the Required Guidance in a Timely Manner

Apparently, the Congressional leadership shepherding the IRA’s passage recognized the applicational complexity created by the “qualified clean hydrogen” definition; it included in the statute a requirement that within a year of the law’s signature date, by August 16, 2023, Treasury provide the necessary operative guidance for stakeholders. However, that date has passed and the guidance has not been issued yet.

The awaited guidance is expected to establish how hydrogen producers can prove their eligibility for the tax credits under the IRA. Qualification for and the amount of the eligible tax credits for the production of hydrogen will depend largely on the rigor of the guidance directing the manner in which emission reduction must be measured. Thus, the value of the tax credits may vary significantly based on the factors that are applied in the impending guidance for calculating the totality and intensity of the lifecycle emissions.

In November 2022, Treasury and the IRS requested public comment to help inform the issues of concern and the manner in which stakeholders propose that these issues be addressed in the guidance. The commentors agreed that, as a baseline, the tax credits that could be claimed would depend on how much CO2 is emitted when hydrogen is produced. Beyond that point, there was substantial disagreement among commenters regarding issues such as the method(s) for tracking and calculating lifecycle emissions and the carbon intensity for differing hydrogen production pathways, and verifying the energy inputs that could be used to demonstrate eligibility for carbon credits.

Industry stakeholders commented that if the guidance is too strict and lacks appropriate flexibility, production will be more expensive, and the development of a clean hydrogen market will suffer. Environmental groups countered that, if the guidance is too lax, the point of the IRA’s generous tax credits - - to incentivize the production of clean hydrogen to reduce GHG emissions-- will be lost.

     c) Key Issues to Watch

There are several items of particular note to consider, and subsequently observe how they are addressed when Treasury/IRS finally issues the guidance.

Those commenters seeking strict adherence to the clean hydrogen definition proposed requirements involving the concepts of time, additionality and deliverability to be included in the guidance, as discussed below.

As noted, proving tax credit eligibility may be easier for some hydrogen production pathways than others. Thus, the use of renewable energy credits may come into play, if pemitted by the impending guidance. The hydrogen produced using electricity from the grid may qualify for tax credits under the IRA if the hydrogen producer can demonstrate that its carbon intense emissions are offset by the procurement of renewable energy credits produced by clean energy projects. This approach of purchasing “carbon credits” currently is used by many companies to offset the emissions from their fossil fuel energy consumption.

However, environmental organizations commenting on whether to allow hydrogen producers to use renewable energy credits to qualify for tax credits have stated that the guidance must apply strict accounting measures to ensure that any procured renewable energy credits offset emissions in proportion to the emissions generated in producing the hydrogen.

Also, climate advocacy groups have commented that any emissions accounting system must impose a rigorous geographic boundary around the location of the grid-provided electricity and the offsetting clean energy project to ensure that clean electricity is delivered into the same grid where the hydrogen is produced.

According to the commenters, these proposed elements of an accounting system are needed to accurately track offsets and avoid the risk of greenwashing.

Climate-based organizations also have advocated for the guidance requiring a “temporal match” between the times of electrolyzer operations and clean energy generation by the offsetting renewable energy project. According to the commenters, requiring such hourly matching--that the electrolyzer operates within the same hours as the clean energy project that the hydrogen producer claims is offsetting the electrolyzer’s grid-related emissions--is necessary to ensure sufficient accounting rigor.

Moreover, these commenters are seeking issuance of a guidance that requires if renewable energy credits may be used to offset emissions from hydrogen production, such credits must be generated from projects that were constructed as a direct result of the new hydrogen production coming on line, and be located within close proximity of the hydrogen production facility.

Industry proponents disagree. They argue that annual matching provides sufficient rigor and is far less costly to implement. These commenters say that as long as a renewable energy project operates within the same year as the electrolyzer, irrespective of the project’s genesis or geographic proximity to the hydrogen facility, the hydrogen producer should be permitted to use the renewable energy credits to offset its grid power consumption.

     3. Conclusion

Until the Treasury/IRS guidance is issued, hydrogen project investors and producers will lack essential information concerning the eligibility requirements and concomitant costs to qualify for the IRA tax credits. Thus, despite the seemingly favorable financial incentives available under the IRA, investors and producers will be reluctant to engage in hydrogen projects absent knowledge of the “rules of the road.”

Jeffrey Karp is the leader of the firm’s environment and natural resources practice group and a member of the energy, infrastructure and climate change practice group.

Jennifer Schultz is the leader of the land use and zoning, and the energy, infrastructure and climate change practice groups.

[1] The Department of Energy (DOE) and private consulting entities now estimate that a 40% reduction in economy-wide GHG emissions below 2005 levels is more likely to occur by 2030 than the Administration’s initial 50-52% estimate.

[2] Additionally, beginning in 2025, taxpayers with zero emissions facilities can choose between a new technology neutral production or investment tax credit.

[3] Blue hydrogen is produced mainly from natural gas, using a process called steam reforming which combines natural gas and heated water in the form of steam. The output is hydrogen, but GHG emissions are produced as a by-product.



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The Environment & Energy Insights blog analyzes developments in the law, as well as provides updates and perspectives on trends and polices.

The material on this site is for general information only and is not legal advice. No liability is accepted for any loss or damage which may result from reliance on it. Always consult a qualified lawyer about a specific legal problem.

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