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Federal Regulators Propose Clarifying Definitions and Additional Requirements for Clean Hydrogen Tax Credits

on Wednesday, 10 January 2024 in Dirt Alert: David C. Levy, Editor

The Department of the Treasury (“Treasury”) and Internal Revenue Service (“IRS”) recently proposed regulations that would clarify key components of the clean hydrogen Investment Tax Credit (“ITC”) and the Clean Hydrogen Tax Credit (“45V Credit”).  See 26 U.S.C. Sections 48(a)(15) and 45V, respectively.  We recently analyzed other proposed regulations relating to the ITC, here.

The proposed regulations are online here.  They address: (1) new requirements for Qualified Energy Attribute Certificates (“EACs”), (2) clarifying definitions and (3) regulations for modifying or retrofitting existing facilities to produce clean hydrogen.  The regulations’ stated purpose is to conform the ITC and 45V Credit to the Inflation Reduction Act (“IRA”). 

  1. Qualified Energy Attribute Certificates.  

The main proposed change pertains to the requirements for Qualified EACs.  An EAC is a representation of the energy a facility generates, typically in increments of one megawatt hour (MWh) per EAC.

To become a qualifying EAC, the generator must comply with three newly proposed requirements.  A qualified “verifier”[1] must confirm that the facility: 

  • Incrementality Requirement (Section 1.45V-4(d)(3)(i)). An EAC qualifies if the electricity-generating facility’s COD was no more than 36 months prior to the hydrogen production facility being placed in service.  Alternatively, an EAC may qualify if the electricity-generating facility experiences an increase in nameplate capacity within 36 months before the hydrogen production facility is placed in service, and the electricity used by the hydrogen production facility is a part of the uprated production.  See Section 1.45V-4(d)(3)(i)(B). 
  • Temporal Matching Requirement (Section 1.45V-4(d)(3)(ii)). For electricity generated prior to January 1, 2028, the electricity the EAC represents must be generated in the same calendar year as the electricity is consumed by the facility.  For electricity generated after December 31, 2027, the electricity the EAC represents must be generated in the same hour as the electricity is consumed by the facility.
  • Deliverability Requirement (Section 1.45V-4(d)(3)(iii)). The electricity the EAC represents must be generated within the same region as the hydrogen production facility, as determined by the Needs Study conducted by the U.S. Department of Energy that can be found here

Becoming a qualifying EAC allows the facility additional benefits when calculating its greenhouse gas emissions (“GHG Emissions”) rate for producing hydrogen.  This crucial figure determines the amount of the 45V Credit that a facility can claim.  See 26 U.S.C. 45V(b)(2)(A)-(D).  A facility can retire a qualifying EACs in exchange for the ability to reflect its usage of clean electricity for GHG Emission rate calculation purposes. This ultimately increases the amount of the 45V Credit. 

  1. Clarifying Definitions.

The proposed regulations add the following definitions: 

  • Facility” means a “single production line that is used to produce qualified, clean hydrogen,” including all components that function interdependently. Section 1.45V-1(a)(7)(i).  This definition does not include equipment used to condition or transport hydrogen beyond the point of production or equipment used to produce electricity that is used to power the hydrogen production process.
  • Taxpayer” means the owner of the hydrogen production facility “at the time of the facility’s production of the qualified clean hydrogen.” Section 1.45V-1(b)(1).
  • Specified Clean Hydrogen Production Facility,” for purposes of the ITC,[2] means any Qualified Clean Hydrogen Production Facility[3] that (i) is placed in service after December 31, 2022; (ii) no 45V Credit or 45Q Credit has yet been allowed; (iii) the taxpayer makes a Section 48(a)(15) election for; and (iv) an unrelated party has verified to produce hydrogen through a process consistent with the facility’s design and expected GHG Emissions.
  1. Modification and Retrofitting of Existing Facilities for the Production of Qualified, Clean Hydrogen.

The proposed regulations provide that the owner of an existing facility may modify or retrofit the facility to become a Qualified Clean Hydrogen Production Facility if the owner meets certain conditions. 

A facility placed in service before January 1, 2023, may qualify if (a) prior to modification, it did not produce qualified clean hydrogen, (b) the owner modifies the facility to do so, and (c) amounts paid or incurred pursuant to the modification are chargeable to the taxpayer’s capital account.  Section 1.45V‑6(a)(2) provides that a facility is modified to become a qualified clean hydrogen production facility if, prior to modification, the facility could not produce hydrogen with a lifecycle GHG Emissions less than or equal to 4 kg CO2e/kg H. 

For the retrofitting of existing facilities to qualify as a Clean Hydrogen Production Facility, including repurposing used equipment, the above rules apply.  Section 1.45V‑6(b) additionally provides that the new facility may establish a new “placed in service [date]” if it satisfies the “80/20 Rule.”  This rule requires that the fair market value of the used property comprising the new facility cannot exceed twenty-percent (20%) of the facility’s total value.  The new date would be the date that the new property added to the existing facilities is placed in service.

The proposed regulations involve highly technical and nuanced changes, clarifications, and calculations.  Public comments close on February 26, 2024, and a public hearing is scheduled for 10:00 A.M. on March 25, 2024.  We anticipate final publication of the regulations sometime this year.  We will monitor the process and provide updates. 

Attorneys at Baird Holm LLP have extensive experience in clean energy tax credit matters, renewable energy, and other general corporate and taxation matters.  If you have any questions about these proposed regulations or would like to discuss the potential eligibility of your entity, please do not hesitate to contact the firm.

[1] The proposed regulations define as either (1) a verifier with an active accreditation from the American National Standards Institute National Accreditation Board, or, (2) a verifier, lead verifier, or verification body under the California Air Resources Board Low Carbon Fuel Standard program.  See Section 1.45V-5(h). 

[2] See 26 U.S.C. Section 48(a)(15). 

[3] Qualified Clean Hydrogen Production Facility is a facility that (a) is owned by the taxpayer, (b) produced qualified clean hydrogen, as defined by 26 U.S.C. Section 45V(c)(2), and (3) the construction of which commences prior to January 1, 2033.  26  U.S.C. Section 45V(c)(3)(A)-(C). 

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