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IRS and Treasury Host Hearing for Proposed Section 45V Clean Hydrogen PTC Regulations

Published by Alvin Lee and Peter Lawrence on Thursday, April 18, 2024 - 12:30PM

Witnesses at an Internal Revenue Service (IRS) hearing on proposed regulations for the Internal Revenue Code (IRC) Section 45V tax credit for the production of clean hydrogen found plenty of problems and offered some solutions.

The March 25-27 hearing allowed members of the clean energy industry to express concerns regarding the proposed regulations. The main concerns brought up by witnesses were about the three-pillars requirements, whether the proposed regulations would harm innovation and methods for measuring Section 45V production tax credits (PTCs) for clean hydrogen facilities generating from greenhouse gases and renewable natural gases. 

The Section 45V base credit varies from $0.12 to $0.60 per kg of carbon dioxide emitted per kg (Co2e/kg) of hydrogen produced, depending on the lifecycle of greenhouse gases generated. This credit can be multiplied by a factor of five if the project follows prevailing wage and apprenticeship requirements. 

Witnesses Express Concerns Over Three Pillars Requirements 

The proposed regulations detail how hydrogen producers must follow the three pillars of incrementality, deliverability and time-matching requirements while using energy attribute certificates (EACs) to provide documentation of energy inputs and outputs.

The incrementality requirement states that hydrogen facilities that begin operating within three years of being placed in service would be considered a new clean energy source. Deliverability requirements are met if electricity is generated by a source within the same region as its corresponding hydrogen production facility. The term “region” is derived from the National Transmission Needs Study issued Oct. 30, 2023, by the U.S. Department of Energy. The separation of these regions is important to reduce electric grid congestion that increases fossil fuel consumption. The time-matching requirements are satisfied 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.

Multiple witnesses said immediate implementation of incrementality rules would be difficult for their clean energy production facilities. Shawn Bennett of the Appalachian Regional Clean Hydrogen Hub said it would be difficult to build projects on such short notice due to difficulties in the permitting and siting appropriate sites in the region, while Matt Tanner of the Los Angeles Department of Water and Power requested a brief delay period before the incrementality rules are implemented. Bernard Turi of Industrie de Nora suggested that the U.S. Department of the Treasury and IRS should increase incrementality exemptions to at least 10% for existing renewables, hydroelectric and nuclear power facilities. Janet Anderson of the Clean Hydrogen Future Coalition and John D. Kotek of the Nuclear Energy Institute said that incrementality should be eliminated in the final regulations. Anderson cited a Lawrence Berkeley Laboratory report that said that it would take a minimum of five years for a clean hydrogen facility to develop and become operational. Kotek said that while he is against the use of incrementality, Treasury and IRS should consider an exemption to the incrementality requirement for hydrogen projects that are under construction before the end of 2026 if they are to impose the rule.

For the deliverability requirements, Rick Miller of LyondellBassell requested that IRS and Treasury loosen requirements for hydrogen produced in the United States. He explained that development of clean hydrogen procedures has been disproportionately sited across the country and that the proposed regulations disincentivize hydrogen producers in the United States to meet demand requirements in an optimal manner. Furthermore, Mo Vargas of BatoTech said the proposed deliverability requirements would restrict new production sites and potentially create an unworkable final rule for taxpayers by needlessly limiting access to customers and offtake partners. 

Time-matching requirements were also met with some criticism from witnesses. Multiple witnesses said that they would benefit from safe harbor rules to protect them from legal liability since they lacked confidence that they would be able to transition from annual to hourly matching by 2028, as required by the regulations. Frank Wolak of Fuel Cell and Hydrogen Energy Association (FCHEA) said that renewable gas (RNG) should not be held to a standard higher than monthly time matching. Bennett suggested a grandfathering rule for projects that begin construction before 2028, while Miller supported a delay in hourly time-matching until the technology is further developed. 

Concerns Arise Over Whether the Proposed Rules Would Harm Innovation

Many witnesses pointed out that the three pillars contradict the main objectives of the Inflation Reduction Act of 2022 by inhibiting the growth of the clean hydrogen industry, with Don Boyajian of Plug Power saying that it will increase the levelized cost of hydrogen and inhibit U.S. decarbonization. Dan Byers of the U.S. Chamber of Commerce agreed, saying that IRS and Treasury should work more toward supplying hard-to-abate sectors, with cleaner energy inputs and power alternatives. Claire Behar of Hy Stor Energy LP said some of the hardest-to-abate sectors included steel production, transportation and fertilizer production, but a 24/7 clean hydrogen supply would make it possible to decarbonize them. Katrina Fritz of the California Hydrogen Business Council said the stringent rules would disincentivize facilities toward using clean hydrogen in lieu of fossil fuels. Karl Gnadt of the Hydrogen Fuel Cell Bus Council said that for smaller facilities, the cost to hire consultants to better understand the guidance of the tax credit might outweigh the savings received from the credit. 

A few witnesses spoke out in defense of the Section 45V PTC proposed rules. Auburn Bell of Earthjustice urged IRS and Treasury not to loosen the rules, as it would allow hydrogen producers to undermine the Biden administration's pursuit of a net-zero-emissions economy. She said that when the Section 45V PTC was enacted, Congress was explicit that the tax credit was intended to reduce greenhouse gas emissions rather than guarantee a profit windfall for the industry. Erik Kamrath of the Natural Resources Defense Council also defended the three pillars, saying that the pillars are the only scenario that lowers the cost to U.S. taxpayers while both reducing emissions and maintaining consistency with U.S. trade language and congressional intent to scale the hydrogen industry and support a green economy. 

Concerns Raised Over Greenhouse Gas Emissions and RNG

Some witnesses had concerns regarding the Greenhouse gasses, Regulated Emissions, Energy use in Transportation (GREET) model used to determine the level of greenhouse gas emissions rates. Andrew Vesey of Fortescue North America said that requiring taxpayers to use the GREET model creates uncertainty and risk as it means that a facility’s ability to qualify for the credit could change year-to-year. Multiple witnesses said they were unable to use the model due to their hydrogen production technology, and that IRS and Treasury should consider altering their yearly reporting requirements. In addition, many witnesses urged Treasury and IRS to consider including rules for production of clean hydrogen from RNG. According to the Environmental Protection Agency (EPA), RNG is defined as biogas that has been upgraded for use in place of fossil natural gas and comes from a variety of sources, including municipal solid waste landfills, digesters at water resource recovery facilities (wastewater treatment plants), livestock farms, food production facilities and organic waste management operations. Charles Franklin of the American Chemistry Council said, “RNG product locations are typically not co-located with hydrogen production facilities, requiring RNG producers to rely on natural gas common carrier pipelines for transport. Book and claim accounting provides a reliable, quantitative method for documenting movement and transport of RNG. It is recognized by EPA in California. It should be allowed for the Section 45V tax credit.”

Awaiting Further Guidance from the IRS and Treasury

Novogradac’s Renewable Energy (RE) Working Group will continue to analyze IRS and Treasury’s proposed regulations. The RE Working Group is led by tax credit experts that examine transferability, adders, new eligible costs/technologies, direct pay, solar PTCs and global minimum tax of renewable energy tax credits for its members. Novogradac will host the Novogradac 2024 Spring Renewable Energy Tax Credits Conference May 16-17 in San Diego where the latest guidance and industry trends on renewable energy tax credits will be discussed by industry insiders and the RE Working Group. Click here to register for this opportunity to learn more about the renewable energy tax credit industry and to connect with professionals in the field.

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