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Section 45V Clean Hydrogen Production Credit Proposes Guidance on Determining Greenhouse Gas Lifecycles, Certification of Hydrogen Production, Generating Electricity from Renewable Resources, and Modifying and Retrofitting Old Facilities

Published by Alvin Lee and Peter Lawrence on Thursday, April 18, 2024 - 12:16PM


The Inflation Reduction Act (IRA) introduced a multitude of new tax incentives for the promotion of clean energy development, including Internal Revenue Code Section 45V Credit for the production of clean hydrogen. 

Since the passage of the IRA, the Internal Revenue Service (IRS) has been busy providing much-needed guidance and clarification. The Section 45V proposed guidelines establish a model for determining the lifecycle of greenhouse gas emissions along with an associated credit for different levels of emissions rates. The Section 45V base credit varies from $0.12 to $0.60, depending on the lifecycle greenhouse gas emissions rate. It can be multiplied by five like the renewable energy investment tax credit, renewable energy production tax credit and other clean energy tax incentives if the taxpayer follows prevailing wage and apprenticeship requirements. 

The Section 45V proposed regulations also provide a means to certify the amount of hydrogen generated from each facility. It proposes guidelines for hydrogen generated from renewable resources and provides guidelines for retrofitting old facilities. 

Determining the Amount of Credit Based on the Life Cycle of Greenhouse Gases

The amount of tax credit provided by Section 45V depends on the amount of greenhouse gas emissions resulting from the hydrogen production process. The IRS opted to follow the Greenhouse gasses, Regulated Emissions, Energy use in Transportation (GREET) model, developed by Argonne National Laboratory, to determine the lifecycle greenhouse gas emissions. The most recent GREET model must be used to determine emissions. That is defined as the latest version of the GREET model that is publicly available as of the first day of the taxable year in which the credit is claimed. 

The proposed regulations provide that lifecycle greenhouse gas emissions include emissions associated with feedstock growth, gathering, extraction, processing and delivery to a qualified facility. It also includes the emissions associated with the hydrogen production process, inclusive of the electricity used by the hydrogen production facility, as well as any capture and sequestration of carbon dioxide generated by the hydrogen production facility. A separate claim must be made for each eligible facility. The GREET model includes the following production pathways: 

  • Steam methane reforming (SMR) of natural gas, with potential carbon capture and sequestration (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 applicable percentage of the base credit rules as follows:

  • $0.12 for emissions above 2.5 kilograms (kg) and below 4 kg of carbon dioxide (CO2) emitted per kg of hydrogen (CO2e/kg), 
  • $0.15 for emissions between 1.5 kg and 2.5 kg of CO2e/kg, 
  • $0.20 for emissions between 0.45 kg and 1.5kg of CO2e/kg, and
  • $0.60 for emissions under 0.45kg of CO2e/kg. 

Following IRA prevailing wage and apprenticeship requirements qualify production facilities for a 5x multiplier, allowing for up to $3 of credits per kg of hydrogen produced. If the taxpayer finds that their hydrogen produced is not covered in the GREET model, they may file a petition with the Secretary of the Treasury to determine the lifecycle greenhouse gas emissions rate, the Provisional Emissions Rate (PER). As part of the process for a taxpayer to petition for a PER, a taxpayer must submit an application to the U.S. Department of Energy for an emissions value that it may use to claim the Section 45V credit. Among the comments requested by the IRS on the guidance is comments on different techniques to verify emissions from fossil fuel-powered electricity generation with CCS and biomass-powered electricity generation are sought.

Certification of Hydrogen Production

Hydrogen production and emissions must be documented for each facility looking to claim the Section 45V credit. In the past, Energy Attribute Certificates (EACs) were used to provide third-party verification to account for each facility’s emissions. EACs must be issued through a qualified EAC registry or accounting system to provide proof that energy was generated. 

There are three requirements for an EAC to be deemed eligible according to Section 45V: incrementality, temporal matching and deliverability.

The incrementality requirement is met when the electricity generating facility that produced the unit of electricity to which the EAC relates has a commercial operations date that is no more than 36 months before the hydrogen production facility for which the EAC is retired was placed in service. An EAC also meets the qualification requirements if the electricity represented by it is produced by an electricity generating facility that had an uprate no more than 36 months before the hydrogen production facility was placed in service. An uprate is an increase in an electricity generating facility’s nameplate capacity measured in megawatts. Unbundled EACs can also be purchased, which means that an EAC can be acquired with or separately from the underlying energy that it represents.

The next requirement, deliverability, states that qualifying EACs are required to represent electricity that was produced by an electricity generating facility that is in the same region as the relevant hydrogen production facility. 

Lastly, the EAC temporal matching requirement is 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. Hourly matching is necessary to properly address the significant indirect emissions from electricity use. Since tracking systems and related contractual systems for hourly matching will take time to develop to maturity, this temporal matching requirement will be updated with further regulations.

The IRS requests comments on how clean power generators can be considered to have met the incrementality requirements. It also requests comments on mechanisms on how to take transmission of clean power between different regions into consideration when it comes to deliverability. The IRS additionally requests comments surrounding whether fossil fuel and biomass derived electric power can be described as incremental used to produce hydrogen. Suggestions for techniques to measure emissions levels are also requested, along with accounting guidelines to measure incrementality, deliverability and temporal matching. 

Modifying and Retrofitting Old Facilities

According to Section 45V, specified clean hydrogen production facility can be modified or retrofitted using proposed Section 48 guidelines. Any facility that was placed in service before Jan. 1, 2023, and did not produce clean hydrogen before this date, can be modified to qualify for the Section 45V credit. The eligible property will be considered to have been placed in service on the date of the modification. In addition, facilities can be retrofitted to qualify for Section 45V by following the 80/20 rule. This rule states that no more than 20% of a facility’s total value (the cost of the new property plus the value of the used property) can be used property. 

Public Reactions to Proposed Section 45V Highlight Potential Issues 

The Section 45V proposed regulations have proven to be highly controversial and have sparked division among businesses and environmental groups. According to Bloomberg Law, the proposed regulations follow the “three pillars,”, which would force hydrogen producers to prove that their electricity comes from new power sources. Further, it also requires hydrogen producers to match their clean power generation on an hourly basis by 2028. In addition, Bloomberg states that nuclear power and hydropower are excluded because they take too long to build, and wind and solar energy cannot produce 24 hours per day. 

These regulations set a very high standard for clean hydrogen subsidies as hydrogen producers must limit their emissions to about 5% of the same amount produced by conventional hydrogen production from fossil fuels.

Blog Graphic: Hydrogen producers must reduce emissions by at least 95% to qualify for the $3 per kilogram tax credit

While these new regulations are a win for environmentalists, clean hydrogen companies have mixed reviews of the economic aspects of them. Frank Wolak, CEO of the Fuel Cell and Hydrogen Energy Association, said that the guidance, “falls woefully short of what is needed to stimulate our hydrogen industry in the United States.” On the other hand, seven companies signed a letter to the Biden administration backing the three pillars. In the letter, the companies claim that the three pillars will, “support scaled industry growth and enable the creation of a successful U.S. and global clean electrolytic hydrogen market.” The letter urges President Biden to be skeptical of claims such as Wolak’s that state that the proposed guidance will destroy the industry.

The three pillars have also split Democrats, as they are supported by progressives but opposed by more moderate Democrats. Sheldon Whitehouse, D-Rhode Island, who helped write the proposed regulations, agrees with the European Union’s stance that hydrogen is only clean if it comes from a green source of electricity

In a letter to the U.S. Department of Treasury, the Whitehouse and seven other senators urged Treasury to, “implement rules for [Section] 45V that accord with the intent of Congress and align with what science tells us is necessary to secure human well-being and planetary health.” The letter went on to explain that if the Section 45V credit is allocated to hydrogen that does not come from green electricity sources, it would just become another subsidy for the fossil fuel industry. Democrat Joe Manchin, D-West Virginia, on the other hand, finds the new guidelines to be too restrictive and on the day of the release, he stated his opposition. 

Preparing for Additional Proposed Regulations for Section 45V

The IRS intends to update the proposed Section 45V regulations to create guidelines for generating clean hydrogen using renewable natural gas and fugitive sources of methane. The term “fugitive methane” refers to the release of methane through such things as 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. 

While the IRS plans to release further guidelines surrounding hydrogen production using renewable natural gas or other fugitive sources of methane, it has provided guidance on biogas that has been updated to be equivalent in nature with fossil natural gas. According to Lily Batchelder, Biden’s Assistant Secretary for Tax Policy at the time, Treasury is launching Phase Three of the implementation of IRA tax credits. This step will work to provide long-term stability for the market by incorporating feedback gathered from stakeholders while finalizing proposed rules. Comments on the proposed regulations were received until Feb. 26. A public hearing was held March 25-27, where speakers expressed their concerns with the proposed regulations. 

Novogradac’s Renewable Energy Working Group will continue to review future proposed Section 45V regulations. The Novogradac 2024 Spring Renewable Energy Tax Credits Conference May 16-17 in San Diego will provide expert-led sessions that enhance renewable energy tax credit knowledge. Register to join other professionals in learning more about IRA guidance, industry trends, emerging technologies, and tax credit equity pricing and financing strategies. 

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