The Inflation Reduction Act of 2022 (the "Act") created a new tax credit, in Internal Revenue Code section 45V, for the production of clean hydrogen (the "Clean Hydrogen Production Credit") by a taxpayer at a qualified facility beginning in 2023 during the ten-year period beginning on the date such facility is placed in service. The credit applies to hydrogen produced after 2022. Construction of qualified facilities must begin before 2033.
The amount of the Clean Hydrogen Production Credit is not a flat amount per kilogram of hydrogen produced. Instead, the credit amount turns on the carbon intensity of the process used to produce the hydrogen. For example, the credit is equal to the "applicable percentage" of $3.00 per kilogram of hydrogen in the case of projects that meet, or are not subject to, certain prevailing wage/apprenticeship requirements, indexed to inflation. The "applicable percentage" depends on the reduction in lifecycle greenhouse gas emissions from "well-to-gate" as determined by the Greenhouse gases, Regulated Emissions, and Energy use in Transportation Model (referred to as the "GREET model"), with the highest applicable percentage being 100% (if lifecycle greenhouse gas emissions are less than 0.45 kilograms of CO2e per kilogram of hydrogen) and the lowest being 20% (if lifecycle greenhouse gas emissions are between 2.5 and 4 kilograms of CO2e per kilogram of hydrogen). It is expected that facilities that produce "green hydrogen" by using an electrolyzer powered by renewable resources such as wind or solar power would be eligible for the full $3.00 per kilogram produced, whereas more carbon intensive production processes, such as steam reformation combined with CO2 capture and sequestration, would qualify for a lower credit amount.
Under the Act, the Clean Hydrogen Production Credit would not be available for hydrogen produced at a facility which includes carbon capture equipment for which the 45Q Credit is allowed to any taxpayer. Therefore, in the case of the production of "blue hydrogen" (which is produced by capturing and sequestering the CO2 emissions therefrom), a taxpayer could claim either the section 45V credit or the section 45Q credit, but not both.
The credit is available only for clean hydrogen that is produced within the United States. The hydrogen must be produced for sale or use, so a taxpayer may claim the credit for producing the hydrogen for its own use in the production of another product, such as ammonia. There is no upper limit on the amount of clean hydrogen production for which the credit may be claimed.
Although the section 45V production tax credit is the key tax incentive introduced by the Inflation Reduction Act for clean hydrogen production, the Act also offers an investment tax credit (ITC) for qualified clean hydrogen production facilities. Taxpayers may elect to treat a qualified clean hydrogen facility as energy property for purposes of the ITC in lieu of the Clean Hydrogen Production Credit, in which case the ITC will equal the applicable percentage multiplied by the energy percentage, meaning that the credit rate would reflect the extent of the reduction in lifecycle greenhouse gas emissions, and the rate of 30% (in the case of projects that meet, or are not subject to, the prevailing wage/apprenticeship requirements) would only apply if the facility emitted less than 0.45 kilograms of CO2e per kilogram of hydrogen.
There are a number of issues surrounding implementation of new section 45V; guidance from the Internal Revenue Service as to the specifics of its application is needed. In this regard, an issue of particular importance is whether taxpayers may include their purchase of renewable energy certificates ("RECs") or other environmental attributes in determining the carbon intensity of their projects for purposes of determining the credit amount. For example, producers of clean hydrogen using electrolyzers may have difficulty obtaining power from renewable sources such as wind and solar. If they necessarily must purchase power from the grid that is more carbon-intensive, could the use of such power be offset by the purchase of RECs or other environmental attributes? A colloquy on the floor of the Senate during the debate of the Inflation Reduction Act would suggest that the answer is yes but regulations to that effect would provide conclusive support.
In addition to section 45V for clean hydrogen production, new section 48(c)(6) offers a credit for energy storage property that extends to hydrogen storage defined as: "Property which receives, stores and delivers energy for conversion to electricity (or, in the case of hydrogen, which stores energy)." The parameters of the credit for hydrogen storage property are unclear, however, it should cover, at a minimum, hydrogen storage tanks and cavern projects.
In November, 2022, the IRS requested public comment on the section 45V issues with respect to which guidance is needed and received numerous thoughtful comment letters in response. If you are interested in learning more about section 45V and the issues associated with its implementation, Baker Botts has published a useful finding tool for accessing the letters HERE.
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