Facility Defined: The NPRM proposes that a “facility,” as used in the IRA, be defined as a single production line producing qualified clean hydrogen. That definition excludes any equipment used to process or transport hydrogen beyond the point of production, as well as any generation equipment creating electricity to power hydrogen production. The NPRM also endorses the “Functional Interdependence Test” established in Section 48 of the IRA to determine whether certain equipment may be considered part of such facility. However, the proposed definition forecloses the ability to stack the Section 45V PTC with the Section 45Q tax credit (which is generated by the capture and sequestration of carbon). This is significant because of the potential co-location of carbon capture and sequestration equipment with a hydrogen facility. If a taxpayer has elected the 45Q credit for a facility for the tax year or a prior tax year, it cannot then also claim the 45V PTC with respect to that same facility.

Anti-Abuse Rule: The NPRM would also require that hydrogen be produced for use or sale. The PTC is available for the tax year in which hydrogen is produced, and storage between production and sale is permitted; however, the 45V PTC is not allowed if the production or sale of hydrogen is wasteful. In other words, if a taxpayer claims the 45V PTC, it can’t do so knowing that the hydrogen will be simply vented, flared, or combusted to make more. The policy rationale here is fairly obvious. The “wasteful” production of hydrogen to generate the PTC may lead to excess emission of greenhouse gases in its production without any offset of the carbon-intensive fuels that created it or displacement of carbon-intensive fuels in other electrical generation settings.

GREET Model: The PTC available per kilogram of hydrogen is determined by the lifecycle greenhouse gas emissions (a defined term in the IRA) associated with the production of that kilogram of hydrogen. In short, the cleaner the process used to produce hydrogen, the higher the value of the PTC per kilogram. Section 45V references the current Greenhouse Gases Regulated Emissions, and Energy Use in Transportation (GREET) model to determine lifecycle greenhouse gas emissions, and the NPRM proposes that the 45VH2-GREET developed by the Argonne National Laboratory be the determinative model.

The 45VH2-GREET model, however, provides for only eight hydrogen production technologies:

1. Steam Methane Reforming
2. Low Temperature Electrolysis
3. High-temperature electrolysis (Nuclear)
4. Coal Gasification
5. Biomass Gasification
6. Autothermal Reforming

As a result, if a facility produces hydrogen with a pathway that is not accounted for in the 45VH2-GREET model, the NPRM also proposes a process whereby a taxpayer may obtain a Provisional Emissions Rate (PER) by petitioning the Department of Energy for a determination and then attaching the DOE assessment to its first tax return under which it is claiming credit. A DOE assessment, however, does not mean that the IRS will grant the credit sought. The DOE PER assessment window is expected to open in April 2024.

EACs: The NPRM also proposes the uses of Energy Attribute Certificates (EACs) to document that the power a facility draws from the grid for the purpose of producing hydrogen via electrolysis is attributable to a specific generation source (or sources). Further, EACs are required when the generation assets are connected directly to the facility or co-located with the facility. The NPRM sets out several requirements for EACs to be valid:

1. Recordation: EACs must be recorded in a qualified registry or accounting system that provides a unique identifier to each EAC, identifies each EAC’s owner, connects each EAC to a single unit of electricity, and provides public visibility of all of the generators in the system.
2. EAC Qualifications: Each EAC must meet the three requirements below.

1. Incrementality: the source of electricity must be a clean generation source brought on-line or upgraded to increase generation capacity no earlier than thirty-six (36) months prior to the hydrogen facility reaching commercial operations.
2. Temporal matching: The EAC must represent electricity generated during the same temporal window as the production of hydrogen. Annual time matching will be permitted through 2027, with hourly time matching commencing in 2028. The transition to hourly time matching will be mandatory for all EAC’s in 2028, with no grandfathering of the previous requirement.
3. Deliverability: The EAC must represent electricity generated in the same region as the hydrogen facility. The regions are determined by the U.S. Department of Energy National Transmission Needs study published on October 30, 2023.

Facility Modifications: The NPRM proposes that an existing facility placed in service prior to 2023 and subsequently modified to produce hydrogen be deemed, for the purposes of 45V, in service after the modification has been completed. Moreover, the NPRM proposes to adopt the “80/20” rule, whereby an existing facility may be considered newly placed in service for the purposes of 45V if the fair market value of the old facility assets make up no more than 20% of the facility’s total fair market value.

The NPRM also mentions the use of renewable natural gas or fugitive methane from fossil fuel extraction in the production of clean hydrogen but has not proposed rules on incorporating them into the 45V paradigm. The specific request for comments in this area, however, indicates a third rulemaking dealing with renewable natural gas and fugitive methane will be forthcoming.

The administration’s hope for these rules is that they provide enough economic certainty to encourage investment in clean hydrogen production but prevent the development of otherwise PTC-eligible factories that represent a net increase in greenhouse gas emissions. The EAC system, however, seems to favor production means deploying new green generation capacity either co-located with or near hydrogen facilities. While encouraging from the standpoint of targeting greenhouse gas emissions, if adopted, there proposed rules may pose a risk to development by making the PTC, often a key part of project financing, more difficult to capture.

The comment period will close on February 26, 2024.

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