TAKEAWAYS

• The proposed regulations go beyond the use of the GREET model by requiring the use of “energy attribute certificates” (EACs) to prove eligibility for the credit under section 45V of the Internal Revenue Code (IRC). The use of EACs is further predicated on the implementation of the three pillars of “incrementality” (otherwise known as “additionality”), deliverability and temporal matching.
• Unlike the European Commission (EC) rules, which delay the implementation of additionality until 2028 and exempt markets with a low-carbon electricity mix, the proposed regulations provide that only facilities that come into operation or implement uprates 36 months prior to the use of the EAC are IRC section 45V eligible.
• The Treasury Department and the IRS are seeking comments on whether and how EACs from facilities at risk of retirement should qualify if the facility is likely to avoid retirement by its use in hydrogen production.

As enacted by the Inflation Reduction Act of 2022 (IRA), section 45V of the Internal Revenue Code (IRC) grants a clean hydrogen production credit (CHPC) for each kilogram of clean hydrogen produced by a taxpayer at a qualified clean hydrogen production facility. The available credit amount under IRC section 45V varies based on the lifecycle greenhouse gas (GHG) emissions generated from the qualified hydrogen production facility (as well as the taxpayer’s compliance with the IRA’s new prevailing wage and apprenticeship requirements). The maximum credit amount is $3.00 per kilogram of clean hydrogen, which requires a lifecycle GHG emissions rate of less than 0.45 kilograms of CO2e per kilogram of hydrogen.

After much anticipation by the budding clean-hydrogen industry, on December 22, 2023, the Internal Revenue Service (IRS) published proposed regulations [REG-117631-23] in the Federal Register providing guidance on the CHPC. The proposed regulations address critical topics relating to the application of IRC section 45V, particularly as relates to eligible facilities. In particular, the proposed rules implement the three pillars of “incrementality” (otherwise known as “additionality”), deliverability and hourly matching advocated by some environmental groups but opposed by many in the hydrogen industry. Additionally, modifications are made to the regulations under IRC section 48 to cover the irrevocable election to claim investment tax credit in lieu of the CHPC for a specified clean hydrogen production facility.

Overview of the Proposed Regulations
The proposed regulations are organized in different sections, and the points below contain an overview of each section.

Key Provisions

§1.45V-4 – Procedures for Determining Lifecycle Greenhouse Gas Emissions Rates for Qualified Clean Hydrogen

• Consistently with the IRC section 45V provisions enacted by the IRA, the proposed regulations provide that the lifecycle GHG emissions rate of hydrogen production shall be determined using the most recent GREET model separately for each hydrogen production facility owned by the taxpayer. Such determinations are made following the close of each tax year and must include all hydrogen production during the relevant tax year. The taxpayer is required to accurately enter all information about its facility requested within the 45VH2–GREET interface of the Department of Energy (DOE).

- In the event that a lifecycle GHG emissions rate cannot be determined from the most recent GREET model, the proposed regulations allow the taxpayer to petition the Treasury Department for a “provisional emissions rate” (PER) by following very detailed procedures. A lifecycle GHG emissions rate is not considered to be determined under the most recent GREET model if either the feedstock used by the hydrogen production facility or the facility’s hydrogen production technology is not included in the most recent GREET model.

- A PER petition must include an emissions value obtained from the DOE, with supporting DOE analytical assessment of the lifecycle GHG emissions associated with the facility’s hydrogen production pathway. If the petition is approved, a taxpayer may rely on the PER until a lifecycle GHG emissions rate for the relevant hydrogen is provided in the most recent GREET model.

• However, in addition to the GREET model calculations, the proposed regulations provide for the use of “energy attribute certificates” (EACs) to qualify hydrogen as clean. In this regard, an EAC is defined as a tradeable contractual instrument, issued through a qualified EAC registry or accounting system, that represents the energy attributes of a specific unit of energy produced. Such EACs would include renewable energy certificates (REC) used by renewable producers and zero emissions credits (ZEC) used by nuclear energy producers. Importantly, the proposed rules provide that the taxpayer may reflect in its GREET model calculations or include in a PER an underlying hydrogen production facility if the taxpayer acquires and retires a qualifying EAC for each unit of electricity that the taxpayer claims from that facility. This means that EACs can’t be “double-counted” for purposes of the facility’s eligibility for the CHPC.
• The EAC requirements in the proposed regulations are closely tied to the “three pillars” advocated by some environmental groups for clean hydrogen. Specifically, the proposed regulations require:

- Incrementality/New Supply (i.e., Additionality). The electricity generation facility that produced the unit of electricity to which the EAC relates has an initial commercial operation date no more than 36 months before the hydrogen production facility for which the EAC is retired was placed in service, or such facility had an “uprate” no more than 36 months before the hydrogen production facility with respect to which the EAC is retired was placed in service and such electricity is part of such electricity generating facility’s uprated production. The term “uprate” is defined as an increase in an electricity generating facility’s rated nameplate capacity (in nameplate megawatts), and the term “uprated production” means the uprated production rate of an electricity generating facility multiplied by its total generation output (in megawatt hours).

- Avoided Retirement. The Treasury Department and the IRS are seeking comments on whether EACs from facilities at risk of retirement (such as nuclear power plants in economically challenging markets) should qualify if the facility is likely to avoid retirement by its use in hydrogen production. Specifically, the Treasury Department is seeking input on: (i) criteria to be considered in assessing retirement risk; (ii) to which extent financial loss, economic market conditions, out-of-market financial support or relicensing decisions should be considered in assessing risk; (iii) industry best practices for estimating and documenting loss; (iv) criteria to assess whether hydrogen production would avoid retirement; (v) whether there should be a cap on qualifying electricity generation from the at-risk facility; (vi) the period during which incrementality should be considered prior to requiring of a new showing; (vii) the process to determine eligibility for this approach; and (viii) role, if any, of EAC tracking systems in eligibility verification.

- Temporal Matching. The electricity represented by the EAC is generated in the same hour that the taxpayer’s hydrogen production facility uses electricity to produce hydrogen (“temporal matching”). Electricity produced before 2028 is subject to a yearly rather than hourly matching requirement.

- Deliverability. The electricity represented by the EAC is generated by a facility that is in the same region as the hydrogen production facility based on a DOE study that was released on October 30, 2023.

• The incrementality requirement goes beyond the additionality limitations imposed on hydrogen production by the European Commission (EC). The EC’s additionality rules are phased in and don’t apply to facilities operating before January 1, 2028. Further, the rules don’t apply to countries with a low-carbon electricity mix, such as France.
• The incrementality requirement has the potential to deeply impact the burgeoning hydrogen industry. In May 2023, the Fuel Cell & Hydrogen Energy Association and more than 50 other organizations filed a letter with the IRS opposing the inclusion of such requirements in the IRC section 45V rule, stating that such restrictions contravene the intent of the IRA in creating a large-scale hydrogen market, would add costs to and diminish the value of the credit and negatively impact investment in clean hydrogen manufacturing. The impact would be felt by all clean-hydrogen producers but in particular the nuclear and renewable industries:

- The proposed rule significantly inhibits the ability of nuclear operators to take advantage of the credit, without either proving that their facilities are at-risk (subject to the Treasury Department adequately implementing the avoided retirement exemption) or investing into costs uprates. Most advanced reactor facilities planned would not be eligible for CHPC, unless it is extended (the CHPC expires in 2032).

- The proposed rule also negatively impacts the plans of some renewable generators to use existing renewable facilities to produce hydrogen. The solar and onshore wind industries are facing land use and transmission build-out headwinds, which limit the ability of renewable developers in siting new facilities for hydrogen production purposes.

§1.45V-6 – Rules for Determining the Placed In-Service Date for an Existing Facility That Is Modified to Produce Qualified Clean Hydrogen

• Under IRC section 45V(d)(4), a facility that was placed in service before 2023, but thereafter is modified to allow for the production of qualified clean hydrogen, will be deemed to have been originally placed in service as of the date the property required to complete the modification is placed in service. The proposed regulations follow the statutory rule but further provide that a new placed in-service date will not be granted unless the modification is made for the purpose of enabling the facility to produce qualified clean hydrogen. In this regard, a modification is made for the purpose of enabling the facility to produce qualified clean hydrogen if the facility could not produce hydrogen with a lifecycle GHG emissions rate that is less than or equal to 4 kilograms of CO2e per kilogram hydrogen but for the modification.
• The proposed regulations adopt the so-called “80-20 rule” under which a retrofitted facility can be considered newly placed in service if the fair market value of the historically used property does not exceed 20 percent of the facility’s total fair market value (new property cost plus used property value).

§1.45V-2 – Special Rules

• The proposed regulations address the coordination between IRC section 45V and IRC section 45Q, which relates to the credit for carbon capture and sequestration, by providing that any qualified clean hydrogen production facility which includes carbon sequestration equipment for which an IRC section 45Q credit is allowed for the current and/or prior tax years is not eligible for the CHPC.
• The proposed regulations include an anti-abuse rule which would make the CHPC unavailable in circumstances where the primary purpose for the production and sale of clean hydrogen is to be eligible to claim the CHPC. Under the anti-abuse rule, producing clean hydrogen that the taxpayer knows will be vented or flared is considered a wasteful activity and, as a result, the taxpayer should not be eligible for the CHPC.
• Pursuant to the proposed regulations, a taxpayer claiming the CHPC must comply with the general recordkeeping requirements prescribed by IRC section 6001. A taxpayer also must retain all raw data used for a submission made to the DOE relating to emissions rates for at least six years after the federal income tax return (or information return) due date for the tax year to which the submission relates.

Other Provisions §1.45V-1 – Credit for Production of Qualified Clean Hydrogen

• The proposed regulations generally apply the statutory definitions for applicable amount, applicable percentage and qualified clean hydrogen production facility.
• For purposes of IRC section 45V, the term “facility” means a single production line, which includes all components of property that function interdependently to produce qualified clean hydrogen. Components are functionally interdependent if placing one component in service is dependent on placing another in service to produce qualified clean hydrogen. The proposed regulations adopt a narrow view of facility and exclude equipment used to condition or transport hydrogen after it has been produced, as well as any electricity production equipment used to power the production process.
• Multifunction components will be considered part of the qualified clean hydrogen production facility when functionally interdependent with other components that are necessary to produce qualified clean hydrogen.
• The proposed regulations adopt the statutory definition of lifecycle GHG emissions, which requires the most recent GREET model to be used. In this regard, the most recent GREET model is the latest version of the 45VH2-GREET interface of the DOE that is publicly available on the first day of the taxable year in which a taxpayer is claiming the CHPC. If a more recent publication of 45VH2-GREET comes out during the taxable year, a taxpayer can choose to treat such publication as the most recent GREET model.
• The proposed regulations adopt a broad view of “emissions though the point of production” by including all emissions generated during production, and emissions associated with feedstock from growth to ultimate delivery to the facility. The term also encompasses the electricity used by the facility and any capture and sequestration of carbon dioxide generated by the facility.
• The proposed regulations generally adopt the statutory definition of qualified clean hydrogen, notably including the requirement that the hydrogen be produced in the United States or a U.S. territory in the ordinary course of business of the taxpayer and for sale or use, all of which is subject to verification as discussed below.
• The proposed regulations clarify that, for purposes of IRC section 45V, the “taxpayer” is the owner of the qualified clean hydrogen production facility at the time the facility produces the qualified clean hydrogen for which the CHPC is being claimed for that tax year. The stated intention of the clarification is to avoid unintended consequences arising from contract manufacturing or tolling arrangements.

§1.45V-5 – Procedures for Verification of Qualified Clean Hydrogen Production and Sale or Use

• The proposed regulations require taxpayers claiming the CHPC to submit verification reports relating to their clean hydrogen production. The verification report must be attached to IRS Form 7210, Clean Hydrogen Production Credit (or any successor form), which is to be included with the taxpayer’s federal income tax return. The verification report must be prepared by a qualified verifier.
• The verification report must include: (i) a production attestation, (ii) a sale or use attestation, (iii) a conflict attestation, (iv) a qualified verifier statement, (v) general information about the taxpayer’s hydrogen production facility, and (vi) documentation necessary to substantiate the verification process.
• Production attestation requires the qualified verifier to perform a verification sufficient to determine that the operation, during the applicable taxable year, of the hydrogen production facility produced the qualified clean hydrogen for the CHPC is claimed, along with the information and steps necessary to meet these requirements.
• Sale or use attestation involves assurances that the amount of qualified clean hydrogen specified in the production attestation actually has been sold or used in the manner required by IRC section 45V. Uses deemed wasteful are disallowed.
• Conflict attestation requires the qualified verifier to demonstrate its independence from the taxpayer, including not receiving fees based upon the amount of CHPC to be claimed.
• The qualified verifier statement includes identifying information along with the verifier’s qualifications and the capacity in which it is acting.
• The term “qualified verifier” is defined to mean “any individual or organization with active accreditation (i) as a validation and verification body from the American National Standards Institute National Accreditation Board; or (ii) as a verifier, lead verifier, or verification body under the California Air Resources Board Low Carbon Fuel Standard program.”

§1.48-15 - Election to Treat Clean Hydrogen Production Facility as Energy Property

• By statute, a taxpayer that owns and places in service a specified clean hydrogen production facility can make an irrevocable election to claim the investment tax credit under IRC section 48 (ITC) in lieu of the CHPC for any qualified property included as part of the facility. The ITC percentage is determined on a sliding scale based on several emission tiers for hydrogen produced by the facility (and dependent on compliance with the prevailing wage and apprenticeship requirements). The proposed regulations define “specified clean hydrogen production facility” and provide related specifications.
• Under IRC section 50(a), the ITC is subject to potential recapture if certain events occur within a five-year period (such as disposition of the relevant facility). The proposed regulations include failure of a facility to achieve the claimed emissions tier in its clean hydrogen production as a recapture event.
• Consistent with the CHPC requirements, the filing of annual verification reports is a necessity to claim the ITC for investments in specified clean hydrogen production facilities. Failure to do so is a recapture event.

Final Points
The proposed regulations purportedly reflect an attempt to balance interests of those in the industry and environmental groups based on numerous comments received by the Treasury Department and the IRS, but the strict adherence to the three pillars has already been hotly attacked by clean energy developers and investors. To that end, comments on the proposed regulations are invited until March 4, 2023. Anyone interested in commenting should be working with counsel. Taxpayers can rely on the proposed regulations for tax years beginning after December 31, 2022, and before the date the final regulations are published in the Federal Register, so long as taxpayers follow the entire proposed regulations in a consistent manner.

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