Title: Navigating Clean Hydrogen Tax Credits: Insights and Implications
Speakers: Mindy McGrath and Anne Loomis
Mindy McGrath (00:07):
Hi, Anne.
Anne Loomis (00:09):
Hey, Mindy.
Mindy McGrath (00:10):
Good to see you. Thanks for joining me today to talk about the Inflation Reduction Act and the tax credits made available for clean hydrogen.
Anne Loomis (00:20):
Absolutely. I’m happy to be here.
Mindy McGrath (00:23):
So the Inflation Reduction Act added a new production tax credit, or PTC, or the election to qualify for an investment tax credit for clean hydrogen. So I’m just curious, why is it important that we incentivize the development of hydrogen facilities?
Anne Loomis (00:46):
Well, hydrogen has the potential to provide a lot of energy services in processes that are typically associated with fossil fuels. So there we’re thinking about industrial processes like steel and aluminum production. We’re thinking about transportation services like long-haul trucking and maritime shipping and the production and storage of electricity. And so far we’re seeing clean hydrogen be used in development projects, but we’d really like to see those development projects become larger utility scale projects to participate in the energy transition.
Mindy McGrath (01:28):
So how does a producer of clean hydrogen actually qualify for a production tax credit?
Anne Loomis (01:36):
The Section 45V credit is available for the production of clean hydrogen at a qualified facility during the 10-year period after the facility is placed in service. To be qualified clean hydrogen, it has to be produced at a facility with a lifecycle greenhouse gas emissions rate of no more than four kilograms of carbon dioxide equivalent per kilogram of hydrogen produced. And that base credit amount is then multiplied by an applicable percentage ranging from 20% to 100% depending on what the lifecycle greenhouse gas emissions of the facility is. It’s also multiplied by five if the facility has met certain prevailing wage and apprenticeship requirements. And when you put all of that together, that means your Section 45V PTC ranges from 60 cents to $3 per kilogram of hydrogen produced, depending on that lifecycle greenhouse gas emissions and whether those labor requirements were met.
Mindy McGrath (02:40):
So there are three criteria that must be satisfied, which are commonly referred to as the three pillars, in order to qualify for the production tax credit. And in December of 2023, the IRS and the US Treasury Department issued some long awaited proposed regulations setting forth some rules around eligibility requirements for the production tax credit for these hydrogen facilities. So I’m curious, how has the IRS’s position on the three pillars affected the industry?
Anne Loomis (03:21):
The credit is based on the lifecycle greenhouse gas emissions of the facility and so part of that is demonstrating what type of energy was used to produce the clean hydrogen. So in order to demonstrate that a facility is using a certain type of electricity instead of just pulling electricity from the regional power grid, they have to retire certain energy attribute certificates, or EACs, to demonstrate that they are sourcing the energy from clean resources. And in order to be a good EAC for purposes of the tax credits, the EAC has to meet the three requirements that we refer to as the three pillars. And those issues relate to the incrementality, the temporal matching, and the deliverability of the electricity itself. An EAC meets the incrementality requirement if the source of the electricity being used has a commercial operation date of no more than 36 months prior to the placed in service date of the clean hydrogen facility.
An EAC meets the temporal matching requirement if the energy that’s being used was produced in the same year as the clean hydrogen is being produced. And starting in 2028, that actually becomes an hourly matching requirement. So the electricity has to be produced in the same hour as the hydrogen is being produced. And then finally, an EAC meets the deliverability requirement if the source of the electricity is in the same region as the clean hydrogen production facility. Region here means the regions that were identified by the DOE in the transmission needs study. In general, the industry has found the IRS’s interpretation with respect to these three pillars to be more onerous than was expected. And so it is proving to be a challenge for getting the industry off the ground and for moving some of these demonstration scale projects into the larger space, into those utility scale type of projects that we need to see in order for clean hydrogen to play a big role in the energy transition.
The IRS received about 30,000 comments on these proposed regulations and so they are sorting through those comments and they are expecting to finalize the proposed regulations by the end of this year. So taxpayers will have to wait and see how the IRS interprets the three pillars moving forward as we look to finalization of the proposed regulations.
Mindy McGrath (06:08):
Well, there seems to be an awful lot at play in assessing the eligibility of these production tax credits. So I can’t say I’m surprised at the number of comments received, but I’m curious, what else should those involved in this industry be aware of as we await the issuance of the final rules?
Anne Loomis (06:32):
The Section 45V PTC is one of the special credits under the IRA that’s eligible for direct pay regardless of the status of the owner. So the owner doesn’t have to be a tax exempt or a governmental entity in order to receive a direct payment from the government in the amount of the credit. And that means there are a lot of monetization possibilities for developers of clean hydrogen facilities. They can monetize those credits through direct pay, through transferability, or through traditional tax equity.
Mindy McGrath (07:07):
There does seem to be quite a bit at play in assessing the eligibility for these credits. I look forward to the issuance of the final rules, I think you said by the end of the year. So it’ll be interesting to see how this all plays out.
Anne Loomis (07:22):
Yes, it’ll be a very exciting year end. I know you do a lot of work with energy clients that are under pressure to lower their carbon emissions based on corporate initiatives and state requirements. How do you see the development of hydrogen technologies having an impact on those clients?
Mindy McGrath (07:42):
Well, there does seem to be general agreement that hydrogen is a viable alternative to traditional fossil fuels like gas and coal. What remains to be seen is if the proper infrastructure to bring that supply to the market will actually be developed. And so while we don’t necessarily need it today, any company who is looking to pursue developing these projects is going to want to have some certainty or assurances that when the time comes, there actually will be the infrastructure there to transport the product.
Anne Loomis (08:26):
That seems like a really important piece of the hydrogen puzzle here. What other obstacles remain?
Mindy McGrath (08:33):
Well, I think the biggest one is probably uncertainty. It’s encouraging that the federal government has provided a number of financial incentives and federal funding to encourage the production and the demand for hydrogen. But uncertainty remains with respect to the technology itself as well as if there will be sufficient demand to support the infrastructure. Regulators and policymakers are rightly concerned with trying to do the right thing, but it is my hope that in issuing final rules governing the tax credits that we can strike the right balance between providing appropriate clarity, but not being too onerous to stifle what I think could be an exciting new technology.
Anne Loomis (09:30):
Absolutely. Thank you so much for joining me today to talk about this very exciting emerging industry.
Mindy McGrath (09:36):
Yes, thank you, Anne. It’s been a pleasure.
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