Clean hydrogen tax credits under the IRA

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On August 22, 2022, US President Joe Biden signed into law the Cutting Inflation Act of 2022 (the Act), which includes $369 billion in energy and climate spending with an unprecedented focus on clean hydrogen. Specifically, the act introduces a clean hydrogen production tax credit (PTC) and expands the existing investment tax credit (ITC) in Section 48 of the Internal Revenue Code (Code). to apply to hydrogen projects and stand-alone hydrogen storage technology. The law further strengthens the hydrogen economy by allowing taxpayers to accumulate bonus credits and capitalize on direct payment, while allowing the portability of hydrogen tax credits.

IN DEPTH


TAX CREDITS FOR CLEAN HYDROGEN PRODUCTION

Act amends code to create new Section 45V, which introduces a PTC for the production of “qualified clean hydrogen” for a period of 10 years from the date of commissioning of the qualified clean hydrogen facility in question.1

Rising

The four-tier incentive for any tax year is calculated as an amount equal to $0.60/kilogram (kg) of eligible clean hydrogen produced multiplied by an applicable percentage based on the greenhouse gas emissions rate of greenhouse resulting from the life cycle as follows:

kg of CO2e produced per kg of QCH

Applicable percentage

2.5 to 4 kg of CO2e

20%

1.5 – 2.5 kg of CO2e

25%

0.45 – 1.5 kg CO2e

33.4%

0kg – 0.45kg CO2e

100%

The credit amount will be multiplied by five in the event that (1) construction of the qualified clean hydrogen facility begins before 60 days after the U.S. Secretary of the Treasury issues guidance regarding salary and apprenticeship requirements, and prevailing wage requirements set forth in the Act are met when any alteration or repair of such installation occurs after that date. Or (2) applicable wage requirements and apprenticeship requirements as set forth in law are met with respect to the construction, modification or repair of the qualified clean hydrogen facility in question (up to at the end of the 10-year period of the PTC).2

Definitions

The law defines “qualified clean hydrogen” as hydrogen that is “produced by a process that results in a life cycle greenhouse gas emission rate of no more than four kilograms of eq. CO2 per kilogram of hydrogen”. This hydrogen must be produced in the United States in the ordinary course of the taxpayer’s business to be sold or used and must be verified by an unrelated third party.

In addition, to meet the requirements of a “qualified clean hydrogen production facility”, the construction of the facility must begin before January 1, 2033, be owned by the taxpayer and produce qualified clean hydrogen.3

No overlap with 45Q tax credits

The law states that no PTC under Section 45V will be available for qualified clean hydrogen produced at a facility for which a carbon capture tax credit under Section 45Q is allowed during any current or previous tax year. This means that a taxpayer cannot combine Section 45V and Section 45Q credits when Section 45Q credits are available.4

Tax credits for investing in clean hydrogen

In addition to the qualified clean hydrogen PTC, the law also introduces a clean hydrogen ITC by allowing taxpayers to treat specified clean hydrogen production facilities as energy goods under Section 48.5

Rising

The four-tier incentive for any tax year is equal to the cost base energy percentage of each specified clean hydrogen production facility commissioned in that tax year as follows:

kg of CO2e produced per kg of QCH

Energy percentage

2.5 to 4 kg of CO2e

1.2%

1.5 – 2.5 kg of CO2e

1.5%

0.45 – 1.5 kg CO2e

2%

0kg – 0.45kg CO2e

6%

The amount of the credit is multiplied by five in the event that (1) the energy project in question has a maximum net production of less than one megawatt of electrical or thermal energy, (2) the construction of the energy project in question begins before 60 days after the Secretary of the Treasury has issued guidance regarding salary and apprenticeship requirements, or (3) the prevailing salary and apprenticeship requirements as set forth in the Code are satisfied insofar as relating to the construction, modification or repair (until the end of the five-year payback period following the date of commissioning of the project) of the energy project concerned.

In addition, these energy projects are also eligible for the 10% domestic content bonus credit amount and the 10% increase in credit rate for energy communities as set out in Section 48, resulting in incentives potentially significant issues related to clean hydrogen projects.6

Definitions

For the purposes of the premium multipliers set out in Section 48, “energy project” means a project consisting of one or more energy properties (that’s to sayclean hydrogen production facilities specified) that are part of the same project.

“Specified clean hydrogen production facility” is defined as a “qualified clean hydrogen production facility” (see above) (1) which is commissioned after 31 December 2022, (2) for which ( A) no tax credit has been allowed under Section 45Q (Carbon Capture Tax Credit) or 45V (QHC Production Tax Credit), and (B) the taxpayer makes an irrevocable election for the energy ITC to apply, and (3) for which an unrelated third party has verified that the rate of life cycle greenhouse gas emissions for each kg of hydrogen produced in a such an installation does not exceed 4 kg of CO2 equivalent.seven

No overlap with 45Q or 45V tax credits

The new hydrogen credit under section 48 provides that no credit will be allowed under section 45Q or section 45V for any taxation year with respect to a hydrogen production facility. specified clean hydrogen (as defined directly above), which means taxpayers cannot stack these credits on top of the Section 48 Energy ITC.8

Hydrogen storage

In addition to the above, the Act includes a new ITC Section 48 for “energy storage technology”, which means “property (other than property used primarily for the transportation of goods or people and not for the generation of ‘electricity) that receives, stores, and supplies energy for the conversion of electricity (or, in the case of hydrogen, that stores energy), and has a nominal capacity of at least 5 kilowatt hours . As a result, the autonomous hydrogen storage technology is now eligible for ITC Article 48, as well as the corresponding salary/apprenticeship bonus multiplier, national content bonus credit amount and the increase in the credit rate for energy communities.9

Direct payment and portability

Another significant move towards strengthening the hydrogen economy is the introduction of the ability to claim the clean hydrogen PTC value determined under section 45V (as detailed above) through a tax refund as if it were an overpayment of taxes. For most credits, direct payment is only available to certain non-taxable entities, but is available to all taxpayers in the case of the Section 45V credit. This direct payment mechanism will, in theory, allow developers and project proponents to reap more of the benefits of hydrogen tax credits instead of having to share or transfer those benefits to others. other tax equity investors. In addition, under the Act, these hydrogen-related credits would also qualify, on an alternative basis, for transfer to unrelated persons through a tax-free cash sale (another avenue that could simplify and reduce the costs associated with hydrogen-related technology and production facilities).ten

Applied together, these statutory hydrogen provisions create substantial incentives for developers and investors. Although only time will tell how this market will develop, specialists in the field of renewable energy believe that the impact of the law will be monumental in the transition from a fossil fuel-based economy to a clean hydrogen economy. .


FOOTNOTES

1Inflation Reduction Act of 2022, HR 5376, 117th Congress. (the Law) § 13204.

2ID.

3ID.

4ID.

5ID.

6IRC § 48.

seven§ 48.

8§ 48.

9§ 48.

tenInflation Reduction Act of 2022, HR 5376, 117th Congress. (the Law) §§ 6417, 6418.

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