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On 22 December 2023, the US Treasury Division (Treasury) launched the extremely anticipated Proposed Rules regarding the Clear Hydrogen Manufacturing Credit score (hydrogen credit score) underneath the US Inside Income Code of 1986, as amended (the Code),1 Part 45V (Proposed Rules).2 We offer a high-level overview of the Proposed Rules beneath.
The Proposed Rules would outline key phrases, corresponding to “lifecycle greenhouse fuel emissions,” “certified clear hydrogen,” “provisional emissions charges,” and “certified clear hydrogen manufacturing facility.” Treasury proposes guidelines for:
- Figuring out lifecycle greenhouse fuel (GHG) emissions charges ensuing from hydrogen manufacturing processes;
- Petitioning for provisional emissions charges;
- Verifying hydrogen manufacturing and sale or use of fresh hydrogen through an unrelated, certified verifier;
- Modifying or retrofitting present certified clear hydrogen manufacturing services;
- Utilizing electrical energy from sure renewable or zero-emissions sources to provide certified clear hydrogen;
- Electing to deal with a part of a specified clear hydrogen manufacturing facility as an alternative as property eligible for the vitality credit score; and
- Figuring out the service date for modified and retrofitted services.
The foundations would come with designation of the relevant Greenhouse gases, Regulated Emissions, and Power use in Transportation (GREET) Mannequin. These guidelines, if adopted, would drastically inform the feedstock eligibility standards for qualifying clear hydrogen, and certain can have a dramatic affect on the event at-scale of the hydrogen worth chain in america. Treasury is in search of additional feedback on many subjects that can inform the ultimate rules.
Credit score Calculations
As set forth within the Inflation Discount Act (IRA),3 the hydrogen credit score quantity will depend on the lifecycle GHG emissions price of the hydrogen manufacturing course of at a professional clear hydrogen manufacturing facility in the course of the taxable 12 months. The bottom credit score price is about at $0.60 per kilogram of hydrogen, adjusted yearly for inflation, and has an eligibility interval of 10 years after the power is positioned in service.4 Amenities that meet the prevailing wage and apprenticeship necessities are eligible for a further 5x multiplier of the relevant base credit score quantity.5
The relevant share of the bottom credit score for which a hydrogen producer is eligible varies relying on the GHG emissions price related to the clear hydrogen product:
- 20% for emissions above 2.5 however not exceeding 4 kg of CO2e/kg of hydrogen;
- 25% for emissions between 1.5 and a pair of.5 kg of CO2e/kg;
- 33.4% for emissions between 0.45 and 1.5 kg of CO2e/kg; and
- 100% for emissions lower than 0.45 kg of CO2e/kg.6
The Proposed Rules would offer extra specificity on the prevailing wage and apprenticeship necessities that have to be met to qualify for the 5x multiplier, which permits for a complete credit score of as much as $3.00 per kilogram of hydrogen produced.7 Certified services which have began building earlier than 29 January 2023 should fulfill the prevailing wage necessities for any alterations or repairs of the power that happen after 29 January 2023 and that fall inside the 10-year interval after the power has been positioned in service. For building of a facility that begins after 29 January 2023, each the prevailing wage and apprenticeship necessities of Part 45(b) have to be met. As such, prevailing wage charges will likely be decided in accordance with the Davis-Bacon Act and are based mostly on prevailing charges inside the locality through which the power is positioned. For situations of noncompliance with the prevailing wage and apprenticeship necessities, the preamble of the Proposed Rules explains that comparable penalties will likely be imposed and alternatives to treatment will likely be out there.
GREET Mannequin
Beneath the IRA, the calculation of lifecycle GHG emissions will embody all upstream emissions from “well-to-gate,” (i.e., by way of the purpose of manufacturing). The preamble of the Proposed Rules offers that this would come with all emissions related to feedstock development, gathering, extraction, processing, and supply to the certified facility. Emissions related to the hydrogen manufacturing course of, corresponding to electrical energy utilized by the hydrogen manufacturing facility and any seize and sequestration of carbon dioxide generated by the hydrogen manufacturing facility, would even be included.
The IRA deferred to Treasury on whether or not to depend on the GREET Mannequin, or alternatively, undertake a “successor” mannequin to calculate lifecycle GHG emissions. Treasury has opted to undertake a successor GREET Mannequin and proposes utilizing the 45VH2-GREET Mannequin developed by Argonne Nationwide Laboratory, which has been purpose-built for the hydrogen credit score.8 The 45VH2-GREET Mannequin is available here.
Notably, the model of the 45VH2-GREET Mannequin that’s in impact on the time the power is positioned into service could not apply all through the lifetime of the certified facility. For annually of manufacturing, the newest model of the 45VH2-GREET Mannequin that’s publicly out there on the primary day of that tax 12 months would apply.9 Nonetheless, the taxpayer would have discretion to make use of a mannequin launched later within the 12 months. Subsequently, taxpayers should guarantee they proceed to qualify for the hydrogen credit score annually and on the similar tier of the hydrogen credit score as supposed.
The 45VH2-GREET Mannequin consists of numerous hydrogen manufacturing pathways. As of the publication date of the Proposed Rules, the 45VH2-GREET Mannequin consists of:
- Steam methane reforming (SMR) of pure fuel, with potential carbon seize and sequestration (CCS);
- Autothermal reforming (ATR) of pure fuel, with potential CCS;
- SMR of landfill fuel with potential CCS;
- ATR of landfill fuel with potential CCS;
- Coal gasification with potential CCS;
- Biomass gasification with corn stover and logging residue with no important market worth with potential CCS;
- Low-temperature water electrolysis utilizing electrical energy; and
- Excessive-temperature water electrolysis utilizing electrical energy and potential warmth from nuclear energy vegetation.
CCS applied sciences are featured prominently within the 45VH2-GREET Mannequin as a way to provide qualifying clear hydrogen. Nonetheless, taxpayers aren’t permitted to take each the Part 45V hydrogen credit score and the Part 45Q carbon seize credit score. Taxpayers modifying or retrofitting services to provide clear hydrogen who’re planning to take the hydrogen credit score ought to guarantee that no Part 45Q carbon seize credit score was claimed on the power in prior years. The Proposed Rules request feedback on mechanisms to confirm emissions associated to hydrogen manufacturing from upstream fossil-fuel- and biomass-powered electricity-generation services that embody CCS applied sciences.
For taxpayers utilizing manufacturing pathways or hydrogen manufacturing applied sciences that aren’t included within the 45VH2-GREET Mannequin, the Proposed Rules would allow these taxpayers to petition the Secretary of Treasury for a provisional emissions price (PER) that will be analogous to the lifecycle GHG emissions price calculated utilizing the 45VH2-GREET Mannequin.10 Such PER would solely be allowed so long as the manufacturing pathway was not included within the annual 45VH2-GREET Mannequin.
Verification Means of Hydrogen Produced Utilizing Electrical energy
To verify that the electrical energy utilized in hydrogen manufacturing is sourced from renewable or zero-emission sources, taxpayers could use Power Attribute Certificates (EACs), together with Renewable Power Certificates (RECs) and different zero-emission attribute certificates, corresponding to these related to nuclear energy era. The Proposed Rules would impose three new standards for EACs to qualify for functions of the hydrogen credit score, generally indicated because the “three pillars”:
1. Incrementality
Clear energy mills that started business operations inside three years of a hydrogen facility being positioned into service are thought-about new sources of fresh energy underneath the Proposed Rules. Uprates are additionally thought-about new sources of fresh energy. The Proposed Rules request feedback on approaches by which era from present clear energy mills could possibly be thought-about to satisfy the necessities for brand spanking new clear energy underneath sure circumstances, which will likely be significantly related for present nuclear producing services, and may embody re-powering present renewables, or renewables that in any other case could be faraway from service on the finish of an influence buy settlement time period. The Proposed Rules enable for the acquisition of “unbundled” EACs, that are offered individually from the underlying electrical energy produced by the generator.11
2. Deliverability
Clear energy have to be sourced from the identical area because the hydrogen producer, as derived from the Division of Power’s 2023 Nationwide Transmission Wants Research. The Proposed Rules request feedback on find out how to take into account transmission of fresh energy between areas.12
3. Temporal Matching
EACs will usually have to be matched to manufacturing on an hourly foundation—which means that the claimed era should happen inside the similar hour that the electrolyzer claiming the hydrogen credit score is working.13 Contemplating the excessive prices of hourly matching, the Proposed Rules embody a transition section to permit annual matching till 31 December 2027.14 The preamble of the Proposed Rules present that the transition is meant to supply time for the EAC market to develop the hourly monitoring functionality essential to confirm compliance with this requirement.
The Proposed Rules include important element and evaluation of the three pillars, and hydrogen business individuals ought to evaluation these sections of the Proposed Rules intently to know the impacts on potential transactions.
The Proposed Rules additionally request substantial feedback on how Treasury and the Inside Income Service (IRS) ought to take into account the utilization of fossil-fuel- and biomass-derived electrical energy for the manufacturing of hydrogen, particularly requesting feedback on, amongst different issues: whether or not an present fossil gasoline electricity-generating facility that provides CCS applied sciences ought to be thought-about “incremental;” mechanisms to confirm precisely real-world emissions associated to hydrogen manufacturing from these energy sources (e.g., feedstock origin, price of carbon seize); and the extent and method through which the three pillars (i.e., incrementality, temporal matching, and deliverability) ought to be utilized in accounting for present or new electrical energy era from fossil feedstocks or biomass.
The breadth and extent of those requested feedback impacting electrolytic hydrogen manufacturing that will come from upstream fossil-fuel sources, demonstrates the Proposed Rules’ basic aversion to fossil-fuel powered electrolytic hydrogen, and certain will additional delay the deployment of a strong hydrogen financial system in america, because the businesses try and type out a path ahead.
Service Date for Modified Amenities
An present facility initially in service earlier than 1 January 2023, and never producing certified clear hydrogen earlier than modification, will likely be thought-about newly positioned in service on the date the property required for modification is positioned in service.15 This is applicable provided that the modification goals to allow the manufacturing of certified clear hydrogen and doesn’t embody mere modifications of gasoline inputs corresponding to a change from typical pure fuel feedstock to renewable pure fuel. Retrofits of present services may set up a brand new in-service date if the honest market worth of the used property is just not greater than 20% of the retrofitted facility’s complete worth.16
Hydrogen Produced Utilizing Renewable Pure Fuel (RNG)
The preamble of the Proposed Rules offers some standards for producing hydrogen from biogas, together with landfill fuel, underneath particular circumstances. Treasury and the IRS plan to finalize rules that would come with extra strategies for hydrogen manufacturing utilizing renewable pure fuel and fugitive methane sources, corresponding to coal mine and coal mattress methane—although it’s clear from the wide-ranging questions the businesses pose that there’s a present lack of readability on how RNG ought to be handled underneath the rules. In consequence, firms probably impacted ought to present feedback on the problems raised by Treasury.
Written or digital feedback have to be obtained by 26 February 2024, which is 60 days after 26 December 2023, the date through which the Proposed Rules are scheduled to be revealed within the Federal Register. A public listening to on the Proposed Rules is scheduled for 25 March 2024 at 10:00 AM EST.
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