January 22, 2025

Treasury Department, IRS Release Section 45V Clean Hydrogen PTC Final Regulations

An In-Depth Review of Qualification Requirements
Holland & Knight Alert
Amish Shah | Nicole M. Elliott | Brad M. Seltzer | Elizabeth Crouse | David H. Mann | Roger David Aksamit | Joshua David Odintz | Lee S. Meyercord | Ryan Phelps | Kenneth W. Parsons | Daniel Graham Strickland | Bryan Marcelino | Mary Kate Nicholson | Alex Lewis | Sanaa Ghanim | Rachel T. Provencher

Highlights

  • The U.S. Department of the Treasury and IRS on Jan. 3, 2025, released Final Regulations regarding the production tax credit (PTC) for hydrogen under Section 45V of the Internal Revenue Code, as enacted by the Inflation Reduction Act.
  • Generally, Section 45V provides a credit for the production of qualified clean hydrogen at a qualified clean hydrogen production facility, with the credit amount for any taxable year calculated as the product of the kilograms of qualified clean hydrogen produced during the taxable year by the "applicable amount," which varies based on the lifecycle greenhouse gas emissions of the process used to produce the hydrogen.
  • This Holland & Knight alert takes a look at the recently issued regulations and how taxpayers can qualify for the Section 45V PTC.

The U.S. Department of the Treasury and IRS on Jan. 3, 2025, released Final Regulations regarding the production tax credit (PTC) for hydrogen under Section 45V of the Internal Revenue Code, as enacted by the Inflation Reduction Act. The U.S. Department of Energy (DOE) also released a new version of 45VH2-GREET Model with an accompanying user manual, frequently asked questions and a log of changes. The Final Regulations were much anticipated and their contents highly contested – roughly 30,000 comments were received, and hearings for the public were held over the course of three days. The Final Regulations, though not taxpayer-favorable in many cases, provide helpful clarity and some additional taxpayer-favorable rules.

Overview

In general, Section 45V provides a credit for the production of qualified clean hydrogen at a qualified clean hydrogen production facility. The credit amount for any taxable year is calculated as the product of the kilograms of qualified clean hydrogen produced during the taxable year by the "applicable amount," an amount that varies based upon the lifecycle greenhouse gas emissions (lifecycle GHG emissions) of the process used to produce the hydrogen. The maximum credit available is $3 per kilogram if the lifecycle GHG emissions are less than 0.45 kilograms of carbon dioxide equivalent (CO2e) per kilogram and the taxpayer meets the prevailing wage and apprenticeship requirements in the construction, alteration and repair of the hydrogen facility. (See Holland & Knight's previous alert, "A Look at IRA Prevailing Wage and Apprenticeship Requirements Final Regulations Highlights," July 8, 2024.) No credit is available if the lifecycle GHG emissions are greater than 4 kilograms. The taxpayer must generally use the DOE's most recent 45VH2-GREET Model to determine lifecycle GHG emissions.

Provided that construction of the qualified clean hydrogen facility commences prior to Jan. 1, 2033, the credit is available for qualified clean hydrogen produced after Dec. 31, 2022, for the 10-year period beginning on the date the facility is placed in service. A qualified clean hydrogen production facility is interpreted as a single production line used to produce qualified clean hydrogen and includes all functionally interdependent components. The Final Regulations made clear that in addition to equipment used to condition or transport hydrogen beyond the point of production and electricity production equipment used to power production, a facility does not include feedstock-related equipment, including production, purification, recovery, transportation or transmission equipment.

To claim Section 45V, the qualified clean hydrogen must be verified by an unrelated party that, inter alia, it was produced in the U.S. in the ordinary course of the taxpayer's trade or business for sale or use. The Section 45V credit can be claimed only by the owner of the facility, as determined at the time of production.

 

Holland & Knight Insight

Ownership is determined without respect to whether such taxpayer is treated as a producer under Section 263A of the Internal Revenue Code. Presumably, the Final Regulations mean the "tax owner" of the facility, i.e., the party that bears the benefits and burdens of ownership rather than the party who holds naked title to the facility.

As an alternative, taxpayers can elect to claim the investment tax credit in lieu of the Section 45V clean hydrogen PTC.

45VH2-GREET Model Used to Determine Lifecycle GHG Emissions

Taxpayers will generally use the 45VH2-GREET Model available the first day of the taxable year or at its election a subsequent revision if such revision is made available during that taxable year. The Final Regulations added an elective safe harbor – the taxpayer may use the model available at the beginning of construction of a facility, but only if taxpayer makes an irrevocable election to do so for the 10-year credit period.

Lifecycle GHG emissions are determined on a per facility (single production line) basis.

 

Holland & Knight Insight

The elective safe harbor should provide certainty for taxpayers as the amount of the credit under Section 45V is directly connected to the lifecycle GHG emissions determined under the 45VH2-GREET Model.

The Final Regulations retain the Provisional Emission Rate (PER) request process. The Final Regulations provide that a PER will be available where 1) the lifecycle GHG emissions of "hydrogen production pathway" have not been determined under the most recent 45VH2–GREET Model, 2) there are no material changes to the information about the taxpayer's hydrogen production process from the information provided to the DOE to obtain an emissions value (a prerequisite to the PER) and 3) all other requirements of Section 45V are met.

Energy Attribute Certificates for Hydrogen Produced Using Grid-Connected Electricity

As with the Proposed Regulations, taxpayers are able to treat a facility's use of grid-connected electricity as being from a specific electricity generation facility (or facilities) only if the taxpayer acquires and retires eligible energy attribute certificates (EACs) for each unit of electricity that the taxpayer claims from such source. The Final Regulations retain the constraints as included in the Proposed Regulations regarding what constitutes a eligible EAC. These constraints are commonly referred to as the "Three Pillars" and include requirements concerning temporal matching, incrementality and deliverability.

Temporal Matching

The Final Regulations retain the requirement for temporal matching of EACs but give taxpayers an additional two years from the requirement to match hourly:

 

  • electricity generated before Jan. 1, 2030 > Final Regulations require annual matching
  • electricity generated on or after Jan. 1, 2030 > Final Regulations require hourly matching

Once hourly matching is required in 2030, a taxpayer is permitted to determine the lifecycle GHG emissions of hydrogen produced on an hourly basis using the attributes of an eligible EAC rather than relying on the default rule requiring a taxpayer to calculate the lifecycle GHG emissions on an annual basis. However, the taxpayer can take advantage of this rule only if the annual average lifecycle GHG emissions of hydrogen produced during the taxable year at the facility is not greater than 4 kilograms of CO2e per kilogram of hydrogen.

Incrementality

Under the Final Regulations, incrementality generally requires that to be eligible, the EAC must represent incremental or additional sources of electricity from a generation facility that began commercial operations no more than 36 months prior to the date the hydrogen facility was placed in service or the generating facility had an uprate within such timeframe. The Final Regulations modify the requirements around uprates, specifically how an uprate is calculated to provide that a generating facility may calculate its increased capacity by a standard other than nameplate capacity, which is particularly helpful to certain generation facilities that have capacity degradation.

The Final Regulations provide an additional avenue to meet incrementality, namely when a generating facility that uses carbon capture and sequestration (CCS) technology and such carbon capture equipment was placed in service no more than 36 months before the hydrogen facility. The Final Regulations also allow certain generating facilities that ceased operations and restarted to qualify.

Deliverability

Deliverability generally requires that the electricity represented in an eligible EAC be sourced from the same region as the taxpayer's hydrogen facility. The Final Regulations retain the definition of "region" to mean a region derived from the DOE Transmission Needs Study issued on Oct. 30, 2023, but add a table identifying the applicable balancing authorities to regions. Under the Final Regulations, the location of a generation facility and the location of a hydrogen facility will be based on the balancing authority to which it is electrically interconnected (not its geographic location), with each balancing authority linked to a single region. Such table may be updated in future IRS guidance.

The Three Pillars: Special Rules

To be eligible, an EAC is one that meets the Three Pillars, as discussed above. The Final Regulations provide some additional new flexibilities.

States with Qualifying GHG Cap Programs. The Final Regulations provide an exception for electricity generated by a generation facility subject to a qualifying GHG cap program, i.e., a program that places a cap on the quantity of certain GHG emissions in a state. In such instances, the incrementality requirement is met. States with qualifying GHG cap programs are currently California and Washington.

Nuclear. The Final Regulations allow that in certain instances, power from existing nuclear plants can satisfy the incrementality requirement. A qualifying nuclear plant must be either:

  • a merchant reactor that is not co-located with any other operating nuclear reactor
  • a reactor with average annual gross receipts (as determined under Section 45U) of less than 4.375 cents per kilowatt hour, for any two of the calendar years 2017 through 2021, as determined with respect to any one owner of the reactor

Additionally, the nuclear plant must have a physical connection to the hydrogen facility or be subject to a binding written contract for 10 years for the plant's EACs (i.e., a 10-year power purchase agreement).

Energy Storage. The Final Regulations allow taxpayers to shift temporal matching based on discharge of stored electricity when:

  • The electricity represented by the EAC is discharged from an energy storage system in the same hour that the taxpayer's hydrogen facility uses electricity to produce hydrogen.
  • The energy storage system is located in the same region as both the hydrogen facility and the facility generating the stored electricity.

 

Holland & Knight Insight

The Final Regulations generally retain the rules regarding the Three Pillars, with some additional relief and special rules. Notwithstanding, temporal matching and deliverability constraints will likely continue to prove a challenge.

Renewable Natural Gas and Fugitive Sources of Methane

The Proposed Regulations under Section 45V provided only a draft set of rules and solicited public feedback on many substantive issues as it relates to the use of renewable natural gas (RNG) and fugitive sources of methane (collectively, natural gas alternatives). The Final Regulations provide different requirements for each type of source of natural gas alternative and reflect parallel considerations of temporal matching, incrementality and deliverability.

Biogas. The Final Regulations remove the proposed range of percentages of methane that a gas must contain to be considered biogas.

First Productive Use. The Proposed Regulations suggested that future guidance could require that the RNG used during the hydrogen production process originate from the first productive use of the relevant methane. The Final Regulations abandon this approach noting substantial verification challenges. Instead, the likelihood of an alternative productive use, i.e., its "alternative fate," is required under the Final Regulations to be used to estimate the lifecycle GHG emissions determination of the hydrogen produced by it.

 

Holland & Knight Insight

The intent of the foreshadowed first productive use requirement was to address incrementality and comply with the requirements of Section 45V(c)(1)(A) to account for direct and significant indirect emissions. The Final Regulations leverage the ability of lifecycle accounting to include those potential direct and significant indirect emissions, significantly reducing the market restraints and administrative burdens of the first production use requirement.

Alternative Fates. The Final Regulations require lifecycle GHG emissions determinations to consider the alternative fates of natural gas alternatives, including avoided emissions and alternative productive uses. Different alternative fates are provided for each major source of natural gas alternatives: methane from landfill sources (flaring), wastewater (flaring), coal mine methane (flaring), animal waste sources (carbon intensity score of -51g of CO2e per megajoule) and fugitive methane from fossil fuel activities other than coal mining (productive use).

 

Holland & Knight Insight

The Final Regulations state that this approach strikes a middle ground between accuracy and administrative practicality. However, in relying on subsector-wide approaches, many facilities will have emission rates that are substantially underestimated or overestimated.

Book and Claim. The Proposed Regulations noted that hydrogen producers using natural gas alternatives would be required to acquire and retire corresponding attribute certificates through a book-and-claim system. The Final Regulations provide for such a book-and-claim system and define a "gas energy attribute certificate" (gas EAC) as the tradeable contractual instrument registered with a qualified gas EAC registry or accounting system as the mechanism for compliance. The Final Regulations establish requirements for the gas EACs and qualification criteria for book-and-claim registries. Gas EACs must meet Two Pillars: monthly temporal matching requirements and deliverability requirements. The deliverability requirements recognize the extensive pipeline networks and enable geographic matching within the contiguous U.S., with separate regions for Alaska, Hawaii and each U.S. territory.

 

Holland & Knight Insight

The temporal matching and deliverability requirements are well aligned with the physical infrastructure and commercial practice.

The Final Regulations note that it will take at least two years for such registries to be established; until such a registries are approved, use of book-and-claim accounting will not be permitted. Rather, until book-and-claim accounting is permitted, delivery of natural gas alternatives via direct pipeline connections with appropriate documentation is allowable.

 

Holland & Knight Insight

Though the approval of book-and-claim is necessary to enable use of natural gas alternatives for hydrogen production, the delay in implementation will result in significant delays and costs.

Interaction Between Sections 45V and 45Q

Under statute, a Section 45V facility does not include a facility that has carbon capture equipment for which a Section 45Q tax credit was allowed. The Final Regulations retained the prohibitive rules between Section 45V and the Section 45Q credit for carbon capture equipment included in the Proposed Regulations without significant modification. The Final Regulations, however, offered clarification on certain circumstances when a facility will have been treated as claiming the Section 45Q credit, which in turn makes such facility ineligible for the Section 45V credit. For example, a hydrogen "facility" does not include electricity production equipment. Therefore, electricity production equipment that powers the hydrogen production process that contains CCS technology for which a Section 45Q credit is allowed will not disqualify the hydrogen facility from the Section 45V credit.

The Final Regulations also retain the 80/20 Rule (see Holland & Knight's previous alert, "Key Highlights of the Section 48 ITC Final Regulations," Jan. 9, 2025, for a discussion of the 80/20 Rule) as it relates to equipment that was previously used to claim the Section 45Q credit. If the 80/20 Rule is satisfied with respect to such carbon capture equipment and no new Section 45Q credit is claimed, then such equipment will not be treated as carbon capture equipment for which the Section 45Q credit was allowed. Therefore, taxpayers can use such equipment, and it will not preclude them from claiming the Section 45V credit on the facility.

Anti-Abuse Rule

The Final Regulations clarified the rules to prevent taxpayers from producing hydrogen only to claim the Section 45V credit. Taxpayers cannot produce hydrogen and sell or use it in a manner that is wasteful. Notably, the Final Regulations specify that hydrogen that is produced in excess of standard commercial practices and used to produce heat or power that is then directly used to produce hydrogen is abusive. However, the anti-abuse rule does not aim to restrict the use of hydrogen for energy storage that is later converted to electricity and sold to a regional electricity grid. This situation arises only when a buyer from the grid uses such electricity to produce hydrogen. Further, the Final Regulations clarified that though venting or flaring hydrogen for safety or maintenance is not abusive, such vented or flared hydrogen is not eligible for Section 45V credit given it is not a verifiable use.

Verification Requirements

The statute requires that the production and sale or use of hydrogen be verified by an unrelated party. Like the Proposed Regulations, the Final Regulations require a verification report be attached to IRS Form 7210, Clean Hydrogen Production Credit, for each facility and taxable year for which the taxpayer claims the credit. The verification report, which must be signed under penalties of perjury by a qualified verifier, must contain the following items:

  • Production Attestation. The verification report must specify and attest to the following data with reasonable assurance: the data taxpayer used as inputs to the 45VH2-GREET Model or the PER data submitted to DOE; if EACs were acquired and retired, confirmation that that the electricity generator or generators were not registered by multiple registries (or if listed as such, that the generation is being used only once); emissions value received from DOE (if applicable), the lifecycle GHG emissions and the kilograms of qualified clean hydrogen produced by the taxpayer.

 

Holland & Knight Insight

The Final Regulations add the requirement that the product attestation include verification of the EACs acquired and retired, if applicable.

  • Sale or Use Attestation. The verification report must attest "verifiable use" of the hydrogen. Verifiable use can occur inside or outside the U.S., and use can include that made by the taxpayer or another person other than the taxpayer. Verifiable use does not include 1) use of hydrogen to generate electricity that is then directly or indirectly used in the production of additional hydrogen (except when such heat or power is derived from a byproduct of hydrogen use) or 2) venting or flaring of hydrogen.
  • Conflict Attestation. The verification report must attest that the verifier has no conflict of interest, including that the verifier is not being paid a fee based on the value of the credit.

 

Holland & Knight Insight

Under the Proposed Regulations, if a Section 6418 transfer election is being made, then the verifier must attest its independence from both the eligible taxpayer and the transferee taxpayer. This requirement was removed in the Final Regulations in light or recognition that the transferee may not be known at the time the attestation is completed.

  • Qualified Verifier Statement. The verification report must include, among other things, the verifier's name, address and Taxpayer Identification Number (TIN) and document the verifier's qualifications.

 

Holland & Knight Insight

A qualified verifier is any individual or organization with active accreditation as a validation and verification body from the American National Standards Institute National Accreditation Board (ANAB) or as a verifier, lead verifier or verification body under the California Low Carbon Fuel Standard (CA LCFS). The Final Regulations clarified that ANAB-accredited qualified verifiers are those are specifically accredited under ANAB Accreditation Program for Greenhouse Gas Validation and Verification Bodies.

  • General Information About the Hydrogen Production Facility. The verification report must also discuss the method of producing the hydrogen, discuss the type(s) and amount(s) of feedstock used, list the metering devices used and attest that the metering devices were calibrated and tested for accuracy in the last year.
  • Necessary Documentation. The verification report must contain any other documentation necessary to substantiate the verification process given the standards and best practices prescribed by the verifier's accrediting body and the circumstances of the taxpayer and the taxpayer's hydrogen facility and any other information required by IRS forms or instructions.

The verifier must sign and date the verification report no later than the due date or extended due date of the tax return or information return for the taxable year during which the hydrogen undergoing verification is produced. When a credit is first claimed on an amended return or administrative adjustment request, the report must be signed and dated no later than the day the amended return or administrative adjustment request is filed.

Like the Proposed Regulations, the Final Regulations provide additional requirements if the taxpayer produced electricity for which either the Section 45 or Section 45U credit is claimed and when that electricity is used to produce qualified clean hydrogen for which it is claiming Section 45V. In such instances the verification report must also attest that 1) the electricity used to produce such hydrogen was produced at the relevant facility for which a Section 45 or Section 45U credit is claimed, 2) the given amount of electricity (in kilowatt hours) used to produce such hydrogen at the relevant hydrogen facility is reasonably assured of being accurate and 3) the electricity for which a Section 45 or 45U credit was claimed is represented by EACs that are retired in connection with the production of such hydrogen.

Modification of an Existing Facility

The statute provides that in the case of an existing facility placed in service prior to 2023 that was not capable of producing qualified clean hydrogen but undergoes a modification to produce qualified clean hydrogen, such facility will be considered to have been placed in service after such modification. For this rule to apply, amounts paid or incurred with respect to such modification must be properly chargeable to the taxpayer's capital account for the facility. Finally, with respect to such existing facilities that produced hydrogen, a modification is made if the facility could not, as it existed, produce qualified clean hydrogen (i.e., hydrogen with a lifecycle GHG emissions less than or equal to 4 kilograms of CO2e).

 

Holland & Knight Insight

Like the Proposed Regulations, the Final Regulations largely reiterate the statutory requirements for modifications of existing facilities. Notably, the Final Regulations reaffirm that there is no monetary threshold that must be met to satisfy this requirement and note that while changing fuel inputs, without more, does not enable a taxpayer to take advantage of this rule, the installation of new components to consume a different type of fuel could qualify the taxpayer to a new 10-year credit period if all requirements are met.

The modification rule allows previously placed-in-service hydrogen production facilities another avenue, as an alternative to the application of the 80/20 Rule (discussed below), to qualify for Section 45V. This alternative pathway may be preferable given the capital-intensive nature of a hydrogen facility.

Retrofitting of an Existing Hydrogen Facility: The 80/20 Rule

As an alternative to the modification rule, the Final Regulations also adopt the traditional 80/20 Rule, which allows a previously placed-in-service hydrogen facility to be considered a "new" facility for purposes of Section 45V. This occurs when the fair market value (FMV) of the existing components of the "old" facility make up no more than 20 percent of the FMV of the "new facility." If a facility satisfies the 80/20 Rule, then the date on which such facility is considered originally placed in service for purposes of Section 45V is the date on which the new property added to the facility is placed in service.

 

Holland & Knight Insight

The Final Regulations provide that the 80/20 Rule applies only to retrofitted hydrogen facilities (rather than all existing facilities) and that the rule applies separately to each single production line.

This Holland & Knight alert provides a summary of the Final Regulations and is not meant to be exhaustive. Please contact the authors if you have any questions. To be sure you receive this forthcoming analysis, please subscribe to our alerts.


Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.


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