Legal & Regulatory

Treasury’s Proposed Clean Hydrogen PTC Rule Disappoints Power Industry

The Department of the Treasury has released proposed regulations and guidance defining a tax credit for the production of “clean hydrogen,” a significant supply-side incentive that is part of the Biden administration’s larger climate-driven policy framework. But though long-awaited, the measure has stirred up strong disappointment from the power industry.

If finalized, the Treasury Department’s proposed regulations issued on Dec. 22 would amend Sections 45V and 48(a)(15) of the Internal Revenue Code as enacted by the 2022 Inflation Reduction Act (IRA). Section 45V would essentially establish a tiered production tax credit (PTC) that is available for each kilogram of clean hydrogen produced during a taxable year (for the first 10 years after a hydrogen production facility begins operation).

Significantly, the rules define “qualified clean hydrogen” as hydrogen that is produced “through a process that results in a lifecycle [greenhouse gas (GHG)] emissions rate of not greater than 4 kilograms (kg) of CO2e per kilogram of hydrogen.” Lifecycle GHG emissions, which are determined under the most recent Greenhouse Gases, Regulated Emissions, and Energy Use in Transportation (GREET) model, include emissions through only the point of production (well-to-gate), but it includes emissions associated with feedstock growth, gathering, extraction, processing and delivery to a hydrogen production facility. They also include emissions associated with power utilized by a hydrogen production facility and any carbon capture and sequestration.

The Section 45V credit equals $3 (adjusted for inflation) per kilogram of hydrogen produced, multiplied by the applicable rate,” explained law firm Holland and Knight. The applicable rate is based on the lifecycle greenhouse gas emissions rate of the hydrogen produced. The highest-value tier of the PTC, for example, requires lifecycle GHG emissions below 0.45 kg CO2e per kg of hydrogen.“Alternatively, taxpayers may elect to claim the investment tax credit (ITC) under Section 48 in lieu of the Section 45V PTC,” the firm noted.

Leveraging Energy Attribute Certificates (EACs) for Assurance

Along with the Treasury Department’s proposed rules, the Department of Energy (DOE) on Friday issued a white paper specifically laying out the lifecycle GHG emissions impacts of electricity required for hydrogen production.

While the DOE acknowledges hydrogen pathways that use energy inputs other than electricity can qualify for 45V, it considers hydrogen production using electricity for electrolysis a “primary pathway.” However, assessing lifecycle emissions from electricity used to produce hydrogen “becomes more complicated when considering hydrogen producers that are connected to an electricity grid or to a specific source of electricity generation that was previously supplied to other electricity customers or the broader electricity grid,” the agency noted. “Electricity cannot be physically tracked on the networked grid from specific source to specific consumption (also known as ‘load’).”

The DOE’s white paper is specifically focused on how GHG emissions from the grid can be considered in the context of 45V when hydrogen producers buy electricity from specific sources that have energy attribute certificates (EACs). EACs, the DOE notes, are legal instruments (which include renewable energy certificates) that verify a certain unit of electricity was generated by a specific entity and has specific associated attributes, such as the place and time of generation, source of fuel, or the month and year the power plant was built. Under Section 45V, EACs should meet three critical criteria—incremental generation, geographic matching, and “granular” temporal matching.

The Rule’s ‘Three Pillars’: Incrementality, Hourly-Matching, and Deliverability

The so-called “three pillars” criteria are elaborately defined in the Treasury Department’s proposed rules. An EAC, for example, meets the incrementality requirement if the power-generating facility has a commercial operating date (COD) that is not more than 36 months before the hydrogen facility was placed in service. An EAC satisfies the temporal matching requirement if the power represented by the EAC is generated in the same hour that the hydrogen production facility uses power to produce hydrogen. The geographic matching (or deliverability) requirement seeks to provide a reasonable assurance that the EAC is generated by a source in the same region as the hydrogen production facility. If finalized, the guidance will immediately require incrementality and deliverability, and hourly matching beginning in 2028.

“If a hydrogen producer’s load is matched with EACs whose attributes meet these three criteria, lifecycle GHG emissions from the hydrogen producer’s electricity use can be reasonably deemed to reflect the lifecycle GHG emissions associated with the specific generators from which the EACs were purchased and retired,” the DOE says. But if hydrogen producers rely on EACs that don’t adequately demonstrate low-induced emissions, there is a “strong likelihood” that the hydrogen production “would in many cases significantly increase induced grid GHG emissions beyond the allowable levels to qualify for [section] 45V.”

The DOE also suggests that “an administrable and practical approach to applying these criteria is feasible.” However, “time may be required to allow development of necessary EAC tracking infrastructure and verification protocols,” it says.

Power Industry Lament Rule’s Limitations

According to the DOE, clean hydrogen production for domestic demand has the potential to scale from less than 1 million metric tons per year (MMTpa) to an estimated 10 MMTpa in 2030. It estimates most near-term demand may come from transitioning existing end-uses, which currently hold a carbon-intensive hydrogen production capacity of around 10 MMTpa. The agency suggests that the “opportunity” for clean hydrogen, aligned with the  DOE National Clean Hydrogen Strategy and Roadmap, is 50 MMTpa by 2050.

However, if water electrolysis becomes the dominant hydrogen production method, the DOE estimates up to 200 GW of new renewable power will be needed by 2030 to support clean hydrogen production. At the end of September 2023, the U.S. held a total capacity of about 1,180 GW, of which 321 GW was from renewables, and 96 GW was from nuclear.

On Friday and over the past week, several power industry groups weighed in on the Treasury Department’s proposed rules and their potential implications on future opportunities. 

The Nuclear Energy Institute (NEI), a prominent nuclear power industry trade association, in a statement sent to POWER, said it was “disappointed to learn the administration plans to adopt a requirement that only new generation adding incremental capacity to the electric grid could be used to produce clean hydrogen for purposes of the [hydrogen (H2) credit.]”

By “explicitly allowing the zero-emission nuclear power production tax credit to be claimed in conjunction with the H2 Credit, the authors of the IRA made clear that existing nuclear facilities are eligible for the H2 Credit,” the group said. However, the proposed rule “effectively eliminates all existing clean energy from qualifying for the H2 Credit, instead requiring hydrogen producers to construct purpose-built energy projects for their production facilities. This requirement will make many clean hydrogen projects uneconomic and will create years of delay for the few projects that can move forward in the face of the Administration’s added constraints,” it said.

NEI underscored nuclear’s growing role as a major carbon-free power-generating resource. “The U.S. nuclear fleet is well positioned to propel the U.S. as a global leader in clean hydrogen production, but the administration’s proposal will undercut the development of a domestic clean hydrogen economy and will bolster the competitiveness of our global competitors,” it said. The decision also “disregards input from industry, labor, and the authors of the Inflation Reduction Act (IRA) and will impede the creation of a clean hydrogen economy, endanger broader decarbonization goals, and destroy opportunities for American workers,” it said.

NEI plans to continue to engage with the administration to ensure the hydrogen credit is implemented “as clearly intended by Congress. Doing so will ensure nuclear energy can fill its full potential in decarbonizing the hardest-to-abate sectors of our economy and will accelerate progress toward a cleaner energy economy,” it said.

The Edison Electric Institute (EEI), a major trade association representing all U.S. investor-owned electric companies, also voiced strong disappointment. “Hydrogen has the potential to be a reliable and affordable tool to reduce emissions in a variety of sectors, including the power sector, and its production and use should be expanded. Treasury’s proposed rules do not offer sufficient flexibility to allow the scale-up that will be necessary to support a U.S. hydrogen economy. Instead, they appear to rely on stringent requirements, particularly given the transition to hourly matching in 2028,” said EEI Senior Vice President, Energy Supply and Finance, and Chief ESG Officer Richard McMahon.

“This would undermine the commercial viability of this nascent domestic sector and severely limit the widespread adoption of hydrogen that is produced using grid-connected facilities,” McMahon added. “As a result, the cost-reducing benefits for hydrogen included in the [IRA] would be squandered, and an important new tool that electric companies and customers could be using to drive down carbon emissions and costs would be sidelined.” EEI ”continues to support using annual matching requirements for the 45V credit, and we appreciate that the proposal initially would allow annual matching. We look forward to working with Treasury to finalize rules that help to unleash this transformational technology, not limit it,” he said.

NEI and EEI’s concerns were notably also echoed by the American Council on Renewable Energy (ACORE), a national non-profit organization focused on advancing renewable energy through finance and policy. “While we’ve been eagerly awaiting the Administration’s proposal on 45V guidance for the clean hydrogen PTC, we are concerned with the lack of flexibility in the proposed rule and the impact it may have in jump-starting a hydrogen industry at scale,” said Ray Long, ACORE president and CEO.

“As our analysis with E3 demonstrated, an annual match accounting approach could help unleash America’s nascent clean hydrogen industry and accelerate our energy transition.” ACORE also said it plans to continue to work with the administration throughout the comment period. “We remain hopeful the final rule ultimately released has the needed flexibility to support the scale and role that hydrogen can play in achieving our decarbonization goals,” Long said.

Some trade groups, however, celebrated the rules. “We’re thrilled to see this critical guidance that will help drive demand for domestic solar manufacturing,” said Mike Carr, executive director of the Solar Energy Manufacturers for America Coalition. “We especially appreciate the thoughtful approach the Biden-Harris Administration took to find a middle ground for industry stakeholders on additionality, deliverability, and hourly-matching requirements, that we believe will align with our shared climate goals while letting this industry grow.”

Carr added that as builders “of the cheapest source of new electricity across the country, U.S. solar manufacturers, along with our partners in the energy storage industry, stand ready to help supply the affordable zero-carbon power needed to make hydrogen a true climate solution. Alignment with the three pillars approach embodies the intent of the IRA to maximize U.S. clean energy production and support the clean energy transition.”

Jessie Stolark, executive director of the Carbon Capture Coalition, meanwhile, lauded the Treasury Department’s efforts to undertake “the enormous task of developing guidance to implement changes to existing tax credits and issue guidance for new tax credits established as part of the Inflation Reduction Act.” However, she noted, the Treasury has yet to issue guidance for the Section 45Q tax credit, a significant and potentially transformative U.S. federal tax incentive that provides credits for carbon capture, utilization, and storage (CCUS) activities.

Finalizing 45Q guidance on the most recent enhancements to the tax credit passed under the leadership of the 117th Congress will be essential to provide the certainty necessary for climate-essential carbon management projects to move forward in securing project financing and breaking ground on construction,” she noted. “Commercial-scale projects are capital- and time-intensive, and financial institutions are less familiar with them than other clean energy technologies. Clear and workable guidance is essential to give these projects a runway to meet the 2033 commence-construction deadline.”

More solid optimism about the Treasury’s rules came from the Clean Air Task Force (CATF), a think tank that advocates for practical solutions to achieving environmental and energy goals. Emily Kent, U.S. director of CATF’s Zero-Carbon Fuels, told POWER that because the PTC is tiered, it “becomes more lucrative for progressively cleaner hydrogen, providing as much as $3.00 per kg of hydrogen produced if the carbon intensity is less than 0.45 kg ofCO2e per kg of hydrogen.” According to CATF analysis, “this would allow certain regions with cheap, plentiful, zero-carbon electricity to produce hydrogen almost for free as capital costs decrease,” she said.

Kent also noted that CATF has advocated that hydrogen-producing power sources “must come from new clean power that is not already serving the grid (‘new supply’ or ‘incrementality’), be matched with generation from new clean power on an hourly basis (‘hourly-matching’), and be physically deliverable to the site (‘deliverability’).” These “Three Pillars,” she said, “help ensure that hydrogen production does not inadvertently increase high-emitting electricity generation, which would go against the plain language of 45V by increasing economy-wide emissions. Strong and strict guidance in line with the Three Pillars—which is supported by industry and implementable today—will limit indirect emissions and be vital to creating a credible market for truly clean hydrogen in the U.S. The new proposed Treasury guidance requires incrementality and deliverability from Day 1 and hourly-matching beginning in 2028.”

The proposed rule also “appropriately does not allow biomethane used to produce hydrogen to count as ‘negative emissions’ in the 45V carbon intensity calculations. In addition, it does not allow book and claim systems for biogas credits in the accounting for 45V,” she said. “These requirements ensure that 45V only incentivizes truly clean hydrogen deployment.”

So as it stands, the new 45V guidance is “an excellent step toward developing a credible clean hydrogen market in the U.S.,” Kent said. “Hydrogen serves as an important feedstock for fertilizer production, petroleum refining, and other sectors vital to our modern economy and will likely play a critical role in decarbonizing hard-to-abate sectors, such as marine shipping, steel production, and aviation.” Effective implementation of the 45V PTC will help meet challenges by “by bridging the cost difference between conventional hydrogen production and low-emission production methods, ultimately reducing long-term clean hydrogen production costs by accelerating the industry along its learning curve.”

Sonal Patel is a POWER senior associate editor (@sonalcpatel@POWERmagazine).

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