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September 18, 2023

Harnessing the Power of Clean Hydrogen: A Closer Look at Section 45V in the IRA

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The Inflation Reduction Act of 2022 (“IRA”), signed into law on August 16, 2022, contains many clean energy tax credits and incentives.  One such credit of significance is Section 45V, Credit for Production of Clean Hydrogen. 

Broadly speaking, the production of “clean hydrogen” refers to the process of generating hydrogen gas (“H2”) employing methods that have little or no greenhouse gas emissions and low environmental impact  Clean hydrogen is considered an essential element of the transition to a low-carbon energy system, as it can be used as a versatile, sustainable, and low-emission energy source.

Examples of methods for producing clean hydrogen include:

  1. Electrolysis:  this method passes an electric current through water (H2O) to split hydrogen from oxygen.  Different types of electrolysis:
    • Proton Exchange Membrane (PEM) Electrolysis – occurs at relatively low temperatures and is suitable for small to medium-scale applications.
    • Alkaline Electrolysis – mature technology and suitable for large-scale hydrogen applications.
    • Solid Oxide Electrolysis – adolescent technology that holds promise for high-temperature, large-scale applications.
  2. Biomass Gasification:  conversion of biomass (e.g., agricultural waste or organic matter) into hydrogen-rich gas through gasification.
  3. Methane Pyrolysis:  also known as methane cracking or methane splitting, involves the breakdown of methane (CH4) into hydrogen and solid carbon, without producing carbon dioxide (CO2).
  4. Photolytic and Photoelectrochemical (PEC) Processes:  these emerging technologies use solar energy to split water directly into hydrogen and oxygen.  Although this process should be considered an adolescent technology, it has the potential to produce clean energy sustainably.
  5. Nuclear Hydrogen Production:  nuclear reactors generate heat that can be used to produce hydrogen through high-temperature electrolysis or other thermochemical methods.

Section 45V is designed to incentivize the production of clean hydrogen at a qualified clean hydrogen production facility in the United States.  A producer of clean hydrogen has the option of receiving (1) a credit equal to a specified dollar value per kilogram of clean hydrogen that is produced (the “production tax credit” or “PTC”) or (2) a tax credit equal to a specified fraction of the clean hydrogen producer’s capital expenses (the “investment tax credit” or “ITC”).  The value of the tax credit depends on the lifecycle greenhouse gas emissions as part of the clean hydrogen production and if the clean hydrogen producer complies with prevailing wage and apprenticeship (PWA) requirements.  These important requirements incentivize the producer of clean hydrogen to ensure all laborers and mechanics performing services in construction of the credit-eligible facility are paid a prevailing wage and that specific apprenticeship rules are met (learn more about PWA requirements here).

The PTC base credit rate, which does get adjusted for inflation, is $0.60 per kilogram of qualified clean hydrogen multiplied by the applicable percentage.  Application percentages for complying producers:

  • Not greater than 4 kilograms of carbon dioxide equivalent (“CO2e”) per kilogram of hydrogen, and not less than 2.5 kilograms of CO2e per kilogram of hydrogen, the applicable percentage would be 20 percent.
  • Less than 2.5 kilograms of CO2e per kilogram of hydrogen, and not less than 1.5 kilograms of CO2e per kilogram of hydrogen, the applicable percentage would be 25 percent.
  • Less than 1.5 kilograms of CO2e per kilogram of hydrogen, and not less than 0.45 kilograms of CO2e per kilogram of hydrogen, the applicable percentage would be 33.4 percent.
  • If the lifecycle greenhouse gas emissions rate is less than 0.45 kilograms of CO2e per kilogram of hydrogen, the applicable percentage would be 100 percent.  

The top rate is five times the amount of the base credit, topping out at $3.00 per kilogram of qualified clean hydrogen produced.  However, the top rate can only be achieved if the PWA requirements described above are properly met.

In regards to the PTC, the tax credit is received for 10-years after the facility is placed in service.  Therefore, the credit is available for any qualified clean hydrogen production facility placed in service before January 1, 2033.  It is important to note that a credit is not permitted under Section 45V for clean hydrogen produced at a facility that also has carbon capture equipment and for which a credit is permitted to any taxpayer under Section 45Q for the current or any prior tax years. 

Taxpayers have the option to elect the ITC instead of the PTC.  Similar to the PTC, there is a base credit and a maximum credit ($6 and $30), in each situation multiplied by the applicable rates discussed above.

Similar to other provisions within the IRA, direct pay is available to tax-exempt organizations, states, political subdivisions, the Tennessee Valley Authority, Indian Tribal governments, Alaska Native Corporations, and rural electricity co-ops (“applicable entities”).  Direct pay applies to facilities placed in service after December 31, 2012.  Entities other than applicable entities are eligible for up to 5 years of direct pay, which is less than the full credit period and expires at the end of 2032, if an election gets made.

If you would like to discuss anything contained in this alert or have questions, contact us.

The information provided in this communication is of a general nature and should not be considered professional advice.  You should not act upon the information provided without obtaining specific professional advice.  The information above is subject to change.

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