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The New Clean Hydrogen Production Tax Credit, Explained

Nov. 23, 2022, 9:45 AM

The growing hydrogen industry got a big boost from President Joe Biden’s tax-and-climate law: a new 10-year tax credit for clean hydrogen production.

Industry supporters and energy analysts say the brand-new credit will spur innovation and expand the number of production facilities.

“It’s absolutely causing people to do projects that they wouldn’t have considered before,” said Barbara De Marigny, a partner at Baker Botts LLP in Houston.

The Energy Department sees hydrogen as essential to meeting the Biden administration’s goals to achieve net-zero greenhouse gas emissions from the power sector by 2035 and the US economy by 2050.

Here’s what you need to know:

1. How does the clean hydrogen credit work?

The Inflation Reduction Act aims to fight climate change by offering $374 billion to energy and climate, including tax credits for clean energy production, carbon sequestration, and electric vehicles.

The hydrogen production tax credit, under Section 45V, gives projects that begin construction before 2033 a tax credit for 10 years after they’re placed in service, getting 60 cents for every kilogram of clean hydrogen produced.

The credits previously available to the industry “were relatively small compared to the impact” of the new hydrogen production credit, said Frank Wolak, president and CEO of the Fuel Cell and Hydrogen Energy Association.

The credit amount decreases the more lifecycle greenhouse gas emissions are emitted during production, with the credit cutting off once the facility produces four kilograms of carbon dioxide equivalent per kilogram of hydrogen.

Critics say the measure is too lenient toward carbon-emitting facilities.

The credit’s carbon intensity limit is “completely unacceptable,” as Europe is achieving a carbon intensity rate closer to three kilograms of cardon dioxide equivalent per kiligram of hydrogen, said Rachel Fakhry, senior advocate in the Natural Resources Defense Council’s Climate and Clean Energy Program.

The new US credit allows hydrogen projects sourced from fossil fuels to “underperform” because they can meet that requirement without more advanced carbon capture systems, said Fakhry.

2. Who can take the credit?

The credit may encourage large-scale energy developers to add hydrogen to their pipeline, said Heather Cooper, a partner at McDermott Will & Emery in Miami.

”They’re going to be shifting into doing it much more aggressively, because these tax credits exist,” she said.

For companies without enough taxable income to use the full value of their credit, like small developers and start-ups, there’s another option—bringing in investors who help finance the projects and receive tax credit benefits.

The projects can increase the amount of their credit five-fold if they meet other requirements in the law, such as paying prevailing wages and taking on apprentice labor.

3. What do developers and investors need to know before they can take the credit?

The hydrogen industry is looking to the IRS and Treasury to answer questions on how to determine the amount of credit a facility receives and how labor requirements to receive the bonus credit apply.

The agencies are prioritizing guidance on the tax-and-climate law, but officials haven’t specified when guidance on the hydrogen production credit will be released. Officials said the agencies do plan to issue guidance on the wage and apprenticeship requirements this year.

The hydrogen industry generally wants flexibility in any Treasury Department guidance. For example, Treasury should allow hydrogen facilities that also are equipped with carbon capture and sequestration equipment the option “to elect to take either” the Section 45C production tax credit or the carbon capture tax credit, known as 45Q, Wolak said.

Public comments are due Dec. 3.

4. How could the credit be used in the Energy Department hub program?

The tax credit comes as the Energy Department advances a separate $7 billion program to scale up the hydrogen industry in as many as 10 regions of the country. The credit could play a pivotal role in the regional hub program, established by the 2021 infrastructure law.

With the tax credit going to production, money received via the hub program can be used to tackle the thorny questions of how to gather, store, and deliver hydrogen to hard-to-decarbonize sectors such as steel, cement, and maritime shipping, said Nathan Iyer, senior associate with the Rocky Mountain Institute’s US program.

The credit-and-hub design “opens the door to more interesting and carbon-reducing concepts like steel and shipping fuels,” Iyer said.

The Energy Department will pick at least one hub centered on “green” hydrogen produced by renewable energy; one from “blue” hydrogen sourced from natural gas and using carbon capture and storage; and one “pink” hydrogen project from nuclear power.

The department will work with hydrogen companies, other government agencies, producers and consumers, pipelines, and transportation companies, Kelly Cummins, head of the Office of Clean Energy Demonstrations, said in September.

The Energy Department is currently assessing concept papers, and full applications are due to the department April 7, 2023.

5. How is ‘clean’ hydrogen measured?

Environmental groups are pressing for hydrogen producers to prove they are drawing from renewable energy at all times and to monitor leakage along the pipeline network.

“Not all hydrogen is created equal, so it’s really important that the incentives are encouraging the cleanest forms of hydrogen,” said Morgan Rote, director of US climate policy for the Environmental Defense Fund.

The group met this year with Deputy Energy Secretary David Turk to discuss clean hydrogen rules. Talks have focused on EDF’s hydrogen leakage research and the need for more community engagement, and the environmental justice implications of building out more hydrogen infrastructure.

US officials should focus on hydrogen production from renewables like solar and wind hydrogen, instead of from natural gas, Rote said.

—With assistance from Dean Scott.

To contact the reporters on this story: Daniel Moore in Washington at dmoore1@bloombergindustry.com; Erin Slowey in Washington at eslowey@bloombergindustry.com; Isabel Gottlieb in New York at igottlieb@bloombergtax.com

To contact the editors responsible for this story: Meg Shreve at mshreve@bloombergindustry.com; Alex Clearfield at aclearfield@bloombergindustry.com