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Inflation Reduction Act: Key Green And Blue Hydrogen And CCUS Provisions – Renewables


Introduction

The U.S. Congress has passed, as of today, the Inflation
Reduction Act (IRA or the “Act”), which is expected to be
signed into law by President Joe Biden very soon.

The IRA is one of the biggest investments in clean energy in
history and a major step towards reducing the United States’
greenhouse gas emissions. According to the Biden Administration,
the Act will result in the investment of $369 billion in energy and
climate change programs and will avoid 6.3 billion tons of
cumulative greenhouse gas emissions by 2030, amounting to a 40
percent annual emissions reduction compared to 2005 levels. For
perspective, without the Act, the U.S. would only be able to reduce
its GHG emissions by 26 percent by 2030 (again compared to 2005
levels).

This article focuses on the clean energy provisions of the IRA,
in particular incentives and provisions pertaining to hydrogen and
carbon capture, utilization and sequestration (CCUS). For a brief
analysis of the Act’s other provisions, including the Corporate
Book Minimum Tax, see our summary of the IRA.

The Focus is on the Reduction in Emissions, not the Technology
Chosen by a Hydrogen Producer

The clean energy provisions of the Act support reduced carbon
sources of energy regardless of the technologies used to achieve
the carbon reductions: they are “source agnostic.” This
is welcome news for various industries within the U.S. that have
been planning to invest in hydrogen and carbon sequestration
technologies as well as conventional clean energy sources,
including solar and wind. In particular, the Act does not
distinguish between hydrogen produced from electrolysis using
renewable sources or nuclear power, nor does it distinguish between
hydrogen produced by electrolysis or from natural gas with carbon
capture and storage (so-called “blue” hydrogen).

Importantly for green hydrogen producers, however, it will be
possible to combine tax credits for renewable power generation
facilities alongside the PTCs and ITCs for clean hydrogen
production and storage infrastructure. The IRA extends existing
investment tax credits (ITCs) and production tax credits (PTCs) for
solar and wind power generation until 2024. After 2024, any
carbon-free generation will have the option to either choose from
an ITC or a PTC, whichever is more viable for each business, or
choose to monetize the credits by transferring them to another
unrelated third-party.

Game Changing Tax Credits and Direct Payments for
“Qualified Clean Hydrogen”

The Act adds section 45V to the U.S. Internal Revenue Code of
1986 (the “Code”) to provide a tax credit for the
production of “qualified clean hydrogen” produced by a
taxpayer at a “qualified clean hydrogen production
facility” during a 10-year period beginning on the date such
facility was placed in service. As described below, the base tax
credit amount is set at $.60 per kilogram of clean hydrogen but
increases to $3.00 per kilogram when the hydrogen’s lifecycle
carbon intensity measures between zero and 0.45 kilograms of
CO2 equivalent (CO2e) per kilogram of
hydrogen (H2) and when the taxpayer complies with the prevailing
wages and apprenticeship requirements.

Importantly, the Act includes a “direct pay option”
for the same amounts instead of a tax credit. The direct payment
for hydrogen and carbon capture facilities will be available for a
limited period (the first five years of production) amount.
Alternatively, the IRA also includes an option for taxpayers to
monetize the credits by transferring them to another taxpayer.

The potential to access a US$3 tax credit or direct payment for
each kilogram of low-carbon hydrogen is truly revolutionary for the
emerging green hydrogen industry. Some sources claim that it will
make green hydrogen structurally cheaper than gray hydrogen and
might reduce the cost of green hydrogen production to as low as
$0.73 per kilograms in the U.S. Northwest. On more conservative
estimates it will likely halve the cost of production of green
hydrogen in many places in the U.S. In either case it immediately
makes green hydrogen a competitive source of energy compared to its
fossil fuel alternatives.

In addition to the PTCs for clean hydrogen, the IRA creates a 30
percent credit for energy storage technology constructed before
January 1, 2025. Whilst the text of the legislation is not precise
on what sorts of infrastructure this might cover, it clearly does
apply to hydrogen-related storage.

The bottom line is this: when combined with the ITCs for
renewable power production and energy storage infrastructure, the
entire upstream value chain for green hydrogen production
infrastructure, from well (i.e., electron generation) to gate
(i.e., the outlet of storage facilities), is now subsidized by the
U.S. government.

This positions the U.S. as among the most competitive places in
the world to develop green hydrogen projects across the value
chain. It will inevitably spur other countries to develop subsidies
of their own to ensure domestic production, and the IRA should
therefore be viewed as a significant boost to the development of a
worldwide hydrogen economy.

Support for CCS Facilities Boost Blue Hydrogen Production

The Act amends Section 45Q of the Code to provide tax credits
for the construction of carbon capture facilities. Any carbon
capture, direct air capture or carbon utilization project that
begins construction prior to January 1, 2033, will qualify for the
Section 45Q tax credit. Additionally, the Act not only extends
carbon capture tax credits through 2033 but also lowers the
requirements for additional carbon capture facilities to qualify.
The Act increases the Section 45Q base tax credit for carbon
capture by industrial facilities and power plants to $85 per metric
ton for CO2 stored in geologic formations, $60 per ton
for the beneficial utilization of captured carbon emissions and $60
per ton for CO2 stored in oil and gas fields.

Energy Innovation and Green Industry also Supported

The IRA encourages technological developments in energy
innovation. Under the Office of Clean Energy Demonstration (OCED),
the IRA creates a $5.8 billion program, available through September
2026, to invest in projects aimed at reducing emissions from
hard-to-abate energy intensive industries, such as iron, steel,
cement and chemical production, and includes retrofit
facilities.

Key Provisions – Hydrogen and CCUS

Below is a summary of the provisions of the Act pertaining to
clean hydrogen and CCUS.

Clean Hydrogen – Section 45V

  • The IRA creates a PTC or an ITC for clean hydrogen, giving the
    owners of production facilities the option to elect either of the
    two.

  • The IRA creates a 10-year incentive for clean hydrogen
    production with four tiers. For a facility to qualify, the hydrogen
    it produces must not exceed lifecycle greenhouse gas emissions rate
    greater than 4 kilograms of CO2 equivalent
    (CO2e) per kilogram of H2, for which the PTC would be
    $0.60 per kilogram of hydrogen (H2). (From a global
    comparative regulatory perspective this is a relatively loose,
    easy-to-satisfy definition of what it means to be “clean
    hydrogen.”)

  • If the carbon intensity is between 0–0.45 kilograms of
    CO2 equivalent (CO2e) per kilogram of H2, the
    PTC would be as high as $3 per kilogram of H2. This is likely to
    make green hydrogen projects immediately economically viable by
    significantly increasing the economic attractiveness of green
    hydrogen produced from renewable sources while keeping certain
    incentives for blue hydrogen produced from natural gas.

  • The base credit amount is at least 60 cents per kilogram of
    qualified clean hydrogen (subject to the above carbon intensity
    limits), multiplied by an emissions factor depending on the GHG
    emissions factor provided by the fuel, up to the $3 level mentioned
    above. These rates of tax credits are adjusted for inflation for
    the calendar year in which the qualified clean energy is
    produced.

  • To qualify as a “qualified clean hydrogen production
    facility,” the facility must meet the following criteria:

    • It must be owned by the taxpayer claiming the PTC or ITC;

    • The facility must produce qualified clean hydrogen; and

    • The facility’s construction must begin before January 1,
      2033.


  • Eligibility criteria includes retrofit facilities. However, the
    clean hydrogen credit cannot stack with the carbon capture and
    sequestration tax credit. No clean hydrogen credit will be allowed
    for a facility which is already qualifying for the carbon
    sequestration credit.

  • The Act also offers a bonus credit multiplier if prevailing
    wage and apprenticeship requirements are met, wherein the
    applicable credit may be multiplied by five. Without this bonus
    credit hydrogen manufactured with 0.45 – 1.5kg of lifecycle
    emissions would only receive 33.4 percent of the $0.60 credit; with
    25 percent for 1.5 – 2.5kg of CO2e and 20 percent
    for 2.5 – 4kg. These amounts will be multiplied by five where
    the facility meets the prevailing wage and apprenticeship
    requirements. However, to benefit from this requirement, the
    construction of such hydrogen production facility must commence
    within 60 days of the Secretary of the Treasury publishing the
    necessary guidance with respect to the prevailing wage and
    apprenticeship requirements.

  • Alternatively, taxpayers have the option to either elect to
    receive an ITC in lieu of the PTC for a base credit of up to 6
    percent, or 30 percent if prevailing wage and apprenticeship
    requirements are met.

ITCs – Section 48

  • The existing ITCs for various energy sources, including solar
    energy, fuel cell energy, combined heat and power property, small
    wind property and offshore wind property have been maintained at 30
    percent for facilities constructed before January 1, 2025.

  • Additionally, the Act creates a 30 percent credit for energy
    storage technology constructed before January 1, 2025.

  • In addition to the aforementioned credits, the IRA provides
    additional bonus credits as follows:

    • a 10 percent bonus if the domestic manufacturing requirements
      for steel, iron or manufactured components are met, and

    • a 10 percent bonus for projects located in existing energy
      communities.

CCUS – Section 45Q

  • The Act extends the tax credits under Section 45Q for carbon
    capture and direct air capture (DAC) to projects beginning
    construction before 2033 and provides additional modifications,
    including an enhanced credit for DAC and lowering the carbon
    capture threshold requirements at facilities.

  • The IRA has lowered the annual thresholds of the amount of
    carbon a qualifying facility must capture:

    • 18,750 tons of carbon oxide for power plants;

    • 12,500 tons of carbon oxide for industrial facilities; and

    • 1,000 tons of carbon oxide for DAC facilities.


  • Electricity facilities that use carbon capture to reduce their
    emissions by at least 75 percent would also qualify for tax
    credits.

  • Similar to the tax credits for hydrogen production facilities,
    the credits for carbon capture are divided into a base credit and a
    “bonus” credit, equal to five times the base credit, if
    the prevailing wage and apprenticeship requirements are met, like
    the PTC and ITC. The amount of the credit depends on how the
    qualified carbon oxide and whether the taxpayer uses the captured
    qualified carbon oxide.

  • The qualifying facilities will be eligible for the following
    credits for each metric ton of carbon captured/sequestered:












S no.

Technology

Base Credit


($/metric ton of CO2)

Bonus Credit

(Base Credit x 5)


($/metric ton of CO2)

1.

Carbon captured and used for enhanced oil recovery (EOR) or
utilization

$12

$60

2.

Industrial Source (direct sequestration)

$17

$85

3.

DAC (used for EOR or utilization)

$26

$130

4.

DAC (direct sequestration)

$36

$180

  • The taxpayer will qualify for a bonus credit when it complies
    with the prevailing wage and apprenticeship requirements and
    commences construction within 60 days after the Secretary of
    Treasury publishes guidance for the prevailing wage and
    apprenticeship requirements.

  • Projects will be entitled to benefit from a direct pay
    incentive for the first 5 years after the carbon capture equipment
    is placed in service, however, nonprofit organizations and co-ops
    can receive direct pay for all 12 years of the credit.
    Additionally, the taxpayer may opt to transfer the credits to a
    third-party.

Prevailing Wages and Apprenticeship Requirements

Given the crucial role the prevailing wages and apprenticeship
requirements will most likely play in these benefits, a brief
summary is as follows:

Prevailing Wages

  • To benefit from the prevailing wage requirements, the taxpayer
    is mandated to make sure that all mechanics and laborers are paid
    prevailing wage during the construction of a project and for any
    alteration and repair of such project during the relevant credit
    period.

  • The Act provides correction procedures and directs the
    Secretary of the Treasury to provide further guidance.

Apprenticeship

  • In order to comply with the apprenticeship requirements, the
    taxpayer is required to make sure that no less than the applicable
    percentage of total labor hours for the project’s construction
    are undertaken by certified apprentices.

  • The Act provides correction procedures and directs the
    Secretary of the Treasury to provide further guidance.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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