Last week, the U.S. Senate passed the Inflation Reduction Act of 2022, a bill aimed at accelerating domestic investment in clean energy technologies and solutions, including hydrogen and fuel cells. This is an opportunity for large-scale projects, economic growth, and an important incentive to decarbonize more sectors of the US economy.
The bill passed the House and was already signed into law by President Joe Biden on Wednesday, August 16. It contains several provisions that, as a result, envision significant investments in domestic clean energy production, thereby reducing carbon emissions in the national economy by about 40% by 2030. The adopted regulations extend and expand tax credit provisions to support the development of the renewable energy sector and carbon capture and utilization methods.
The bill emphasizes developing the market for clean hydrogen in the US. Green fuel is set to become crucial to the continued functioning of not only the U.S. but also the global economy. It is therefore essential to support its construction through a series of initiatives and incentives. Accordingly, the production, storage, and operation of hydrogen are characterized by significant tax benefits. The bill promotes hydrogen through, among other things:
- a 10-year production tax credit (PTC) for “clean hydrogen,” with corresponding elections to claim the investment tax credit (ITC) in place of the PTC,
- qualifying energy storage technologies for the ITC with a definition that specifically includes hydrogen,
- revising the “clean vehicle” credit for passenger vehicles and introducing credit for clean commercial vehicles, of which hydrogen vehicles are treated as key,
- reviving and expanding the credit for alternative fuel stations, which is expected to translate into an increase in the number of newly built facilities.
Clean hydrogen production – new provisions
Clean hydrogen is defined considering the life-cycle greenhouse gas emission rate of the fuel at a qualifying hydrogen production facility. To speak of clean hydrogen, the level of emissions generated must not exceed 4 kg CO₂e per kilogram of hydrogen produced. The amount of credit can be as high as approx. USD 0.60 per kilogram, provided that the plant produces clean hydrogen that generates less than 0.45 kg CO₂e per kilogram of hydrogen over its life cycle. If this level is between 0.45 kg and 4 kg, the credit is available, but at a correspondingly lower rate.
The provisions apply to clean hydrogen produced after 2022 at eligible facilities. The condition is that they must be facilities located in the United States, and the hydrogen is produced under requirements set by the Secretary of the Treasury. The provisions are also to apply to hydrogen produced in the US for export.
Significantly, the base rate of $0.60 per kilo can be increased by up to 500% if the relevant requirements are met. Bonus credits of up to 10% PTC/ITC are also available, provided additional requirements are met, including locating the facility in an “energy community.”
Hydrogen storage
The law adds hydrogen storage to the definition of energy storage technology, which means it qualifies as an energy property that can receive credits. According to records, storage technology includes “property (other than property used primarily for the transportation of goods or persons) that receives, stores and delivers energy for conversion to electricity (or in the case of hydrogen that stores energy) and has a rated capacity of not less than 5 kWh.”
Also, the ITC for energy storage technology is subject to the concept of a credit multiplier. The basic rate is 6% of eligible costs but can be increased by up to 500% (to a rate of 30%).
Transferability of credits
An interesting concept included in the regulations is the possibility of direct sale of tax credits. This is a complete novelty hence experts point out that the effects of the free transferability of certain credits for the time being remain unforeseen. Directly for taxpayers, this means that they can choose to transfer all (or any part) of a qualifying credit to an unrelated taxpayer on an annual basis, provided that certain conditions in the law are met.
In addition to tax credits related to hydrogen, the bill also includes favorable provisions for biofuels and bioenergy, including sustainable aviation fuel (SAF). Total funding is expected to reach $737 billion, with $369 billion going to energy security and climate change issues.
Source: King & Spalding, “Hydrogen-Related Provisions of the Inflation Reduction Act of 2022.”
