Existing Clean Power and Eligibility for Hydrogen Production Tax Credits: “Additionality” Doesn’t Add Up
Tuesday, February 21, 2023
The Inflation Reduction Act promises to transform the energy sector in many ways, but among the most exciting is the hydrogen production tax credit, which provides a production tax credit, over a ten year period beginning with the date a facility is placed in service, of up to 60 cents per kilogram of “clean hydrogen” – that is, hydrogen “produced through a process” with a life-cycle greenhouse gas emissions rate below specified thresholds. 26 U.S.C. § 45V. The credit is enhanced five-fold, up to $3 per kilogram, for clean hydrogen produced at facilities complying with certain prevailing wage and apprenticeship requirements. Clean hydrogen can be used to decarbonize hard-to-electrify sectors, such as steel, cement, and chemical production, that today are responsible for a significant share of the Nation’s carbon emissions.
The Treasury Department is currently reviewing comments on the implementation of the hydrogen tax credit under Section 45V. See IRS Notice 2022-58. Several commenters have urged the agency to limit tax credits to hydrogen production powered by new renewable generation – thus eliminating the ability for hydrogen producers to receive tax credits if they source their electricity from existing renewable or nuclear plants. Similar arguments are being raised at the Department of Energy as it seeks to finalize its Clean Hydrogen Production Standard to guide funding decisions under the Infrastructure Investment and Jobs Act.
The policy rationale for this limitation – which its proponents call “additionality” – is that if existing renewable or nuclear plants are used to produce hydrogen, they will no longer be available to serve the grid, and the result will be increased dispatch of fossil fuel plants to fill the gap, resulting in increased carbon emissions overall. In their view, only “additional” clean generation – generation that would not otherwise exist, but for the electricity demand created by hydrogen production – should be allowed to be used by hydrogen producers claiming tax credits or federal funding.
An “additionality” requirement, however, is simply inconsistent with the statutory scheme. If one is adopted, it is almost certain to be challenged in court – creating uncertainty that will discourage clean hydrogen production. And, for the reasons I describe below, such a challenge is likely to succeed.
First, the text of the Inflation Reduction Act forecloses such a requirement. The statute makes tax credits available to “any qualified clean hydrogen,” 26 U.S.C. § 45V(b)(2)(A), (B), (C), (D) (emphasis added), and defines “qualified clean hydrogen” to focus on the process used to produce the hydrogen – not the indirect effects like the potential for other power sources to be dispatched to serve other load on the electric grid. Thus, hydrogen counts as “clean hydrogen” if it is “produced through a process that results in a lifecycle greenhouse gas emissions rate” below a specified threshold. Id. § 45V(c)(2)(A). Lifecycle greenhouse gas emissions are to be calculated using a model known as “GREET,” developed by Argonne National Labs, and “shall only include emissions through the point of production” as determined by the GREET model. Id. § 45V(b)(1) (emphasis added). In calculating emissions through the point of production, the GREET model makes no distinction between sources of electricity based on whether they are existing or new. Thus, there is no room for an “additionality” requirement in the definitions establishing eligibility for the tax credit.
Second, if Congress had wanted to impose an “additionality” requirement, it knew how to do so. For example, Section 45V contains other vintage-related requirements: a “qualified clean hydrogen production facility” is defined as one that begins construction before 2033. § 45V(c)(3)(C). Vintage requirements also limit which hydrogen production facilities are eligible for the increased credit amounts on account of compliance with certain prevailing wage and apprenticeship requirements. § 45V(e)(2)(A). But there is no vintage limitation on the resources used to provide energy to a clean hydrogen production facility.
Moreover, other provisions in the Inflation Reduction Act make clear that Congress anticipated the use of electricity generated by existing nuclear facilities to produce hydrogen and coordinated other clean energy credits with Section 45V on that assumption. Section 45U, for example, establishes a nuclear production tax credit that is only available to nuclear facilities placed in service prior to enactment of the Inflation Reduction Act. In Section 45U(c)(2), Congress incorporated special rules (set forth in Section 45(e)(13)) that would allow nuclear facilities receiving credits under Section 45U to use the electricity they generate to produce clean hydrogen receiving credits under Section 45V. Congress would not have done so if it intended to limit Section 45V credits to hydrogen produced using energy generated by “additional” resources. Indeed, an “additionality” requirement would make Section 45U(c)(2)’s incorporation of Section 45(e)(13) superfluous, conflicting with a basic principle of statutory interpretation and negating Congress’s intent.
Third, Congress sought to promote new renewable generation directly in the Inflation Reduction Act, through tax credit programs aimed directly at new clean generation, in Sections 45Y and 48E. Especially in light of Sections 45Y and 48E, imposing an “additionality” requirement on Section 45V would be arbitrary. After all, the purpose of Sections 45Y and 48E is to massively increase the amount of new renewable generation. Against the backdrop of that expected influx, there is no reason to believe that new renewable generation providing electricity to hydrogen producers is “additional” just because it is new. Such new renewable generation likely would have come online anyway. And from the standpoint of the grid, such new renewable resources are just as available to serve load as existing renewable and nuclear resources are. Consequently, the main effect of grafting an “additionality” requirement onto Section 45V is simply to favor one group of clean generators that otherwise would be serving load (new generators) over other clean generators that would otherwise would be serving load (existing generators). That would be at odds with the purpose of Section 45V, which is to encourage hydrogen production—not promote new renewable generation. From the standpoint of hydrogen producers, the main effect of an “additionality” requirement is to limit the options available to them in sourcing electricity—and thereby potentially make it more costly to produce clean hydrogen. That is directly contrary to Congress’s objectives in Section 45V.
Imposing an “additionality” requirement under the DOE’s Clean Hydrogen Production Standard, see 42 U.S.C. § 16166, which will guide funding decisions under the Infrastructure Investment and Jobs Act, would face similar legal hurdles. The Clean Hydrogen Production Standard concerns “the carbon intensity of clean hydrogen production that shall apply” to the various hydrogen-related activities carried out under 42 U.S.C. subchapter 8, id. § 16166(a), including the selection of regional clean hydrogen hubs.
An “additionality” requirement has no place there. Section 16166(b) directs that the clean hydrogen production standard should “support clean hydrogen production from each source” listed in Section 16154(e)(2). That provision, in turn, makes no distinction between new energy sources and existing energy sources, but instead lists “diverse energy sources” including “fossil fuels with carbon capture, utilization, and sequestration” and “nuclear energy.” Id. § 16154(e)(2), (2)(A), (2)(D); see also id. § 16166(c) (listing numerous sources to which “the standard” shall apply, but making no distinction among resources based on vintage). Similarly, Section 16166(b) requires “clean hydrogen” to be defined in terms of carbon emissions “produced at the site of production per kilogram of hydrogen produced.” Id. § 16166(b)(1)(B) (emphasis added). In other words, hydrogen’s carbon intensity is to be assessed based on the energy source used to produce the hydrogen—not the indirect effects that using that energy source for hydrogen production may have on the carbon intensity of the grid as a whole. An “additionality” requirement would be inconsistent with this statutory text. What is more, the purposes of the statute are squarely focused on promoting the development and commercialization of hydrogen technology. 42 U.S.C. § 16151. Nothing in those purposes suggest that hydrogen should be pursued only to the extent it can be created by new carbon-free resources.
The Inflation Reduction Act amounts to a once-in-a-generation opportunity to kick-start hydrogen production. It could have a transformational effect on our energy economy. Unless already committed to other uses, existing clean resources should be available to American manufacturers seeking to realize that transformation. It would be unfortunate indeed if the transition to a hydrogen-based economy were delayed or thwarted because of an “additionality” requirement limiting hydrogen producers to electricity procured from new resources that need to be constructed and interconnected. Moreover, an additionality requirement is likely to face litigation that will create significant regulatory uncertainty for this nascent industry. The resulting chilling effect is exactly the opposite of what Congress hoped to achieve.