In this issue:

  • U.S. Department of Energy and Treasury Department Advance Clean Hydrogen Incentives
  • U.S. Treasury Department and Internal Revenue Service Issue Additional Guidance Regarding Sustainable Aviation Fuel Credits
  • Continued Growth in Battery Manufacturing Incentives
  • FERC Blanket Authorizations for Investment Companies Under Review
  • New York Identifies Additional Public Policy Transmission Needs

U.S. Department of Energy and Treasury Department Advance Clean Hydrogen Incentives

The clean hydrogen sector in the U.S. is undergoing substantial transformation as a result of both the Section 45V clean hydrogen production tax credit and the clean hydrogen portion of the corresponding Section 48 investment tax credit ("Clean Hydrogen Tax Credit") established under the Inflation Reduction Act of 2022 ("IRA") and the Regional Clean Hydrogen Hubs ("H2Hubs") initiative established under the Infrastructure Investment and Jobs Act. On December 22, 2023, the U.S. Treasury Department issued long-awaited proposed regulations ("Proposed Regulations") detailing the implementation of the Clean Hydrogen Tax Credit. In addition, on October 13, 2023, the U.S. Department of Energy ("DOE") announced seven regional hydrogen hub proposals selected under the H2Hubs initiative, to commence award negotiations with DOE for funding of up to US$7bn in aggregate.

Clean Hydrogen Tax Credits

The Proposed Regulations for the Clean Hydrogen Tax Credit allow taxpayers to use certain "qualifying" Energy Attribute Certificates ("EACs") to treat the source of electricity to power hydrogen production facilities as coming from a specific source for purposes of establishing how "clean" the hydrogen production process is (and therefore, how many dollars in credits are earned). A qualifying EAC must provide information regarding the generating facility and technology as well as its feedstock, the amount of electricity, the commercial operation date of the facility, and the time during which the electricity was generated.

The Proposed Regulations adopt three strict requirements for hydrogen facilities to qualify for the Clean Hydrogen Tax Credit. These are generally referred to respectively as "additionality," "temporal matching," and "geographical" requirements. While some disagreement exists in the industry about whether the above requirements, which refer to ECAs, would be required for all hydrogen production projects, a conservative reading of the regulations would suggest that even a project that was co-located at the facility producing its power inputs would need to utilize ECAs compliant with the three requirements mentioned above in order to produce the data required in order to claim the Clean Hydrogen Tax Credit. Specifically, these requirements are as follows:

  1. Additionality – Newly generated electricity must come from clean power generators with a commercial operation date no more than 36 months prior to the hydrogen production facility being placed in service. This requirement also applies to existing electricity-generating facilities that have increased production due to an uprate that occurred within the same 36-month window. The U.S. Treasury Department is also contemplating formulaic approaches to addressing incrementality, for example a safe harbor provision where 5% of the hourly generation from generators placed in service before 2023 would automatically meet the additionality requirement.
  2. Temporal Matching – Electricity used to power the applicable hydrogen facility must be matched with the clean power generation on an annual basis, and beginning January 1, 2028, must be matched on an hourly basis.
  3. Geographic Correlation – An EAC must be generated in the same "region" as the relevant hydrogen production facility in order to meet the deliverability requirement. The "regions" are identified in the National Transmission Needs Study released by the DOE on October 30, 2023.

In addition to the three criteria above, the Proposed Regulations also mandate the calculation of the lifecycle greenhouse gas ("GHG") emissions rate for clean hydrogen production to determine the Clean Hydrogen Tax Credit. The GHG emissions are assessed on a "well-to-gate" basis using the Greenhouse Gases, Regulated Emissions and Energy Use in Transportation ("GREET") model by Argonne National Laboratory, which considers emissions from the complete production cycle, including feedstock procurement and electricity use, through the point of production. The "45VH2-GREET" model will be available online for taxpayers, who can then determine their credit amount by selecting from one of eight production pathways. Taxpayers with technologies or feedstocks not covered by the model may request a provisional emissions rate from the Treasury.

Hydrogen Hubs

The seven regional hydrogen hubs selected as part of the H2Hubs initiative cover 16 states and involve hundreds of partners. The selected proposals are expected to attract more than $40bn in private investments and collectively produce three million metric tons of clean hydrogen annually. The technologies to be used for hydrogen production include natural gas (with carbon capture and storage), electrolysis through renewable or nuclear energy and biomass gasification.

DOE's Office of Clean Energy Demonstrations is in negotiations with the selected projects. Once a project finalizes a cooperative agreement with DOE, the relevant project will initiate a four-phase development plan to receive funding over a period of eight to 12 years. DOE has noted that it may also consider a second solicitation round for additional hubs.

On July 5, 2023, DOE also released a Notice of Intent and Request for Information ("RFI") to advance the H2Hubs program with a $1bn support mechanism to secure private investment in the early stages of the H2Hubs program and incentivize long-term offtake agreements by mitigating market risk through measures such as pay-for-difference contracts, fixed levels of support for projects, feasibility funding to support analysis by offtakers, and establishing a "market-maker" for clean hydrogen to provide a ready purchaser/seller for clean hydrogen.

On January 17, 2024, DOE announced the selection of a consortium to administer the demand side initiative and support the launch of the H2Hubs. The consortium – which consists of the EFI Foundation, S&P Global, and Intercontinental Exchange – is expected to work with DOE over the next six to nine months to design demand-side support measures to decrease the risk in hydrogen projects, increase market certainty, and lay a strong foundation to help accelerate the development of the clean hydrogen economy.

See our report, "Getting Hy? The U.S.," for more information on the hydrogen industry in the U.S.

U.S. Treasury Department and Internal Revenue Service Issue Additional Guidance Regarding Sustainable Aviation Fuel Credits

On December 15, 2023, the U.S. Department of the Treasury ("Treasury Department") and the Internal Revenue Service ("IRS") published Notice 2024-6 (the "Guidance") for the new Sustainable Aviation Fuel ("SAF") tax credit established by the IRA, providing guidance on additional safe harbors for calculating the lifecycle greenhouse gas emissions reduction percentage using the Environmental Protection Agency's ("EPA") RFS program and related guidance and explaining that the Argonne-GREET model and other GREET-based models currently do not satisfy the applicable statutory requirements for the SAF credit.

Background

The IRA established the SAF tax credit under the Internal Revenue Code (the "Code") which applies to the production of certain fuel mixtures containing SAF that is sold or used after December 31, 2022, and prior to January 1, 2025. The SAF credit is $1.25 per gallon of SAF in a qualified mixture, which increases by $0.01 per gallon for each percentage point by which the emissions reduction percentage of the SAF exceeds 50%, up to a maximum increase of $0.50. The IRS issued an initial guidance on SAF credits on December 19, 2022, in Notice 2023-6.

Summary

Under the Code, SAF must be certified in order to establish the requisite "lifecycle greenhouse emissions reduction percentage" of at least 50% to qualify for the tax credit. Section 40B(e) of the Code provides that this emissions reduction percentage may be calculated in accordance with (i) the most recent Carbon Offsetting and Reduction Scheme for International Aviation that has been adopted by the International Civil Aviation Organization with the agreement of the United States, or (ii) any similar methodology that satisfies the criteria under Section 211(o)(1)(H) of the Clean Air Act, as in effect on August 16, 2022.

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