The ‘Three Pillars’ of EAC Use and the Proposed Regulations for Clean Hydrogen Tax Credit


March 31, 2024

The Internal Revenue Service (IRS) and US Department of the Treasury (Treasury) published proposed regulations (the Proposed Regulations) in late December 2023 setting forth rules that would apply to the tax credits for US-situated clean hydrogen production facilities enacted under the Inflation Reduction Act of 2022 (IRA).

The Proposed Regulations provide much-anticipated guidance regarding eligibility and the requirements for claiming the tax credits available to hydrogen production facilities following the IRA (generally, an investment tax credit (ITC) under Section 48 of the Code and a production tax credit (PTC) under Section 45V of the Code).

Among the most sought-after guidance, the Proposed Regulations address the use of energy attribute certificates (EACs), such as renewable energy certificates, to support a project’s clean hydrogen emissions profile. This article focuses on the approach of the Proposed Regulations with respect to the use of EACs under the so-called “three pillar” model. These rules are critical to the credit eligibility of electrolytic hydrogen production facilities.

For a discussion of additional aspects of the Proposed Regulations, see our LawFlash Treasury and IRS Publish Much Anticipated Guidance on Clean Hydrogen Tax Credit.

Three Pillar Compliance for Use of Electrical Power

While the industry generally expected that EACs could be used to support the credit-eligible production of hydrogen, the critical question has been how the so-called “three pillars” of EAC use to evidence emissions reductions—incrementality, temporal matching, and deliverability—would be addressed.

The Proposed Regulations’ approach would be to require a relatively strict form of three pillar compliance for facilities using electricity to produce hydrogen in order to qualify for the ITC or PTC.

This means that all facilities producing hydrogen through electrolysis, whether “in front of the meter” (pulling power from the grid) or “behind the meter” (pulling power from a directly interconnected energy production facility), would be required to procure and retire qualifying EACs to substantiate the facilities’ lifecycle greenhouse gas (GHG) emissions rates or else be subject to the general electrical grid–specific emissions rate found in the GREET model (as further discussed in the aforementioned LawFlash).

The Proposed Regulations would credit EACs to power consumption of a hydrogen production facility on a one-to-one basis regardless of whether the generating facility is behind or in front of the meter, although the IRS and Treasury has solicited comments for whether a different treatment would be more appropriate to account for transmission and distribution line losses.

We outline below the Proposed Regulations’ approach to incrementality, temporal matching, and deliverability.

  • Incrementality: EACs can satisfy the Proposed Regulations’ incrementality requirements in one of two ways. First, the hydrogen facility utilizing EACs is placed in service within 36 months after the power generation facility begins commercial operation. Second, the electricity represented by the EAC is produced by a power generating facility that increased its rated nameplate capacity no more than 36 months before the hydrogen project was placed into service. The IRS and Treasury also include a very extensive request for comments on additional options to satisfy the incrementality requirement in ways that, in their view, do not result in significant induced GHG emissions, including the following approaches:
    • Obtaining EACs from an energy-generating facility that would otherwise retire but for its relationship with a hydrogen production facility.
    • A modeled approach that would cover EACs obtained (1) during periods in which minimal-emitting generation would have otherwise been curtailed or experienced negative energy pricing and (2) in locations where grid-electricity is 100% generated by minimal-emitting generators or where increases in load do not increase grid emissions (e.g., due to state policy capping total GHG emissions such that new load must be met with minimal-emitting generators).
    • A formulaic approach that would allow for a specified percentage (currently proposed at 5%, but the IRS and Treasury have requested feedback on alternatives) of generation from minimal-emitting resources placed in service before January 1, 2023.
  • Temporal Matching: The Proposed Regulations would require that, until December 31, 2027, electricity represented by the EAC be generated in the same calendar year that the taxpayer’s hydrogen production facility uses electricity to produce hydrogen (annual matching). However, beginning on January 1, 2028, hourly matching would be required (i.e., the electricity represented by the EAC would need to be generated in the same hour as the electricity utilized by the hydrogen production facility to produce hydrogen). The IRS and Treasury are soliciting comments on the proposed transition period, the predicted timelines for the development of hour-tracking mechanisms, and the predicted timeline for market development for hourly EACs.
  • Deliverability: The reference energy generation facility must be included in the same geographic region as the hydrogen production facility (based on the National Transmission Needs Study released by the US Department of Energy in October 2023).

The EAC requirements may lead to further competition in an already competitive field to secure offtake agreements from renewable energy projects. Average power purchase agreement prices have steadily increased since 2020, and demand for renewable projects remains very strong among corporate offtakers and utilities.

It can be particularly challenging to find development-ready projects in certain markets where projects are more likely to face permitting and interconnection challenges. That said, depending on how the final rules address incrementality, the EAC requirements may also incentivize the expansion of existing projects.

While the three pillar approach taken in the Proposed Regulations answers some of the most pressing questions relating to hydrogen PTC and ITC qualification, it does so in a relatively stringent manner in relation to various types of stakeholders (e.g., hydrogen producers and power producers).

The IRS and Treasury have received numerous[1] comment letters reacting to the Proposed Regulations, many of which focus on this three pillar approach. The clean hydrogen industry and other stakeholders are anxiously awaiting further guidance (including final regulations) to see whether their concerns are addressed.

[1] Comment letters may be viewed at Interestingly, thousands of comment letters appear to have been submitted by persons in their individual capacity (not on behalf of any organization or institution) pursuant to various grassroots campaigns. Such letters follow various models (in each case using the same language), depending on the relevant campaign, and advocate for various (and in many cases opposing) positions. Time will tell how the IRS and Treasury respond to this strategy.