Newly Finalized Section 45V and 48 Regulations Face Uncertain Future

On December 4, 2024, and January 3, 2025, respectively, the Department of the Treasury and Internal Revenue Service finalized two key sets of regulations pertaining to the energy credit (most commonly referred to as the “investment tax credit” or “ITC”) under Section 48 of the Internal Revenue Code of 1986 (the “Code”) on the one hand (the “Final ITC Regulations”), and the clean hydrogen credit under Section 45V of the Code, on the other hand (the “Final Hydrogen Regulations”) (together with the Final ITC Regulations, the “Final Regulations”).

These Final Regulations, and the Final Hydrogen Regulations in particular, have been heavily anticipated by the renewables and energy transition industry. Not only do such regulations provide much-needed clarity in the application of key statutory provisions, but they also serve to address well-recognized concerns the industry had with regard to the administrability of proposed rules. However, while the Final Regulations will likely prove helpful to taxpayers in the interim, there are many questions as to whether these and other recently-finalized Treasury Regulations will long survive, given possible rescission under the Congressional Review Act (the “CRA”). This risk, and some of the potential additional issues, are further discussed below.

Final Hydrogen Regulations

The Final Hydrogen Regulations were issued by the Internal Revenue Service and the Department of the Treasury on January 3, 2024, in pre-publication form, after proposed regulations were released in December 2023.[1] Some highlights include the following:

• Significantly liberalized restrictions on Energy Attribute Certificates (“EACs”) from the Proposed Hydrogen Regulations, which have come to be known as the “three pillars”;
• Allowance for determination of emissions on an hour-by-hour basis, effectively allowing for a partial clean hydrogen credit even if some production doesn't meet applicable greenhouse gas requirements (rather than potentially forfeiting the entire credit amount); and
• Additional clarity on open items from the Proposed Hydrogen Regulations, including the GREET Model, Renewable Natural Gas (RNG), and Fugitive Methane.

To expand at a high level upon the above, below are some additional details:

1. Loosening of the “Three Pillars”

Notably, the Final Hydrogen Regulations significantly liberalize all three of the infamous “three pillars,” as further explained below. 

As brief background, Section 45V of the Code provides that the dollar value of the Section 45V clean hydrogen credit depends on the amount of CO2 equivalent released as a byproduct of the applicable hydrogen production process.[2] However, the statutory language is silent on the specifics of determining the amount of CO2 released, making it virtually impossible for taxpayers to logistically plan for the amount of credit available in the absence of regulatory guidance. 

The initial iteration of this guidance was issued under the Proposed Hydrogen Regulations, which indicated that taxpayers could match input energy with produced hydrogen through the use of EACs, provided three requirements (i.e., the “three pillars”) were met with respect to such EACs. Specifically, the requirements were as follows: 

• Additionality/Incrementality: Electricity used to power the applicable hydrogen facility must be sourced from power facilities that began commercial operations no more than 36 months before the hydrogen facility was placed in service;
• 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, needed to be matched on an hourly basis; and
• Deliverability/Geographic Correlation: Electricity used to power the applicable hydrogen facility needed to be sourced from a power producer in the same geographical region as the hydrogen production facility.[3]

The three pillars requirements of the Proposed Hydrogen Regulations had been subject to fervent and widespread criticism by industry pundits, with many maintaining that the requirements were so strict as to effectively stifle the burgeoning clean hydrogen industry in its entirety. Accordingly, the Final Hydrogen Regulations made significant and taxpayer-friendly changes to these rules, as highlighted below: 

Additionality/Incrementality:

Under the Final Hydrogen Regulations, the requirement remains that clean power sources must not have been in commercial operation for more than 36 months, and facilities that have already begun construction are not grandfathered out of this rule.[4] The Final Hydrogen Regulations, however, introduce some notable exceptions, including “at-risk” nuclear facilities[5] and power produced in states with renewable mandates like California and Washington, which will be “per se” respected as incremental provided certain requirements are met.[6] Other states may qualify as well if they adopt similar policies. Moreover, electricity produced from a generator that has added carbon capture and sequestration capability within a 36-month window before the hydrogen facility is placed in service will also per se be considered incremental for these purposes.[7]

Temporal Matching:

Under a development welcomed by industry, the transition to hourly matching of clean hydrogen and power is delayed under the Final Hydrogen Regulations until January 1, 2030, with annual matching allowed until then.[8]

Geographic Matching/Deliverability: 

The Final Hydrogen Regulations retain the requirement that clean power must come from a producer within the same region as the hydrogen production facility, as per the DOE's National Transmission Needs Study.[9] However, in contrast to the proposed rules, there is now flexibility for demonstrating energy transfers between regions and also the possibility for a taxpayer to import from a different region in certain cases.

2. Hourly Accounting

Under the Proposed Hydrogen Regulations, there was a concern that a failure of any portion of a year’s production of hydrogen to meet applicable greenhouse gas emissions requirements would result in the loss of the entire section 45V clean hydrogen credit for all production during that year. To address this concern, the Final Hydrogen Regulations clarify that producers may determine emissions on an hour-by-hour basis.[10] As long as the emissions of the hydrogen production process are under section 45V’s limit of 4 kg of CO2e per kg of hydrogen produced on an annual basis, it is possible to claim a partial credit rather than facing an “all or nothing” proposition.[11]  

3. GREET Model Certainty

Under the Final Hydrogen Regulations, hydrogen producers can now elect to rely on the version of the GREET model in effect when their facility began construction, safeguarding eligibility for the credit throughout the facility's operational life, even if future models change.[12]

4. Renewable Natural Gas (“RNG”) and Fugitive Methane

The Final Hydrogen Regulations endorse the “book-and-claim” system for RNG or coal mine methane production, with implementation postponed until 2027.[13] With regard to fugitive methane regulation, the Final Hydrogen Regulations adopt national default methane leakage rates with allowances for project-specific rates using EPA data and, in a taxpayer-favorable development, do not enforce a “first productive use” rule, allowing for use of RNG or fugitive sources of methane to echo industry hopes that these be respected as a means of reducing the GHG emissions of hydrogen production irrespective of the nature of prior usage.[14]

Final ITC Regulations

On the whole, the Final ITC Regulations adopt similarly-focused proposed ITC regulations from November 2023 (the “Proposed ITC Regulations”) with certain modifications. Similar to the proposed regulations, the primary function of these regulations is to update the regulatory framework upon which renewable energy projects claiming the ITC can rely to account for changes made under the Inflation Reduction Act of 2022 (the “IRA”). One of the principal focuses is therefore on defining “energy property” in light of the expansion of the types of property eligible to claim such ITCs under the IRA. While much of the substance of the Final ITC Regulations mirrors that of the Proposed ITC Regulations, there are some notable differences. See our client alert for a discussion of the Proposed ITC Regulations.

Some of the specific highlights of the Final ITC Regulations include the following:

• Expansion of types of property constituting “qualified biogas property”;
• Removal of the unpopular and controversial “end use requirement” with respect to hydrogen energy storage property;[15] 
• Key updates to the all-important definition of “energy project”;
• Updates to the interconnection ITC whereby qualified interconnection costs may be included for each separate energy property with a maximum net output of less than 5 MW, even if an applicable interconnection agreement allows for a maximum output far in excess of the 5 MW Limitation; and
• Removing “buyer-only” liability in the context of ITC transfer deals where recapture occurs due to failing prevailing wage requirements. 

Some of the highlights of the Final ITC Regulations include the following:

1. Elimination of End Use Requirement for Hydrogen Energy Storage Property

The Proposed ITC Regulations had provided that, as to hydrogen energy storage property, the ITC could only be claimed with respect to hydrogen stored to be used as energy, and not for other uses, such as fertilizer (i.e., the so-called “end use requirement”). The Final ITC Regulations eliminated this requirement, citing agreement with a number of concerns raised by commentators.[16] 

Linklaters Commentary: The elimination of the end use requirement will be very well received in the market as there had been a sense that the requirement would seriously impact the utility of the ITC in hydrogen storage projects, or at least render qualification sufficiently uncertain as to jeopardize bankability. Specifically, the end use requirement would have been an administrative nightmare—as commenters made clear, for example (1) currently, there are simply insufficient documentation precedents available for a taxpayer to efficiently demonstrate the end-use of hydrogen, a fungible molecule, stored in a taxpayer’s hydrogen energy storage property, and (2) it is not only too difficult for storage owners to predict how hydrogen will ultimately be used, but ultimate use is generally not a process of which such owners readily have visibility. 

2. Definition of Energy Property

Whereas the Proposed ITC Regulations would have required two of the “single property” factors in common to identify a single energy project, the Final ITC Regulations now require four.[17] While perhaps counterintuitive, the change is actually taxpayer-friendly in that it serves to protect taxpayers from disadvantageous outcomes in cases where different energy properties might inadvertently be treated as one project. The factors, long familiar to the renewables industry, include the following: (i) the energy properties are constructed on contiguous pieces of land; (ii) the energy properties are described in a common power purchase, or thermal energy or other off-take agreement or agreements; (iii) the energy properties have a common intertie; (iv) the energy properties share a common substation, or thermal energy off-take point; (v) the energy properties are described in one or more common environmental or other regulatory permit; (vi) the energy properties are constructed pursuant to a single master construction contract; and (vii) the construction of the energy properties is financed pursuant to the same loan agreement.[18]

3. Removal of Buyer-Only Liability on ITC Transfer Deals

In the context of ITC transfer deals, the Final ITC Regulations offer clarification that if there is a recapture of the ITC due to a failure to meet the prevailing wage requirements, the loss of credit is shared proportionally between the transferor and the transferee based on the amount of credit actually claimed by the same, rather than assigning all liability on the buyer.[19]

4. Offshore Wind Developments

The Proposed ITC Regulations had meaningfully expanded the universe of ITC-eligible expenses in the case of offshore wind projects. Specifically, the Proposed ITC Regulations specified that the turbines, inter-array cables, offshore substation, subsea cables, and onshore substation all counted as functionally interdependent components for the generation of electricity leading up to the point of interconnection that are each necessarily placed in service together and, therefore, each constituted ITC-eligible energy property.[20] The Final ITC Regulations implemented this boon to the offshore wind industry without change.[21] 

Clouds Looming for Solar, Clean Hydrogen and other ITC Projects

It would be difficult to understate the impact of the new administration on energy policy in the United States. While a complete overhaul of the IRA or tax credits applicable to renewable energy projects is widely considered to be very unlikely, specific changes to current IRA provisions seem increasingly likely, particularly given the single party control of Congress and the Executive Branch, and the expected costs of renewing expiring provisions of the 2017 Tax Cuts and Jobs Act. 

Moreover, it seems like changes to the renewable energy regulatory landscape are even more likely than actual statutory changes, which regulatory changes could occur fairly quickly with utilization of the CRA. During the first Trump Administration, the CRA was utilized 16 times to overturn final rules published during the end of the Obama Administration.[22]

A 30,000-Foot View of the CRA

The CRA essentially allows Congress to quickly and easily invalidate “major” rules promulgated during a specified “lookback period,” which, in the case of the incoming administration, will begin “on or after August 1, 2024.”[23] This means of invalidating rulemaking had traditionally been seldom utilized; however, as mentioned above, it was frequently implemented during Trump’s first administration. While no Treasury rule has ever been invalidated by the CRA, many in the market are anticipating Trump to resort to the CRA again in full force in order to invalidate certain regulatory tax rules finalized during the latter phases of the Biden Administration, including, for example, final rules promulgated under the Section 45X Advanced Manufacturing credit and these Final Regulations as well. Once a rule is invalidated under the CRA, it “shall have no force or effect.”[24]

As far as quantifying the potential impact of the CRA, there are a couple of key parameters to keep in mind:

• The CRA can technically only be used to invalidate final, and not proposed, Treasury Regulations. The CRA incorporates the Administrative Procedure Act’s definition of a “rule,” which is defined as “the whole or a part of an agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy or describing the organization, procedure, or practice requirements of an agency.”[25] However, there are three exceptions to rules covered by the CRA: (1) rules of particular applicability; (2) rules relating to agency management or personnel; and (3) rules of agency organization, procedure, or practice that do not substantially affect the rights or obligations of non-agency parties.[26]
• It is unclear to what extent an IRS proposed regulation may stay “in effect” or otherwise remain helpful to taxpayers if the underlying final regulation is invalidated under the CRA. Each situation will need to be analyzed on a case-by-case basis, to look at what specifically the proposed regulations at bar indicate in terms of applicability and whether and to what extent taxpayers can rely on them in the absence of final regulations.[27]
• Invalidation of a rule under the CRA has both short- and long-term impacts. Once rules are invalidated under the CRA, no rules that are “substantially the same” can be issued or reissued, unless the new or reissued rule is specifically authorized by law.[28]The CRA does not define what constitutes a rule that is “substantially the same” as an invalidated rule. While two rules that were overturned under the CRA were subsequently reissued, in both cases, the agencies took the legislative history from the resolutions of disapproval into account in revising and reissuing the regulations.[29]

What Happens if the Final Regulations are Invalidated under the CRA? 

If the Final Regulations are invalidated under the CRA, taxpayers will be put in the precarious position of needing to decide whether and to what extent applicable Proposed Regulations apply to their fact patterns.[30] Without the Proposed Regulations, many of the efforts to update the applicable provisions to account for all of the IRA updates will effectively have been erased, creating not only a lack of certainty but lack of efficiency as to the implementation of ITC principles. To that end, a host of questions and issues arise. Below are just a few:

• Should taxpayers simply revert to treating the Proposed Regulations as either the de facto rule of law or at least the source of the “latest and greatest” view? It will be somewhat unclear whether taxpayers should rely on the Proposed Regulations. In the case of the provisions mentioned above, if the Final Regulations were to be invalidated in a few months, will the brief period during which the Final Regulations became effective allow such reliance, or will the better view be that in light of the CRA, taxpayers should treat the Final Regulations as though they never existed?
  • While reverting to Proposed Regulations could be a mere administrative nuisance in the case of the ITC, a reversion to the Proposed Hydrogen Regulations could have a chilling effect on the industry and put a widespread halt to projects potentially already underway. 
• Even if taxpayers can rely on the Proposed Regulations, “substantially similar” final regulations will not be permitted pursuant to the CRA. What does “substantially similar” mean? Does this mean that final regulations on the topics addressed in the Proposed Regulations can simply never be issued? If so, what does that mean for the technologies (e.g., offshore wind in the case of the ITC, or nuclear energy in the case of the clean hydrogen credit) benefitting substantially from the expanded guidance? Will the unpopular provisions of the Proposed Regulations, e.g., the end use requirement, effectively be given new life and spur significant headwinds for clean hydrogen projects?
  • Notably, on January 7, Treasury issued another set of final regulations pertaining to technology-neutral PTC and ITC credits under Sections 45Y and 48E, respectively, of the Code. These provisions apply to renewable energy projects placed in service after 2024, and are effectively the continuation of the current PTC and ITC. Many of the aforementioned considerations will potentially apply to these regulations as well. 
     

[1]    The proposed regulations issued as to the ITC under Section 48 of the Code in November 2023 and the proposed regulations issued as to the clean hydrogen credit issued under Section 45V of the Code in December 2023 will be referred to as the “Proposed ITC Regulations” and “Proposed Hydrogen Regulations,” respectively. Where the Proposed ITC Regulations and Proposed Hydrogen Regulations are referred to collectively, they are referred to simply as the “Proposed Regulations.” 

[2]    26 U.S.C. § 45V. 

[3]    Prop. Treas. Reg. § 1.45V-4(d). 

[4]    Treas. Reg. § 1.45V-4(d)(3)(i)(A). The Final Hydrogen Regulations are set to be published in the Federal Register on January 10, 2025. All citations to the Final Hydrogen Regulations in this article reference the section of the published regulation into which the relevant provisions will be incorporated. 

[5]    Treas. Reg. § 1.45V-4(d)(2)(x). 

[6]    Treas. Reg. § 1.45V-4(d)(2)(xii). 

[7]    Treas. Reg. § 1.45V-4(d)(3)(i). 

[8]    Treas. Reg § 1.45V-4(d)(3)(ii)(B). 

[9]    Treas. Reg § 1.45V-4(d)(3)(iii). 

[10]   Treas. Reg. § 1.45V-4(a)(2). 

[11]   Id. 

[12]   Treas. Reg. § 1.45V-4(b)(2).

[13]   Treas. Reg. § 1.45V-4(f).

[14]   Treas. Reg. § 1.45V-4(f)(3).

[15]   89 Fed. Reg. 100598, 100605 (Dec. 12, 2024).

[16]   89 Fed. Reg. 100598, 100605 (Dec. 12, 2024).

[17]   Treas. Reg. § 1.48-13(d)(1).

[18]   Id.

[19]   Treas. Reg. § 1.6418--5(f)(3).

[20]   Prop. Treas. Reg. § 1.48-9(f)(5)(iii), Example 3.

[21]   Treas. Reg. § 1.48-9(f)(5)(iii), Example 3. 

[22]   U.S. Gov’t Accountability Office, “FAQs on the Congressional Review Act” under “What congressional resolutions of disapproval have occurred under CRA?,” https://www.gao.gov/legal/congressional-review-act/FAQs-on-the-Congressional-Review-Act.

[23]   Congressional Review Service, “The Congressional Review Act: The Lookback Mechanism and Presidential Transitions” (July 9, 2024), https://crsreports.congress.gov/product/pdf/IF/IF12708. The lookback period begins 60 working days before the end of a session of Congress. Regulations issued between that day and the beginning of the subsequent session of Congress are available for review in the new session of Congress.

[24]   5 U.S.C. § 801(f). 

[25]   5 U.S.C. § 551(4).

[26]   5 U.S.C. § 804(3). 

[27]   It is worthwhile to also note the distinction between proposed and temporary Treasury Regulations. The U.S. Government Accountability Office issues opinions to Congress about whether certain actions fit under the definition of a “rule” under CRA purview or fall within one of the applicable exceptions. To date, these opinions have not addressed temporary regulations issued by the IRS. Under 26 U.S.C. §7805(e)(1), temporary regulations are required to be issued as proposed regulations, which do not fall under the definition of a rule covered under the CRA. However, the IRS’s temporary regulations have the force of law similar to a final rule during their limited time period of three years, which could support an argument for a temporary regulation being considered an interim final rule or final rule under the CRA. Because each temporary regulation varies greatly in terms of applicability as well as whether and to what extent taxpayers can rely on them in the absence of final regulations, each temporary regulation will need to be reviewed on a case-by-case basis. 

[28]   A rule that does not take effect (or does not continue) under paragraph (1) may not be reissued in substantially the same form, and a new rule that is substantially the same as such a rule may not be issued, unless the reissued or new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original rule.” 5 U.S.C. § 801(b)(2). 

[29]   Congressional Research Service, “Congressional Review Act Issues for the 117^th Congress: The Lookback Mechanism and Effects of Disapproval, at 10 (Feb. 19, 2021), https://crsreports.congress.gov/product/pdf/R/R46690. 

[30]   Regarding the Final ITC Regulations, with respect to the bulk of impactful provisions under the Proposed ITC Regulations, such as (i) the provisions defining certain specific types of energy property, including hydrogen storage property and the end use requirement provisions and (ii) the expanded perimeter for offshore wind expenses, the text of the Proposed Regulations indicates that taxpayers may rely on such provisions with respect to property that is placed in service after December 31, 2022, and during a taxable year beginning on or before the date final regulations are published in the Federal Register, provided the taxpayer and all related persons apply the proposed regulations in their entirety and in a consistent manner.