Alternative incrementality compliance pathways for section 45V hydrogen production tax credit

Issue

A 5% exemption to incrementality is too broad and will increase systemwide emissions, contrary to the text and intent of section 45V. 

Surplus electricity that would have otherwise been curtailed and facilities that can avoid retirement through section 45V-related revenues should qualify for the incrementality requirement under section 45V. This is because additional electricity consumption from hydrogen production in both cases helps keep more clean generation on the grid than would otherwise have existed. However, CATF has urged Treasury to avoid a blanket 5% exemption to incrementality and to adopt more targeted solutions.  

A 5% exemption does not target the specific circumstances that cause curtailments, and it unfairly allows financially healthy generators to be exempt when they do not need the hydrogen revenues to avoid retirement. Curtailments usually occur when there is a systemwide oversupply of energy compared to the demand on the system or when transmission constraints inhibit power exports from a region. But both are specific circumstances that vary depending on the time of day and the location. This makes a 5% exemption at all hours of the day across all locations inappropriate. And for avoided retirements, a 5% exemption for all facilities without any consideration of the financial health of the facilities is likewise excessively broad.  

A 5% exemption will increase systemwide emissions contrary to the text and intent of section 45V. Analysis from the Rhodium Group found that a 5% exemption could result in 1.5 billion metric tons of increased emissions cumulatively through 2035. And new analysis of existing clean generators in California observes a “consequential emissions intensity of roughly 20 kg CO₂e/kg H₂ for any hydrogen produced by electrolyzers taking advantage of this [5-10%] incrementality exemption,” which far exceeds the statutory thresholds for section 45V.² 

Solution

Adopt targeted compliance pathways for both curtailments and avoided retirements. 

Curtailments: Treasury should establish price floors for the real-time price of electricity for the hydrogen producer (i.e., the locational marginal pricing), below which electricity could be considered curtailed. Treasury should also ask the Department of Energy to conduct backwards-looking analyses at fixed frequencies to determine curtailment capacities and timeframes in each deliverability region. These can then be the basis for a region-specific percentage that can be used to meet the incrementality requirement, limited to specific hours of the day.  

Avoided retirements: A 5% allowance could be applied to facilities that prove that they are in financial distress and therefore need the section 45V tax credit to avoid retirement. For nuclear facilities, for example, Treasury could apply the same economic test used to determine eligibility for the section 45U nuclear production tax credit or qualification to receive the Civil Nuclear Credit Program to establish whether the nuclear facility is at risk of shutting down without additional funding.  

Other targeted pathways to comply with the incrementality requirement may include facilities that go through uprates and regions that have emissions caps and clean electricity grids.