We Interviewed Kenneth P. Kramer, Managing Director of Rushton Atlantic, he shared valuable insights on how to structure a tax equity deal for hydrogen projects considering the Inflation Reduction Act (IRA)

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Tell me a bit about you and your experience in the tax equity space – and how you are positioning for the zero-carbon hydrogen market in terms of services?

I have been in the valuation consulting business for over 25 years, and cofounded Rushton Atlantic in 2008, as a provider of due diligence and transaction support serving the renewable energy industry. I am a former engineer and banker, and my entire career has been involved in tax-oriented structured asset finance.

I chaired the Renewable Energy & Energy Efficiency Advisory Committee to the US Secretary of Commerce and served on the US DOE Future of the Grid Initiative steering committee.
Our firm’s independent valuation services support financing, investment, insurance, M&A, financial reporting, taxation, litigation and restructuring in the energy, infrastructure, transportation and manufacturing sectors.

We have been a leading provider of valuation services to support tax equity investment in renewable energy, and with the passage of the IRA, will apply this expertise in supporting the financing of the hydrogen economy.

What opportunities and challenges do you see in the zero-carbon hydrogen industry in the US considering the Inflation Reduction Act (IRA)?

The primary impact of the IRA is that clean H2 is competitive with dirty H2 today, as opposed to in 3 or 5 or 10 years from now. There will always be price competition in commodity markets, and while public sentiment or government intervention may impact markets somewhat, long term success will generally go to the low-cost producer.  The most important feature of the IRA is the subsidy of up to $3 per kilogram, which will permit green hydrogen to compete on price with gray hydrogen, although the subsidy will vary with the carbon intensity of the production process.

End use markets for hydrogen will also be eligible for new investment tax credits under the IRA, which should increase demand.  Fuel cells and fuel cell vehicles will be eligible for ITC, as will energy storage assets and capital improvements made to reduce greenhouse gas emissions of industrial facilities, both of which may utilize hydrogen technology.

What should zero carbon hydrogen producers consider when entering the market?

Factors zero carbon H2 producers should consider include:

·        Demand mix (legacy industrial H2 customers vs. “green” users looking to decarbonize by switching to H2 applications like fuel cells and substitution for natural gas), and the relative sizes of the different end-use markets.

·        Transportation logistics, absent a national pipeline network, and the potential use of ammonia or other alternatives to facilitate transportation, the importance of hydrogen clusters to co-locate H2 supply and demand.

·        Price sensitivity by region and location, in terms of both local production costs and local demand

·        Competitive economics of dirty H2 from steam methane reforming. Also, in thinking about the longer term, to make sure they are cost competitive after the IRA $3 per kilogram subsidy expires. Other relevant legislation – e.g., will there be meaningful carbon taxes?

·        Is there still a “Hindenburg” factor?  Are all stakeholders comfortable with safety/materials handling issues?

How does the Inflation Reduction Act (IRA) and the Bipartisan Infrastructure Act (BIA) work in practice, meaning, how do companies along the supply chain apply it to their respective businesses?

I’m more familiar with the IRA, which provides incentives for producing clean energy and clean fuels, including hydrogen, as well as for investing in facilities that will manufacture property used for renewable generation, energy storage, grid modernization, carbon sequestration, energy conservation, renewable and low carbon/low emission fuel production, electric, fuel cell or hybrid vehicles and charging/refueling infrastructure.   

The IRA’s clean H2 Investment Tax Credit is granted on a sliding scale, providing a base level of credit for each kilogram of H2 produced, varying with the CO2 emissions per kilogram, ranging from 0.9 to 6 percent of the capital cost of the production facility, and a multiplier of 5, for those projects meeting US prevailing wage and apprenticeship requirements. The upper end of the ITC range is therefore 30 percent (six percent times five).

The production tax credits, based on level of production as opposed to the capital investment in the production facility, works on a similar sliding scale. These facilities are also eligible for adders based on US domestic content requirements, and whether the facility is located in an “energy community” which includes brownfield sites and areas with significant unemployment after the loss of local fossil fuel businesses, such as powerplants or coal mines.

How do you structure a tax equity deal around the IRA? 

The existing tax equity structures, partnerships flips, sale/leasebacks, and inverted leases, are expected to remain viable under the IRA.  Current financial technology already permits both investment and production tax credits to be transferred from project operators to tax equity investors, and, while different assets will now be eligible for these credits, the transaction structures shouldn’t change.

There will be limited applicability for refundable tax credits, as these will be restricted to governmental entities such as states and municipalities, Indian tribes, Alaskan native corporations, and the Tennessee Valley Authority.

Potentially, the largest impact to the tax equity market under the IRA will be the introduction of transferability of tax credits.  The intent is to permit cash sales of the credits, which would be much simpler transaction structures than tax equity deals, and presumably less expensive to document. But the detailed regulations applicable to these transactions have yet to be issued by the US Treasury.  It is expected that the market for transferable credits will only include more creditworthy potential sellers, or those who can secure insurance to cover their obligations under the associated tax indemnity agreements.

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