This article was republished in Law360 on February 26, 2024.
In the dynamic world of renewable energy, hydrogen technology stands as one of the main pillars of sustainable progress.
However, the introduction of new hydrogen regulations, such as the Internal Revenue Service’s newly released proposed tax credit for production of clean hydrogen under Section 45V of the Inflation Reduction Act, is causing a seismic shift in the industry, particularly highlighting the criticality of intellectual property protection.
The regulations were brought back into the spotlight with proposed guidance for clarifying when the tax credit applies from the U.S. Department of the Treasury and the IRS on Dec. 22, 2023.
These regulations are shaping the development framework for hydrogen technologies and are equally applicable to all companies in this space, large and small. Corporations with sufficient resources can adapt swiftly to regulatory changes and can aggressively build their IP portfolios to take advantage of this new tax credit.
All innovators in this field would be advised to develop their own custom strategy to protect their hydrogen technology and take advantage of these new government benefits.
Here, we will explore how these new regulations are reshaping the competitive landscape and why securing IP rights is now a vital battleground for all players in the hydrogen sector. We will delve into the strategies that can help businesses of all sizes navigate this new regulatory environment and leverage the opportunities it presents in the era of hydrogen energy.
The Clean Hydrogen Production Tax Credit provided in Section 45V of the IRA of 2022 is the most recent example of the federal government providing incentives for companies to generate so-called green hydrogen, which is generated using renewable energy sources.
The IRA specifically defines green hydrogen as hydrogen that is produced in which greenhouse gas emissions do not exceed 4 kilograms of carbon dioxide equivalent, or CO2e, per kilogram of hydrogen.
Under Section 45V(b)(2), the IRA organizes the tax credits into four tiers in which there is a greater tax credit award for companies that produce cleaner forms of hydrogen:
(i) if the lifecycle GHG emissions rate is not greater than 4 kilograms of carbon dioxide equivalent (CO2e) per kilogram of hydrogen, and not less than 2.5 kilograms of CO2e per kilogram of hydrogen, then the applicable percentage [of the tax credit] is 20 percent;
(ii) if the lifecycle GHG emissions rate is less than 2.5 kilograms of CO2e per kilogram of hydrogen, and not less than 1.5 kilograms of CO2e per kilogram of hydrogen, then the applicable percentage [of the tax credit] is 25 percent;
(iii) if the lifecycle GHG emissions rate is less than 1.5 kilograms of CO2e per kilogram of hydrogen, and not less than 0.45 kilograms of CO2e per kilogram of hydrogen, then the applicable percentage [of the tax credit] is 33.4 percent; and
(iv) if the lifecycle GHG emissions rate is less than 0.45 kilograms of CO2e per kilogram of hydrogen, then the applicable percentage [of the tax credit] is 100 percent.
It is evident from these tiers that there is a large incentive for companies to generate hydrogen energy while producing as little carbon emissions as possible.
Given the tax incentives for producing greener hydrogen energy, companies are relying more and more on improving or changing the underlying technology that is used to produce the hydrogen energy to make the production process cleaner. Many companies are already raising their funding rounds based on improvements relating to the electrolysis process itself or to any other step in the hydrogen production process that may be used to generate green hydrogen with a low CO2e emission rate to obtain the Clean Hydrogen Production Tax Credit.
Similar to the change in perspective of solar energy companies entering the battery space, the incentives to produce green hydrogen have turned hydrogen production companies into technology companies that continue to improve their hydrogen production innovations and processes. These improvements often involve high-level engineers solving problems, from issues creating hydrogen production plants, to problems with the hydrogen generation process, to challenges generating hydrogen as efficiently as possible.
These improvements will likely involve innovations that build upon each other over time, such that the hydrogen production companies are transitioning to technology companies, similar to companies in other technology spaces such as artificial intelligence or quantum computing.
With the transition of hydrogen production companies into technology companies, IP will become an area of increased emphasis as businesses determine new ways to efficiently create green hydrogen. Creating the largest hydrogen production plants will no longer be enough to be considered the most successful hydrogen production company.
Instead, the companies that will last or that will have the most success will focus on creating hydrogen generation plants that generate hydrogen as efficiently as possible.
As evidenced by the above-noted success, these efficiencies will often originate from new technologies that will almost assuredly involve protectable innovations. If companies do not procure patent protection to help guard these innovations in a timely manner, other companies may reap the research and development costs of the innovations and simply copy the technology for their own purposes.
Transitioning into a technology company without a clear IP strategy comes with inherent risks that both small and large companies should and can avoid. For example, small companies may not have the resources to build the bigger plants that larger companies may have. Instead, small companies may compete by creating technology that is more efficient or that qualifies the company for the highest tier of tax credits provided by the federal government, such as the Clean Hydrogen Production Tax Credit.
It is important for all companies to obtain protection over these technologies to keep others from copying this technology and to crowd competitors out of the market. With an appropriate IP strategy, companies can avoid over-committing resources to their green hydrogen technology only to have other companies copy the technology without spending the same resources.
Further, it is important for all companies to both document their improvements and perform due diligence to ensure their technology is respectful of any competing proprietary innovation.
It is also important to create an IP strategy earlier rather than later. For instance, given that the drive to create green hydrogen is relatively new with the introduction of the Clean Hydrogen Production Tax Credit, there is no significant amount of technology out there that will block the protection of new technology geared towards improving the efficiency of generating hydrogen. Accordingly, companies may be rewarded with patent protection that covers a broad swath of space if they file patents early.
In contrast, companies that wait to file for patent protection may have to settle for more incremental protection, in addition to being limited by the amount of green hydrogen technology that they can create in view of patents that are granted to other companies. Thus, it is important for companies to develop an IP strategy now more than ever or risk being behind the eight ball compared with companies that are active in the technology and patent space.
The U.S. Patent and Trademark Office has shown an emphasis on protecting clean energy technology like innovations to green hydrogen production. For example, in June 2022, the USPTO launched the Climate Change Mitigation Pilot Program in which the USPTO will grant accelerated examination to patent applications “involving technologies that reduce, remove, prevent, and/or monitor greenhouse gas emissions.”
Acceptance of the program can significantly reduce the time it takes to begin examination of an application from a few years to just a few months. Normally, companies have to pay thousands of dollars for accelerated examination, but the Climate Change Mitigation Pilot Program can make the acceleration free for applicable innovations with the submission of a form.
Companies innovating with green hydrogen technology should take advantage of the program now before the program expires June 7, 2027, or a total of 4,000 applications have been granted special status under the program — whichever happens earlier.
For those companies that have not yet created an IP strategy to help accomplish the business objective of maximizing available tax credits and protecting their technology in the marketplace, there are a few steps they should take to get started.
The company should take account of the technology it currently uses to generate green hydrogen, particularly identifying aspects of the technology that are not common or involve an invention that overcomes a technical hurdle.
The company should then have their IP attorney identify the available proprietary technology and map this technology to corporate business goals and objectives. By employing this client-lens analysis, the technology determined to be of business value can be protected in a series of strategic patent filings.
If possible, companies should take advantage of the Climate Change Mitigation Pilot Program while it is still available to expedite the patent examination process and obtain protection faster. This will afford both offensive and defensive patent protection, enabling your company to operate in your intellectual space on your terms, and with a tax benefit thrown in for good measure.
Following these steps can help you guard against inadvertent encroachment on the IP rights of other companies while also securing exclusivity in a burgeoning new field.
