Final Regulations for New Clean Energy Production and Investment Tax Credits

Last week, the Internal Revenue Service (“IRS”) and Department of the Treasury issued the highly anticipated final regulations for the Clean Electricity Production Tax Credit set forth in Section 45Y of the Internal Revenue Code of 1986, as amended (the “Code”) and the Clean Electricity Investment Tax Credit set forth in Section 48E of the Code (the “Final Regulations”), which may be found here.  The Final Regulations follow the issuance of proposed regulations (the “Proposed Regulations”) last June.  The Final Regulations provide clarification regarding the definition of “qualified facility” and the mechanism for calculating the greenhouse gas (“GHG”) emissions rates for qualified facilities, although a full analysis of the GHG requirements is beyond the scope of this blog post.  Further, we note that with the incoming administration, the executive branch could review and, potentially, rescind, these Final Regulations, although at this point the Trump administration has not publicly indicated support or a the lack thereof.

The Final Regulations generally apply to facilities placed in service after December 31, 2024, and during a taxable year ending on or after January 15, 2025.  However, certain rules relating to the “One Megawatt Exception” under Section 1.45Y-3 of the Final Regulations and relating to qualified facilities with integrated operations have a delayed applicability date that is 60 days after publication of the Final Regulations.

When Sections 45Y and 48E of the Code were initially enacted, we posted a blog describing the new statutes, which is available here.  The following is a brief, high-level, summary of the Section 45Y and Section 48E rules, but does not describe every requirement for credit qualification.  The rules under Sections 45Y and 48E of the Code apply to qualified facilities that both begin construction and are placed in service, each for federal income tax purposes, on or after January 1, 2025.  As such, qualified facilities that either begin construction or are placed in service before January 1, 2025, should still generally look towards the rules set forth in Section 45 of the Code for the production tax credit (the “PTC”) or in Section 48 of the Code for the investment tax credit (the “ITC”), as applicable. 

The credits under Sections 45Y and 48E are available with respect to any qualified facility that is used for the generation of electricity, which is placed in service on or after January 1, 2025, and has an anticipated GHG emissions rate of not more than zero.  In the case of Section 48E, a qualifying energy storage facility is also eligible for the credit.  Qualified facilities also include any additions of capacity that are placed in service on or after January 1, 2025. 

The credit under Section 45Y generally mirrors the PTC in that it is a credit that is based on electricity produced by a qualified facility, and the credit under Section 48E generally mirrors the ITC in that it is a credit that is based on a taxpayer’s tax basis in a qualified facility, with several differences in each case.  The credit amount for each is generally calculated in the same manner as the ITC or PTC, as applicable.  However, the credit amount is phased out (as set forth in the chart below) based on when construction of a qualifying facility begins after the “applicable year.”  Under Sections 45Y and 48E of the Code, the applicable year means the later of (i) the calendar year in which the annual greenhouse gas emissions from the production of electricity in the United States are reduced by 75% from 2022 levels, or (ii) 2032.

The Final Regulations apply many of the historical rules of Sections 45 and 48 of the Code, including rules surrounding the base credit amount—0.3 cents per kWh of electricity (subject to inflation adjustments) under Section 45Y and 6% under Section 48E.  These credit rates may be increased in either case by satisfying either the 1 MW (AC) exception or the prevailing wage requirements—up to 1.5 cents per kWh of electricity (subject to inflation adjustments) under Section 45Y and 30% under Section 48E.  Energy community and domestic content bonus credits may also increase these credit rates, although there are important differences in how these rules apply.

The below highlights several notable aspects of the Final Regulations.

Notable Rules Under Section 45Y

• Under Section 45Y, a facility that initially operates with greater than zero GHG emissions (and, therefore, is not eligible for the credit under Section 45Y) may later be treated as a qualified facility—and, therefore, eligible for the credit under Section 45Y—if it meets the requirements in any taxable year during the 10-year period beginning on the date the facility was originally placed in service.  For example, if an otherwise qualified facility has greater than zero GHG emissions for its first three years of operation (2025-2027, for example), but then is updated in such a way that it satisfies the zero GHG emissions requirement, then the Section 45Y credit may be claimed for years 4 through 10 of operations (2028-2034, in this example).

• Similar to the PTC, electricity produced at a qualified facility must be sold by the taxpayer to an unrelated person.  However, in a departure from the rules under Section 45, the statute and Final Regulations provide that, in the case of a qualified facility equipped with a metering device that is owned and operated by an unrelated person, the credit under Section 45Y of the Code is available for electricity produced at a qualified facility and sold, consumed, or stored by the taxpayer.  Although this rule provides some flexibility to taxpayers, the IRS declined to adopt the Section 45 rule from IRS Notice 2008-60, which provides that electricity sales will be treated as made to an unrelated taxpayer if the producer of electricity sells electricity to a related person for resale to a person unrelated to the producer.

Notable Rules Under Section 48E

• Under the Final Regulations, “qualified facilities” and “energy storage technology” (“EST”) are defined, and treated, separately.  Accordingly, Section 48E does not permit combined solar and storage facilities—each facility must claim the credit under Section 48E separately as a “qualified facility” or an “EST,” as applicable.  This rule could have implications for application of the prevailing wage and apprenticeship requirements, domestic content adder eligibility, and energy community adder eligibility.

• Similarly, the Final Regulations define “unit of qualified facility” to include all components of functionally interdependent property, and the term “qualified facility” to mean a unit of qualified facility plus integral parts.  This is significant because satisfaction of the prevailing wage and apprenticeship requirements, domestic content adder eligibility, and energy community adder eligibility are each determined on a “qualified facility” basis.  To take an example, this means in many cases that prevailing wage and apprenticeship, domestic content, and energy community eligibility would be measured for a solar facility at the inverter level, rather than on a project-wide basis as is required for the ITC under Section 48 of the Code.  Although this rule was in the Proposed Regulations, many commenters asked the IRS to permit some form of aggregation (similar to the energy project rules under Section 48) for purposes of Section 48E.  The IRS declined this request, and the rules in the Final Regulations now will require very careful planning for prevailing wage and apprenticeship, domestic content adder, and energy community adder purposes.

• In addition, under the Final Regulations, the cost of qualified interconnection property (which is similarly defined under the final regulations for Section 48) is only ITC-eligible for “qualified facilities.”  For EST, the cost of interconnection property is not eligible for the credit under Section 48E.  Again, this is different from the application of the ITC for qualified interconnection property for energy storage technology that is eligible for the ITC under Section 48 of the Code.

Notable Rules for both Section 45Y and 48E

• The Final Regulations adopt the rule from the Proposed Regulations that the following types or categories of facilities may be treated as having an emissions rate of not greater than zero: wind, solar, hydropower, marine and hydrokinetic, geothermal, nuclear fission, fusion energy, and certain waste energy recovery property.  For types or categories of facilities not listed above, taxpayers must rely on the annual table that sets forth the GHG emissions rates in effect as of the date the facility begins construction or, if not set forth on the annual table, the provisional emissions rate determined by the Secretary for the taxpayer’s particular facility.

• In addition, for the types or categories of facilities not listed above, the Final Regulations confirm that certain emissions of GHGs are excluded from the requirement that the GHG rate be not greater than zero, including, for example, emissions that occur before commercial operation commences and emissions from routine operational and maintenance activities.

• Both Section 45Y and 48E rely on the existing prevailing wage and apprenticeship rules contained in Sections 45(b)(7) and (8) of the Code and Sections 1.45-7, 1.45-8 and 1.45-12 and 1.48-13 of the Treasury Regulations except, as noted above with respect to Section 48E, prevailing wage and apprenticeship is measured as the qualified facility level rather than the energy project level (as it has been for the ITC).

• For the 1 MW (AC) exception under both Sections 45Y and 48E, the Final Regulations incorporate similar rules for calculating nameplate capacity as provided in the final regulations under Section 48.  However, the Final Regulations also provide that the nameplate capacity of a qualified facility with “integrated operations” with any other qualified facility must be calculated using the aggregate nameplate capacity of each qualified facility.  A qualified facility will be treated as having “integrated operations” with any other qualified facility if the qualified facilities are of the same type of technology and (1) are owned by the same or related taxpayers, (2) placed in service in the same taxable year, and (3) transmit electricity generated by the qualified facilities through the same point of interconnection, if grid-connected, or are able to support the same end user, if not grid-connected or if delivering electricity directly to an end user behind the meter.  These rules have a delayed applicability date of March 16, 2025.

• Both Sections 45Y and 48E adopt the familiar 80/20 rule, which states that a facility may qualify as originally placed in service even if the unit of qualified facility contains some used components of property provided the fair market value of the used components of the unit of qualified facility is not more than 20% of the total value of the unit of qualified facility (which is determined by adding together the cost of the new components of property plus the value of the used components of property included in the qualified facility). 

The Foley team will continue to monitor developments in connection with these Final Regulations.  Please reach out to one of the attorneys listed here with any questions.