IRS Proposes Clean Energy Tax Credit Rules

On May 29, 2024, the Internal Revenue Service (IRS) and the Department of the Treasury released a pre-publication version of proposed guidance for implementing “technology neutral” tax credits for clean electricity, including the designation of certain technologies as as such zero emissions and outlining potential methods for determining how other technologies – namely those involving combustion or gasification – can qualify as zero emissions based on a life cycle emissions analysis (LCA). The Clean Electricity Production Credit (45Y) and the Clean Electricity Investment Credit (48E) were introduced in the Inflation Reduction Act of 2022 and replace current production and investment tax credits that are explicitly tied to certain types of technology renewable energy.

Stakeholders cited 45Y and 48E credits as the most important driver of reducing greenhouse gas (GHG) emissions made possible by IRAs over the next decade. One study by Rhodium Group found that the credits could reduce greenhouse gas emissions in the energy sector by up to 73 percent by 2035. The tax credits are intended to give eligible facilities the ability to develop technologies over time as they reduce emissions and provide long-term certainty for investors and developers of clean energy projects. The proposed rule, when finalized, will be a key factor for developers and companies allocating resources among various projects and investments.

The proposed guidelines are scheduled for publication on June 3, 2024 in the journal Federal Register, initiating a 60-day comment period. The public hearing will be held on August 12-13, 2024.

Proposed guidance details

Beginning in fiscal year 2025, for projects placed in service after December 31, 2024, 45Y provides taxpayers with a base credit of 0.3 cents (1.5 cents if the project meets applicable wage and seniority requirements) per kilowatt of electricity produced and sold or stored in zero or negative greenhouse gas emission facilities. (These loan per kilowatt values ​​are adjusted for inflation, using 1990 as the base year.) Under 48E, taxpayers would receive a 6 percent base credit (30 percent if the project meets applicable salary and seniority requirements) for a qualified investment in a qualified facility for the year the project is placed in service. Both credits include bonus amounts for projects located in historic energy communities, low-income communities or tribal lands; to meet some national production requirements; or for being part of a low-income housing building or economic benefit project. Direct payment and transfer options are available for both loans. Both credits are valid until 2032, when they will be phased out for three years.

Technologies recognized as as such Zero emissions in the guidelines apply to wind, solar, hydro, marine and hydrokinetic energy, nuclear fission and fusion, geothermal energy and certain types of waste energy recovery facilities (WERP). The guidance also describes how energy storage may qualify, including by proposing definitions for properties related to the storage of electricity, heat and hydrogen.

The main debate in the proposal is how to determine, through LCA, whether certain combustion and gasification (C&G) technologies qualify as zero emission technologies.

The guidelines contain a set of definitions and interpretations that are key to the implementation of tax reliefs. For example, the proposed definition of C&G includes a hydrogen fuel cell if it “generates electricity using hydrogen that has been produced in an electrolyzer powered in whole or in part by grid electricity because some grid electricity has been produced by combustion or gasification.” ” The proposed definition of C&G would also include energy based on both biogas and biomass, but eligibility depends on LCA results; for biomass, the guidance comments on what spatial and temporal scales should apply and how land use affects LCA.

The guidance states that the IRS intends to establish rules for qualified facilities generating electricity from biogas, renewable natural gas and fugitive methane sources. The guidance says the Treasury Department and the IRS “anticipate” requiring that for such facilities, the gas comes from the “first productive use of suitable methane.”

The proposed C&G definition includes carbon capture and storage (CCS) that meets LCA requirements. However, the IRA does not allow the credits to be allocated to facilities that already benefit from certain other credits, including the relatively more generous Section 45Q credits for CCS.

Specifically, there are seven other credits that cannot be used in conjunction with the 45Y or 48E credit: 45 (existing clean electricity production credit); 45J (Advanced Nuclear Credit); 45Q (CCS); 45U (zero-emission nuclear credit); 48 (existing clean electricity investment loan); for 45Y, 48E (new loan for clean electricity production); and for 48E, 45Y (new clean electricity investment loan).

The guidance proposes starting and ending limits for LCA, stating that “initial limits would cover the processes necessary for the production and collection or extraction of raw materials used to produce electricity through combustion or gasification technologies, including raw materials used as energy input for the production of electricity. This includes the emissions effects of relevant land management activities or changes associated with or related to the production of raw materials.” Another topic of the advisory is the use of carbon offsets to achieve net zero qualifying status, with the proposal seeking comment on the boundaries: “offsets and offsetting activities unrelated to the electricity production of a C&G facility, including the production and distribution of any fuel input, cannot be taken into account” by LCA. The guidelines also include rules on eligible interconnection costs based on eligible low-capacity associated installation, facility expansion and additive manufacturing, and retrofitting of an existing facility.

The guidance describes the role of the Department of Energy (DOE) in implementing tax credits. Any future changes to technologies designated as zero-emissions or to LCA models must be complemented by analyzes prepared by DOE national laboratories in conjunction with other technical experts. Facilities seeking allowances may also request a “provisional emission level,” which the DOE will set in conjunction with national laboratories and experts “where appropriate.”

Next steps

As noted above, the proposed guidelines are scheduled for publication in the Journal on June 3, 2024 Federal Register, establishing a 60-day comment period during which interested parties can submit arguments and evidence for changes they would like to see made before the rule becomes final. The public hearing will be held on August 12-13, 2024. The Department of the Treasury, in consultation with interagency experts, plans to carefully review the comments and continue to evaluate how other types of clean energy technologies, including C&G technologies, may qualify for credits for clean electricity.