Summary

The Treasury Department and IRS on Wednesday issued an eagerly awaited notice of proposed rulemaking to incentivize clean energy facilities: the “clean electricity production credit”—Section 45Y credit—and “clean electricity investment credit”—Section 48E credit—established by the Inflation Reduction Act of 2022.

The Upshot

• The proposed Section 45Y and Section 48E credits incentivize wind, solar, and geothermal facilities that achieve net zero greenhouse gas emissions.
• Energy storage technologies can qualify for the Section 48E clean electricity investment credit.
• The proposed regulations offer clarity to clean electricity project developers and lenders.
• The federal agencies have scheduled public hearings on the proposed measures for August 12 and 13.

The Bottom Line

The proposed regulations affect all taxpayers that produce clean electricity and claim these credits for a facility placed in service after 2024. The clean electricity production credit is for facilities, while the clean electricity investment credit is for facilities or energy storage technologies.

On May 29, 2024, the Treasury Department and the Internal Revenue Service filed proposed regulations regarding the Internal Revenue Code Section 45Y Clean Electricity Production Credit and Code Section 48E Clean Electricity Investment Credit. The Section 45Y credit and Section 48E credit were added by the Inflation Reduction Act and replace the credits previously allowed by Sections 45 and 48 of the Code. The Section 45Y and Section 48E credits apply to qualified facilities and energy storage technologies placed in service after December 31, 2024. If construction on a qualified facility or energy property begins before January 1, 2025, a taxpayer may be entitled to choose which credit to claim: a credit under the old Sections 45 and 48 or a new 45Y or 48E credit, although a taxpayer can only claim one of these credits with respect to the qualified facility or energy property.

Proposed Section 45Y Credit

The proposed regulations provide helpful guidance as to how the Section 45Y credit will be calculated and what will constitute a “qualified facility.”

Under the proposed regulations, the amount of the Section 45Y credit is calculated by multiplying the total kilowatt hours of eligible electricity (i.e., electricity sold to an unrelated person during that year or, where the facility includes a metering device owned by the third party, electricity sold, consumed, or stored by the taxpayer during that year) by the applicable amount with respect to such qualified facility. This applicable amount will be either a “base amount” of 0.3 cents (as adjusted for inflation) or, if the qualified facility qualifies for it, a “higher alternative” amount. The higher alternative amount of 1.5 cents (as adjusted for inflation) applies for any qualified facility that meets certain criteria. Specifically, this higher alternative amount will apply to a qualified facility that 1) has a maximum net output below 1 MW (AC), 2) began construction prior to January 29, 2023, or 3) satisfies the wage and apprenticeship requirements of the Code.

Importantly, the proposed regulations also offer guidance on the meaning of a “qualified facility” for purposes of Section 45Y. A facility will meet this definition for a 10-year period from its placed-in-service date if it is used for electricity generation, placed in service after December 31, 2024, and the greenhouse gas emissions rate for the facility is not greater than zero.

Proposed Section 48E Credit

With respect to the Section 48E credit, the proposed regulations provide helpful guidance as to how the credit will be calculated, what types of investment will qualify, and how the recapture rules will be applied.

Under the Code, taxpayers are entitled to a credit during any taxable year in which a qualified investment is made with respect to any qualified facility and any energy storage technology (EST). The credit amount equals the applicable percentage of the qualified investment in any qualified facility and any EST.

Under the proposed regulations:

• The “applicable percentage” will be either the base amount of 6% or, if the facility qualifies, a higher alternative rate. The higher alternative rate of 30% applies to any qualified facility 1) with a maximum net output of below 1 MW (AC), 2) with a construction start date before January 29, 2023, or 3) that satisfies prevailing wage and apprenticeship requirements of the Code. The credit rate may be increased if the qualified facility or EST is located in an energy community or if it meets certain domestic content bonus requirements.
• The qualified investment with respect to a qualified facility equals the sum of the basis of qualified property placed in service by the taxpayer that is part of a qualified facility plus expenditures paid or incurred by the taxpayer for qualified interconnection property. Property is “qualified property” if it is tangible personal property (not including a building or its structures) used as an integral part of the qualified facility, for which depreciation is permitted, and the construction of which is completed by the taxpayer or the taxpayer is the first user of the property.
• Interconnection property is “qualified interconnection property” if it is in connection with a qualified facility that is no larger than 5 MW (AC) and placed in service during the taxable year and otherwise meets requirements in the Code. The term “qualified facility” has the same meaning as proposed for the Section 45Y credit, although additional rules apply. For example, certain facility types are excluded, such as nuclear facilities claiming other types of credits.
• A qualified investment with respect to EST is the basis of any EST placed in service during a taxable year. EST is defined as property that receives, stores, and delivers energy for conversion to electricity (or, for hydrogen, stores energy) and has a nameplate capacity of no less than 5 kWh. Special additional rules apply, including certain prevailing wage and apprenticeship requirements.
• A special recapture rule applies to credits claimed under Code Section 48E. If the greenhouse gas emission rate for a qualified facility is greater than 10 grams of CO2e/kWh, any property for which a credit was allowed under Code Section 48E ceases to be tax credit property in the taxable year in which the determination is made.

The proposed regulations, which span more than 190 pages in the Federal Register, are extremely detailed and will require further consideration, but the highlights above will be important for anyone looking to claim the Sections 45Y or 48E credits. We will continue to monitor the proposed regulations and other developments in this area.

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