On January 7, 2025, the U.S. Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) released Final Regulations (the Final Regulations) regarding clean electricity production tax credits and clean electricity investment tax credits under Sections 45Y (Tech-Neutral PTC) and 48E (Tech-Neutral ITC and, collectively, the Tech-Neutral Credits) of the Internal Revenue Code of 1986, as amended (the Code). The Final Regulations provide rules for determining greenhouse gas emissions rates resulting from the production of electricity, petitioning for provisional emissions rates, and determining eligibility for the Tech-Neutral Credits in various circumstances. The Final Regulations update proposed regulations published on June 3, 2024 (the Proposed Regulations) discussed in our previous white paper here.
Key Takeaways
Treasury and the IRS received numerous public comments regarding the Proposed Regulations. While they acknowledged numerous comments from taxpayers in their comprehensive preamble, Treasury and the IRS overall did not reflect the majority of such comments in the Final Regulations themselves. Notable changes or clarifications from the Proposed Regulations and our prior white paper include the following:
- No general aggregation of qualified facilities.
- No aggregation of qualified facility and energy storage technology (EST).
- Integration of PWA guidance and amendments regarding the One-Megawatt Exception (described below).
- Software excluded from power conditioning equipment for qualified facility.
- Clarified interaction of 80/20 Rule and Incremental Production Rule (each described below).
- Added considerations applicable to combustion or gasification facility (a C&G Facility).
- Amended definition applicable to C&G Facility relevant to fuel cell technology.
- Clarified renewable natural gas qualification for the Tech-Neutral Credits.
- Clarified definition of thermal energy property.
- Amended hydrogen energy storage rules.
Despite public comments to remove certain technologies from the list of facilities meeting the zero-greenhouse gas (GHG) emissions requirement for purposes of the Tech-Neutral Credits, Treasury and the IRS retained the list in the Proposed Regulations with one update to change “nuclear fusion” to “fusion energy” in order to avoid public confusion with nuclear fission. The eight types of non-combustion or gasification (Non-C&G) qualified facilities listed in the Final Regulations are:
- Wind
- Hydropower
- Marine and hydrokinetic
- Solar
- Geothermal
- Nuclear fission
- Fusion energy
- Waste energy recovery property that derives energy from one of the sources listed above
The Final Regulations are effective on January 15, 2025, and apply to qualified facilities and EST placed in service on or after January 1, 2025. As noted in our previous white paper, taxpayers who “began construction” on facilities and projects before January 1, 2025, that are placed in service after 2024 can elect to claim the existing production tax credit under Section 45 (PTC) or investment tax credit under Section 48 (ITC), assuming continuity requirements are met, or one of the Tech-Neutral Credits. Only one such credit may be claimed.
No General Aggregation of Qualified Facilities
One significant outstanding question regarding the Tech-Neutral Credits was whether Treasury and the IRS would provide for an aggregation principle similar to the approach in recently released Treasury Regulation Section 1.48-13(d) for purposes of certain bonus credit amounts. Whereas the legacy ITC is determined with respect to an “energy project,” which includes all closely related generation and storage assets, Treasury and the IRS specifically indicated in the preamble to the Final Regulations that the Tech-Neutral Credits do not include an energy project concept which would allow for grouping (except for the One-Megawatt Exception discussed below). Rather, the Tech-Neutral Credits and any bonus credit amounts are determined with respect to each qualified facility or EST separately. Accordingly, for purposes of claiming the domestic content bonus credit amount and the increase in credit in energy communities, more than one qualified facility under Section 45Y and more than one qualified facility or EST under Section 48E may not be treated as a single qualified facility or EST. Each qualified facility under Section 45Y and each qualified facility or EST under Section 48E must separately qualify for the increased credit rate for the domestic content or energy community bonus, as applicable.
No Aggregation of Qualified Facility and EST
Similar to the guidance above, Treasury and the IRS clarified that a qualified facility may not be combined with EST for purposes of the Tech-Neutral ITC. Several commentators highlighted the co-location of “hybrid” systems consisting of a qualified facility and EST and questioned whether a single Section 48E tax credit may apply to such systems. Treasury and the IRS considered such comments, but ultimately determined that the statutory framework of Section 48E does not support treating a qualified facility and EST as a single creditable property that would allow taxpayers an option to claim a single credit for such hybrid systems.
PWA Guidance and One-Megawatt Exception
Treasury and the IRS issued final regulations regarding prevailing wage and apprenticeship (PWA) requirements for the increased credit amount on June 25, 2024 (PWA Regulations). Such PWA Regulations addressed the general application of the PWA requirements and provided the rules applicable for Section 45Y (except the One-Megawatt Exception described below) but did not include final regulations for Section 48E. The Final Regulations make no substantive changes regarding application of the general PWA requirements, notwithstanding the new applicability date, apart from amendments to address the One-Megawatt Exception. Taxpayers that began construction after June 25, 2024, and taxpayers that begin construction after the publication of the Final Regulations may continue to follow the same general rules with respect to the PWA requirements.
A taxpayer must generally satisfy the PWA requirements unless a qualified facility has a maximum output of less than one megawatt (as measured in alternating current) determined based on the nameplate capacity of the facility (the One-Megawatt Exception) or began construction prior to January 29, 2023. In contrast to the general approach to the Tech-Neutral Credits discussed above, the PWA requirements in the Final Regulations include aggregation principles for purposes of measuring nameplate capacity and application of the One-Megawatt Exception where a qualified facility or EST has “integrated operations” with one or more other qualified facilities or EST. The Final Regulations provide that a qualified facility is treated as having integrated operations with any other qualified facility of the same technology type if the facilities are: i) owned by the same or related taxpayers; ii) placed in service in the same taxable year; and iii) transmit electricity generated by the facilities through the same point of interconnection or, if the facilities are not grid-connected or are delivering electricity directly to an end user behind a utility meter, are able to support the same end user.
Similarly, for purposes of the EST One-Megawatt Exception, an EST is treated as having integrated operations with any other EST of the same technology type if the ESTs are: i) owned by the same or related taxpayers; ii) placed in service in the same taxable year; and iii) transmit energy through the same point of interconnection or, if the ESTs are not grid-connected or are providing storage directly to an end user behind a utility meter, are able to support the same end user (and in the case of thermal energy storage property and hydrogen energy storage property EST, which use the same piping and distribution systems for the respective type of EST).
Treasury and the IRS understand that taxpayers may need additional time to comply with the amendments made to the One-Megawatt Exception to the PWA requirements. Therefore, the amendments made to the Final Regulations with respect to the One-Megawatt Exception have a delayed applicability date that is 60 days after publication of the Final Regulations.
Software Excluded from Qualified Facility
Commenters requested expanding the scope of power conditioning equipment that is considered an integral part of a qualified facility to include software that optimizes or automates the function of power conditioning equipment. Commenters also requested that the Final Regulations clarify that software performing similar functions to other integral parts of the qualified facility, such as energy management systems, battery management systems, data acquisition systems, and optimization software, are all considered “power conditioning equipment.” Treasury and the IRS noted that Section 48E(b)(2) defines qualified property, in part, as property that is tangible personal property or other tangible property but only if such property is used as an integral part of the qualified facility. Software is not tangible property and therefore cannot be integral property included in the qualified investment of a qualified facility. Thus, the Final Regulations remove any reference to software in the description of power conditioning and transfer equipment.
Interaction of 80/20 Rule and Incremental Production Rule
Treasury and the IRS clarified that retrofit of an existing facility or expansion of capacity of an existing facility each constitute a separate basis to qualify for the Tech-Neutral Credits. A retrofitted facility may qualify as a new qualified facility provided that the fair market value of any used components is not more than 20 percent of the total value of the facility (the “80/20 Rule”). Specifically, the 80/20 Rule applies at the qualified facility level to the components of property within a unit of qualified facility. If the 80/20 Rule is met, i) the retrofitted qualified facility is considered to be placed in service on the date the new components of property are placed in service and ii) the cost of new components of the qualified facility includes all costs properly included in the depreciable basis of such new components. Under the 80/20 Rule, the taxpayer does not need to increase the capacity of the facility.
A new unit or addition of capacity to a facility may also qualify for the Tech-Neutral Credits, but only to the extent of the increased amount of electricity produced at the facility by reason of such new unit or addition of capacity (the "Incremental Production Rule"). Thus, a pre-2025 facility that fails the 80/20 Rule may still qualify for the Tech-Neutral Credits under the Incremental Production Rule. Additionally, Treasury and the IRS confirmed that the Incremental Production Rule will apply to a pre-2025 facility regardless of whether it satisfies the 80/20 Rule.
C&G Facilities: Additional LCA Considerations
A C&G Facility is generally eligible for Tech-Neutral Credits, contingent upon maintaining zero GHG emissions, as verified through a lifecycle analysis (LCA) beginning with feedstock generation or extraction up to the ending point of electricity transmittal. Among other considerations, such as the starting and ending boundary, baseline, offsets and offsetting activities (which are ignored), and included and excluded emissions, the Final Regulations provide that an LCA may consider alternative fates and account for avoided emissions and should evaluate temporal and spatial scales of emissions.
- Alternative fates and avoided emissions. The term “alternative fate” means a set of informed assumptions (for example, production processes, material outcomes, and market-mediated effects) used to estimate the emissions from the use or disposal of each feedstock were it not for the feedstock’s new use due to the implementation of policy (that is, to produce electricity). The term “avoided emissions” means the estimated emissions associated with the feedstock, including the feedstock’s production and use or disposal, that would have occurred in the alternative fate (if such feedstock had not been diverted for electricity production) but are instead avoided with the feedstock’s use for electricity production.
- Temporal scales. The LCA should evaluate the emissions over a time horizon of 30 years from the year in which a qualified facility first qualifies for the Tech-Neutral PTC (or, for purposes of the Tech-Neutral ITC, the year in which a qualified facility was placed in service).
- Spatial scales. To determine the initial spatial scope of the LCA, the initial qualitative assessment should analyze whether the feedstock has been or is anticipated: to be used or sold on the market in the absence of the Tech-Neutral Credits; to be used directly in or as an input to an activity or good in local markets; to be transported for use in domestic markets elsewhere; to be traded for use in international markets; or to be used in a manner that has significant ramifications on other markets. If this assessment concludes that the feedstock does not meet one or more of these criteria, then the market-mediated effects analysis would not be necessary beyond the relevant spatial scale(s) (for example, if the feedstock is not traded or not anticipated to be traded for use in international markets and increased use in the United States is not anticipated to have significant market ramifications abroad, international market-mediated effects analysis would not be necessary). Based on the results of the assessment, the LCA should evaluate the emissions on a sub-regional, regional, national, or international scale as appropriate. The evaluation of emissions should include the market and emissions implications of sourcing new or additional material for electricity generation across the applicable market and spatial scales.
In addition, an LCA should distinguish between primary products, co-products, byproducts, and waste products when evaluating the GHG emissions of a facility.
C&G Facilities: Fuel Cell Technology
In the preamble to the Proposed Regulations, Treasury and the IRS explained that a facility that produces electricity using any fuel that was produced using electricity that had been produced, in whole or in part, from the combustion of fossil fuels would be considered a C&G Facility. Commentators expressed concern that such a rule would be difficult to administer and would virtually ensure that certain fuel cell technology would be considered a C&G Facility. Instead, certain commentors proposed that the rule should focus solely on whether the reactions occurring directly at the electricity generation facility itself constituted production of electricity through combustion or gasification.
Treasury and the IRS acknowledged that the C&G Facility rule should be amended but i) to appropriately give effect to the term “gasification,” it is necessary to give consideration to transformations beside the transformation directly producing electricity in determining the appropriate classification of a facility as a C&G Facility and ii) the steps leading up to the production of electricity by a C&G Facility are relevant in determining whether electricity is produced through combustion or gasification. Requiring an evaluation of whether a fuel or feedstock used by an electricity-generating facility involved combustion or gasification at any point of the fuel or feedstock supply chain, however, would be difficult to administer, particularly given the complexity of such supply chains. To enable the Tech-Neutral Credits to be administered, Treasury and the IRS limited the analysis of production “through combustion or gasification” to the electricity production itself and the production of the input energy source. Accordingly, the Final Regulations revise the definition of the term “facility that produces electricity through combustion or gasification” to mean “a facility that produces electricity through combustion or uses an input energy source to produce electricity, if the input energy source was produced through a fundamental transformation of one energy source into another using combustion or gasification.”
Under such revised definition in the Final Regulations, a hydrogen fuel cell would still be considered a C&G Facility if it produced electricity using hydrogen that was produced through combustion or gasification, for example through steam methane reforming. A fuel cell facility such as a solid oxide fuel cell, which uses methane as fuel, would also still be considered a C&G Facility, because the methane reforming reaction that produces syngas within the fuel cell prior to the production of electricity would be considered a gasification reaction. In contrast, a hydrogen fuel cell facility using hydrogen produced using electrolysis would not be considered a C&G Facility, because the input energy source was not produced through a transformation of one energy source into another using combustion or gasification.
Natural Gas Alternatives
In the preamble to the Proposed Regulations, Treasury and the IRS disclosed an intent to provide final regulations addressing electricity production that uses biogas, renewable natural gas, and fugitive sources of methane (collectively, natural gas alternatives), for purposes of the Tech-Neutral Credits. Treasury and the IRS acknowledge that assessment of GHG emissions with respect to such natural gas alternatives presents a complex set of technical questions. Nevertheless, the Final Regulations describe use of methane from certain sources listed below to produce electricity.
- Biogas. Gas containing methane that results from the decomposition of organic matter under anaerobic conditions.
- Coal mine methane. Methane that is stored within coal seams and is liberated as a result of current or past mining activities. Liberated coal mine methane can be released intentionally by the mine for safety purposes, such as through mine degasification boreholes or underground mine ventilation systems, or it may leak out of the mine through vents, fissures, or boreholes. The term coal mine methane does not include methane removed from virgin coal seams (for example, coal bed methane).
- Fugitive methane. Methane released from equipment leaks or venting during the extraction, processing, transformation, or delivery of fossil fuels and other gaseous fuels to the point of final use.
- Renewable natural gas (RNG). Biogas that has been upgraded to remove water, CO2, and other impurities such that it is interchangeable with fossil natural gas.
For purposes of determining the GHG emissions rate of a C&G Facility that produces electricity through combustion or gasification using methane derived from any of the above natural gas alternatives as a fuel or feedstock, measurements of lifecycle GHG emissions must consider all the direct and significant indirect emissions associated with a C&G Facility’s production of electricity. For purposes of determining alternative fates and avoided emissions of the C&G Facility, such determinations must consider the alternative fates of that methane, including avoided emissions and alternative productive uses of that methane, the risk that the availability of tax credits creates incentives resulting in the production of additional methane or otherwise induces additional emissions, and observable trends and anticipated changes in waste management and disposal practices over time as they are applicable to methane generation and uses. Mindful of such risks, Treasury and the IRS provided limitations in the Final Regulations on applicable alternative fates for specific natural gas alternatives. For example, the alternative fate of methane from landfill sources to produce electricity must be flaring.
Treasury and the IRS are also mindful of emissions associated with the diversion of natural gas alternatives from other productive uses and the risk of emissions associated with the creation of new or expansion of existing sources of natural gas. In the preamble to the Proposed Regulations, Treasury and the IRS intended to require that in order for natural gas alternatives to receive an emissions value consistent with that gas (and not fossil natural gas), the natural gas alternative used in the production of electricity must originate from the first productive use of the relevant methane (the “first use” requirement). After full consideration of the public comments for and against such a requirement, the Final Regulations do not impose a first use requirement. Although such requirement could effectively address important considerations in the determination of a GHG emissions rate, Treasury and the IRS acknowledge that the requirement may be difficult for taxpayers to substantiate and to independently verify. Establishing compliance with a first use requirement could involve taxpayers needing to obtain detailed, often unavailable, historical documentation of the operations of the methane source, including historical production levels, material changes in waste source composition and volume, use of capture equipment and capture rates, sales or uses of captured methane, and waste management practices. Treasury and the IRS will continue to consider the recommendations raised by public comments in evaluating whether imposing a first use requirement, with potential modifications, may be appropriate in future guidance.
Thermal Energy Storage Property
Similar to final regulations regarding the legacy ITC issued on December 4, 2024, the Final Regulations include several clarifications with respect to the definition of thermal energy storage property.
First, the Final Regulations exclude equipment that transforms other forms of energy into heat in the first instance as an eligible component of thermal energy storage property (e.g., a conventional gas boiler with an integrated storage tank would not generally be thermal energy storage property). Second, to address taxpayer questions relating to the “subsequent use” of transferred heat with respect to energy storage, the Final Regulations clarify that property that removes heat from, or adds heat to, a storage medium for subsequent use is property that is designed with the particular purpose of substantially altering the time profile of when heat added to or removed from such thermal storage medium can be used for heating or cooling of the interior of a residential or commercial building, and as a result may qualify as thermal energy storage property. Finally, the Final Regulations specify that thermal energy storage property includes a system that heats bricks to high temperatures that later use this stored energy to heat a building through the HVAC system, heat pump systems that store thermal energy in an underground tank, artificial pit, an aqueous solution, or a solid-liquid change material, and air-to-water heat pump systems with a water storage tank. However, if thermal energy storage property includes equipment that also serves a purpose in an HVAC system that is installed in connection with the thermal energy storage property, the taxpayer’s basis in the thermal energy storage property includes the total cost of the thermal energy storage property and HVAC system less the cost of an HVAC system without thermal storage capacity that would meet the same functional heating or cooling needs as the heat pump system with a storage medium, other than time shifting of heating or cooling.
The Final Regulations include a safe harbor to the effect that an eligible thermal energy storage property will be deemed to have the purpose of substantially altering the time profile of when heat added to or removed from the thermal storage medium can be used to heat or cool the interior of a residential or commercial building if that thermal energy storage property is capable of storing energy that is sufficient to provide heating or cooling of the interior of such building for a minimum of one hour.
Hydrogen Energy Storage Property
The Proposed Regulations provided that hydrogen energy storage property must store hydrogen that is solely used as energy and not for other purposes, such as for the production of end products such as fertilizer (referred to as the “end use requirement”) to be eligible for the Tech-Neutral ITC. Treasury and the IRS received numerous public comments to the effect that such end use requirement was not statutorily proscribed, would be difficult, if not impossible, to implement, created unfair discrimination between hydrogen energy storage and other forms of EST and would be inconsistent with the policy goals for hydrogen energy storage among other concerns. After further consideration, Treasury and the IRS determined that such end use requirement was not statutorily required and would pose administrative challenges for taxpayers. Accordingly, the Final Regulations do not contain the requirement that hydrogen energy storage property store hydrogen that is solely used as energy and not for other purposes such as for the production of end products like fertilizer.
Effective Date
The Final Regulations are effective on January 15, 2025. Except as noted below, the Final Regulations generally apply to qualified facilities and EST placed in service after December 31, 2024, and during a taxable year ending on or after January 15, 2025.
Except as noted below for the One-Megawatt Exception, for purposes of the Tech-Neutral PTC, the PWA requirements in the Final Regulations apply to qualified facilities placed in service in taxable years ending after January 15, 2025, and the construction of which begins after January 15, 2025. Taxpayers may apply the PWA requirements in the Final Regulations to qualified facilities placed in service in taxable years ending on or before January 15, 2025, and qualified facilities placed in service in taxable years ending after January 15, 2025, the construction of which begins before January 15, 2025, provided that taxpayers follow the PWA requirements in the Final Regulations in their entirety and in a consistent manner. The One-Megawatt Exception applies to qualified facilities placed in service in taxable years ending after January 15, 2025, and the construction of which begins after March 16, 2025. For purposes of the One-Megawatt Exception, taxpayers may apply the PWA requirements in the Final Regulations to qualified facilities placed in service in taxable years ending on or before January 15, 2025, the construction of which begins before January 15, 2025, provided that taxpayers follow the PWA requirements in the Final Regulations in their entirety and in a consistent manner.
For purposes of the Tech-Neutral ITC, the PWA requirements in the Final Regulations apply to qualified facilities and qualified EST placed in service in taxable years ending after January 15, 2025, and the construction of which begins after March 16, 2025. Taxpayers may apply the PWA requirements in the Final Regulations to qualified facilities and qualified EST placed in service in taxable years ending on or after January 15, 2025, the construction of which begins before January 15, 2025, provided that taxpayers follow the PWA requirements in the Final Regulations in their entirety and in a consistent manner.
