June 25, 2024

The Technology-Neutral Sections 45Y PTC and 48E ITC Are Coming

What There Is to Know in the New Proposed Regulations
Holland & Knight Alert
Amish Shah | Nicole M. Elliott | Bryan Marcelino | Mary Kate Nicholson | Roger David Aksamit | Brad M. Seltzer | Lee S. Meyercord | Ryan Phelps | Daniel Graham Strickland | Kenneth W. Parsons | Rachel T. Provencher

Highlights

  • The U.S. Department of the Treasury and IRS recently issued proposed regulations under the new Internal Revenue Code Section 45Y Clean Electricity Production Tax Credit (PTC) and Section 48E Clean Electricity Investment Tax Credit (ITC).
  • The technology-neutral Section 45Y PTC and Section 48E ITC were enacted as part of the Inflation Reduction Act of 2022 and generally replace the existing Section 45 PTC and Section 48 ITC for certain property placed in service after Dec. 31, 2024.
  • This Holland & Knight alert reviews certain key aspects of the proposed regulations.

The U.S. Department of the Treasury and IRS on May 29, 2024, issued proposed regulations under the new Internal Revenue Code (Code) Section 45Y Clean Electricity Production Tax Credit (PTC) and Section 48E Clean Electricity Investment Tax Credit (ITC). The technology-neutral Section 45Y PTC and Section 48E ITC were enacted as part of the Inflation Reduction Act of 2022 and generally replace the existing Section 45 PTC and Section 48 ITC for certain property placed in service after Dec. 31, 2024. Comments on the proposed regulations are due by Aug. 2, 2024, and a public hearing has been scheduled for Aug. 12-13, 2024.

This Holland & Knight alert highlights certain key aspects of the proposed regulations.

Background

For decades, developers of specifically identified electric generation projects have been entitled to Section 45 PTCs and Section 48 ITCs. New Sections 45Y and 48E apply to projects placed in service after Dec. 31, 2024, and replace the existing Section 45 PTC and Section 48 ITC, respectively.

 

Holland & Knight Insight

In some cases, if a taxpayer places a qualified facility or energy property in service after 2024, the construction of which begins before 2025, the qualified facility or energy property may be eligible for more than one of the credits determined under Sections 45, 45Y, 48 or 48E – although, a taxpayer can claim only one of these credits with respect to such qualified facility or energy property. Once the taxpayer has claimed one of these credits with respect to a qualified facility or an energy property, the taxpayer cannot claim any other of these credits with respect to the same qualified facility or energy property.

Section 45Y PTC and Section 48E ITC are available for electricity produced at a facility for which the greenhouse gas (GHG) emissions rate is zero or less. Thus, unlike the existing Section 45 PTC and Section 48 ITC, Section 45Y and Section 48E do not include a list of qualified technologies. However, the proposed regulations do identify certain technologies that are zero-GHG facilities, including a number of facilities specified in Section 45 and/or Section 48: wind (including small wind), hydropower, marine and hydrokinetic, solar, geothermal, nuclear fission, nuclear fusion and waste energy recovery property. The Section 45Y credit also is available for combined heat and power (CHP) facilities, and the Section 48 ITC also is available for energy storage technologies.

 

Holland & Knight Insight

The move to technology-neutral credits means that technologies such as new nuclear facilities will now be eligible for the PTC and ITC. However, nonzero GHG emission technologies will no longer be eligible for credits, including qualified biogas property, closed- and open-loop biomass, and municipal solid waste. Taxpayers should consider beginning construction of projects using these technologies no later than Dec. 31, 2024, to safe-harbor eligibility under the existing PTC and ITC. The IRS has issued rules over the last decade-plus regarding when construction is treated as beginning for purposes of energy tax credits. Taxpayers seeking to begin construction must evaluate those rules and also consider market practices when determining how to begin construction of a project.

Both Section 45Y and Section 48E require taxpayers to meet the prevailing wage and apprenticeship requirements in order to receive the full value of the credit. (See Holland & Knight's previous alert, "Highlights of the Proposed Regulations on IRA Prevailing Wage and Apprenticeship Requirements," Sept. 6, 2023.)

Section 45Y: The Clean Electricity PTC

The proposed regulations outline the criteria for determining the amount of the Clean Electricity PTC under Section 45Y and provide definitions for a number of relevant terms, including "qualified facility," "metering device," and "combined heat and power system (CHP) property," among others.

Qualified Facility

Similar to how the term is defined under Section 45Y, the proposed regulations define a "qualified facility" to mean a facility owned by a taxpayer that meets three specific criteria: 1) the facility must be used for generating electricity, 2) it must be placed in service after Dec. 31, 2024, and 3) the facility must have a GHG emissions rate not greater than zero.

Further, the proposed regulations specify that a qualified facility encompasses "units of qualified facility" and components of property that are "integral parts" of such facility.

A unit of qualified facility includes all functionally interdependent components owned by the taxpayer that are operated together to produce electricity. Generally, components are functionally interdependent if they rely on each other to produce electricity.

Components of property are integral parts of a qualified facility if they are directly used in the intended function of the facility and are essential to its operations.

 

Holland & Knight Insight

The rules regarding "unit of qualified facility" and "integral parts" are generally consistent with the proposed regulations released under Section 48. (See Holland & Knight's previous alert, "Breaking Down the Section 48 Investment Tax Credit Proposed Regulations," Nov. 28, 2023.)

Notably, the proposed regulations also include a rule for shared integral property. This proposed rule provides that multiple qualified facilities may utilize shared property that may be considered an integral part of each qualified facility without affecting the eligibility of a qualified facility seeking to claim Section 45Y (or Section 48E, as discussed below), provided that the cost of such shared property is allocated among the qualified facilities (to avoid double-counting of costs).

 

Integral Parts

Nonintegral Parts

  • Power and conditioning equipment, including equipment that modifies the characteristics of electricity into a form suitable for use, transmission or distribution, as well as parts related to the functioning or protection of such equipment (e.g., switches, circuit breakers, arrestors, and hardware and software used to monitor, operate, and protect power and conditioning equipment)
  • Transfer equipment, which includes components of property that allow for the aggregation of electricity generated to be transferred to a transmission or distribution line (e.g., wires, cables and combiner boxes that conduct electricity), as well as parts related to the functioning or protection of such equipment (e.g., current transformers used for metering, electrical interrupters (such as circuit breakers, fuses and other switches), and hardware and software used to monitor, operate and protect transfer equipment)
  • Certain roads (e.g., onsite roads that are used to operate and maintain the qualified facility)
  • Certain buildings (e.g., structures that are essentially an item of machinery or equipment and structures that are clearly expected to be replaced if the components of property that are integral parts of the qualified facility they initially house are replaced)
  • Transmission or distribution lines
  • Certain roads (e.g., access roads used primarily for employee or visitor vehicles)
  • Fences
  • Buildings, in general (but see "certain buildings" included as integral parts)

The proposed regulations contain a coordination rule whereby the term "qualified facility" as used for purposes of Section 45Y does not include any facility for which a credit determined under Sections 45, 45J, 45Q, 45U, 48 or 48E is allowed for the taxable year or any prior taxable year. The proposed regulations define "allowed" (as often contrasted with the term "allowable") to mean credits that taxpayers actually have claimed.

 

Holland & Knight Insight

Though taxpayers that directly own a qualified facility are disallowed from stacking the Section 45Y PTC with any of the credits allowed under the Code sections referenced above, the proposed regulations specifically provide that nothing in these proposed rules precludes a taxpayer from claiming Section 45Y with respect a qualified facility that is co-located with another facility for which a credit determined under any of the sections previously referenced is allowed. This favorable guidance is further illustrated in a series of examples included in the proposed regulations.

Metering Device

Section 45Y provides that the electricity produced must either be sold by the taxpayer to an unrelated person during the taxable year or – in the case of a qualified facility that is equipped with a metering device that is owned and operated by an unrelated person – sold, consumed or stored by the taxpayer during the taxable year. The proposed regulations provide that the term "metering device" means equipment that is owned and operated by an unrelated person for energy revenue metering to measure and register the continuous summation of an electricity quantity with respect to time.

Taxpayers must follow specific standards required for maintaining and operating a metering device for purposes of Section 45Y, including that the metering device 1) be maintained in proper working order according to the instructions of its manufacturer, 2) meet the requirements of the American National Standards Institute C12.1-2022 standard (or subsequent revisions), 3) be revenue-grade with a plus or minus 0.5 percent accuracy and 4) be properly calibrated.

 

Holland & Knight Insight

Unlike the Section 45 PTC, a taxpayer does not have to sell power to an unrelated party to claim the Section 45Y PTC. The sale requirement historically had been a challenge for taxpayers that preferred to consume the generated power in its own operations. Now, for taxpayers that are self-consumers or that intend to store the generated electricity, Section 45Y provides much needed flexibility.

For purposes of operating a metering device, the unrelated person who owns such a device may share certain network equipment (e.g., fiberoptic cables) with the taxpayer producing electricity. The proposed regulations provide additional detailed operational guidelines for metering devices, which are not extensively covered in the statutory rule under Section 45Y.

The proposed regulations provide that the term "unrelated person" means a person who is not related – related being defined as persons who would be treated as a single employer under Section 52(b). The proposed regulations further provide that in the case of sales of electricity to an individual consumer, such sales will be treated as sales to an unrelated party for purposes of the Section 45Y Credit.

Combined Heat and Power (CHP) Property

To be eligible for the Section 45Y PTC, CHP property must produce at least 20 percent of its total useful energy in the form of useful thermal energy that is not used to produce electrical or mechanical power (or combination thereof) and at least 20 percent of its total useful energy in the form of electrical or mechanical power (or combination thereof). The energy efficiency percentage of CHP property must exceed 60 percent, with the percentages determined on a British thermal unit (Btu) basis. The proposed regulations provide special rules with respect to calculating such percentages and calculating the tax credit amount with respect to CHP property.

Section 48: The Clean Electricity ITC

Like the existing Section 48 ITC, the Section 48E ITC amount is based on the qualified investment for the taxable year with respect to any qualified facility and energy storage technology (EST).

Qualified Facility and EST

Under the proposed regulations, consistent with the statute, a "qualified facility" means a facility that 1) is used for the generation of electricity, 2) is placed in service by the taxpayer after Dec. 31, 2024, and 3) has a GHG gas emissions rate of not greater than zero. The qualified investment with respect to any qualified facility for any taxable year is the sum of the basis of any qualified property placed in service by the taxpayer during such taxable year that is part of a qualified facility and, for 5-megawatt AC (MWac) or smaller facilities, the amount of any expenditures paid or incurred by the taxpayer for qualified interconnection property.

Consistent with Section 48E, the proposed regulations define qualified property as property that 1) is tangible personal property or other tangible property (not including a building or its structural components), but only if such other tangible property is used as an integral part of the qualified facility, 2) is depreciable (or amortizable in lieu of depreciation) and 3) either the construction, reconstruction or erection of the property is completed by the taxpayer or the taxpayer acquires the property if the original use of the property commences with the taxpayer. The proposed regulations also clarify that any component of a qualified property that otherwise meets the requirements to be considered qualified property is part of a qualified facility regardless of where such component of property is located.

EST includes a unit of EST and property owned by the taxpayer that is an integral part of the EST. EST includes electrical energy storage property, thermal energy storage property and hydrogen energy storage property.

 

Holland & Knight Insight

The proposed regulations define unit of EST and integral part generally consistently with the proposed regulations under Section 45Y, discussed above, and Section 48. (See Holland & Knight's previous alert, "Breaking Down the Section 48 Investment Tax Credit Proposed Regulations," Nov. 28, 2023.)

EST does not include equipment that is an addition or modification to existing EST except where 1) the EST had a capacity of less than 5 kilowatt hours (kWh) and is modified in a manner that such property (after such modification) has a nameplate capacity of not less than 5 kWh or 2) the EST is modified in a manner that such property (after such modification) has an increase in nameplate capacity of not less than 5 kWh.

Qualified Interconnection Costs

Section 48E allows for the ITC to include costs incurred with respect to "qualified interconnection property" incurred in connection with a qualified facility that has a maximum net output of not greater than 5 MWac. The interconnection property must be tangible property that is part of an addition, modification or upgrade to a transmission or distribution system that is required at or beyond the point at which the qualified facility interconnects to such transmission or distribution system in order to accommodate such interconnection.

Because qualified interconnection property is not part of a qualified facility, qualified interconnection property is not taken into account in determining whether a qualified facility satisfies the requirements for energy community or domestic content bonus credits.

Recapture

In addition to the recapture rules under Section 50, Section 48E is also subject to recapture where the qualified facility has a GHG emissions rate of greater than 10 grams of CO2e per kWh during the five-year recapture period.

 

Holland & Knight Insight

The recaptures rules applicable to the traditional Section 48 also apply, which includes changes in ownership of the facility, as well as the facility ceasing to be eligible for Section 48E. The failure to meet the prevailing wage and apprenticeship requirements for the recapture period would also cause a recapture event.

Rules Common to Section 45Y and Section 48E

Calculating the GHG Emissions Rate

The proposed regulations provide rules and definitions for determining emissions rates for purposes of Section 45Y and Section 48E. Specifically, they provide the method for calculating GHG emissions for a facility, as well as the method for requesting a provisional emission rate (PER) for a facility for which an emissions rate has not been otherwise established.

The statutes provide that "greenhouse gas emissions rate" means the amount of GHGs emitted into the atmosphere by a facility in the production of electricity, expressed as grams of CO2e per kWh. In the case of a facility that produces electricity through combustion or gasification (a "C&G facility"), the GHGs emissions rate equals the net rate of GHGs emitted into the atmosphere by such facility (taking into account life cycle GHGs, as described in Section 211(o)(1)(H) of the Clean Air Act (42 U.S.C. 7545(o)(1)(H)) in the production of electricity, expressed as grams of CO2e per kWh.

The proposed regulations provide that the statutory term CO2e per kWh means with respect to any GHG, the equivalent carbon dioxide (as determined based on global warming potential) per kWh of electricity produced. The 100-year time horizon global warming potentials (GWP-100) from the Intergovernmental Panel on Climate Change's Fifth Assessment Report (AR5) must be used to convert emissions to equivalent carbon dioxide emissions.

The proposed regulations further provide that the GHG emissions rate in the production of electricity means "emissions from a facility that directly occur from the process that transforms the input energy source into electricity." The following emission sources are generally excluded from the emissions calculation:

  • backup generators
  • routine operational and maintenance activities
  • step-up transformers that condition the electricity for use or sale
  • construction or decommissioning emissions
  • infrastructure associated with the facility
  • distribution of the electricity

The proposed regulations also deem certain non-C&G facilities as zero-GHG emission:

  • wind (including small wind properties)
  • hydropower (including retrofits that add electricity production to nonpowered dams, conduit hydropower, hydropower using new impoundments and hydropower using diversions such as a penstock or channel)
  • marine and hydrokinetic
  • solar (including photovoltaic and concentrated solar power)
  • geothermal (including flash and binary plants)
  • nuclear fission and nuclear fusion
  • certain waste energy recovery property

C&G facilities and non-C&G facilities not deemed to be zero-GHG emission require a life cycle analysis (LCA). For purposes of calculating an LCA, the following rules, among others, apply:

  • Offsets. Renewable energy certificates (RECs) and offsetting activities unrelated to the production of electricity, including the production and distribution of any input fuel, are ignored.
  • Included Emissions. LCAs must take into account direct emissions, significant indirect emissions in the U.S. or other countries, emissions associated with market-mediated changes in related commodity markets or feedstock generation or extraction, consequences of increased production of feedstocks, emissions at all stages of fuel and feedstock production and distribution, and emissions associated with distribution, delivery and use of feedstocks to and by a C&G facility.
  • Excluded Emissions. LCAs do not take into account emissions that are not directly produced by the fundamental transformation of the input energy source into electricity are not included (emissions from hydropower reservoirs due to anoxic conditions, emissions due to activities and operations occurring offsite).
  • Carbon Capture and Sequestration. Carbon that is captured and sequestered or used is not included in the GHG emissions rate.

The proposed regulations provide that the U.S. Energy Secretary (Secretary) will publish an annual GHG emissions table that a taxpayer must use for purposes of Sections 45Y and 48E. The taxpayer must use the table in effect when construction of the facility began or on the first day of the taxpayer's taxable year in which the credit under Section 45Y or Section 48E is determined.

A taxpayer that owns a type or category of facility for which an emissions rate has not been described in the table may file a PER petition with the Secretary to determine the facility's emissions rate. If the PER request is pending at the time such facility is or becomes described in the table, the taxpayer's request for an emissions value will be automatically denied. The taxpayer may rely on the PER for the entire 10-year period for which it will claim the PTC.

To request a PER, the taxpayer must submit a petition by attaching it to the tax return for the first taxable year in which the taxpayer claims the credit with respect to the facility to which the PER applies. The PER petition is deemed accepted upon the IRS' acceptance of the taxpayer's return.

The PER petition must contain an emissions value (obtained from the DOE or by using an LCA model) and, if applicable, the associated letter from the DOE. A taxpayer can request emissions value from the DOE only after a front-end engineering and design (FEED) study or similar indication of project maturity has been completed. A taxpayer may rely upon an emissions value provided by the DOE for purposes of claiming Sections 45Y or 48E, provided that any information, representations or other data provided to the DOE in support of the request for an emissions value are accurate.

A taxpayer must maintain records and documentation regarding the design, operation and, if applicable, feedstock or fuel source used by the facility that establishes that such facility had a GHG emissions rate not greater than zero. Sufficient documentation is a report prepared by an unrelated party that verifies that the facility has an emissions rate the taxpayer is claiming. However, facilities that are categorically deemed to be zero-GHG, such as solar, do not require third-party documentation.

 

Holland & Knight Insight

The preamble to the proposed regulations includes numerous requests for comments regarding the LCA calculation and process. Taxpayers should consider filing comments with regard to the proposed rules and the request for comments. Notably, the Treasury Department again included indications of proposed rules without actually issuing the related proposed regulations. For example, for renewable natural gas (RNG), similar to certain other proposed regulations, these proposed regulations state that the Treasury Department and IRS are considering a first productive use requirement, but such requirement is not actually included in the proposed regulations.

Section 45Y and Section 48E Phaseout

The proposed regulations generally adopt the statutory rules regarding the Section 45Y and Section 48E phaseout and clarify that for purposes of making a determination with respect to the GHG emissions from electricity production in the U.S. in a given year, the Secretary must separately assess data from the U.S. Energy Administration's (EIA) Electric Power Annual and the U.S. Environmental Protection Agency's (EPA) Inventory of U.S. GHG Emissions and Sinks reports, respectively.

 

Holland & Knight Insight

Taxpayers are encouraged to review the data provided in the two sources the Secretary must assess. This will help taxpayers anticipate when the "applicable year" might be determined. Further, taxpayers should consider providing comments on what other similar data sources the Secretary should look to in the event it has to replace an existing data source.

Multiple Owners

The proposed regulations generally adopt the statutory rules regarding how to allocate production of a qualified facility in which more than one person has an ownership share and further clarify that if a such a qualified facility is owned through an unincorporated organization that has made a valid election under Section 761(a), each member's undivided ownership share in the qualified facility will be treated as a separate qualified facility owned by such member.

 

Holland & Knight Insight

The Treasury Department and IRS are considering additional updates to modernize the proposed regulations under Section 761, which provide partnerships a possible path for making an elective payment election under Section 6417 with respect to inter alia Section 45Y and Section 48E. (See Holland & Knight's previous alert, "Inflation Reduction Act Direct Pay Rules Finalized," March 18, 2024.) Though the comment period for those proposed regulations has ended, taxpayers are encouraged to closely monitor developments around the proposed regulations under Section 761 as, once finalized, they could possibly provide for additional ways taxpayers could monetize the Section 45Y Credit.

Expansion of Facility and Incremental Production

The proposed regulations follow the statutes and provide that for purposes of Section 45Y and Section 48E, the term "qualified facility" includes either a new unit or an addition of capacity placed in service after Dec. 31, 2024, in connection with a facility that was placed in service before Jan. 1, 2025, 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. Such a new unit or an addition of capacity is treated as a separate qualified facility under the proposed regulations.

Facilities that are decommissioned (or are in the process of being decommissioned) and "restart" can be considered to have increased capacity if the following conditions are met: 1) the existing facility must have ceased operations, 2) the existing facility must have a shutdown period of at least one calendar year during which it is without a valid operating license from its respective federal regulatory authority (that is, the Federal Energy Regulatory Commission (FERC) or Nuclear Regulatory Commission (NRC)) and 3) the increased capacity of the restarted facility must have a new, reinstated or renewed operating license issued by either FERC or NRC.

The proposed regulations provide that to determine the increased amount of electricity produced by a facility by reason of a new unit or an addition of capacity, a taxpayer must multiply the amount of electricity that the facility produces during a taxable year after the new unit or addition of capacity is placed in service by a fraction, the numerator of which is the added nameplate capacity that results from the new unit or addition of capacity and the denominator of which is the total nameplate capacity of the facility with the new unit or addition of capacity added.

 

Holland & Knight Insight

The examples in the proposed regulations refer to additional capacity in terms of "nameplate capacity." It is unclear whether modifications that restore the facility to its original nameplate capacity potential would be eligible under the proposed regulations.

The 80/20 Rule

The proposed regulations extend the application of the 80/20 Rule to qualified facilities for purposes of Section 45Y and Section 48E. Under the 80/20 Rule, qualified facilities that are retrofitted may be considered originally placed in service even if they contain some used components where the fair market value of the used components is not more than 20 percent of the total fair market value of the unit of the qualified facility.

 

Holland & Knight Insight

The proposed regulations adopt the long-standing 80/20 Rule present in prior IRS guidance, including Rev. Rul. 94-31 and Notice 2018-59, and are generally consistent with the proposed regulations issued under Section 48. (See Holland & Knight's previous alert, "Breaking Down the Section 48 Investment Tax Credit Proposed Regulations," Nov. 28, 2023.)

The Holland & Knight Energy Tax Team is available for questions regarding these regulations. To receive additional analysis from the team, please subscribe to our alerts.


Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.


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