Department of the Treasury and IRS issue final regulations for tech-neutral credits

ARTICLE | January 30, 2025

Authored by RSM US LLP

Executive summary

On Jan. 15, 2025, the Department of the Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) published final regulations regarding the section 45Y clean electricity production credit and the section 48E clean electricity investment credit established by the Inflation Reduction Act of 2022 (“IRA”) (collectively, the “Tech-Neutral Credits”). The Tech-Neutral Credits, which replace the legacy section 45 production tax credit and the section 48 investment tax credit, generally apply to qualified facilities that are placed in service after Dec. 31, 2024.

• While the final regulations largely adopt the proposed regulations, there are several key updates including but are not limited to the following:
• Rules for determining the One-Megawatt Exception for prevailing wage and apprenticeship
• Clarifications for conducting a greenhouse gas (“GHG”) emissions lifecycle analysis (“LCA”)
• Explanation of the application of 80/20 Rule and the Incremental Production Rule
• Expansion of the definition of energy storage technology (“EST”) under section 48E
• Confirmation that a de minimis rule does not apply for GHG emissions

The final regulations are effective as of Jan. 15, 2025.

On Jan. 15, the IRS also released Revenue Procedure 2025-14 which provides the first Annual Table of GHG emission rates for certain types or categories of facilities. It specifically enumerates the following types or categories of facilities with a GHG emissions rate that is not greater than zero to include:

• Wind (including small wind properties)
• Hydropower
• Marine and hydrokinetic
• Solar (including photovoltaic and concentrated solar power)
• Geothermal (including flash and binary plants)
• Nuclear fissions
• Fusion energy
• Waste energy recovery property that derives energy from any of the sources above.

The Annual Table is effective as of Jan. 15, 2025, and until the effective date of a subsequent annual table.

Unlike the legacy tax credits under sections 45 and 48, the Tech-Neutral Credits introduced under the IRA are designed to be technology agnostic. They require that a qualified facility must produce electricity and have a GHG emissions rate of zero or less.

Section 45Y provides a credit based on the number of kilowatt hours of electricity produced at a qualified facility and either: a) sold by the taxpayer to an unrelated person during the taxable year, or b) in the case of a qualified facility which is equipped with a metering device which is owned and operated by an unrelated person, sold, consumed or stored by the taxpayer during the taxable year.

Section 48E generally provides a credit amount equal to the qualified investment in a qualified facility, multiplied by the applicable credit percentage. EST is eligible under section 48E. The term “qualified facility” does not include any facility which a credit was determined under sections 45, 45J, 45Q, 45U, 45Y, 48 or 48A.

Treasury and the IRS published proposed regulations for the Tech-Neutral Credits on June 3, 2024. See RSM US’s prior article, Treasury issues proposed regulations for technology-neutral credits.

One-Megawatt Exception for purposes of prevailing wage and apprenticeship

Increased credit amounts are generally available under the Tech-Neutral Credits with respect to qualified facilities with a maximum net output (or capacity for EST under section 48E) of less than one megawatt (the “One Megawatt Exception”). The preamble to the prevailing wage and apprenticeship (“PWA”) final regulations indicated that the One Megawatt Exception for purposes of section 45Y would be addressed in the final Tech-Neutral Credit regulations.

The final regulations specify that the determination of whether a qualified facility has a maximum net output of less than one megawatt of electricity (as measured in alternating current) is based on the nameplate capacity of the qualified facility. If the qualified facility has integrated operations with one or more other qualified facilities, the aggregate nameplate capacity of all the qualified facilities is used to determine whether the One-Megawatt Exception applies.

Generally, the nameplate capacity is the maximum electrical generating output in megawatts that a qualified facility is capable of producing on a steady state basis and during continuous operation under standard conditions, as measured by the manufacturer. Special rules apply for determining nameplate capacity for qualified facilities that generate in direct current.

A qualified facility is considered as having integrated operations with another qualified facility of the same technology type if the facilities are owned by the same or related taxpayers, placed in service in the same taxable year; and 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.

Similar rules apply to section 48E, with additional guidance on how to determine nameplate capacity for EST including electrical energy storage property, thermal energy storage property and hydrogen energy storage property.

Combustion and Gasification Facilities

Consistent with section 45Y(b)(2)(B), a “C&G Facility” means 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. Generally, the GHG emissions rate for a C&G Facility must be determined by an LCA. The proposed regulations outlined the requirements for a LCA, including starting boundary, ending boundary, baseline, offsets and offsetting activities, principles for included and excluded emissions; and alternative fates and avoided emissions. These requirements were expanded in the final regulations to include temporal scales, spatial scales and the categorization of products as primary products, co-products, byproducts and waste products.

The final regulations require the future anticipated baseline to be updated at least every ten years and confirmed offsets and offsetting activities may not be considered in the LCA.

For C&G Facilities that produce electricity through combustion or gasification using methane derived from biogas, renewable natural gas (“RNG”) derived from biogas, or fugitive sources of methane (or any hydrogen derived from methane from these sources) as fuel or feedstock, measurements of lifecycle GHG emissions must account for all direct and significant indirect emissions associated with the facility’s electricity production. When determining the alternative fates and avoided emissions, the alternative fates of that methane must be considered. Additionally, a book-and-claim accounting system may not be used to establish or claim the energy attributes of biogas, RNG, coal mine methane, or any other methane, input, or feedstock.

80/20 Rule and Incremental Production Rule

Under section 45 and 48, a taxpayer could claim a credit for an addition or modification to a previously placed in service facility if the 80/20 Rule was satisfied. Under the 80/20 Rule, a retrofitted qualified facility or an EST may qualify as originally placed in service even if it contains some used components of property within the unit of property, provided that the fair market value of the used components of the unit of property is not more than 20 percent of the total value of the unit of property. The final regulations confirm that the 80/20 Rule applies at the unit of the qualified facility.

While the final regulations continue to include the 80/20 Rule, they also confirm that the term “qualified facility” includes either a new unit or addition of capacity placed in service after Dec. 31, 2024, in connection with a facility which 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 (“Incremental Production Rule”). The final regulations expand on the measurement standards taxpayers must use to measure the capacity and change in capacity of a facility.

The final regulations confirm that the 80/20 Rule and Incremental Production Rules are separate and distinct. However, if a retrofitted facility satisfies the 80/20 Rule, the final regulations provide that the facility will be treated as newly placed in service even if the taxpayer also satisfies the Incremental Production Rule. Conversely, a qualified facility that fails the 80/20 Rule may still qualify under the Incremental Production Rule.

Energy Storage Technology

EST includes certain electrical energy storage property, thermal energy storage property and hydrogen energy storage property.

Thermal energy storage property is property comprising a system that is directly connected to a heating, ventilation, or air conditioning (HVAC) system; removes heat from, or adds heat to, a storage medium for subsequent use; and provides energy for the heating or cooling of the interior of a residential or commercial building. The final regulations clarify that thermal energy storage property does not include property that transforms other forms of energy into heat in the first instance.

The final regulations further specify 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 the thermal storage medium can be used for heating or cooling of the interior of a residential or commercial building. For example, thermal energy storage property includes a system that adds heat to bricks heated to high temperatures that later use this stored energy to heat a building through the HVAC system. The final regulations provide a safe harbor for determining whether a thermal energy storage property meets this purpose and confirm an incremental cost rule applies to thermal energy storage.

Additionally, the final regulations removed the proposed rule 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 (end use requirement).

De Minimis Rule

The final regulations confirm that there is no de minimis exception to the rule that a “qualified facility” must have a GHG emissions rate of zero or less from electricity production. Therefore, a facility cannot qualify for the section 45Y credit in any taxable year during the 10-year credit period if it has a GHG emissions rate greater than zero, even for a limited time or amount. However, failing to qualify for the section 45Y credit in one or more taxable years does not prevent the facility from qualifying in other taxable years during the 10-year credit period. Conversely, for section 48E, potential recapture is only triggered if actual GHG emissions rate for a qualified facility is greater than 10 grams of CO₂e per KWh.

Washington National Tax takeaways

The final regulations for the Tech-Neutral Credits provide important clarifications for taxpayers looking to claim a credit for property placed in service under this new tax credit regime. While the Tech-Neutral Credits introduce new concepts, such as the distinction between C&G Facilities and Non-C&G Facilities and the Incremental Production Rule, they also remove or modified historic concepts that applied under the section 48 investment tax credit including the dual use rule and the single energy project rule for PWA, domestic content and energy community bonus credits.

Although the technology agnostic approach aims to provide flexibility to emerging technologies in the clean energy industry, some restrictions on determining the GHG emissions rate may preclude certain industries from participating.

Taxpayers should closely monitor any impact on the Tech-Neutral Credits with the change in administration. Currently, the Tech Neutral Credits are set to phase out for projects the construction of which begins no earlier than 2033. However, Congress may consider repealing or shortening the life of the Tech-Neutral Credits as a revenue-raising measure.