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The proposed regulations set forth proposed guidance regarding measurement of greenhouse gas (GHG) emissions rates for purposes of the 45Y and 48E credits.

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The replacement of Section 45 and 48 credits with 45Y and 48E credits will not significantly change the qualification standards for wind, solar and geothermal qualified facilities because the proposed regulations identify them as zero-rate GHG emissions facilities.

The measurement of GHG emissions rates is fairly complicated for facilities classified as combustion and gasification facilities (i.e., biogas and biomass). Taxpayers that have these types of facilities should study the preamble and consider providing comments in areas where the IRS has asked for input.

The proposed regulations generally harmonize the rules relating to 45Y and 48E credits. For example, the proposed regulations consistently use the term “qualified facility” and provide similar rules regarding measurement of GHG emissions with respect to both credits. There are some differences, however, between 45Y and 48E credits regarding the scope of property included.

Both the 45Y and 48E credits may be sold for cash to an unrelated taxpayer under Section 6418. Certain tax-exempt entities also may elect direct payment with respect to the 45Y and 48E credits.

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The IRS and Treasury on June 3 issued <a href="https://www.federalregister.gov/documents/2024/06/03/2024-11719/section-45y-clean-electricity-production-credit-and-section-48e-clean-electricity-investment-credit" target="_blank" rel="noreferrer noopener">proposed regulations under Sections 45Y and 48E (proposed regulations)</a>,<a id="_ftnref1" href="#_ftn1">[1]</a> which address clean electricity production and investment tax credits, respectively, that generally replace existing production and investment tax credits under Sections 45 and 48.<a id="_ftnref2" href="#_ftn2">[2]</a> The clean electricity production tax credit (45Y credit) and the clean electricity investment tax credit (48E credit) apply to facilities placed in service after December 31, 2024.

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The 45Y and 48E credits diverge from their predecessors under Sections 45 and 48 in that they require facilities and property to have a GHG emissions rate of zero. The 45Y and 48E credits are two of the main mechanisms enacted by the Inflation Reduction Act (IRA) to reduce GHG emissions, and they were also two of the most expensive provisions in the IRA, costing $11.2 billion and $50.8 billion, respectively.<a href="#_ftn3" id="_ftnref3">[3]</a> Market participants, policymakers and Congress (depending on the 2024 elections) will have an increased interest in 45Y and 48E credits as their effective date approaches.

What follows is an overview of the proposed regulations. Proposed regulations have no force of law until finalized.

Effective Dates – Sections 45, 48, 45Y and 48E

The proposed regulations confirm the potential overlap of availability of the Sections 45 and 48 credits and the 45Y and 48E credits. The Sections 45 and 48 credits are generally available (other than for geothermal heat pumps) for energy property the construction of which begins before January 1, 2025, while the 45Y and 48E credits apply to facilities placed in service after December 31, 2024. Thus, there could be instances when a taxpayer begins construction before 2025 and places in service the qualified facility or energy property after 2024, making the qualified facility or energy property eligible for more than one of the Section 45 and 48 credits, the 45Y credit, or the 48E credit. Nevertheless, a taxpayer may claim only one of those credits and will therefore have to decide which credit to claim.

Amount of Credit – 45Y and 48E

The 45Y credit provides taxpayers with a 10-year base credit (pre-inflation) of 0.3 cents per kilowatt-hour (kWh) and an alternative amount of 1.5 cents per kWh if the <a href="https://www.bakerlaw.com/insights/analysis-of-irs-proposed-regulations-addressing-the-renewable-energy-credit-prevailing-wage-and-apprenticeship-requirements/">prevailing wage and apprenticeship requirements</a> are satisfied. For calendar years beginning after 2024, both the base and the alternative amounts are adjusted by multiplying the amounts by the inflation adjustment factor as published in the Federal Register. Similar to the Section 45 credit, the 45Y credit is also eligible for a 10 percent increase to the credit if the qualified facility is located in an energy community. In addition, the 45Y credit is eligible for an additional 10 percent increase if the domestic content bonus credit requirements are met.

The 48E credit is based on the qualified investment with respect to a qualified facility. The qualified investment generally equals the basis of qualified property and the amount of any expenditures paid or incurred for qualified interconnection property. The 48E credit has a base credit of 6 percent and is multiplied by the qualified investment amount. The base credit is increased to 30 percent if the prevailing wage and apprenticeship requirements are met. If the prevailing wage and apprenticeship requirements are met, the 48E credit is additionally increased by 10 percentage points if the energy communities requirement is met (discussed above) and by a further 10 percentage points if the domestic content bonus requirement is met.

The 45Y and 48E credits begin to phase out in the later of (i) the calendar year in which the IRS determines that the annual GHG emissions from the production of electricity in the United States are equal to or less than 25 percent of the GHG emissions from the production of electricity in the United States for 2022 or (ii) 2032. Facilities the construction of which begin during the first calendar year following the phase-out year are entitled to 100 percent of the credit. This percentage is reduced to 75 percent in the second year, 50 percent in the third year and completely phased out thereafter. The sources for calculating the GHG emissions are the U.S. Energy Information Administration’s Electrical Power Annual and the U.S. Environmental Protection Agency Inventory of U.S. Greenhouse Gas Emissions and Sinks annual electric-power-related carbon dioxide, methane and nitrous oxide emissions data.

45Y – Definition of a Qualified Facility

The proposed regulations define a qualified facility as a facility that (i) generates electricity; (ii) is placed in service after December 31, 2024; and (iii) has a GHG emissions rate of not greater than zero. Taxpayers must also sell the electricity to an unrelated person or store it and use a metering device owned and operated by an unrelated person.

The proposed regulations adopt a familiar approach to defining what property is included in this definition of a qualified facility. Similar to the proposed regulations under Section 48, these proposed regulations adopt a unit of property approach and state that a qualified facility includes (i) all functionally interdependent components of property that are operated together and that can operate apart from other property to produce electricity and (ii) components that are an integral part of a qualified facility. Power conditioning and transfer equipment are defined as integral parts of a qualified facility, but buildings are generally not integral parts unless they are an item of machinery or equipment that houses components of property that are integral to the intended function of the facility and are closely related to the use of the housed components.

A qualified facility includes a new unit or an addition of capacity to an existing facility if the new unit or addition is placed in service after December 31, 2024. However, only the increased amount of electricity produced at the facility by reason of the new unit or addition is taken into account for purposes of calculating the 45Y credit. A new facility can also consist of used components of property, provided that the fair market value of the used components is not more than 20 percent of the total value of the facility.

48E – Definition of Energy Property

The rules in the proposed regulations relating to 48E credits cross-reference the rules relating to 45Y credits. For example, a qualified facility for purposes of a 48E credit is defined as a facility that (i) generates electricity; (ii) is placed in service after December 31, 2024; and (iii) has a GHG emissions rate of not greater than zero. In addition, for purposes of a 48E credit, a similar unit of property approach is adopted, thus requiring an analysis of whether property is functionally interdependent or an integral part of a qualified facility. However, for purposes of the 48E credit, qualified facilities of no more than 5 megawatts can also claim the 48E credit with respect to interconnection property.

Qualified property is property that is tangible personal property for which depreciation is allowable and either the construction of which is completed by the taxpayer or the taxpayer acquires it for original use. Qualified property also includes energy storage technology that receives, stores and delivers energy for conversion to electricity (other than property primarily used in the transportation of goods or individuals). Qualified property further includes thermal energy storage property that is directly connected to a heating, ventilation or air-conditioning system; that removes heat from or adds heat to a storage medium for subsequent use; and that provides energy for the heating or cooling of the interior of a residential or commercial building.

The proposed regulations establish different GHG emissions rates based on whether a facility is a combustion and gasification facility (C&amp;G Facility) or a noncombustion and gasification facility (Non-C&amp;G Facility). A C&amp;G Facility is a facility that produces electricity through combustion or uses an input energy source to produce electricity. As documented below, the rules are significantly more complicated for C&amp;G Facilities.

The proposed regulations define the relevant GHG emissions as the amount of GHG emitted into the atmosphere by the facility producing the electricity. The GHG emissions are measured by grams of carbon dioxide per kWh, and the proposed regulations provide an equivalency to convert other gases such as methane, nitrous oxide and sulfur hexafluoride to their carbon dioxide equivalent. For both C&amp;G Facilities and Non-C&amp;G Facilities, the relevant emissions are those that directly occur from the process that transforms the input energy source into electricity.

For both C&amp;G Facilities and Non-C&amp;G Facilities, the GHG emissions rate does not include emissions that are captured by the taxpayer and either disposed of in a secure geological storage site or utilized by the taxpayer pursuant to the carbon sequestration rules under Section 45Q.

Non-C&amp;G Facility – Measuring GHG Emissions Rates

For Non-C&amp;G Facilities, the GHG emissions rate is determined through a technical and engineering assessment of the fundamental energy transformation into electricity. The assessment must consider all input and output energy carriers and chemical reactions or mechanical processes taking place at the facility in the production of electricity. The proposed regulations additionally list categories of Non-C&amp;G Facilities that are considered to have a rate of GHG emissions not greater than zero. They include wind, hydropower, marine and hydrokinetic, solar, geothermal, nuclear fission, nuclear fusion, and waste energy recovery property deriving energy from one of these other listed sources.

For Non-C&amp;G Facilities other than those mentioned immediately above, the GHG emissions rate must be determined through a technical and engineering assessment of the fundamental energy transformation into electricity. Emissions from land use changes or changes in demand and the transportation of fuels are excluded from the GHG emissions rate.

C&amp;G Facility – Measuring GHG Emissions Rates

A life cycle analysis (LCA) is required to determine GHG emissions rates for C&amp;G Facilities. The starting boundary for the LCA is the feedstock generation stage, which is the extraction process for fossil fuel feedstocks and the generation process for generation-derived feedstocks (such as biogenic feedstocks). The ending boundary for the LCA is the meter at the point of production of the C&amp;G Facility, including emissions from transmission and distribution.

The proposed regulations address direct and indirect emissions. Examples of direct emissions are emissions from feedstock generation, production or extraction, including emissions from fertilizers, and emissions from combustion and gasification at the electricity-generating facility. Examples of indirect emissions include emissions from land use and land use changes. Excluded emissions include emissions from facility construction and maintenance, infrastructure associated with the facility, and distribution of electricity to consumers.

Under Section 45Y(b)(2)(C), the IRS is required to annually publish the GHG emissions rates for the types of facilities eligible for the 45Y and 48E credits. The proposed regulations do not contain the annual publication of emissions rates that the IRS is required to issue on an annual basis. The table will set the emissions rates for various facilities, and projects not covered in the table need to apply to the Department of Energy for a GHG emissions rate. The preamble states that the IRS will publish the first annual table after the publication of final regulations. Until then, taxpayers may treat the categories of facilities listed in proposed Treasury Regulation § 1.45Y-5(c)(2)(i) through (viii) – discussed above – as having a GHG emissions rate that is not greater than zero.

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<a href="#_ftnref1" id="_ftn1">[1]</a> REG-119283-23.

<a href="#_ftnref2" id="_ftn2">[2]</a> As covered in our prior alerts, the <a href="https://www.congress.gov/bill/117th-congress/house-bill/5376/text">Inflation Reduction Act</a> <a href="https://www.bakerlaw.com/alerts/overview-renewable-energy-tax-credits-under-inflation-reduction-act">modified and reinstated existing renewable energy credits, enacted new renewable energy credits</a>.

<a href="#_ftnref3" id="_ftn3">[3]</a> See JCX-18-22, “Estimated Budget Effects of the Revenue Provisions of Title I – Committee on Finance, of an Amendment in the Nature of a Substitute to H.R. 5376, the ‘INFLATION REDUCTION ACT OF 2022,’” August 9, 2022 (available at <a href="https://www.jct.gov/publications/2022/jcx-18-22/">https://www.jct.gov/publications/2022/jcx-18-22/</a>).

Proposed Regulations – Clean Electricity Production and Investment Credits (45Y and 48E)

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