Applying the Single Energy Project Framework to Prevailing Wage and Apprenticeship Requirements Under the Technology Neutral ITC

The Inflation Reduction Act of 2022 introduced the Clean Electricity Investment Tax Credit under section 48E of the Code^[1] (the “Tech-neutral ITC”) ushering in a new framework for incentivizing investment in zero-emissions electricity development and generation. This framework has given rise to an important and actively debated question among clean energy developers, tax counsels and other industry participants: whether the prevailing wage and apprenticeship (“PWA”) requirements should be applied on a qualified “facility” basis, consistent with the general structure of the Tech-neutral ITC, or on a “single energy project” basis, consistent with the framework under the legacy investment tax credit under Section 48 of the Code?

This question has meaningful and practical implications. Developers typically construct and manage clean energy projects on a project-wide basis, with labor procured and administered across the entire project. Requiring PWA compliance to be demonstrated separately for each “qualified facility” or “energy storage technology” (“EST”) (e.g., for each wind turbine, PV or BESS circuit, fuel cell, etc.) could introduce significant administrative complexity and compliance risk, whereas a project-level approach better aligns with commercial and construction realities.^[2]

This issue arises because the Tech-neutral ITC is generally determined separately with respect to each qualified “facility” or “EST.” By contrast, the legacy investment tax credit under Section 48 of the Code utilizes an “energy project” concept, under which multiple energy properties must be treated as one energy project for purposes of applying various credit requirements if they are owned by the same taxpayer and meet at least four of the “single energy project” factors.^[3] In the preamble to the final Tech-neutral ITC regulations (the “Final Regulations”), Treasury made clear that this “energy project” concept does not apply for purposes of determining the availability of Tech-neutral ITC generally or for determining eligibility for domestic content, energy community, or low-income credit adders– this must instead be evaluated separately for each individual qualified facility or EST. The absence of the energy project concept from the Tech-neutral ITC’s general framework has prompted debate as to whether the PWA requirements under section 48E may be applied on a project-wide basis.

In our view, the answer turns on a close reading of section 48E’s statutory cross-references and the preamble to the Final Regulations.

Notwithstanding the Tech-neutral ITC’s general framework, there is a compelling statutory and regulatory basis for applying the PWA requirements on a single energy project basis where applicable. Specifically, Section 48E(d)(3), which incorporates the prevailing wage requirements, expressly provides that “[r]ules similar to the rules of section 48(a)(10) shall apply.” Section 48(a)(10), in turn, applies the prevailing wage requirements “with respect to any energy project,” thereby incorporating the single energy project concept under section 48 to the prevailing wage requirements under section 48E. Treasury and the IRS have acknowledged this link in the preamble to the Final Regulations, rejecting a commenter’s argument that there is “no legal basis to incorporate an aggregation rule into section 48E” and confirming that applying the PWA requirements consistently with Section 48(a)(10) is the “best implementation of the overall statutory framework because it results in the PWA requirements being applied appropriately and consistently across credits.” With respect to the apprenticeship requirements, section 48E(d)(4) cross-references section 45(b)(8), which applies the apprenticeship requirements on a facility basis. However, Treasury has stated in the preamble to the Final Regulations that a consistent interpretation must apply to both the prevailing wage and apprenticeship requirements under section 48E “as inconsistent interpretations would frustrate congressional intent by creating different standards for the prevailing wage requirements and apprenticeship requirements and would be difficult for the IRS to administer.”^[4] In other words, for both the prevailing wage and apprenticeship requirements under the Tech-neutral ITC, Treasury has acknowledged and agreed that a project-wide determination is appropriate.

Although Treasury explicitly rejected proposals by commenters to provide taxpayers the option to elect whether to aggregate multiple facilities with “interrelated operations” or treat them separately for PWA purposes,^[5] this position is separate and apart from the explicit application of the project-wide rules of Section 48. In other words, the rejection of elective grouping based on interrelated operations does not foreclose application of the mandatory single energy project test where its criteria are satisfied.

Accordingly, where multiple qualified facilities constitute a “single energy project”, there is a well-grounded argument that the PWA requirements under section 48E should be assessed on that project-wide basis. This interpretation is grounded in the statutory cross-references, supported by the preamble to the Final Regulations, and aligned with the practical realities of how clean energy projects are developed and constructed.

^[1] “Code” means the Internal Revenue Code of 1986, as amended.

^[2] EST includes property (other than property primarily used in the transportation of goods or individuals and not for the production of electricity) which receives, stores, and delivers energy for conversion to electricity, and has a nameplate capacity of not less than 5 kilowatt hours, as well as any integral property essential to its operation.

^[3] “Single energy project” factors include: (i) constructed on contiguous pieces of land, (ii) described in common power purchase agreements, (iii) share a common intertie, (iv) share a common substation, (v) described in common environmental or other regulatory permits, (vi) share financing, or (vii) constructed pursuant to the same construction contracts.

^[4] The full relevant language found in the preamble to the Final Regulations is:

Commenters also stated opposition to adopting the concept of an “energy project” or aggregation rule similar to those in the section 48 proposed regulations for purposes of claiming the increased rate for meeting the PWA requirements under section 48E (as well as section 45Y). Commenters asserted that there is no legal basis for using the definition of an energy project or any aggregation rule for the section 48E credit. A commenter instead suggested permitting a taxpayer to elect to combine multiple interrelated facilities into one aggregated unit or, alternatively, elect to treat the facilities individually for purposes of the PWA requirements. Another commenter requested permitting taxpayers to certify that individual qualified facilities meet the PWA requirements if interrelated facilities meet the PWA requirements. The commenter stated that taxpayers typically contract with mechanics and laborers for an entire project, rather than for an individual qualified facility, and that it would be difficult to certify compliance with the PWA requirements at the qualified facility level.

The Treasury Department and the IRS do not agree with commenters that there is no legal basis to incorporate an aggregation rule into section 48E. Section 48E(d)(3) provides that “[r]ules similar to the rules of section 48(a)(10) shall apply.” Section 48(a)(10) applies the prevailing wage requirements to “energy projects,” which requires the aggregation of energy properties under section 48. Additionally, the reference in section 48E(d)(3) to the prevailing wage requirements provided in section 48(a)(10) indicates that the express delegation of authority in section 48(a)(16) also applies in the context of section 48E for implementation of the prevailing wage requirements.

Although the apprenticeship requirements provided in section 48E(d)(4) applies rules similar to section 45(b)(8) rather than section 48(a)(11), an appropriate reading of the statute is to apply a consistent interpretation to both of section 48E’s prevailing wage requirements and apprenticeship requirements, as inconsistent interpretations would frustrate congressional intent by creating different standards for the prevailing wage requirements and apprenticeship requirements and would be difficult for the IRS to administer. For the reasons noted in this Summary of Comments and Explanation of Revisions, interpreting the PWA requirements for section 48E consistently with section 48(a)(10) is the best implementation of the overall statutory framework because it results in the PWA requirements being applied appropriately and consistently across credits.

^[5] “Interrelated operations” standard considers ownership, placed in service timing, and interconnection. Importantly, the commenter was not requesting application of the single-project rule, but instead a new and different rule based on this interrelated concept.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.