Treasury Releases Proposed Regulations on Tech-Neutral PTC and ITC

On May 29, 2024, the Treasury Department (the “Treasury”) and the Internal Revenue Service (the “Service”) issued proposed regulations (REG-119283-23) (the “proposed regulations”) regarding the clean electricity production tax credit and the clean electricity investment tax credit provided by the Inflation Reduction Act of 2022 (the “IRA”)¹ and available under new sections 45Y and 48E, respectively, of the Internal Revenue Code of 1986, as amended (the “Code”). These regulations are only in proposed form and will undoubtedly undergo some changes before finalization.²

As background, Code sections 45 and 48 have historically provided for a production tax credit (“PTC”) and an investment tax credit (“ITC”) for certain clean electricity, biogas, storage, and other energy transition property. These credits are currently available for qualifying projects that “begin construction” prior to January 1, 2025.³ Code sections 45Y and 48E will succeed Code sections 45 and 48, providing for a PTC or ITC for energy and storage projects with a greenhouse gas (“GHG”) emission rate⁴ of not greater than zero that are placed in service after December 31, 2024 (the “New PTC” and “New ITC,” respectively).⁵ The New PTC and New ITC will begin to phase out over a three-year period in the calendar year following the later of (i) the “applicable year” in which GHG emissions drop at least 25% in the U.S. compared to the GHG emissions during calendar year 2022⁶ or (ii) 2032.

Unlike the original PTC and ITC, which were restricted to specific technologies, Code sections 45Y and 48E take a “tech-neutral approach” — regardless of the type of project or technology, an electricity or storage project may be eligible for the New PTC or New ITC so long as the relevant facility generates, or is anticipated to generate, electricity with a GHG emission rate of not greater than zero.⁷ For many clean energy projects (including wind, solar, geothermal and hydropower), it will be business as usual; however, more novel technologies and projects that generate electricity through the combustion or gasification of feedstocks that have not been historically eligible for the Code sections 45 and 48 credits may now be eligible for the New PTC or New ITC — and the proposed regulations provide important rules for determining eligibility.

The proposed regulations are almost two hundred pages in length and provide fairly detailed guidance and discussion raised in connection with Code sections 45Y and 48E. As described below, the proposed regulations also pose dozens of questions for taxpayer and stakeholder feedback. While a fulsome summary of these regulations is beyond the scope of this alert, we have highlighted certain notable items below:

• The proposed regulations delineate certain types of property that are eligible to earn the New PTC or New ITC.
  • As noted above, clean energy projects, such as wind, solar, hydropower, and geothermal, are eligible for the New PTC or New ITC because they have a GHG emission rate of not more than zero.
  • Because the New PTC and New ITC generally require a facility to produce electricity, Code section 48’s “qualified biogas property” (that is, facilities which convert biomass into a gas with a methane content of not less than 52%)⁸ does not appear eligible for the New ITC, and it is unclear whether closed- and open-loop biomass facilities will be eligible for the New ITC and New PTC.⁹
  • Eligible energy storage technology under Code section 48E explicitly includes electrical storage, hydrogen storage, and thermal storage with a nameplate capacity of 5 kWh or greater (with the clarification that any hydrogen stored must be ultimately used for production of electricity).
  • Nuclear fission and fusion facilities are expressly eligible for the New ITC and New PTC.
  • Combined Heat and Power facilities may earn the New PTC based on electricity and heat (converted to kWh), subject to efficiency requirements, the GHG emissions rate requirement, and allocations of GHGs among products generated.
• For facilities that are not specifically identified in the proposed regulations, it is possible that some will be found to be eligible for the New PTC and New ITC.
  • Treasury intends to publish an “Annual Table” after the publication of final regulations that identifies the types of facilities — including feedstock, operational characteristics and the use of carbon capture equipment — that have a GHG emission rate of not more than zero and would be considered eligible for the New PTC and New ITC.¹⁰
  • In the alternative, taxpayers may rely on a “Provisional Emission Rate” granted from the Department of Energy (DOE) (including for the New PTC’s full 10-year credit period), in a process that is described in detail in the proposed regulations.
  • If a facility is not listed in the “Annual Table” and a Provisional Emission Rate has not been granted, the taxpayer may determine the GHG emission rate using a life cycle analysis (“LCA”) model.¹¹
• The proposed regulations do provide some clarity as to how Treasury, DOE, and the National Laboratories will determine the GHG emission rate for those facilities which are not specifically enumerated as having a GHG emission rate of zero.
  • For facilities that produce electricity without using combustion or gasification (“Non-C&G Facilities”), the GHG emission rate will be determined through a technical and engineering assessment of the fundamental energy transformation of an input to electricity.
    • Emissions that may be associated with Non-C&G Facilities but that are not fundamental to the transformation of energy into electricity are not considered in the GHG emission rate of Non-C&G Facilities. For example, GHGs released by flash geothermal facilities from underground deposits, GHGs released by certain auxiliary heaters at concentrated solar facilities, and GHGs associated with water reservoirs at hydroelectric facilities are all excluded from the GHG emission rate of the relevant facilities.
  • For facilities that produce electricity with combustion or gasification (“C&G Facilities”),¹² the GHG emission rate will be determined through a broader full lifecycle analysis:
    • The scope includes (a) emissions from feedstock generation, production, and extraction (including emissions attributable to land-use changes), (b) emissions from feedstock and fuel transport and distribution, (c) emissions from handling, processing, upgrading and/or storing feedstocks, fuels and intermediate products and emissions from process additives, and (d) direct emissions from combustion and/or gasification.
    • The lifecycle analysis may consider avoided emissions and allocate emissions between co- and by-products, each of which can reduce the GHG emission rate of a facility.
    • While offsets that are unrelated to electricity or fuel production will not reduce a facility’s GHG emission rate, carbon oxides that are captured, utilized or sequestered consistent within the requirements of section 45Q will be excluded from the lifecycle analysis and thereby reduce the GHG emission rate of the relevant facility.
• Unlike the Code section 45 PTC, taxpayers do not need to sell electricity to an unrelated person to earn the New PTC if the qualified facility is equipped with a metering device that is owned and operated by an unrelated person (for example, it can sell the electricity to a related party or use/store the electricity itself).
• In addition to the general recapture requirements under Code section 50(b), the New ITC will be subject to recapture if a qualifying facility’s actual GHG emission rate for a taxable year during the five-year recapture period exceeds 10 grams of CO₂e per kWh.
  • Furthermore, in order to be eligible for the New ITC, the taxpayer must reasonably expect (based on certain objective indicia) that the facility’s GHG emission rate will be no greater than zero for ten years.
• The proposed regulations provide further clarity on the definition of a “qualified facility,” which is generally consistent with regulations recently released with respect to Code section 48.¹³
  • The proposed regulations provide that a “qualified facility” includes a “unit of qualified facility” as well as qualified property¹⁴ owned by the taxpayer that is an integral part of the facility.
  • A “unit of qualified facility” includes all functionally interdependent components (that is, components in which the placing in service of each component is dependent upon placing in service the other components) that are operated together and can operate separately from other units of property to produce electricity.
  • An “integral part” of a facility includes any component of property that is used directly in the intended function of the qualified facility and is essential to the completeness of such function.
  • The proposed regulations generally require that a single taxpayer must own the entire unit of a qualified facility in order to be eligible for a New PTC or New ITC — this is particularly notable for certain industries where separate ownership of components may be required by commercial or legal realities.
    • However, in the case of a qualified facility in which more than one person has an ownership share (and the arrangement is not treated as a partnership for federal tax purposes), production may be allocated in proportion to their respective ownership shares.
• While incurring capital costs, modifications, additions, or expansions generally will not entitle a facility to a New PTC or New ITC, the proposed regulations set forth a few exceptions that may allow a qualified facility to be eligible for a New PTC or New ITC to the extent of the added capacity.
  • If a new unit is placed in service after December 31, 2024, or capacity to a facility is increased after December 31, 2024, the expanded capacity can qualify for either the New PTC or the New ITC as its own qualified facility, even though it is a part of a facility placed in service prior to January 1, 2025, but only to the extent of an increase in electricity produced at the facility by reason of the new unit or addition to capacity.
  • There is also a special rule which allows a New PTC or New ITC to the extent of new capacity for decommissioned facilities that have restarted so long as the existing facility had (i) ceased operations, (ii) been shut down for at least one calendar year, and (iii) received a new or reinstated operating license from the relevant federal regulatory commission (that is, the Federal Energy Regulatory Commission or the Nuclear Regulatory Commission).
  • In addition, the 80/20 rule allows retrofitted projects (that are otherwise qualifying under applicable Code provisions) to receive a New PTC or New ITC if the fair market value of the used components at the time the project is placed in service does not exceed more than 20% of the total fair market value of the qualified facility. The proposed regulations provide examples of the 80/20 rule, but they do not give further clarity as to how the used components should be valued.
• 5 MW Limit for Interconnection Property
  • Expenditures paid or incurred for qualified interconnection property may be included in the calculation of the qualified investment for the New ITC if the qualified facility has a maximum net output of not greater than 5 MWac, as measured at the unit of the qualified facility at the time placed in service. An example in the proposed regulations suggests that this would be the case where multiple units of facilities below 5 MWac comprise a larger project.
• In addition to the above guidance, the preamble lays out a significant number of open items that Treasury and the Service are requesting taxpayer feedback on, which are largely focused on the appropriate approach for C&G Facilities. Areas requested for comment include:
  • The treatment of carbon capture, land use change and other market-mediated indirect effects.
  • How to distinguish between co-products, byproducts, and waste products.
  • Numerous issues around LCAs, such as analytical LCA parameters, maintaining LCA baselines, LCA modeling, and how emissions should be allocated between electricity, heat, co-products and byproducts in LCAs.
  • The treatment of renewable natural gas (“RNG”) and issues related thereto.¹⁵ Notably, compared to the Code section 45V proposed regulations, Treasury and the Service now appear somewhat open to the use of book-and-claim accounting for RNG, but have again proposed a “first-productive use” requirement that may substantially limit the use of RNG for purposes of the New PTC and New ITC.

The drafting and issuance of the proposed regulations required substantial thought and effort, and the Treasury and the Service may be somewhat modifying their approach in implementing the IRA, moving from drafting rulemaking and awaiting response to affirmatively seeking comments and guidance from taxpayers before putting pen to paper on novel topics. It is clear that a fair amount of work still needs to be done before these regulations are made final — and with only seven months left in an election year, it is anyone’s guess how soon we will see further rulemaking for the New PTC and New ITC.

¹ Our full coverage of IRA matters can be found here.

² Prior to issuing final regulations, Treasury and the Service will accept comments on the proposed regulations until August 2, 2024. They plan to hold a public hearing on August 12, 2024, with oral comment outlines due by August 2, 2024.

³ Presumably, the beginning of construction date will be determined according to the previous begun construction guidance issued by the Service. See our previous coverage here.

⁴ Defined as the amount of GHG emitted into the atmosphere by a facility in the production of electricity, expressed as grams of CO₂e per kWH.  Code Sections 45Y(b)(2)(A) and 48E(b)(3)(B)(ii).

⁵ For qualifying PTC or ITC projects that “begin construction” prior to January 1, 2025, such projects will be eligible for the applicable credit under Code sections 45 or 48 regardless whether the project was placed in service after December 31, 2024. As such, eligible projects that begin construction prior to January 1, 2025 but are placed in service after December 31, 2024 have the ability to choose between Code sections 45, 45Y, 48, or 48E for the qualified facility.

⁶ The proposed regulations include a proposal for two datasets that may be used for calculating the value of the GHG emissions of the applicable year – the EPA Greenhouse Gas Reporting Program and Emissions & Generation Resource Integrated Database.

⁷ In order to get the full credit rate, taxpayers must either (i) satisfy the prevailing wage and apprenticeship requirements with respect to the construction and applicable alteration and repair of such qualifying facility or eligible project, (ii) own a project or facility that has a maximum net output of less than one MWac, or (iii) begin construction of the project or facility prior to January 29, 2023.

The credit rate may be increased if the “domestic content requirements” are met or if the qualified facility is located in an “energy community” or low-income community. See Code sections 45Y(g)(7), 45Y(g)(11), 48E(a)(3)(A), 48E(a)(3)(B), and 48(e). See our prior alerts on energy communities and domestic content here, here, here, here, and here. 

⁸ See sections 48(c)(7) and 48(a)(2)(A)(vii). The proposed regulations have not specifically provided that qualified biogas property or biomass facilities would (or would not ) be eligible for the New ITC; however, the preamble has requested comments from taxpayers that relate to the eligibility of qualified biogas properties under the New ITC.

⁹ The intent may be to require biomass to satisfy the zero GHG emission rate because its power product is based on combustion.

¹⁰ Taxpayers may rely on the “Annual Table” in effect as of the date a facility begins construction. 

¹¹ If the LCA model is relied on, the Service will be deemed to accept that rate when the taxpayer files its return (however, the taxpayer will still be subject to potential for audit). Details with respect to LCA modeling are not currently available but are presumably forthcoming in future rulemaking.

¹² Notably, C&G Facilities would also include Non-C&G Facilities that produce electricity using a fuel that was produced in whole or in part by the combustion of fossil fuels. For example, a hydrogen fuel cell — which would otherwise be considered a Non-C&G Facility — would be considered a C&G Facility if its hydrogen fuel was produced using electricity from the grid, because such electricity is, in part, produced by the combustion or gasification of fossil fuels.

¹² See our prior client alert on the recently released Code section 48 regulations here.

¹⁴ “Qualified property” means property that is (i) tangible personal property (or other tangible property used as an integral part of the qualified facility), (ii) depreciation is allowable with respect to the property, and (iii) either (A) the construction, reconstruction or erection of the property is completed by the taxpayer or (B) if the original use of the property begins with the taxpayer. Proposed Regulation § 1.48E-2(e).

¹⁵ Treasury and the Service previously addressed the use of RNG to reduce GHG emissions in proposed regulations regarding the Code section 45V hydrogen credit. See our prior coverage here.

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.