Clean energy projects have relied upon valuable tax credits, the section 45 Production Tax Credit and the Section 48 Investment Tax Credit, since 1992 and 2005, respectively. These long-running and generous tax credits have supported capital access and lowered the cost of development for the majority of wind, solar, and battery storage projects in the US. In 2022, the Inflation Reduction Act expanded the scope of the PTC and ITC to new clean energy technologies and, in doing so, kicked off a wave of new investment.
Beginning in 2025, clean energy projects have access to the new 48E clean electricity Investment Tax Credit and 45Y clean electricity Production Tax Credit. The legacy Section 48 ITC and Section 45 PTC credits will no longer be available to projects that start construction after December 31, 2024, and will instead be replaced by the tech-neutral tax credits. Like the legacy PTC and ITC, 45Y and 48E are transferable for eligible taxpayers. Going forward, developers of new projects need to understand the details of the new tax credits, and tax credit buyers should understand the different qualification parameters under the tech-neutral tax credit regulations.
Qualification for the tech-neutral PTC or ITC for long-standing clean energy technologies like wind, solar, and storage should not greatly complicate the process of claiming and transferring the tax credits. The tech-neutral framework also creates opportunities for newer non-emitting electric generating technologies to qualify for tax credits.
When Congress enacted the IRA in 2022, a key policy priority was to provide the energy industry with long-term visibility into tax incentives, like transferable tax credits, designed to encourage investment in clean energy technologies and manufacturing.
In order to do so, Congress outlined a transition from the legacy technology-specific ITC and PTC to a new tech-neutral credit, designed to evolve with the energy industry over the long term.
Historically, as clean energy technologies have reached commercial viability (energy storage and offshore wind, for instance), each technology has had to obtain explicit access to tax credit support. Under the tech-neutral framework, new technologies that generate electricity with zero GHG emissions would be eligible for inclusion in the IRS’s annual determination of eligible technologies.
The tech-neutral tax credits take effect on January 1, 2025. These credits have a number of similarities with the expiring ITC and PTC, but differ in key ways. Qualifying facilities that enter service starting in 2025 and through 2032 are entitled to elect either the 45Y PTC or the 48E ITC. Qualification hinges upon several factors, including:
Owners of facilities that are eligible for the legacy PTC and ITC which began construction prior to 2025 may continue to access those tax credits through a safe harbor. The IRS has previously defined the criteria for qualification for the safe harbor.
Commonly, companies claiming the safe harbor will do so by demonstrating that they had incurred at least 5% of the cost of the facility prior to the expiration of the ITC or PTC. Additionally, companies must be able to demonstrate that they have maintained continuous efforts towards the completion of the facility.
Facilities that enter service beginning in 2025 which also qualify for a safe harbor for the legacy tax credits have the opportunity to access tax credits through either the new Section 48E and Section 45Y tax credits or through the legacy ITC/PTC. Facilities which start construction after 2025 will be eligible for the new tech-neutral tax credits and will be able to opt for either the ITC or PTC subject to which tax credit provides more attractive economic benefits.
The IRS has proposed regulations for both the tech-neutral 48E tax credit and the 45Y tax credit. A key aspect of the proposed regulations hinges upon the determination that an electric generating facility has zero GHG emissions, or less. In the proposed regulations, the IRS proposes several treatments.
The IRS proposes that a category of electric generating technologies are non-emitting by default. These technologies include:
Based upon the presumption that these facilities have zero GHG emissions, projects which incorporate one or more of these technologies would be eligible to generate a clean electricity investment tax credit under the tech-neutral ITC or PTC.
Combustion and gasification facilities (C&G) comprise a second category of potentially-eligible generating facilities. The IRS proposes that the emissions rate for these facilities would be calculated on the basis of the net rate of GHGs emitted into the atmosphere by such facilities (taking into account lifecycle emissions) per KWh of generation.
The lifecycle emissions for a fuel, derived from the Clean Air Act, relies on an LCA incorporating “aggregate quantity of greenhouse gas emissions (including direct emissions and significant indirect emissions such as significant emissions from land use changes) related to the full fuel lifecycle, including all stages of fuel and feedstock production and distribution, from feedstock generation or extraction through the distribution and delivery and use of the finished fuel to the ultimate consumer.”
GHGs are measured in carbon dioxide equivalent (CO2e) tons, where GHG emissions are adjusted to their CO2 equivalent values on the basis of their 100-year global warming potential. For instance, methane emissions are estimated to be 25 times more potent than CO2 over a 100-year period, and the CO2 equivalent value for methane is then 25 times greater than the volumetric methane emissions.
C&G facilities may use a variety of technologies to generate electricity, and onsite fuel combustion is not dispositive. The IRS proposes, “C&G [f]acility 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, or multiple transformations, of one energy source into another using combustion or gasification.”
Based upon this framing, the IRS proposes that, for instance, a fuel cell facility fueled by hydrogen produced by an electrolyzer powered in part by power generators that emit GHGs would be a C&G facility because of the combustion of fuels used by power plants supporting the electrolyzer.
Alternatively, fuel cells which operate exclusively using hydrogen produced by an electrolyzer powered by renewable energy would not be considered a C&G facility, because there is no combustion in the electricity production process or in the fuel supply chain.
The IRS outlines a series of questions relating to the proper designation of electric generating facilities fueled by biogas or RNG and for fuel cells. The IRS seeks comments on the LCA calculation for RNG and biogas.
These fuels are often derived from fugitive methane emissions, and can have negative GHG values representing a net reduction in emissions associated with their use. IRS also seeks comments on whether fuel cells are properly classified as C&G facilities in certain cases, and whether in practice it is possible to calculate the emissions of the fuels used.
Absent additional information and clarification on the subject of electric generation from RNG, biogas, and fuel cells, there is likely to be some delay in those projects accessing the tech-neutral tax credits. IRS did give some indication that fuel cells that use hydrogen produced (indirectly) with only renewable energy may be eligible for the tax credits.
The IRS proposes that facilities which elect either the 48E tax credit or 45Y tax credit may not also elect other tax credits for which they could be eligible — companies will have to choose which credits to elect.
Facilities that have elected the legacy ITC or PTC, or any of the 45Q carbon capture and sequestration tax credit, the 45U nuclear production tax credit, the 45J advanced nuclear production tax credit, or the 48A advanced coal investment tax credit, in the current or prior tax years will not be eligible for the 48E or 45Y tax credits.
The value of the 48E tax credit and legacy 48 ITC are similarly determined as a percentage of the cost of development of an eligible facility. There are distinctions between technologies which qualify for the legacy ITC and the tech-neutral ITC. Only technologies that generate electricity (or function as energy storage) are eligible to receive the tech-neutral tax credit.
Technologies can be grouped into four categories: qualifies both for legacy and tech-neutral ITC; qualifies for legacy ITC and sometimes the tech-neutral ITC; qualifies for legacy ITC but does not qualify for tech-neutral ITC; does not qualify for legacy ITC but does qualify for tech-neutral ITC.
*hydrogen sourcing for fuel cells can influence access to the tech-neutral ITC
The IRS has not made a final determination for the eligibility of electric generating facilities fueled by RNG and municipal solid waste. The IRS articulated a series of questions related to the applicability of lifecycle CO2e emissions for facilities fueled by biogas and RNG.
However, for biogas and RNG facilities to be eligible for the Section 48E tax credit, they must generate electricity. This distinction is significant as RNG and biogas have a wide range of transportation, industrial, and retail applications that do not require electric generation. Crux has observed that a large share of RNG project tax credits are not electric generating facilities.
The new tech-neutral PTC offers eligible recipients a tax credit for each unit of electricity generated and sold to a third party. The credit is earned over a ten year period, beginning in the year in which the facility is placed in service.
Prior to 2023, only wind facilities were eligible for the PTC, but the IRA expanded the program to a wider range of technologies. The 45Y tech-neutral PTC expands the scope of the PTC program to additional clean electric technologies.
Section 45Y tax credit value is determined per unit of electricity production. The base value of the 45Y mirrors the legacy 45 PTC, at 0.3 cents per KWh (adjusted for inflation), increased to 1.5 cents per KWh for facilities which meet prevailing wage and apprenticeship standards.
Companies are able to increase the value of the 45Y tax credit by siting a project in a designated energy community, satisfying domestic content adder requirements, and/or qualifying for a low income bonus for projects under 5MWac. The value of each bonus adder increases the base value (either 0.3 cents or 1.5 cents) by 10%, except for certain low income bonuses which increase the value by 20%.
Section 48E tax credit value mirrors the legacy 48 ITC. The tax credit has a base value of 6% of eligible construction costs incurred by the taxpayer. This value rises to 30% for projects which can demonstrate that they meet prevailing wage and apprenticeship standards.
Projects can also get a 10 percentage point bonus to the tax credit by locating the project in an energy community or meeting domestic content standards (or both). Projects under 5MWac may apply for the low income communities bonus, which is additive to the base value plus any other bonuses and increases the ITC value by either 10 or 20 percentage points.
Tech-neutral tax credits are available to all qualifying facilities that enter service through 2032, with one caveat. Congress directed that the IRS phase out the tech-neutral tax credits when power sector emissions decline to 25% of 2022 emissions.
The year that either emissions decline to 25% of 2022 emissions or 2032 is called the applicable year. The tax credit value steps down annually following the applicable year. In the first year (i.e. 2033 or the year after emissions reach 25% of 2022 levels), the tax credit value is 100%.
The subsequent year tax credit values decline to 75%, and then 25% in the final year. The phase out is not retroactive to projects which entered service prior to the phase out period (in the case of PTCs) or qualify for a safe harbor by starting construction prior to the phase out.
For context on the measure of emissions decline that triggers the phase out, in 2022, the US power sector accounted for an estimated 1,685 million metric tons of CO2e emissions, according to the Energy Information Administration. A 75% reduction in emissions would mean that, in a given year, power sector emissions totaled 421.25 million metric tons or less — roughly equivalent to the annual emissions of the international aviation industry in 2022.
The EIA’s most recent long-term forecast, the 2023 Annual Energy Outlook, forecasts a decline in power sector emissions of 50% to 55% by 2032 from 2022. As such, it is possible, but not likely that emissions reductions will reach or exceed a 75% decline from 2022 levels.
Crux is observing a significant uptick in buy-side demand for 2025 tax credits. While many tax credits will continue to qualify for the legacy ITC and PTC, buyers are seeking to learn more about the tech-neutral tax credit regime as it takes effect next year.
Get in touch with Crux today to learn more about the availability of transferable tax credits for 2025 and how to transact transparently and efficiently in the tax credit market.
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