Final Clean Electricity Production and Investment Tax Credit Regulations Provide Taxpayers With Welcomed Guidance

The Inflation Reduction Act of 2022 introduced the Section 45Y clean electricity production and Section 48E clean electricity investment tax credits. These credits are technology neutral and generally apply to any type of electricity generation that achieves zero greenhouse gas emissions. These tax credits will begin to replace the prior Section 45 production tax credit and Section 48 investment tax credit this year—the old credits apply only to projects starting construction before 2025, and the new credits apply to projects placed in service in 2025 or later.

Comprehensive proposed regulations were issued in May of 2024. These final regulations were released on January 7, 2025. These final regulations generally maintain the rules from the proposed regulations while making certain clarifications and providing additional guidance on open issues. Certain revisions include: 

• Removal of the "End Use" Requirement. The final regulations eliminate the requirement that hydrogen stored in hydrogen energy storage property be used only for the production of energy. This change was in response to industry concerns regarding the fact that taxpayers regularly use hydrogen for other purposes, as well as the inherent challenges of tracking the end use of hydrogen. 
• Further Lifecycle Analysis Guidance. While these credits are technology neutral, the regulations deem certain technology types to have a zero emissions rate while requiring lifecycle analysis reports in connection with other technologies to prove they satisfy the emissions standards. The final regulations provide guidelines for these lifecycle analysis reports. These include establishing the appropriate timeframe a lifecycle analysis must cover (30 years from the year in which the relevant facility first qualifies for credits). Additionally, the regulations provide that further guidance on lifecycle analyses will be forthcoming.
• Clarification of the One Megawatt Exception. The final regulations clarify the methods for measuring the maximum net output of qualified facilities and energy storage technologies for purposes of the "One-Megawatt Exception." The "One-Megawatt Exception" relieves certain low output facilities from the wage and apprenticeship requirements generally required to obtain the full tax credit.

These regulations take effect 60 days after they are published in the Federal Register, which is scheduled for January 15, 2025. Additionally, the Department of Treasury and the Internal Revenue Service separately released final regulations regarding the implementation of the low-income community bonus credit to the clean electricity investment tax credit, which are largely in line with the proposed regulations. Satisfaction of the bonus credit requirements can allow for up to an additional 20 percentage point increase to the Section 48E credit. This bonus credit is available for projects located in qualifying communities, but taxpayers must apply to the Internal Revenue Service for an allocation of an annual nationwide capacity limitation.