Proposed Green Energy Tax Credit Regs Would Tighten Requirements

By Scott Stogsdill
Ryan, LLC

Ryan, LLC’s Scott Stogsdill reports on recent Treasury guidance with regard to green energy tax credits shifting away from incentives focused on certain industries toward industry-neutral standards for reducing emissions. 

Recent Treasury regulatory proposals for clean energy vehicle and production tax credits should allow continuation of the investment boom in the related industries while implementing provisions toward conservation goals. The guidance is intended to further President Biden’s Investing in America agenda, support U.S. jobs, and bolster energy production and security while reducing energy costs for American consumers.

REG-119283-23, released June 3, 2024, proposes rules for the I.R.C. §45Y Clean Electricity Production Credit and §48E Clean Electricity Investment Credit established by the Inflation Reduction Act (IRA) of 2022, for facilities starting construction after December 31, 2024, on which date the §45 Renewable Energy Production Tax Credit and §48 Renewable Energy Investment Tax Credit will sunset for most technologies specifically listed therein. The only exceptions, for certain geothermal technologies, are set to continue until the 2030s. The new 45Y/45E rule, instead of listing technologies, utilizes an open “tech-neutral” standard based upon whether a facility generates electricity with “less than zero” greenhouse gas emissions or a specifically defined energy storage technology.

REG-117631-23, released April 11, proposes rules for the IRA-introduced §45V Credit for Production of Clean Hydrogen as well as the §48(a)(15) Election to Treat Clean Hydrogen Production Facilities as Energy Property, providing for an emissions value request process. Instead of using the proposed “Three-Pillar” program, a taxpayer can choose to request a Provisional-Emissions-Rating (PER) request from the Dept. of Energy for on-site (behind-the-meter) energy production. A classic example of a valid behind-the-meter clean hydrogen production facility would be on-site energy generation via solar panels or wind turbines. In comparison, the off-site Three-Pillar program is borrowed from the European Union requiring that clean electricity (1) be purchased from a carbon-free facility that was built in the last three years and is (2) physically located within the same region of the clean hydrogen facility, and (3) be hourly matched. Therefore, the PER (on-site power) option is the preferred option.

REG-118492-23, released Dec. 4, 2023, proposes rules for the IRA-amended §30D New Clean Vehicle Credit, providing definitions and requirements for qualified manufacturers of vehicles to determine eligibility for the credit. These regulations further define excluded building manufacturers due to ownership percentage by foreign entities or sourcing of minerals and subcomponents abroad.

On June 4, 2024, many green energy enthusiasts and credit stakeholders tuned in to a Senate Appropriations Committee hearing where Sen. Joe Manchin (I-WV), noting that the regulatory language introduces “conditions to get the credits,” squared off with Treasury Secretary Janet Yellen on her department’s implementation of the IRA and the bipartisan Back to Work Act in terms of U.S. jobs and energy independence.

“My Committee wrote the bill to bring back manufacturing to America so that we would not be dependent on unreliable supply chains, especially those of China, Russia, Iran and North Korea,” Manchin said. “We wrote the IRA as a very balanced bill to ensure energy security …why can’t we just implement the law the way it was written? You’re trying to implement a bill you never passed!”

“We recognize that there is an issue …” Yellen responded, “and we’ve asked explicitly in the guidance we put out how people [specifically industry stakeholders] suggest addressing it and we’re reviewing comments.”

In that light, it’s not surprising that the guidance poses more questions than answers.

Recent Round of Open Questions

Overall, the proposed regulations for §45Y and §48E are in keeping with the previously proposed energy property rules for §45 and §48. While they provide clarity on a few expected issues, the IRS is asking about 45 open questions to industry regarding the various technologies that should be eligible under the new tech-neutral standard. Therefore, we still have a long way to go to gain certainty for the U.S. energy industry.

The IRS is requesting comment on seven different areas, including feedback on:

1. The utilization of biogas, renewable natural gas (RNG), and fugitive methane.
2. The life-cycle-analysis (LCA) method including the spatial and temporal scaling of the greenhouse gas assessment horizon.
3. Combustion or gasification facility (C&G) feedstock, co-products, and waste products in determining lifetime greenhouse gas emissions.
4. Combined heat-power (CHP) and the LCA modeling methods to assess greenhouse gas emissions.
5. Methods to determine the annual tables for estimated net greenhouse gas emissions for C&G facilities.
6. Availability and implementation of carbon capture and sequestration technologies.
7. The books and records to substantiation, contemporaneously the levels of greenhouse gas emissions.

Many were expecting a clearer definition of the “less- than-zero greenhouse emissions” portion of the IRA requirements, which has not yet been fully addressed by these proposed regulations. Instead, the IRS is specifically asking for industry feedback on how life-cycle-analysis (or LCA) for gas emissions should be measured. The industry fears a repeat of the controversial “three-pillar regime” from the proposed regulations for 45V addressing spatial and temporal scaling.

Additionally, the IRS has not yet provided the annual table of emissions standards for various technologies as required by the statute. Projects not covered by the table or specifically exempted may need to apply to the Department of Energy for a provisional emissions rate similar to the proposed regulation issued on April 11 for §45V Clean Hydrogen.

Questions Answered

The proposed regulations do, however, answer some questions. For example, the new proposed regulations are consistent with the previously proposed regulations for §45 and §48 Definition of Energy Property and Rules Applicable to the Energy Credit, REG-132569-17, published on November 22, 2023.

The new rules import concepts like the definition of an energy system (including the necessary test, etc.), the definition of facility, the scope of qualifying property (including rules for access roads, etc.), the eligibility of refurbished projects (including the 80-20 Rule), and clarity on the prevailing wage and apprenticeship (PWA) bonus plus other bonuses such as domestic content and energy communities.

The new proposed regulations provide blanket qualification under the zero emissions standard for many existing green technologies such as solar, wind, geothermal, hydro, waste heat recovery, and nuclear projects. Likewise, the rules for energy storage technologies, which includes thermal energy storage machinery like boilers, chillers, and central-utility-plants (CUPs), is consistent with the previous rules. Therefore, developers planning future projects for these green technologies will likely have enough guidance to proceed with some confidence.

Projects that have begun construction by December 31, 2024 but are placed in service in 2025 (or later) will have the have the option of applying either the existing §45 and §48 rules or the new §45Y and §48E versions.

Conclusion

For projects that involve combustion or gasification technologies such as CHP, biogas, closed- or open-loop biomass, or municipal solid waste, the proposed rules for §45Y and §48E are much more complex than those applicable to the sunsetting §45 and §48 provisions. The IRS outlined how the emissions rate would be calculated, but asked for comments on many unresolved issues. Stakeholders in projects that will begin construction on or after January 1, 2025, should carefully assess the proposed rules and consider providing, by August 2, 2024, comments on the proposal and requests speak at a public hearing to be held August 12–13.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners. 

Author Information

Scott Stogsdill is Director of Green Incentives at Ryan, LLC.

Scott Stogsdill
Director, Federal Income Tax Consulting
Ryan
469.399.4496
scott.stogsdill@ryan.com