45Y and 48E Tax Credit Regulations: Final Rules Released

In early January, likely spurred by the upcoming change in administration, the IRS finalized several key regulations tied to the Inflation Reduction Act. Among these were the much-anticipated rules for clean energy production and investment tax credits.

The newly finalized credits, outlined in Sections 45Y and 48E of the tax code, mark a major shift in how clean energy projects qualify for tax benefits. In the past, facilities had to use specific technologies to generate electricity in order to be eligible. Starting January 1, 2025, that’s no longer the case. Now, any technology that generates electricity—or even heat energy—with zero greenhouse gas emissions can qualify. It’s a big step forward for encouraging innovation in clean energy.

Here’s a quick overview of what stayed the same in the final rules and what’s changed. Check out our previous blog post for a summary of the proposed regulations.

Tech Neutral in Theory, Not Practice

Non-C&G Facilities: While the new rules are intended to be “technology neutral,” the IRS has identified a few technologies that automatically qualify: solar (both photovoltaic and concentrated solar), wind, nuclear (fission and fusion), geothermal, marine and hydrokinetic, hydropower, and waste energy from these sources. Credits can also be claimed for energy storage technology.

C&G Facilities: Other technologies, like Combustion and Gasification Facilities (“C&G Facilities”), need to pass a life cycle analysis (LCA) showing net zero greenhouse gas emissions to qualify. Since these facilities usually emit some greenhouse gases, their eligibility depends on proving they avoid enough emissions elsewhere in their lifecycle to offset their own and achieve net-zero or negative emissions. 

What’s Stayed the Same:

• Energy use by tax payers: Tax payers can claim the production credit for the energy they use, as long as it is metered by a qualifying device owned and operated by an unrelated party.

• Annual technology list: The IRS will publish an annual list of technologies that qualify for the credit, may also include some that don’t, for clarity.  The initial list has already been released, and includes no C&G Facilities.
• Provisional emissions ratings: Taxpayers with unlisted technologies can apply for a provisional emission rating to qualify for credits.
• Investment Tax Credit (ITC) eligibility: Facilities must be expected to generate zero (or less) net greenhouse gas emissions for at least 10 years.
• Recapture rules: Credits can be recaptured if a facility’s emissions exceed 10 grams of CO2e during the recapture period.
• No general aggregation of qualified facilities: Each qualified facility must independently meet the criteria to claim credits, including any bonus credits. Facilities can no longer be grouped together into an "energy project" as allowed under the old investment tax credit system. A "qualified facility" refers to a single unit of property capable of producing energy on its own, like an individual wind turbine or a solar panel array connected to one inverter.

What's Changed:

The updates to the final regulations focus on refining the earlier proposals and filling in some gaps, particularly around how C&G Facilities can qualify for credits. Here are some key changes:

Help for Renewable Natural Gas (RNG) Developers

• Dropped the “first productive use” rule: This rule would have disqualified facilities diverting natural gas from uses other than venting or flaring.
• Clarified “alternative fates”: Second, it clarified several “alternative fates” for renewable natural gas technologies. These alternative fates form a baseline against which the lifecycle greenhouse gas emissions of C&G Facilities are measured - in other words, if an “alternative fate” involves the emissions of substantial amounts of greenhouse gases, a C&G Facility may be credited with avoiding those emissions and able to achieve zero or negative emissions as a result.  Facilities using renewable natural gas or other alternatives can now count avoided emissions from scenarios like flaring or average animal waste management practices to qualify for credits. 

Life Cycle Analysis (LCA) Details

• Time horizon: LCAs must model emissions over 30 years.
• Spatial horizon: The scale of analysis depends on whether the facility’s feedstock impacts are local, domestic or international.
• Carbon capture and sequestration: Only emissions captured at the point of electricity generation count. Emissions displaced on the grid or reduced through “book-and-claim” systems don’t count. 

Fuel Cells Using Clean Hydrogen

• Hydrogen not produced using C&G: Fuel cells that use hydrogen produced without combustion or gasification now qualify as “non-C&G facilities,” meaning they don’t need an LCA to claim credits.
• No end-use requirement: The IRS also dropped the “end use” requirement that would have mandated that hydrogen storage technology only store hydrogen used as energy. 

Prevailing Wage and Apprenticeship Exemption

• Aggregation rules for small facilities: Facilities with a capacity of less than one megawatt will now be grouped together for the purposes of the one-megawatt exemption from labor requirements if they meet all of the following conditions:

1. They are owned by the same taxpayer.
2. They are placed in service in the same year.
3. They transmit electricity through the same interconnection point.

This rule prevents developers from dividing larger projects into smaller facilities to bypass prevailing wage and apprenticeship requirements.

• Limited scope of aggregation: This aggregation rule does not apply to the 5-megawatt limitation for interconnection property or to domestic content or energy community bonuses. However, it will apply to the 5-megawatt nameplate capacity for the 48E(h) low-income community bonus.
• Aggregation only applies to exemption, not compliance: The aggregation rule only applies when determining whether facilities qualify for the one-megawatt exemption from labor requirements. If the exemption does not apply, each individual facility within the aggregated group must independently comply with the rules. For example, developers must verify compliance for each facility, including meeting requirements such as a minimum percentage of labor hours performed by apprentices.
  

Relationship to Previous Credits

• 80/20 test for retrofitted facilities: Facilities that have already claimed legacy investment or production tax credits can qualify for the new tech-neutral credits if at least 80% of the facility’s value is from new construction. 
• Incremental production: Developers can claim credits on incremental additions to capacity, even if the facility does not meet the 80/20 test.
  

Key Takeaways

• Developers of C&G Facilities still face uncertainty about eligibility, with many details left for future guidance. 
• The IRS has rejected biomass as an eligible technology for now and expressed skepticism that traditional natural gas systems will qualify.

• Carbon capture at the point of generation was approved, and alternative fates were clarified for some renewable natural gas technologies, creating the possibility they will qualify due to avoided emissions.

• The one-megawatt exemption rule is a compromise, offering more favorable treatment for projects on different sites compared to the aggregation rule under the legacy credits. Unlike the legacy credits, these rules generally don’t aggregate projects across multiple sites.

Next Steps

• The new rules took effect on January 1. Projects that started before that date can still claim credits under the old rules. 
• Additional guidance on specific modeling topics may be forthcoming.

Important notice: Ever.green and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.