Treasury Issues Final Regulations on Technology Neutral Clean Energy Projects

On January 7, 2025, the US Department of the Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) issued final regulations (the “Final Regulations”) relating to technology-neutral tax credits for clean energy projects under Sections¹ 45Y and 48E that were enacted as part of the Inflation Reduction Act of 2022. The Final Regulations are generally consistent with proposed regulations published in May 2024 (the “Proposed Regulations”), as well as final regulations issued under Section 48, but do include significant changes in response to over 1,800 written comments received by Treasury and the IRS, the most potentially meaningful of which are discussed below. The Final Regulations were particularly focused on providing additional rules and guidelines for the calculation of a facility’s greenhouse gas (“GHG”) emissions rate and boundaries for performing the lifecycle analysis (“LCA”).

Beginning in 2025, Sections 45Y and 48E, the technology-neutral production tax credit (“45Y PTC”) and technology-neutral investment tax credit (“48E ITC”), respectively, will replace many of the existing credits under Sections 45 and 48. Unlike Sections 45 and 48, which apply only to specific types of energy property and production and storage facilities, Sections 45Y and 48E establish a “technology neutral” framework. Under this system, energy generation or storage technologies qualify for credits by meeting a “zero or negative” GHG emissions threshold, regardless of the specific technology. The purpose of these credits is to foster innovation by enabling the development of new zero emissions technologies over time and to offer stable, long-term incentives for investments in clean energy technologies. It is expected that technologies that are eligible for Section 45 and Section 48 currently will largely continue to qualify for the new credits (although certain technologies, such as renewable natural gas, may have additional challenges) and additional technologies, such as those technologies that produce electricity through the combustion or gasification of feedstocks, will be eligible to benefit. These credits are available for facilities that are placed in service after December 31, 2024 and will begin to phase out over a three-year period in the calendar year following the later of (i) the year in which GHG emissions drop to at least 25% in the United States, compared to the GHG emissions in the United States during calendar year 2022; or (ii) 2032.

Differentiation Between C&G Facilities and Facilities Meeting the Zero Emission GHG Standard

The Final Regulations identify certain types or categories of facilities that are deemed to have a GHG emissions rate of not greater than zero and are automatically considered to have a GHG emissions rate that is not greater than zero, thus qualifying for the credits without the need for further emissions analysis.

These facilities are considered “Non-C&G Facilities” and include:

1. Wind (including small wind properties)
2. Hydropower (including retrofits that add electricity production to non-powered dams, conduit hydropower, hydropower using new impoundments, and hydropower using diversions, such as a penstock or channel)
3. Marine and hydrokinetic
4. Solar (including photovoltaic and concentrated solar power) 
5. Geothermal (including flash and binary plants) 
6. Nuclear fission
7. Fusion energy
8. Waste energy recovery property that derives energy from a source described in the categories above

On the other hand, the Final Regulations introduce complex rules for determining the GHG emissions rate for combustion and gas (“C&G”) facilities. The definition of C&G facilities encompasses technologies that use combustion or gasification either in the production of electricity itself or in the production of fuel used to make electricity. C&G facilities must determine their GHG emissions rate by performing an LCA of both direct and indirect emissions, including emissions at all stages of fuel and feedstock production and distribution. The Final Regulations provide extensive requirements for an LCA, which must include broader changes in commodity markets, such as emissions from land use changes and the consequences of commodity production. The LCA must evaluate the emissions over a period of 30 years. Fuel cells could be considered C&G facilities if the hydrogen used to power the fuel cell is produced using combustion or gasification, or if the electricity used to produce hydrogen was made from combustion or gasification.

The GHG emissions rate for these facilities must be determined by an LCA that complies with specific requirements, including:

1. Starting Boundary: The LCA starts from feedstock generation for biogenic feedstocks or feedstock extraction for fossil fuel feedstocks. 
2. Ending Boundary: The LCA ends at the meter at the point of production of the C&G Facility. 
3. Baseline: The LCA must be based on a future anticipated baseline, projecting the future status quo in the absence of the credits.
4. Offsets and Offsetting Activities: Offsets and offsetting activities are not considered in the LCA.
5. Included Emissions: The LCA must account for direct emissions and significant indirect emissions, including those associated with feedstock production, extraction, transport, and use. 
6. Excluded Emissions: Certain emissions, such as those from backup generators or routine maintenance, are excluded from the LCA.

Natural Gas Alternatives

No First Productive Use Requirement

The 45Y PTC and 48E ITC are available for the production of electricity that uses biogas, renewable natural gas (“RNG”), and fugitive sources of methane. However, to address the concern of significant indirect emissions, the Proposed Regulations required that the production of electricity would need to be the first productive use of the relevant methane, in order to ensure that methane used for electricity production was not diverted from other productive uses. However, as discussed in the preamble to the Final Regulations, this requirement was ultimately deemed difficult to substantiate and verify. Instead, Treasury and the IRS have opted for a more administrable approach. The Final Regulations do not impose a first productive use requirement for methane feedstocks, instead taking alternative productive uses into account in assessing alternative fates.

Alternative Fate Analysis

The Proposed Regulations provided that an LCA may consider alternative fates and may account for avoided emissions. The preamble to the Proposed Regulations defined the term “alternative fate” to mean a set of informed assumptions (e.g., production processes, material outcomes, and market-mediated effects) used to estimate the emissions from the use of each feedstock were it not for the feedstock’s new use due to the implementation of policy to produce electricity. This alternative fate analysis is designed to account for the lifecycle of GHG emissions of methane feedstocks, considering the potential alternative uses and regulatory trends. The Final Regulations adopt this definition of alternative fate but make certain restrictive clarifications. The Final Regulations specify different alternative fates for various methane sources, including:

• Landfill Gas:The alternative fate is assumed to be flaring. 
• Wastewater:The alternative fate is flaring of gas not used to heat the anaerobic digester. 
• Coal Mine Methane:The alternative fate is flaring. 
• Animal Waste:The alternative fate is derived from the national average of all animal waste management practices, resulting in a carbon intensity score of -51 CO₂e/megajoule (MJ).
• Fugitive Methane from Oil and Gas Operations:The alternative fate is productive use, resulting in emissions equivalent to fossil natural gas.

Prohibition of Book-and-Claim Accounting

The preamble to the Proposed Regulations requested comment on whether book-and-claim accounting may be suitable for use in substantiating and verifying claims to the energy attributes of fuels and feedstocks used by a facility to generate electricity. The Final Regulations prohibit the use of book-and-claim accounting systems to establish or claim the energy attributes of biogas, RNG, coal mine methane, or any other methane feedstock. The rationale provided in the preamble to the Final Regulations is that the statute requires the measurement of GHG emissions at the facility-specific level. This means that the actual physical use of the relevant fuels and feedstocks at the facility must be documented and verified.

45Y PTC

Metering Devices

The 45Y PTC is available for electricity produced at a qualified facility if it is measured by a metering device owned and operated by an unrelated party and sold, consumed, or stored by the taxpayer. The Proposed Regulations required the metering device to adhere to ANSI C12.1-2022 standards (or future revisions), be revenue grade with ±0.5% accuracy, and be properly calibrated and maintained. The Final Regulations confirm that a metering device meeting these standards may be operated remotely by a third party, and that the device’s location—whether before energy delivery to storage or at the interconnection point—is irrelevant, as long as it satisfies the specified requirements. Thus, no specific location requirement for the metering device is imposed. Notably, in the preamble to the Final Regulations, Treasury and the IRS rejected the application of the rule in Notice 2008-60 that is applicable to the Section 45 credit, under which the sale of electricity to a related party with a subsequent sale to an unrelated party is treated as a sale to an unrelated party, to the 45Y PTC.

One-Megawatt Exception

The One-Megawatt Exception provides that facilities with a maximum net output of less than one megawatt (as measured in alternating current) are eligible for the increased credit without meeting the prevailing wage and apprenticeship (“PWA”) requirements. The Final Regulations clarify the One-Megawatt Exception under Section 45Y, aligning it with rules under Section 48E. For facilities producing electricity in alternating current (“AC”), the maximum net output is based on nameplate capacity, defined as the maximum generating output under steady-state conditions. For direct current (“DC”) facilities, taxpayers can measure output as either the sum of nameplate generating capacities in DC or the capacity of the first component that converts DC to AC.

To determine whether the exception applies, facilities with integrated operations, defined as those owned by the same or related taxpayers, placed in service in the same year, transmit electricity generated by the facilities through the same point of interconnection or, if the facilities are not grid-connected or are delivering electricity directly to an end user behind a utility meter, are able to support the same end user, must aggregate their nameplate capacities. Related taxpayers, as defined under Treasury Regulation §1.52-1(b), are treated as a single entity. This aggregation rule applies for 48E ITC purposes as well.

48E ITC

Incremental Cost Rule

The Treasury Department and IRS addressed a request for clarification on the application of the “incremental cost” concept to Section 48E. The incremental cost refers to the excess cost of equipment used for a qualifying purpose over the cost of similar equipment for a non-qualifying purpose. This rule, previously established under the Proposed Regulations, was introduced to address situations where property serves both qualifying and non-qualifying functions. The Final Regulations adopt a similar approach for Section 48E as is used for Section 48 and state that, if a component of qualified property in a facility or energy storage technology (“EST”) also serves a non-qualifying purpose, only the incremental cost of the component is included in the facility’s or EST’s basis for credit purposes. The term “incremental cost” is defined as the additional cost beyond what would have been spent if the component were solely for non-qualifying purposes.

Ownership

The Final Regulations affirm that the Section 48E credit is only available to taxpayers who directly own at least a fractional interest in an entire qualified facility, not just individual components or integral property.

Hydrogen Energy Storage Property

The Proposed Regulations required hydrogen energy storage property to store hydrogen exclusively for energy use, excluding many other purposes. Commenters referred to this as the “end use requirement.” After consideration of the comments, the IRS agreed to abandon the end use requirement in the Final Regulations, meaning that Section 48E will not require that hydrogen energy storage property store hydrogen that will be solely used for the production of energy.

Commenters requested the Final Regulations clarify and expand the definition of “hydrogen energy storage property” to include a broader range of components and technologies, such as equipment for liquefying hydrogen, converting it to ammonia, and storing electrolytic hydrogen derivative e-fuels. Some commenters emphasized the need to distinguish storage equipment from production, conditioning, and transportation equipment to avoid double crediting under Section 48E and Section 45V. Others suggested including specific pipelines and compressors directly linked to storage systems as eligible hydrogen energy storage property while excluding broader transportation infrastructure.

The Final Regulations addressed these concerns by clarifying that hydrogen liquefaction equipment, if integral to storage, qualifies as hydrogen energy storage property. Additionally, pipelines and distribution lines directly connected to and used within a storage facility can be considered integral to the storage property, but pipelines, trailers, and railcars primarily used for transportation outside the facility do not qualify. These updates aim to provide clarity on eligible components and boundaries between storage and transportation infrastructure.

The 80/20 and Incremental Production Rules

There are two separate rules that allow for additional tax credits after a property is placed in service. Under the 80/20 Rule, retrofitting an existing facility can qualify it as a new facility if the fair market value of the new property constitutes at least 80% of the total fair market value of the combined new and used components. The analysis focuses on functionally interdependent property, excluding integral property, unless the 80/20 Rule is met (in which case new integral property can also qualify for the credit). For Section 45Y, satisfying the 80/20 Rule resets the 10-year credit eligibility period for the entire facility. For Section 48E, compliance with the rule allows for an additional credit based on the expenditures associated with the new components based on the portion of basis attributable to the property that increases the nameplate capacity (without regard to degradation that may have occurred over time). For purposes of calculating the 80/20 Rule, taxpayers need only consider the costs of the unit of qualified facility or energy storage technology and not property of the qualified facility that is integral property.

The Incremental Production Rule, introduced in the Final Regulations, represents a significant departure from the previous credit framework under Sections 45 and 48. Under the Final Regulations, any new unit or expansion of capacity in an existing unit qualifies for the credit. For Section 45Y, the added capacity is treated as newly placed in service and qualifies for a full 10-year credit period, but only for the additional capacity. The Final Regulations include specific rules for calculating the increased capacity and permit the restarting of a decommissioned facility to be classified as an increase in capacity.

The Proposed Regulations would have restricted the Section 48E credit to a proportional share of the cost based on the ratio of new to old capacity. The Final Regulations eliminate this rule and allow the full cost of any additions or replacements of qualified property to qualify for the Section 48E credit, provided there is an increase in capacity. There is no minimum capital expenditure requirement, and the additional capacity can result from improvements in efficiency alone.

Domestic Content, Energy Communities, and the PWA Requirements

The Final Regulations clarify that the domestic content bonus credit under Sections 45Y and 48E, the increased credit for energy communities, and the PWA requirements must be applied on a facility-by-facility basis, without aggregation. While Section 48 permits aggregation for these credits under its “energy project” concept, Sections 45Y and 48E lack this provision. Commenters were divided on whether aggregation should be allowed, with some supporting facility-level treatment and others proposing optional aggregation. The Final Regulations state that each qualified facility (or EST, in the case of Section 48E) must independently meet the requirements for the domestic content bonus, energy community credit, and PWA compliance to qualify for the increased credit rate. As noted above, the special aggregation rule for purposes of the One-Megawatt Exception is an exception to this general framework of facility-level determination.

Other Updates:

• The Final Regulations clarify that a taxpayer may claim a 45Y PTC or 48E ITC for a qualified facility that is co-located with another facility, irrespective of any credit that the co-located facility claimed.
• To be eligible for a 45Y PTC or 48E ITC, the qualified facility must generate electricity. The Final Regulations clarify that, for a facility to meet this requirement, the facility must be a net generator of electricity, taking into account any electricity consumed by the facility.
• For purposes of the Section 48E ITC, qualified property includes tangible personal property or other tangible property (excluding buildings or structural components) used as an integral part of a qualified facility. Since software is not considered tangible property, it cannot be included as integral property in the qualified investment of a Section 48E qualified facility.
• The Final Regulations confirm that taxpayers must satisfy the substantiation and verification requirements under Section 45Q to count qualified carbon dioxide in computing the GHG emissions rate of a qualified facility. The Final Regulations clarify that Section 45Q rules apply only to carbon dioxide captured at the qualified facility during electricity production, excluding carbon dioxide captured in upstream fuel production due to the lack of an administrable method for tracking third-party emissions.

¹  References to “Section” refer to sections of the Internal Revenue Code of 1986, as amended, unless otherwise specified.