Tech-Neutral Credits Final Regulations Released for Clean Electricity Production

The U.S. Department of the Treasury (Treasury) and Internal Revenue Service (IRS) have released final regulations for two new tax credits under the Internal Revenue Code (Code), established by the Inflation Reduction Act (IRA): the clean electricity production credit under Section 45Y (Section 45Y PTC) and the clean electricity investment credit under Section 48E (Section 48E ITC). Together, these are known as the Tech-Neutral Credits.

Section 45Y PTC

The Section 45Y PTC is available for a qualified facility that (i) is owned by the taxpayer, (ii) used for electricity generation, (iii) has a greenhouse gas (GHG) emissions rate not greater than zero and (iv) is placed in service after 2024. The Section 45Y PTC is intended to replace the renewable energy production credit under Section 45 of the Code (Section 45 PTC). However, a taxpayer can choose to claim either the Section 45 PTC or the Section 45Y PTC with respect to a facility that qualifies under both sections, provided construction began before 2025.

An important distinction between the Section 45 and 45Y PTCs is how the electricity produced is used. For the Section 45 PTC, the taxpayer must own the qualified facility and sell the electricity produced there to an unrelated person. Additional guidance provided that sales to a related person that were then resold to an unrelated person would be eligible for the Section 45 PTC. In contrast, the Section 45Y PTC specifies that the taxpayer must either (i) own the facility and sell the electricity produced there to an unrelated person; or (i) own the facility, (ii) equip the facility with a metering device that is owned and operated by an unrelated person and (iii) sell, consume or store the electricity. Thus, there is no requirement to sell the electricity to an unrelated person or even sell the electricity at all, so long as the metering device is owned and operated by an unrelated person. The final regulations provide standards for an eligible metering device and definitions for related and unrelated persons.

Section 48E ITC

The Section 48E ITC is available for qualified investments in (i) qualified facilities that generate electricity with a greenhouse gas (GHG) emissions rate not greater than zero and are placed in service after 2024 or (ii) energy storage technology. Similar to the Section 45Y PTC, the Section 48E ITC is intended to replace the energy credit under Section 48 (Section 48 ITC) of the Code. However, taxpayers can choose to claim either the Section 48 ITC or the Section 48E ITC for property that qualifies under both sections, provided construction began before 2025.

Credit Phaseout

The Tech-Neutral Credits are subject to special phaseout rules. The phaseout begins on the later of (i) 2032 or (ii) the calendar year in which the IRS determines that the annual GHG emissions from U.S. electricity production are 25% or less of the 2022 levels.

Once this determination is made, the phaseout schedule is as follows:

Orrick observation: Since the phaseout begins in the later of the two years, predicting the duration of the Tech-Neutral Credits is challenging. Assuming the Tech-Neutral Credits are not statutorily repealed, the phaseout may not begin until well after 2032 if U.S. electricity production's annual GHG emissions do not meet the threshold specified above.

Final Regulations

Property Included in a Qualified Facility or Energy Storage Technology

The final regulations outline rules similar to those for the Section 48 ITC regarding units of property, the property included in a qualified facility or energy storage technology and ownership.

Both Tech-Neutral Credits provide that a qualified facility is comprised of: (i) a unit of a qualified facility, which includes all functionally interdependent components of property owned by the taxpayer that operate together and can function independently from other property to produce electricity and (ii) property that is an integral part of a qualified facility. Property is an integral part of a qualified facility if it is used directly in the intended function of the qualified facility and is essential to the completeness of such function. Similarly, for purposes of the Section 48E ITC, a unit of energy storage technology includes all functionally interdependent components of property that are owned by the taxpayer that operate together and can function independently to perform the technology’s intended purpose. In each case, components of property are functionally interdependent if the placing in service of each of the components is dependent upon the placing in service of each of the other components to generate electricity.

Like the Section 48 ITC regulations, taxpayers must own at least a fractional interest in an entire unit of a qualified facility or energy storage technology to claim the Tech-Neutral Credits. However, they are not required to own all property integral to the qualified facility. Taxpayers owning property that is an integral part of a qualified facility without at least a fractional interest in an entire unit of such qualified facility cannot claim the Tech-Neutral Credits.

Orrick observation: Understanding the concept of a “unit of a qualified facility” is crucial for tracking ownership of specific property components to determine eligibility for the Tech-Neutral Credits. It also helps assess whether property is considered newly placed in service for purposes of the 80/20 Rule and eligibility for credit adders, as discussed below.

Incremental Production Rule and 80/20 Rule

If a taxpayer places in service either a new unit or adds capacity to a facility after 2024 and that facility otherwise meets the requirements of a qualified facility, the taxpayer may be eligible for the Tech-Neutral Credits for the incremental electricity produced by the facility. The new unit or addition of capacity would be treated as a separate qualified facility. Thus, for example, a facility that was placed in service before 2025 may continue to claim the Section 45 PTC in addition to claiming the Section 45Y PTC for the incremental production. However, although the unit or addition of capacity are treated as a separate qualified facility, the total capacity of the original facility and the incremental production facility will be counted to determine the nameplate capacity, which is used for the 1 MW exception to prevailing wage and apprenticeship requirements.

In addition, under the Tech-Neutral Credits, a qualified facility can be retrofitted and considered newly placed in service if the fair market value of retained used components is no more than 20% of the facility’s total value (80/20 Rule). The 80/20 Rule is implemented on a unit-by-unit basis and does not require additional capacity to qualify.

Furthermore, investments in modifications to pre-existing energy storage technology may be eligible for the Section 48E ITC if (i) the energy storage technology was placed in service prior to August 16, 2022, and its nameplate capacity increases from below 5 kWh to at least 5 kWh or (ii) the nameplate capacity of the energy storage capacity is increased by at least 5 kWh from the pre-existing nameplate capacity.

Orrick observation: Treasury has provided several ways for taxpayers to benefit from the Tech-Neutral Credits, even if the qualified facility or energy storage technology is not 100% new. We encourage project owners and developers to evaluate potential opportunities at existing facilities.

Qualified Interconnection Property

The Section 48E ITC provides that a qualified investment includes expenditures paid or incurred for qualified interconnection property in connection with a qualified facility with a maximum net output of 5 MW or less. The final regulations, similar to those for Section 48 ITC, state that these costs may be included in the amount of qualified investment, but they are not taken into account for purposes of the prevailing wage and apprenticeship requirements, the domestic content bonus credit or the increased credit rate for energy communities. Qualified interconnection costs must be properly chargeable to the taxpayer’s capital account. If the taxpayer’s costs are reduced by any utility or non-utility payments, the taxpayer may be required to reduce the amounts treated as paid or incurred in the ITC-eligible basis of the property. The final regulations confirm that the 5 MW limitation for qualified interconnection property is measured at the qualified facility’s level, meaning it is assessed on a unit-by-unit basis.

Orrick observation: Similar to the final regulations for the Section 48 ITC, large-scale solar projects, which are comprised of many units of qualified facilities, may include costs related to qualified interconnection property in the Section 48E ITC. Costs for interconnection property related to energy storage technology do not qualify for the Section 48E ITC.

Co-Located Qualified Facilities

Taxpayers who own a qualified facility that shares integral property with another qualified facility are eligible to claim the Tech-Neutral Credits, provided the cost basis for the shared property is properly allocated in proportion to each taxpayer’s ownership interest.

The final regulations generally provide that units of a qualified facility are treated separately. However, if the qualified facility has integrated operations with one or more other qualified facilities, then the aggregate nameplate capacity of the qualified facilities is used to determine if the 1 MW exception to the prevailing wage and apprenticeship requirements applies to the qualified facility. For purposes of determining eligibility for domestic content and energy community bonus credits, as well as the 5 MW exception for qualified interconnection costs, units of a qualified facility will be treated separately.

The final regulations generally provide that a taxpayer may claim a Section 45Y PTC or Section 48E ITC for a qualified facility co-located with another facility, irrespective of any credit that the co-located facility claimed. Thus, for example, a single taxpayer that owns co-located solar and energy storage facilities could claim the Section 45Y PTC for the solar qualified facility and the Section 48E ITC for the energy storage technology.

Orrick observation: Eligibility for the energy community and domestic content credit adders must be assessed for each unit of qualified facility separately, which may require additional analysis and strategy. In particular, the domestic content bonus credit will necessitate new strategies for combined solar and energy storage systems to ensure that each unit of qualified facility meets the domestic cost percentage individually.

GHG Emissions

The Tech-Neutral Credits require that a qualified facility have a GHG emissions rate not greater than zero. The IRS will produce an annual table that lists facility types and corresponding GHG emissions rates, which taxpayers must use to verify compliance. For facilities that produce electricity through combustion or gasification (C&G Facilities), the annual table must include a lifecycle analysis (LCA) to determine the GHG emissions rate. For non-combustion or non-gasification facilities (Non-C&G Facilities), the annual table must include a technical assessment of the fundamental energy transformation into electricity. If a facility type is not included in the annual table, the taxpayer must request a provisional emissions rate. The final regulations specify that the following facility types may be listed in the annual table as having a GHG emissions rate not greater than zero:

• Wind
• Hydropower
• Marine and hydrokinetic
• Solar
• Geothermal
• Nuclear fission
• Fusion energy
• Waste energy recovery property that derives energy from a source listed above.

Orrick observation: The annual table includes several energy technologies that previously qualified for the Section 45 PTC and Section 48 ITC, while leaving room for new technologies. Traditional renewable energy facilities of the type listed in the annual table, such as solar or wind farms, may rely on the documentation prepared by the IRS to support the GHG emissions rate of zero or less to qualify for the Tech-Neutral Credits. On January 15, 2025, the IRS issued Revenue Procedure 2025-14 with the first annual table, listing the 8 non-C&G Facilities as having a GHG rate not greater than zero. Taxpayers can rely on the GHG emissions rate in this table for facilities that begin construction when the table is in effect.

Annual Reporting and Recapture

Both Tech-Neutral Credits require the taxpayer to maintain adequate documentation to verify the qualified facility’s anticipated GHG emissions rate.

For the Section 48E ITC, if the qualified facility is disposed of or ceases to be a qualified facility within 5 years of being placed in service (the 5-year recapture period), the credit is generally subject to recapture under Section 50 of the Code. In addition, a qualified facility is subject to recapture if the qualified facility has a GHG emissions rate that is not greater than 10 grams of CO2e per kWh during the recapture period

The Section 45Y PTC is calculated annually based on the qualified facility’s production over a 10-year period beginning when the qualified facility is placed in service. Thus, if the qualified facility ceases to be a qualified facility in a particular year because it has a GHG rate greater than zero (even temporarily or in small amounts), the taxpayer may not claim the Section 45Y PTC for that year. If the facility then becomes a qualified facility in a subsequent year during the 10-year period, the taxpayer may claim the Section 45Y PTC for that year.

Orrick observation: The recapture rule for the Section 48E ITC allows a de minimis increase in the GHG emissions rate without triggering recapture. Taxpayers must maintain precise documentation to support credit eligibility.

What’s Next

Although these regulations are effective as of January 15, 2025, we note that they are subject to the Congressional Review Act, which allows Congress to overturn administrative rules through a joint resolution within a certain window of time after publication, subject to presidential approval. In addition, President Trump’s regulatory freeze executive order raises questions about implementation. We will continue to monitor and provide updates.

Want to know more? Reach out to a member of our Renewables Tax team.