On May 29, 2024, the Department of the Treasury (Treasury) and the IRS released proposed rules for the section 45Y clean electricity production tax credit (“Section 45Y Credit”) and the section 48E clean electricity investment tax credit (“Section 48E Credit”).  These credits are informally referred to as tech-neutral credits because they do not specify particular technologies eligible for credits, unlike the existing production and investment tax credits.  Below we summarize certain important provisions in these proposed rules and some of their implications for project finance for constructing facilities with net-zero greenhouse gas (“GHG”) emissions, such as a need for emissions accounting and monitoring. Comments are due on August 2, 2024, and a public hearing is scheduled to be held on August 12 and 13.

Clean Electricity Production Credit (Section 45Y)

Section 45Y provides a tax credit, with the credit amount being the “applicable amount,” multiplied by the amount of electricity produced (in kWh) at a “qualified facility.”

Applicable Amount.  The “applicable amount” is determined with respect to each facility depending on whether it satisfies certain requirements.  Section 45Y provides for both a base amount of 0.3 cents per kWh of electricity produced and an increased alternative amount of 1.5 cents, generally when the prevailing wage and apprenticeship requirements are satisfied.  Both amounts are subject to adjustment for inflation and phaseout starting in 2032 or, if later, when GHG emissions from the production of electricity in the U.S. are equal to or less than 25 percent of such emissions in 2022.  Similar to the section 45 PTC and section 48 ITC, there are credit “adders” for satisfying energy community requirements and domestic content requirements.

Qualified Facility.  A “qualified facility” is defined as a facility that (1) is owned by the taxpayer and used for generation of electricity; (2) is placed in service after December 31, 2024; and (3) has a GHG emissions rate of not greater than zero.  A qualified facility includes a “unit of qualified facility” and qualified property that is an “integral part” of the qualified facility. 

Calculations of Greenhouse Gas (GHG) emissions. The term “greenhouse gas emissions rate” means the amount of GHGs emitted into the atmosphere by a facility in the production of electricity, expressed as grams of CO2e per kWh.  The proposed regulations provide separate rules with respect to facilities that produce electricity through combustion or gasification (“C&G Facilities”) and Non-C&G Facilities.  A C&G Facility means “a facility that produces electricity through combustion or uses an input energy source to produce electricity, if the input energy source was produced through a fundamental transformation, or multiple transformations, of one energy source into another energy source using combustion or gasification.”  Prop. Reg. § 1.45Y-5(b)(4).  It includes a facility that produces electricity using any fuel that was produced using electricity that had been produced from the combustion of fossil fuels.

The proposed regulations would exclude from the GHG emissions rate emissions that may relate to a facility but do not occur “in the production of electricity” (i.e., emissions that do not “directly occur from the process that transforms the input energy source into electricity”).  For both C&G and Non-C&G Facilities, the definition excludes the following:

(i) Emissions from electricity production by back-up generators that are primarily used in maintaining critical systems in case of a power system outage or for supporting restart of a generator after an outage.

(ii) Emissions from routine operational and maintenance activities that are integral to the production of electricity, including, but not limited to, emissions from internal combustion vehicles used to access and perform maintenance on remote electricity generating facilities or emissions occurring from heating and cooling control rooms or dispatch centers.

(iii) Emissions from a step-up transformer that conditions the electricity into a form suitable for productive use or sale.

(iv) Emissions that occur before commercial operations commence or after commercial operations terminate, including, but not limited to, on-site emissions occurring from construction or manufacturing of the facility itself, emissions from the off-site manufacturing of facility components, or emissions occurring due to siting or decommissioning.

(v) Emissions from infrastructure associated with the facility, including, but not limited to, emissions from road construction for feedstock production.

(vi) Emissions from the distribution of electricity to consumers.

Prop. Reg. § 1.45Y-5(b)(6).  Additionally, the proposed regulations provide information on what emissions are excluded separately for C&G Facilities and Non-C&G Facilities.

The proposed regulations also provide an emissions assessment process for Non-C&G Facilities and specify that certain Non-C&G Facilities have a GHG emissions rate that is not greater than zero.  These categorical Non-C&G Facilities are wind facilities, hydropower facilities, marine and hydrokinetic facilities, solar facilities, geothermal facilities, nuclear fission facilities, nuclear fusion facilities, and certain waste energy recovery facilities.

The GHG emissions rate for a C&G Facility equals the net rate of GHG emitted into the atmosphere by such facility (taking into account lifecycle GHG emissions) in the production of electricity, and only if the GHG emissions rate is no greater than zero, such C&G Facility can qualify for the Section 45Y Credit.  Lifecycle GHG emissions means the aggregate quantity of GHG emissions (including direct emissions and significant indirect emissions such as significant emissions from land use changes) related to the full fuel lifecycle. 

The GHG emissions rates for C&G Facilities must be determined by a lifecycle analysis (“LCA”) that complies with a set of specific requirements, including the following: 

  • First, under the proposed regulations, the starting and ending boundaries of an LCA are from feedstock generation or extraction (“processes necessary to produce and collect or extract the raw materials used to produce electricity from combustion or gasification technologies”) to the meter at the point of production of the C&G Facility.
  • Second, an LCA must be based on a future anticipated baseline, which projects status quo in the absence of the tech-neutral credits, taking into account anticipated changes in technology, policies, practices, and environmental and other socioeconomic conditions. 
  • Third, offsetting activities that are unrelated to the production of electricity may not be taken into account in an LCA. 
  • Fourth, an LCA must consider direct emissions, significant indirect emissions (regardless of location), emissions associated with market-mediated changes in related commodity markets, emissions associated with feedstock generation or extraction, emissions consequences of increased production of feedstocks, emissions at all stages of fuel and feedstock production and distribution, and emissions associated with distribution, delivery and use of feedstocks to and by a C&G Facility. 

Treasury and the IRS requested comments on various topics relating to the determination of net GHG emissions rates for C&G Facilities. 

With respect to carbon capture and sequestration, a taxpayer that captures and properly disposes of or utilizes qualified carbon dioxide that results from the taxpayer’s production of electricity may exclude that carbon dioxide when determining its facility’s GHG emissions rate.  Treasury requested comments on what requirements should apply to substantiate and verify that captured carbon dioxide is disposed of or utilized properly, and on what rules should apply when emissions leakages occur.

Treasury will annually publish a table that sets forth the GHG emissions rates for types or categories of facilities, which a taxpayer must use for purposes of section 45Y.  If an emissions rate has not been established for a facility, the taxpayer that owns such facility may file a petition for the determination of the emissions rate with respect to such facility.

Treasury and the IRS seek comment on the types of documentation taxpayers should maintain to substantiate eligibility for the Section 45Y Credit, including supply chain tracing and substantiation requirements related to a specific fuel to produce electricity.

Clean Electricity Investment Tax Credit (Section 48E)

Having similar statutory requirements as section 45Y, section 48E provides a credit equal to the “applicable percentage” of the “qualified investment” for a taxable year with respect to (1) any “qualified facility” and (2) any “energy storage technology.”  The proposed regulations provide similar rules for both tech-neutral credits.

The base rate of the applicable percentage is 6 percent, which increases to 30 percent if the qualified facility or energy storage technology satisfies the prevailing wage and apprenticeship requirements (or certain other conditions).  This amount may further increase due to energy communities and domestic content adders.

A “qualified facility” is a facility that: (1) is used for the generation of electricity; (2) is placed in service after December 31, 2024; and (3) has a GHG emissions rate of not greater than zero.  As with the Section 45Y Credit, a qualified facility includes a unit of qualified facility, as well as components of property owned by the taxpayer that are an integral part of the qualified facility.  “Qualified investment with respect to a qualified facility” is defined as the sum of (1) the basis of any qualified property placed in service by the taxpayer during a taxable year that is part of a qualified facility and (2) the amount of capital expenditures paid or incurred by the taxpayer for qualified interconnection property. 

A Section 48E Credit is subject to recapture if a facility has a GHG emissions rate that exceeds 10 grams of CO2e per kWh during the five-year period beginning on the date such qualified facility is originally placed in service.  Any failure of a qualified facility to not exceed a GHG emissions rate of 10 grams per CO2e per kWh during the five-year recapture period is a recapture event.  However, a change to the GHG emissions rate for a category of facility published in the Annual Table after the facility is placed in service is not treated as a recapture event. 

Impact on Project Financing

GHG emissions rates do not apply to the current solar, wind and energy storage tax credit eligibility requirements or to the recapture triggers under the current ITC for those technologies.  As such, forecasting and monitoring of GHG emissions rates will become a necessary art of due diligence and covenants in tax equity financing and tax credit transfers for such projects placed in service after December 31, 2024.   As attention to carbon management proliferates in corporate planning and finance, these tech-neutral credit provisions add one more category to an increasing array of transactions, the value of which depends entirely on GHG emissions accounting.  

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Photo of W. Andrew Jack W. Andrew Jack

Andrew Jack has a diverse corporate and securities practice with clients principally in the energy, industrial manufacturing, technology and sports and entertainment industries. He regularly represents corporations, board committees, and other forms of enterprises in mergers and acquisitions, strategic alliances, financing activities, securities…

Andrew Jack has a diverse corporate and securities practice with clients principally in the energy, industrial manufacturing, technology and sports and entertainment industries. He regularly represents corporations, board committees, and other forms of enterprises in mergers and acquisitions, strategic alliances, financing activities, securities law compliance, corporate governance counseling, and executive compensation arrangements. Mr. Jack also co-chairs the firm’s Energy Industry Group.

Photo of Jamin Koo Jamin Koo

Jamin Koo advises clients across a broad range of tax issues, including international and domestic tax planning and acquisition and financing transactions. He works with numerous U.S. and non-U.S. clients (in particular, several Asia-based clients) on cross-border investments, joint ventures, and restructurings. His…

Jamin Koo advises clients across a broad range of tax issues, including international and domestic tax planning and acquisition and financing transactions. He works with numerous U.S. and non-U.S. clients (in particular, several Asia-based clients) on cross-border investments, joint ventures, and restructurings. His expertise includes taxation of debt instruments, derivatives, and other financial instruments, and he has been providing tax advice related to digital assets to a number of clients.

Most recently, with his background in engineering and environmental science, Jamin has been advising clients in a number of industries on various issues involving tax credits and other tax provisions of the Chips & Science Act and the Inflation Reduction Act and drafting comments to Treasury and the IRS.

Photo of Justin Coutts Justin Coutts

Justin Coutts is an associate in the firm’s Palo Alto office. He is a member of the Tax Practice Group.