Final regulations released for section 45Y and 48E tax credits

GHG emissions rates are central to the eligibility requirements for section 45Y. To qualify for the clean electricity production tax credit, facilities must demonstrate net-zero or negative emissions through a rigorous measurement process. The final regulations expand upon the methodologies introduced in the proposed regulations, offering detailed guidance on calculating GHG emissions rates using life cycle analysis (LCA) and the annual table.

LCA is an approach to measuring all GHG emissions associated with a facility's electricity production process. This includes emissions from raw material extraction, transportation, electricity generation and waste disposal. The goal is to capture the full environmental footprint of the facility, expressed as grams of carbon dioxide equivalent (CO2e) per kilowatt-hour (kWh) of electricity produced. Notably, the final regulations clarify that emissions from auxiliary activities, such as backup generators or maintenance operations, are excluded from the calculation. Facility owners are required to conduct this analysis using approved LCA models, ensuring consistency and accuracy across projects.

For most facilities, GHG emissions rates will be determined using the annual table, a resource provided by the DOE that lists emissions rates for commonly used technologies. However, facilities that do not fit into the predefined categories in the annual table must petition for a provisional emissions rate. This process involves submitting detailed emissions data and supporting documentation with the facility’s first tax return claiming the section 45Y credit. To qualify, the petition must use either an emissions value certified by the DOE or one calculated through an LCA model that complies with the guidelines outlined in the regulations. Once accepted, the provisional emissions rate is deemed valid unless further review determines otherwise.

Calculating a facility’s GHG emissions rate involves several steps. First, all emissions data from the facility’s production process are gathered, including emissions from fuel use and on-site combustion. Next, emissions are aggregated and converted into CO2e. This total is then divided by the facility’s annual electricity output in kilowatt-hours to determine the emissions rate in grams per kWh. Facilities must retain records of their calculations, as these are subject to audit by the IRS.

The final regulations emphasize the importance of accurate and transparent GHG emissions reporting. For facility owners, this means investing in reliable data collection systems and ensuring that their LCA aligns with regulatory standards.

The final regulations for section 45Y provide a detailed definition of a qualified facility, building on the framework established in the proposed regulations and adding important clarifications. A qualified facility is defined as one used to produce electricity, placed in service after Dec. 31, 2024, and having a GHG emissions rate of zero or less. The facility must be owned by the taxpayer claiming the credit and include all components that operate together to generate electricity. Notably, any facility that has previously claimed credits under sections 45, 45Q, 48 or other specified provisions is excluded from eligibility under section 45Y.

A key aspect of the eligibility criteria is the inclusion of functionally interdependent components. The final regulations confirm that all parts of the facility that work together as a single system to produce electricity are considered integral. Examples include power conditioning and transfer equipment, roads essential to the facility’s operations and structures directly supporting energy production. However, the regulations also clarify that components not essential to electricity production, such as administrative buildings, do not qualify as part of the facility. These updates are consistent with the proposed regulations but provide additional examples and clearer boundaries for what constitutes a qualified facility.

The proposed regulations provided limited guidance on how combustion and gasification technologies could qualify. The final regulations under section 45Y provide detailed qualification criteria for facilities utilizing combustion and gasification technologies, addressing ambiguities from the proposed regulations. These technologies, which convert fuel into electricity, must meet strict LCA standards to qualify for the credit. The LCA ensures that all emissions from the energy transformation process, including those from the combustion or gasification of biomass, alternative fuels or other inputs, are fully accounted for. Facilities must demonstrate compliance with emissions thresholds by calculating GHG emissions rates using approved LCA models.

To qualify, facilities employing combustion or gasification technologies must meet three specific criteria:

• LCA: conducting comprehensive evaluations of the environmental impacts associated with all stages of the technology’s life cycle, from raw material extraction to disposal;
• Emission standards: meeting stringent emission standards to ensure minimal environmental impact (e.g., greenhouse gas emissions, air pollution, particulate matter, toxic emissions and resource depletion) and
• Efficiency metrics: demonstrating high efficiency in converting feedstock materials into usable energy.

The final regulations also address key uncertainties from the proposed rules. For example, clarifying that facilities using mixed fuel sources must calculate emissions for each fuel type separately and aggregate the results. Additionally, the rules provide examples of qualifying feedstocks, such as agricultural waste and specific types of municipal solid waste, offering guidance to developers navigating complex fuel supply chains. This clarity reduces uncertainty for investors and facility operators, ensuring projects can align with the regulatory requirements without unnecessary delays.

The final regulations under section 45Y clarify and expand on the interaction between prevailing wage and apprenticeship requirements and the "1MW exception" for smaller projects. The 1MW exception, which exempts projects with a maximum net output of 1MW AC or less from these labor requirements, remains consistent with the proposed regulations. However, the final regulations clarify that this exception applies on a per-project basis, ensuring smaller facilities, like community solar installations, can claim the full credit amount without meeting administrative labor standards.

For projects exceeding the 1MW threshold, compliance with prevailing wage and apprenticeship requirements remains necessary to qualify for the increased credit rate of 2.5 cents per kilowatt-hour. The final regulations reaffirm that prevailing wage rules require construction workers to be paid wages equivalent to local union rates, while apprenticeship requirements mandate that certified apprentices perform a portion of total labor hours. To address taxpayers’ concerns, the final rules provide taxpayers with a 180-day correction period to remedy labor deficiencies identified by the IRS.

The final regulations establish a structured phaseout for section 45Y, ensuring that the credit remains available until clean electricity production reaches a significant threshold. The phaseout begins in the latter of two scenarios: (1) the first calendar year in which the Secretary of the Treasury determines that total annual GHG emissions from U.S. electricity production are 25% or less of 2022 levels or (2) the year 2032. This means that if emissions reductions progress faster than expected, the credit could phase out earlier than 2032. However, if emissions targets are not met, the credit could remain available beyond 2032.

Once the phaseout begins, the credit will gradually decrease. In the first year of phaseout, the available credit is reduced to 75% of its original value, followed by a reduction to 50% in the second year and 25% in the third year. By the fourth year after the phaseout is triggered, the section 45Y credit will no longer be available. This timeline provides taxpayers with a predictable framework to plan long-term clean energy investments while aligning with national emissions reduction goals.

The final regulations clarify that facilities placed in service after Dec. 31, 2024, may be eligible for credits under section 45Y or section 48E. However, a taxpayer cannot claim both credits for the same facility. Additionally, if a facility has previously claimed credits under sections 45, 45Q, 48 or other specified provisions, it is excluded from eligibility under section 45Y. This clarification is important for taxpayers to strategically plan which credit to claim, especially when transitioning projects that began under the old credit regimes.

The final regulations under section 48E provide detailed guidance on what constitutes qualified investments and eligible property for the clean electricity investment tax credit. A qualified investment refers to the taxpayer’s basis in eligible property that is part of a qualified facility or energy storage technology placed in service during the tax year. The credit is available for both new facilities and retrofitted projects that meet the 80/20 rule, meaning that at least 80% of the facility must consist of new components to qualify. The investment credit is calculated based on the cost of these qualified assets.

The regulations clarify that eligible property includes tangible personal property and other tangible assets (excluding buildings and structural components) that are integral to the operation of the facility. These assets must play a direct role in electricity generation, storage or conditioning. One key clarification in the final rules is the treatment of interconnection properties, such as transformers, circuit breakers and voltage regulation equipment. Facilities with a maximum net output of five megawatts or less can include interconnection costs as part of their qualified investment, which was not explicitly addressed in the proposed regulations.

Types of eligible property under section 48E

The final regulations specify various clean energy technologies and components that qualify as eligible property under section 48E, including:

Renewable energy technologies

• Solar (including photovoltaic and concentrated solar power)
• Wind turbines
• Hydropower generation systems
• Geothermal (including flash and binary plants)
• Marine and hydrokinetic energy conversion equipment
• Nuclear fission
• Fusion energy
• Certain waste energy recovery properties

Energy storage technologies

• Lithium-ion and solid-state battery storage systems
• Flow battery storage technology
• Pumped hydroelectric energy storage
• Thermal energy storage systems
• Hydrogen storage systems

Learn more about the new ITC opportunities under 48E for biogas-to-electricity facilities.

The final regulations under section 48E introduce a low-income community bonus credit designed to encourage clean energy investments in underserved areas. This provision increases the base investment tax credit by 10 percentage points for projects located in a low-income community or on Indian land and by 20 percentage points for facilities that qualify as qualified low-income residential building projects or qualified low-income economic benefit projects. To claim the bonus credit, taxpayers must apply for an allocation of capacity limitation from the DOE before placing the facility in service. The regulations emphasize that property placed in service before receiving an allocation is ineligible for the bonus credit, making advance planning critical for project developers. Additionally, the project will need to comply with prevailing wage and apprenticeship requirements to receive the added bonus, regardless of the 1 MW exception.

The final rules also clarify eligibility requirements and procedural aspects of the bonus credit. A low-income community is defined using the same criteria as the new markets tax credit (NMTC) program, meaning that projects must be located in census tracts where poverty rates are at least 20% or where median family incomes do not exceed 80% of the area median income. Additionally, Indian land is defined based on existing federal classifications, ensuring consistency in determining eligibility. The regulations provide specific application procedures, including documentation requirements and timelines, giving taxpayers more certainty in securing the allocation. By expanding access to clean energy infrastructure in historically disadvantaged areas, this provision aligns with the broader policy goals of the Inflation Reduction Act, ensuring equitable distribution of renewable energy benefits.

The final regulations under section 48E provide expanded guidance on what qualifies as energy storage technology, recognizing its role in enhancing grid reliability and enabling greater deployment of renewable energy. Unlike previous tax credit structures, section 48E allows for standalone energy storage systems to qualify for the investment tax credit, meaning these facilities do not need to be co-located with a power generation source to be eligible. The regulations define energy storage technology as any property that stores energy for later conversion to electricity or for direct use as thermal, mechanical or chemical energy. This expanded definition ensures that various storage technologies, including batteries, pumped hydro, hydrogen storage and thermal energy storage systems, can claim the credit.

To qualify, energy storage property must be physically integrated into an electricity system and designed to store and discharge energy efficiently. The final regulations confirm that battery energy storage systems, including lithium-ion, solid-state and flow battery technologies, are eligible, provided they meet minimum efficiency requirements to ensure meaningful grid support. The rules also specify that hydrogen energy storage systems, pumped hydroelectric storage, compressed air storage, flywheel energy storage and thermal energy storage systems (such as molten salt or ice storage) qualify under section 48E. These clarifications broaden the scope of eligible technologies.

The final regulations under section 48E outline specific recapture provisions to ensure that the clean electricity investment tax credit is utilized appropriately. A recapture event occurs if the qualified property ceases to be eligible within five years of being placed in service. This includes scenarios where the property is disposed of, ceases to be a qualified facility or is otherwise no longer in compliance with the credit's requirements. In such cases, the taxpayer must increase the basis of the energy property by the amount of the previously claimed, effectively reversing the tax benefit. The regulations provide a clear framework for determining recapture events, calculating recapture amounts and reporting compliance, thereby promoting transparency and accountability.

To comply with the reporting requirements, taxpayers must maintain detailed records demonstrating that the property continues to meet all eligibility criteria throughout the recapture period. This includes documentation of operational status, ownership and any modifications to the property. The final regulations emphasize the importance of timely and accurate reporting to the IRS, including the obligation to notify the agency promptly if a recapture event occurs. By adhering to these provisions, taxpayers can ensure compliance with section 48E and avoid potential penalties associated with recapture events.

The final regulations provide additional flexibility for projects seeking to meet prevailing wage and apprenticeship requirements under section 48E. One key clarification in the final regulations is the introduction of a correction period for compliance failures. If a taxpayer fails to meet prevailing wage or apprenticeship requirements, they now have 180 days after receiving IRS notification to correct the deficiency and pay the necessary penalties. This provides developers with an opportunity to rectify inadvertent mistakes without losing eligibility for the higher credit rate. The final rules also outline recordkeeping expectations, emphasizing the importance of detailed payroll documentation to demonstrate compliance. These updates offer greater flexibility while ensuring that clean energy projects continue to support fair labor standards.