New energy tax credit regime incentivizes projects to begin construction ahead of Dec. 31, 2024, deadline

Within the Inflation Reduction Act (IRA), there are more than 70 available tax credits, many of which are “entitlements,” meaning an organization is entitled to the tax credit if their project meets specific eligibility criteria. Most of these credits are effectively good through 2032 and this “10-year runway” is one of the largest in our nation’s energy policy history. This timeframe provides stakeholders with time to plan, develop and execute projects that could leverage the energy tax credit program as part of the energy transition.

While a large chunk of the 10-year runway remains, there continue to be significant changes in how the legislation is promulgated. Companies need to be aware of the changing tax credit details (including the deadlines). It is imperative that organizations get their wheels in motion now if they hope to benefit from the “new regime” starting in 2025 – and beyond.

Understanding the new regime

Historically, two categories of income tax credits were available for renewable energy projects (1) investment tax credits (ITC) under section 48 and (2) production tax credits (PTC) under section 45. Both programs were in place prior to the passage of the IRA. Eligibility under the existing credit programs is generally based on technology types, which are listed below.

As of Dec. 31, 2024, the existing credit regime under section 48 and section 45 expires. Projects that begin construction after Dec. 31, 2024, will need to qualify under the new credit regime of section 48E clean energy investment tax credits and section 45Y clean electricity production tax credits. Eligibility under the new credit regime focuses on producing electricity without producing greenhouse gas emissions. The new credit regime is essentially technology neutral and focuses on the output of the process.

The shift from a technology-specific to technology-neutral credit program impacts many of the technologies that have qualified under the old regime. Some will be left out of the new regime.

Further, qualification under the new regime may require complicated life cycle analysis to establish a greenhouse gas (GHG) emissions rate that is not greater than zero. These studies can be time consuming and subject to changing regulatory requirements each year.