Proposed guidance for clean electricity production and investment tax credits just released

The GHG emissions rate measures the amount of greenhouse gases emitted by a facility during electricity production. The new regulations mandate that the GHG emissions rate must be determined using a life cycle analysis (LCA), which accounts for all emissions from the production process. This includes direct emissions from electricity production, but excludes emissions from backup generators, routine maintenance and other specific activities. For C&G facilities, the emissions rate includes all emissions from the transformation of the input energy source into electricity, ensuring a comprehensive and accurate assessment of their environmental impact.

Provisional emission rates are temporary GHG emissions rates for facilities not listed in the annual emissions rate table (the Annual Table). Facility owners can submit petitions for these rates that include detailed emissions data and supporting documentation with their federal income tax returns for the first year they claim the section 45Y credit. The petition must include an emissions value obtained from the Department of Energy (DOE) or determined using a designated LCA model. Upon IRS’ acceptance of the return with the PER petition, the emissions values are deemed to be accepted.

Qualified facilities are those that meet specific criteria to be eligible for the section 45Y credit. The new regulations expand these definitions, detailing requirements based on energy source and technology. A qualified facility for the section 45Y credit is one owned by the taxpayer, used for electricity generation, placed in service after Dec. 31, 2024, and has a GHG emissions rate of zero or less. Additionally, a qualified facility excludes any facility that has received a credit under Sections 45, 45J, 45Q, 45U, 48, 48A, or 48E according to section 38 of the Code for the current or any prior taxable year.

CHP property refers to systems using the same energy source to simultaneously or sequentially generate electrical power, mechanical shaft power, or both, along with steam or other forms of useful thermal energy, including heating and cooling applications. However, CHP property does not include equipment for transporting the energy source to the generating facility or distributing the produced energy. To qualify for the section 45Y credit, a CHP property must produce at least 20% of its total useful energy as thermal energy and at least 20% as electrical or mechanical power, with an energy efficiency percentage exceeding 60%, measured on a British thermal unit (Btu) basis.

The energy efficiency percentage is calculated as the ratio of total useful electrical, thermal, and mechanical power produced by the system to the lower heating value of the fuel sources. Additionally, for calculating electricity produced, useful thermal energy from CHP property is converted to kilowatt hour (kWh) by dividing the total useful thermal energy by the facility’s heat rate, which is the energy used to generate 1 kWh of electricity, expressed in Btus per kWh.

Section 45Y tax credits are provided based on the kWh of electricity produced by the taxpayer at a qualified facility, and either sold to an unrelated person or sold, consumed, or stored by the taxpayer in a qualified facility equipped with a metering device. A metering device measures and registers the continuous amount of electricity over time for energy revenue metering.

Related and unrelated persons refer to the relationships between entities or individuals involved in the clean electricity project, which can affect eligibility for tax credits. A related person is defined as someone who would be considered a single employer with another person. This means they are treated as related if they have common ownership or control as defined by the tax regulations. An unrelated person, on the other hand, is someone who does not meet these criteria and is not considered related under section 45Y. Additionally, sales of electricity to individual consumers are treated as sales to an unrelated party for the purpose of claiming the section 45Y credit, ensuring that such transactions qualify for the credit.

The 80/20 rule for retrofitting an existing facility under section 45Y allows a facility to qualify as originally placed in service even if it contains some used components, provided the fair market value of the used components does not exceed 20% of the total value of the facility. The total value is calculated by adding the cost of new components to the fair market value of the used components. If a facility meets this requirement, it is considered originally placed in service on the date the new components are placed in service.

Facilities that meet prevailing wage and apprenticeship requirements can receive higher credit amounts. The new regulations specify that these facilities can qualify for an increased credit rate of 1.5 cents per kilowatt-hour, compared to the base rate of 0.3 cents per kilowatt-hour, promoting fair wages and training opportunities alongside environmental benefits.