Treasury Department and IRS Issue Final Regulations Regarding the Clean Electricity Tax Credits Under Sections 45Y and 48E of the Internal Revenue Code

Previously, in May 2024, Treasury and the IRS published proposed regulations [REG-119283-23] (Prior Regulations). After considering the approximately 1,800 comments received, the Final Regulations largely adopt the Prior Regulations while addressing some open issues and providing additional clarity on certain topics.

Notable Provisions of the Final Regulations
Below is a high-level overview of the topics addressed in the Final Regulations.

• The Prior Regulations required that hydrogen energy storage property must store hydrogen that will be solely used for energy purposes. After receiving several comments criticizing this requirement, Treasury and the IRS agreed that IRC Section 48E does not require hydrogen storage property to store hydrogen that will be used for the production of energy and removed such end-use requirement from the Final Regulations. For example, the end use of hydrogen could be fertilizer production.
• The Final Regulations define WERP as “property that generates electricity solely from heat from buildings or equipment if the primary purpose of such building or equipment is not the generation of electricity.” The Final Regulations include examples of WERP property to be manufacturing plants, medical care facilities, facilities on school campuses and associated equipment.
• The Final Regulations clarify and provide guidelines for the life cycle analysis (LCA) which taxpayers are required to use to determine life cycle GHG emissions rates.

- Treasury and the IRS emphasized that IRC Section 45Y distinguishes C&G and non-C&G facilities, and as such, the starting boundary for an LCA begins with extraction and/or production activities for C&G facilities.

- Treasury and the IRS maintained that the meter at the point of electricity production at a C&G facility is the appropriate ending boundary for an LCA because IRC Sections 45Y and 48E require analysis of GHG emissions associated with the production of energy and not its use.

- The Final Regulations also ensure that LCAs take into account direct and certain indirect emissions, including emissions from land-use changes and market-mediated effects.

- The Final Regulations provide that LCA baselines must be updated every 10 years—but not more often than every five years—to reflect regulatory, economic, supply chain or environmental changes.

- The Final Regulations adopt a 30-year horizon for analyzing life cycle emissions, which balances a number of considerations including, but not limited to, expected life of biofuel production facilities, such facilities long-term market impact on emissions, and the innate uncertainty of estimating GHG emissions over longer periods of time. This timeline is consistent with the U.S. Environmental Protection Agency’s Renewable Fuel Standards program.

- Treasury and the IRS received various suggestions of LCA models and determined there is no clear or obvious model that would be appropriate for all situations. Treasury and the IRS intend to coordinate with federal agencies’ experts on the development of models.

• The Final Regulations provide clarity for the One Megawatt Exception, specifically with respect to the methods for measuring the maximum net output of qualified facilities and energy storage technologies. If a facility meets the One Megawatt Exception, the taxpayer is eligible to receive the full tax credit without having to meet the prevailing wage and apprenticeship requirements.
• Treasury and the IRS declined to provide a de minimis exception for emissions from a facility, but did acknowledge that emissions above zero in any taxable year does not disqualify a facility’s eligibility for the CEPC for the remaining years in the credit period.
• Satisfaction of the 80/20 rule qualifies as newly placed in service even if such facility also satisfies the additional capacity rule.
• The CEIC can be claimed for energy storage technology co-located with electricity generation equipment for which the CEPC is claimed. Taxpayers who take this approach and elect to transfer all or part of the Clean Electricity Tax Credits will need to have separate registrations.
• Treasury and the IRS confirmed that qualified progress expenditures under the CEIC are eligible for direct payment but did not feel a clarification in the Final Regulations was necessary.
• A decommissioned nuclear facility that restarts operations can obtain a base of zero in determining increased capacity if the facility was shut down for at least a year during which it was not authorized to operate by a federal regulatory authority.

Provisions Discussing the Treatment of Biogas, Renewable Natural Gas (RNG) and Fugitive Sources of Methane
The Final Regulations contain a significant amount of detail around biogas, RNG, and other similar technologies. A summary of the major changes is discussed below.

• The Final Regulations provide that facilities which produce electricity by combusting waste are C&G facilities and, as such, are required to perform an LCA to determine eligibility for the credits.
• Treasury and the IRS included rules for assessing life cycle emissions for woody biomass and forestry residues, specifically addressing concerns about forest regrowth and land-use changes.
• Taxpayers using biomass feedstock must document sourcing practices and obtain third-party certifications.

- For feedstocks that do not have marketability, the taxpayer needs to retain origin information and details around the original form of such feedstocks.

• The Final Regulations provide clearer guidance for calculating life cycle GHG emissions and considering alternative fates for RNG projects.

- Treasury and the IRS determined that specifically addressing the assessment of alternative fates for natural gas alternatives will help ensure accurate life cycle GHG emissions determinations, prevent improper credit claims and increase certainty for taxpayers.

- For electricity produced through C&G facilities using methane, the alternative fate must be flaring. The also applies to methane derived from wastewater (if not used to heat the anaerobic digester). For C&G facilities using animal waste, Treasury and the IRS decided the most appropriate approach is to use the alternative fate for the sector as a whole derived from the national average of all animal waste management practices.

• In the preamble to the Proposed Regulations, Treasury and the IRS had suggested a requirement that the production of electricity would need to be the first productive use of the relevant methane in order to be eligible for Clean Electricity Tax Credits. After significant criticism from the industry, the Final Regulations do not adopt a first productive use requirement and instead take alternative productive uses into account in assessing alternative fates.
• Several commenters requested that certain C&G facilities that burn biomass be considered to have a net GHG emissions rate of not greater than zero. Treasury and the IRS declined to do so, stating that many of the LCAs cited by commenters as supporting the claim that biomass, industrial wastes or manufacturing residuals have negative life cycle GHG emissions do not align with the LCA requirements provided for in the Final Regulations.
• Use of the book and claim method was rejected because the IRC Sections 45Y and 48E require eligibility to be determined based on the actual operations of the facility. As explained by Treasury and the IRS, book and claim by its nature cannot establish what fuel or feedstock is physically used to produce a facility’s input.

Final Thoughts
While the Final Regulations offer taxpayers some clarity, the rules around biomass, RNG and other similar projects were not offered the flexibility that was requested by such industries. The Final Regulations are effective 60 days after publication in the Federal Register. Please reach out to one of your Pillsbury team members to discuss the impact of these regulations to your ongoing and/or future projects.