What is a Production Tax Credit (PTC)?

A Production Tax Credit (PTC) is a per kilowatt-hour (kWh) tax credit for electricity generated by solar and other qualifying clean technologies for the first 10 years of a system’s operation at a project or facility (collectively “projects”).[1] The PTC reduces the federal income tax liability and is adjusted annually for inflation.

What is an Investment Tax Credit (ITC)?

An Investment Tax Credit (ITC) is a federal tax incentive for investments in renewable energy projects to stimulate new investments. The ITC reduces federal tax liability for a percentage of the capital cost of a qualifying project placed in service during the tax year.[2]

Why are PTCs and ITCs important components of renewable energy projects?

Many of the Inflation Reduction Act of 2022 (IRA)[3] tax credits that we are considering in this Q&A with Andie series are modifications or expansions of earlier energy tax credits that are already defined in Internal Revenue Code (Code) sections—specifically, the PTC originally introduced at Section 45; and the ITC originally introduced at Section 48:

The Production Tax Credit and its Successors

• Section 45: Electricity Production Tax Credit (Section 45 PTC)
• Section 45U: Zero-Emission Nuclear Power Production Credit
• Section 45V: Clean Hydrogen Production Credit
• Section 45Y: Clean Electricity Production Credit (CEPTC)

The Investment Tax Credit and its Successors

• Section 48: Energy Investment Tax Credit (Section 48 ITC)
• Section 48E: Clean Electricity Investment Credit (CEITC)

To encourage fair wages and meet other societal objectives, the IRA also introduces the concept of “bonus credits,” and it provides new monetization techniques so that credit holders can directly cash out or sell their credits.

Although the Section 45 PTC and the Section 48 ITC credits sunset at the end of 2024, they have continuing significance as reflected in their successors: CEPTC, CEITC, and other PTC- and ITC-based energy tax credits. Section 45 PTCs and Section 48 ITCs apply to projects that began construction before 2025. The Section 45 PTC is replaced by the successor CEPTC, and the Section 48 ITC is replaced by the successor CEITC. They apply to projects placed in service after December 31, 2024. Project developers that can demonstrate construction started prior to 2025 need only follow the requirements at Section 45 or Section 48. They are not subject to any additional requirements that apply to the credits that succeed them.

Why did Congress decide to phase out the Section 45 PTC and the Section 48 ITC credits?

Pragmatism. Modifications and expansions of the Section 45 PTC and the Section 48 ITC over the past three decades reflect Congress’ continued reliance on tax credits to incentivize American clean energy investments. Although the scope of both Section 45 and Section 48 have expanded dramatically over the years, broadly focusing on the reduction of greenhouse gas (GHG) emissions, they focus on specific energy technologies. They do not cover many new and promising clean energy technologies.

To avoid the need to legislate every time Congress seeks to encourage development and commercialization of a new clean energy technology, it focused on broad definitions and specific GHG emission outcomes; ignoring technology specifics in defining the CEPTC and the CEITC. Thus, the CEPTC and CEITC are also known as “technology-neutral credits.”

Why are the CEPTC and the CEITC important?

The CEPTC and CEITC credits have been referred to as one of the IRA’s “most significant reforms.”[4] They provide cash incentives through tax credits to projects that achieve net-zero GHG emissions. The CEPTC and the CEITC are technology-neutral, clean energy tax credits that remain in place until the United States reduces its GHG emissions in accordance with requirements set out in the IRA. The Treasury issued Proposed Clean Energy Treasury Regulations (Clean Energy Proposed Regulations) identifying the following qualifying technologies: wind, solar, hydropower, marine, hydrokinetic, nuclear fission, nuclear fusion, geothermal, and certain types of waste energy recovery property.

When are the IRA’s production and investment tax credits available?

Most of the IRA’s tax credits took effect for projects that began construction after December 31, 2022, and before December 31st, 2024. The exceptions are the Clean Energy Production Credit (CEPTC), and the Clean Energy Investment Tax Credit (CEITC), both of which are effective for projects beginning construction after December 31, 2024.

With the specific exception of the Section 45 PTC and the Section 48 ITC credits that expire at the end of 2024, the IRA energy tax credits generally run for 10 years until December 31, 2032. The CEPTC and CEITC run until the later of 2032, or the time when the United States meets certain GHG emission reduction targets introduced by the IRA and set out in the Code.

Tax credits help incentivize certain behaviors and activities to build new industries and create new technologies. Why the obsession with emissions?

The reduction of both direct and indirect GHG emissions is a central organizing principle that is core to how the IRA energy tax credit frameworks are constructed. Accordingly, emissions reduction definitions and measurements are some of the most detailed aspects of the IRA’s rollout. Under the general principle that you can only manage what you can measure, measurement frameworks are set out.

Why did Congress provide unique sunset provisions for the CEPTC and the CEITC?

The Congressional Research Service (CRS) noted that Congress based the GHG reduction amount for the CEPTC and the CEITC on a “journal article in Science [that] compared emissions estimates from a number of modeling groups. The groups’ estimates indicated that under baseline conditions (i.e., federal, state, and local policies and practices in place before IRA), U.S. GHG emissions would decrease by 25 percent to 31 percent by 2030 compared to 2005 levels.”[5] In addition, CRS noted that the same modeling teams estimated that “the IRA provisions would reduce U.S. GHG emissions by 33 percent to 40 percent by 2030 compared to 2005 levels. The range of estimates from the baseline and IRA scenarios is due to varied assumptions in the models, such as future oil and natural gas prices, among other uncertain factors. Actual GHG emission levels will depend on how the provisions are implemented, the growth rate of the U.S. economy, fuel prices, and a range of other factors.”

Can a taxpayer apply for both a production tax credit and an investment tax credit for the same project?

No, in those situations where both a PTC and an ITC are available, a taxpayer cannot elect both credits. As was noted in the Proposed Treasury Regulations addressing the CEPTC and the CEITC,[6] it is possible that a taxpayer that “places in service” a qualified facility or “energy property” after 2024 with construction beginning before 2025, the property may be eligible for more than one of the credits under Sections 45 or 48, or CEPTC or CEITC. “Accordingly, a taxpayer must choose which one of these credits to claim with respect to such qualified facility or energy property. Once the taxpayer has claimed one of these credits with respect to a qualified facility or an energy property, the taxpayer cannot claim any other of these credits with respect to the same qualified facility or energy property.”[7]

The Production Tax Credits

What were the frameworks for production tax credits before the IRA?

Introduced in the Energy Policy Act of 1992, the PTC sought to encourage the development of certain renewable energy projects [8]. Over the years, however, that Section 45 PTC saw many modifications and amendments. Originally scheduled to expire in 1999; instead, it was extended many times.

Prior to the IRA, the Section 45 PTC covered the following technologies: wind, closed-loop biomass, open-loop biomass, geothermal, municipal solid waste, qualified hydropower, marine facilities, and hydrokinetic facilities that produced electricity. The Section 45 PTC provided a tax credit based on kilowatt-hours (kWh) of electricity produced from statutorily specified, qualified renewable facilities, sold to an unrelated party. The PTC credit amount was payable over a 10-year period.

The PTC focused on electricity generated by wind or certain other clean sources, as identified in Section 45; but The Energy Policy Act of 2005 did not extend the PTC to solar or to refined coal facilities. As a result, from 2005 until 2022, taxpayers could not claim a PTC for electricity produced from solar energy. The American Recovery and Reinvestment Act of 2009[9] extended the “placed in service” time periods for wind, solar, and other renewable facilities, also providing grants when specified energy properties were placed in service.[10]

How did the IRA modify the legacy Section 45 PTC?

The IRA modified and extended the legacy Section 45 PTC until the end of 2024. As modified, the Section 45 PTC covers renewable projects, including “wind, biomass, geothermal, solar, small irrigation, landfill and trash, hydropower, marine and hydrokinetic energy.” Prior to the IRA, solar photovoltaic energy projects, for example, could only apply for the ITC; such projects were not eligible for the PTC. Under the IRA, solar photovoltaic projects qualify for the Section 45 PTC and will also qualify for the CEPTC.

These IRA changes to the PTC frameworks are major.

What are some key differences between the legacy Section 45 PTC (PTC) and the next generation Section 45Y CEPTC (CEPTC) energy credits?

For projects starting after December 31, 2024, the Section 45 PTC is replaced with the Section 45Y CEPTC. Although both are production tax credits, there are several key differences between the two:

1. The legacy PTC—that is, the Section 45 PTC—is limited to those technologies that were specifically set out in Section 45. The next-generation CEPTC—also referred to as “technology-neutral tax credit”— will cover all low-carbon and zero-carbon technologies.
2. The PTC does not require taxpayers to source project materials from U.S. sources, whereas the CEPTC does.
3. The PTC does not have any GHG emission-reduction targets, while the CEPTC requires a qualified facility to lay in a path toward achieving zero GHG emissions.[11] A developer can receive the CEPTC credit, however, if the facility had been in operation before 2025 (because the GHG requirement does not apply,) or it has less than 10 grams carbon dioxide equivalents per kWh.
4. Unlike most energy credits, the CEPTC is not subject to a mandatory 10-year sunset provision. Rather, it remains in effect until the later of 2032, or the time when U.S. GHG emissions are less than 25 percent of 2022 levels; and when these emission reductions have been achieved, the CEPTC will be phased out. CEPTC projects financed with tax-exempt bonds will have the credit amount reduced by a formula set out in Section 45(b)(3).

What is the CEPTC credit amount?

The CEPTC credit provides a 10-year base credit (pre-inflation) of 0.3 cents per kilowatt-hour (kWh) and an alternative amount of 1.5 cents per kWh if the prevailing wage and apprenticeship (PWAP) requirements are met.[12] For calendar years beginning in 2025, the base and the alternative amounts are adjusted by multiplying these amounts by the inflation adjustment factor published in the Federal Register.[13] A qualified project may secure additional bonus credits of 10 percent if located in an energy community,[14] and an additional 10 percent if it meets certain U.S. domestic sourcing requirements.

When the 25 percent GHG emissions threshold is met, how will this affect projects that begin construction after that date?

On an ongoing basis, the U.S. Government will measure greenhouse gas emissions, and determine when those annual GHG emissions from the production of U.S. electricity are equal to—or less than—25 percent of the GHG emissions from the U.S. production of electricity in 2022. Category and facility-specific GHG admission rate data will be published on an annual basis so that taxpayers can use these data in applying for the CEPTC.[15]

A project that begins construction during the first calendar year after the “applicable” (pay-down) year will receive 100 percent of the credit.[16] This credit percentage amount is reduced to 75 percent in the second year after the applicable year; to 50 percent in the third year after the applicable year; and it is completely phased out thereafter.[17] In other words, when U.S. GHG emissions are less than 25 percent of 2022 levels, no credit is available for facilities that begin construction in the fourth year after phase out.

How is a “qualified facility” defined for purposes of the CEPTC?

A qualified facility is one that (1) generates electricity; (2) is placed in service after December 31, 2024; (3) has a GHG emissions rate of not greater than zero;[18] and (4) sells that electricity to an unrelated person during the taxable year.[19]

A qualified facility is defined in a way that is similar to the way it is defined in Proposed Section 48 Regulations. It adopts a “unit of property” approach so that a qualified facility includes: “components of property that are functionally interdependent if the placing in service of each of the components is dependent upon the placing in service of each of the other components to produce electricity.[20]

A qualified facility can include a new unit or an addition of capacity to an existing facility if it is placed in service after December 31, 2024.[21] Referred to as the 80/20 rule, a new facility can include used components of property if their fair market value does not exceed 20 percent of the facility’s total value.[22]

What is meant by “an integral part of a qualified facility”?

Integral to producing electricity for onward transmission or distribution. Integral parts of a qualified facility include power conditioning equipment that modifies the characteristics of electricity into a form suitable for use or transmission or distribution (plus the parts related to the functioning or protection of such equipment). It also includes transfer equipment (but excludes transmission and distribution lines). Buildings and fences (“structures”) are not treated as integral parts of a qualified facility unless they are essentially an item of machinery or equipment. In addition, a structure that houses components of property that are integral to the intended function of the facility are integral parts if they are closely related to the use of the housed components.[23]

The Investment Tax Credits

What did the Section 48 ITC apply to prior to the IRA?

Prior to the IRA, the Section 48 ITC applied to funds invested in qualified property used for generating and distributing clean energy. It covered solar energy to generate electricity, or to heat or cool a structure used to produce, distribute, or use energy derived from a geothermal deposit.

What was the framework of the Section 48 ITC prior to the IRA?

The Section 48 ITC allows a taxpayer to deduct from its federal tax liability the credit amount based on the cost of a portion of a qualified renewable facility. The credit amount varies, based on the type of the energy property, multiplied by the tax basis of the property placed in service for a given tax year. Once that facility is operational, the one-time Section 48 ITC credit becomes available for that same tax year.

What are some key differences between the Section 48 ITC and the Section 48E CEITC?

For projects starting after December 31, 2024, the Section 48 ITC is replaced with the technology-neutral CEITC at Section 48E. The CEITC is available to any zero- or low-emission technology if the project is anticipated to have zero GHG emissions. Once the project is in operation, the project must have less than 10 grams carbon dioxide equivalents per kWh. It is not subject to the 10-year sunset provision that applies to most of the IRA credits that we are looking at in this Q&A with Andie series. Rather, the CEITC remains in effect until U.S. GHG emissions fall below 25 percent of the 2022 U.S. emissions level. Then, it will then be phased out.

Can the CEITC become subject to tax credit recapture?

Yes. Although an ITC is claimed in full in the first tax year, the credit vests over five years. The CEITC would be subject to tax credit recapture if the taxpayer no longer qualifies for the credit. That is, for any qualified facility with a GHG emissions rate exceeding 10 grams of carbon dioxide equivalents per kWh during the five-year period beginning on the date it is placed in service. Whether there is a “recapture event” is determined for each taxable year in the five-year recapture period. In addition, failure to meet PWAP requirements during the recapture period can also result in a recapture event.

Further, the tax recapture rules that generally apply to Section 48 also apply. If a project loses its qualification for the credit over the five-year recapture period, the unvested portion is recaptured (80 percent in year one; 60 percent in year two; 40 percent in year three; or 20 percent in year four). Recapture can also be triggered if the project changes ownership, is destroyed, or becomes inoperable. Under such circumstances, the tax recaptured portion must be repaid to the U.S. Treasury.

Energy Property

Why is the definition of “Energy Property” important in considering the PTC and the ITC?

The PTC and ITC credits apply to projects involving “Energy Property,” so the definition of Energy Property is critically important in understanding application of these tax credits. Energy Property is defined as property constructed, reconstructed, or erected by the taxpayer,[24] including property that the taxpayer acquires if the property’s original use commences with the taxpayer.[25] Energy Property must (1) be eligible for depreciation or amortization;[26] (2) meet prescribed performance and quality standards; (3) not be part of a qualified facility from which a Section 45 credit is available; and (4) constructed, reconstructed, or erected by the taxpayer in accordance with the taxpayer’s specifications.[27]

How is Energy Property defined in the Proposed Treasury Regulations?

On November 22, 2023, the Treasury issued Proposed Regulations to expand the current definition of Energy Property to account for the new technologies introduced by the IRA (Proposed Clean Energy Regulations).[28] The Treasury and the IRS worked with the Department of Energy (DOE) to propose definitions for the following types of property: solar energy property, fiber-optics solar energy property, electrochromic glass property, geothermal energy property, qualified fuel cell property, qualified microturbine property, combined heat and power system property, qualified small wind energy property, geothermal heat pump equipment, waste energy recovery property, energy storage technology, qualified biogas property, and microgrid controllers.

As the Treasury noted, “Because future legislation may add additional types of Energy Property to section 48, proposed section 1.48-9(e)(13) would provide that any other property specified by section 48 as Energy Property is treated as Energy Property for purposes of these proposed regulations.”[29] The Treasury adopted “a function-oriented approach to describe the types of components that are considered Energy Property. Accordingly, Prop. Treas. Reg. section 1.48-9(f) would adopt the concepts of functional interdependence and property that is an integral part of an Energy Property.”[30]

How is Energy Property defined for purposes of the CEITC?

A qualified facility is defined as a facility that (1) generates electricity; (2) is placed in service after December 31, 2024; and (3) has a GHG emissions rate of not greater than zero.[31] The Proposed Clean Energy Regulations set out a “similar unit of property” approach that requires a taxpayer to conduct an analysis of whether property is functionally interdependent or an integral part of a qualified facility.[32] Only qualified facilities of no more than five megawatts can qualify for the CEITC credit with respect to interconnection property, that is, tangible property that is part of a transmission or distribution system.[33]

What is “qualified property”?

Qualified property is tangible personal property—that is, property that can be touched or moved—and for which depreciation is allowable and the taxpayer either completes the construction of the property, or acquires the property for its original use.[34] Qualified property includes (1) energy storage technology that receives, stores, and delivers energy for conversion to electricity (other than property primarily used in the transportation of goods or people)[35] and (2) thermal energy storage property directly connected to a heating, ventilation, or air conditioning system that removes heat from (or adds heat to) storage property for subsequent use and that provides energy for the heating or cooling of the interior of a residential or commercial building.[36]

How is a “qualified investment” defined for CEITC purposes?

The CEITC is based on a “qualified investment with respect to a qualified facility.”[37] The qualified investment is generally the tax basis of the qualified property plus any expenditures paid or incurred for qualified interconnection property.[38]

When does construction commence?

Two tests are used to determine when construction commences. Both the Five Percent Test and the Physical Work Test require continuous progress towards completion of the project:

• Five Percent Test: At least five percent of final qualifying project costs are incurred. Expenses must be “integral” to generating electricity, and equipment and services must be delivered (or anticipated to be delivered) within 3.5 months after payment.
• Physical Work Test: Physical work is commenced on the site or equipment that is integral to the project.

How is the term “qualified facility” defined?

“Qualified facility” is defined in the Proposed Clean Energy Regulations as property for which the GHG emission rates are measured consistently between the CEPTC and the CEITC. Differences in the scope of property included between the CEPTC and CEITC are noted; and both the CEPTC and CEITC require zero GHG emissions. Construction of a qualified facility or Energy Property can begin before 2025 if it is placed in service after 2024.

Greenhouse Gas Emissions

How are GHG emissions defined under the Proposed Treasury Regulations?

The “greenhouse gas emissions rate” is defined in the Proposed Clean Energy Regulations as the amount of GHG emitted into the atmosphere by a facility in the production of electricity, expressed as grams of CO2 e per kWh. .[39] Methane, nitrous oxide, sulfur hexafluoride, and other recognized greenhouse gases are, thus, converted into their carbon dioxide equivalent using this defined methodology.[40]

Do the IRA Proposed Treasury Regulations address how to measure GHG emission rates?

Yes. The Proposed Clean Energy Regulations provide initial guidance on measuring GHG emission rates for purposes of the CEPTC and CEITC.[41]

Do the CEPTC and CEITC change the qualification standards for zero-rate GHG emission facilities?

No. Replacing the Section 45 PTC and the Section 48 ITC with the CEPTC and CEITC will not significantly change the qualification standards for wind, solar, and geothermal qualified facilities—because these facilities are designated zero-rate GHG emission facilities.

Are GHG emission rate measurements more complicated for qualified facilities that are not zero-rate GHG emission facilities?

Yes. A combustion and gasification facility (C&G Facility) produces electricity through combustion, or it uses a liquid or gaseous fuel source input to generate electricity; a Non-C&G Facility (such as a zero-rate GHG emission facility like a solar or wind farm) does not. For both C&G and Non-C&G Facilities, emissions result directly from the transformation of the applicable energy source into electricity.[42] When considering combustion and gasification facilities, including those that handle biogas and biomass, measuring GHG emission rates can prove more challenging.

Do GHG emission rate measurements calculations differ for C&G and Non-C&G facility types?

Yes. GHG emission rate measurement definitions vary according to whether the energy project facility is treated as a C&G facility or Non-C&G Facility.[43] GHG emissions do not include emissions from C&G and Non-C&G Facilities that are captured and disposed of in a secure geological storage site, or that are utilized in accordance with current and possible future Section 45Q carbon sequestration rules.[44]

How are GHG emissions rates measured for a Non-C&G Facility?

A Non-C&G Facility’s GHG emissions rates are based on a technical and engineering assessment of the fundamental energy transformation into electricity.[45] This assessment considers all input and output energy carriers and chemical reactions or mechanical processes at the facility in the production of electricity.[46] Non-C&G Facilities that do not have a greater than zero rate of GHG emissions[47] include wind (including small wind properties), hydropower (including retrofits), marine, hydrokinetic, solar (including photovoltaic and concentrating solar power), geothermal (including flash and binary plants), nuclear fission, nuclear fusion, and waste energy recovery property (WERP).[48] All other types of Non-C&G Facilities will have their GHG emissions rates determined through a technical and engineering assessment of the fundamental energy transformation into electricity.[49]

How are GHG emissions rates measured for a C&G Facility?

The GHG emissions rate requirements for a C&G Facility require a taxpayer to conduct a “lifecycle analysis” (LCA).[50] Such an analysis starts with feedstock generation and the extraction process for fossil fuel feedstocks and other feedstocks that are generation-derived, including biogenic feedstocks.[51] An LCA ends at the point of production, including transmission and distribution emissions at the C&G Facility.[52]

How are annual GHG emission rates published by the IRS?

The IRS is required to publish on an annual basis the GHG emission rates for facilities that are eligible for the CEPTC and the CEITC.[53] Emission rates for those facilities and projects not covered in the IRS’ annual publication are expected to be addressed by the DOE. After final Treasury Regulations are issued, the IRS will publish the first annual table addressing GHG emission rates. Until final regulations are published, however, taxpayers can treat the facilities listed in Prop. Treas. Reg. §§ 1.45Y-5(c)(2)(i) through (viii) as having GHG emission rates that are not greater than zero.

Direct, Indirect, Excluded and Avoided Emissions

Do the Proposed Clean Energy Regulations address direct and indirect emissions?

Yes. The Proposed Clean Energy Regulations address direct and indirect emissions.

What are Direct Emissions?

Direct emissions are treated as emissions from feedstock generation, production, or extraction (including emissions from feedstock and fuel harvesting and extraction and direct land use change and management, including emissions from fertilizers, and changes in carbon stocks).[54] Direct emissions also include an electricity generating facility’s emissions from combustion and gasification.[55]

What are Indirect Emissions?

Indirect emissions, on the other hand, are treated as emissions from indirect land use and land use changes, and other (natural- or human-) induced emissions associated with the increased use of the feedstock for electricity production.[56] The government is still hard at work on the frameworks for measurement and reporting indirect emissions. The U.S. Treasury will provide examples of significant indirect emissions that must be taken into account by taxpayers in calculating their LCAs. These include, but are not limited to, emissions from indirect land use and land use change and other [natural- or human-] induced emissions associated with the increased use of the feedstock for electricity production. Significant indirect emissions may include positive or negative emissions. For biogenic resources, significant indirect emissions may include emissions from growth and regrowth.[57]

What are Excluded Emissions?

Excluded emissions include those connected with facility construction and maintenance, infrastructure, and distribution of electricity to consumers. Principles will be provided for excluded emissions by listing types of emissions that taxpayers must not take into account in their LCAs.[58]

How should taxpayers consider Avoided Emissions in their LCA?

One complex area of the IRA rollout includes LCA calculations that may consider “alternative fates” and “avoided emissions.” “Alternative fate means a set of informed assumptions (for example, production processes, material outcomes, market-mediated effects) used to estimate the emissions from the use of each feedstock were it not for the feedstock's new use due to the implementation of policy (that is, to produce electricity). Avoided emissions means the estimated emissions associated with the feedstock, including the feedstock's production and use, that would have occurred in the alternative fate (if such feedstock had not been diverted for electricity production) but are instead avoided with the feedstock's use for electricity production.”[59]

This part of the Proposed Treasury Regulations squarely addresses many related and important issues—including the specific intersections in regard to land use competition between clean energy projects and both permanent and seasonal agrarian and husbandry operations.

Take agrarian operations for example. Many larger-scale solar and wind farm projects, in particular, compete head-to-head to occupy the same prime farmlands in rural America. In the U.S. corn belt, the same farms can grow corn for feedstocks that can convert to either food or for ethanol production.

Annual GHG emissions are significantly affected by the existence of such necessary production agrarian agriculture; not only the machinery and equipment used in cultivation and delivery of field inputs and outputs, but the specifics of lo-till practices used in the planting and cropping of such annual food and energy crops.

Alternatively, solar and wind farms often covert—effectively—to fallow lands with lower energetic footprints. Of course, this begs the question whether there are specific innovations that may be possible, such as the planting of cover crops or permanent market garden crops (for example, berrying fruits) under solar farms in the Corn Belt. But taxpayers could benefit from specific incentivizations to consider such approaches: those that are not only “good for the planet,” but that deliver multiple sources of value to the bottom line of such farms.

These questions are not side issues—rather, they are absolutely central in delivering clear implementation guidance that can truly incentivize taxpayers to do the very hard work of developing thoughtful and innovative approaches to reducing their energy footprint of the entire U.S. food and agriculture sector. There are many other clear examples of where thoughtful consideration of these issues would benefit both operators and society.

The U.S. government is taking meaningful steps to address this major area of overlap between energy, agriculture and food production, stating that proposed Treasury Regulation Section 1.45Y-5(d)(2)(vii) “would provide that an LCA may consider alternative fates and may account for avoided emissions. […] It is important to note that, while, in some circumstances, emissions may be avoided if compared to the alternative fate, in others the new use of the material (for example, for electricity production) may involve additional emissions that were not emitted in the alternative fate estimation. Relatedly, in some circumstances, emissions may be avoided in one part of the supply chain only to occur elsewhere along the supply chain due to the new use.”[60]

Are there any Additional Issues Regarding Greenhouse Gas Emissions Rates for C&G Facilities?

At the time of this publication, the government recognizes the following: “The determination of net GHG emissions rates for C&G Facilities raises a range of complex technical questions that are relevant to determining eligibility for the section 45Y and section 48E credits. The Treasury Department and the IRS are requesting comment on the following topics: (1) the treatment of renewable natural gas (RNG) and fugitive sources of methane; (2) analytical LCA parameters, including spatial scales and time horizons; (3) whether and how to distinguish between co-products, byproducts, and waste products and how emissions should be allocated to each in LCAs; (4) how to attribute emissions to the heat produced by facilities using combined heat and power systems; (5) how to create and maintain LCA baselines; and (6) certain issues related to LCA modeling.”

Choosing between the PTC and the ITC

What are some of the decision-making considerations?

A project cannot claim both the CEPTC and the CEITC, so a taxpayer must consider which of the two credits to elect, and is likely to consider the following criteria in doing so:

• The PTC amount is based on the project’s energy generation.
• The ITC amount is based on the total project cost.
• Determination of potential bonus credits available for the specific PTC or ITC.
• The date that a project is placed in service.
• Whether a project is financed with tax-exempt bonds.
• Whether an upfront ITC-based credit is preferable to a PTC-based credit that applies over the project’s first 10 years of operation.[61]
• Project developers who expect to expand service, reduce construction costs, or increase production efficiency over 10 years will likely prefer the PTC. Both the ITC and PTC are reduced by tax-exempt bond proceeds up to a maximum reduction of 15 percent (for facilities beginning construction after enactment of IRA), and both the ITC and the PTC are eligible for bonus credits.

The firm extends gratitude to Nicholas C. Mowbray for his comments and exceptional assistance in the preparation of this article.

[1] “Federal Solar Tax Credits for Businesses,” DOE, Solar Energy Technologies Office, updated August 2024, https://www.energy.gov/eere/solar/federal-solar-tax-credits-businesses#:~:text=.

[2] Ibid.

[3] The Inflation Reduction Act of 2022, Pub. L. No. 117-169, 136 Stat. 1818 (2022) (IRA), August 16, 2022.

[4] “U.S. Department of the Treasury, IRS Release Proposed Guidance to Continue Investment Boom in Clean Energy Production,” Press Release, U.S. Department of the Treasury, May 29, 2024.

[5] “Inflation Reduction Act of 2022 (IRA): Provisions Related to Climate Change,” updated October 26, 2023, Congressional Research Service.

[6] 89 Fed Reg. 47792 (June 3, 2024) as corrected by 89 FR 58305 (July 18, 2024).

[7] 89 Fed Reg. 47792 (June 3, 2024) as corrected by 89 FR 58305 (July 18, 2024).

[8] Energy Policy Act of 1992, Pub L. No. 102-486, 106 Stat. 2776, § 1914(a).

[9] American Recovery and Reinvestment Act of 2009 Pub. L. No. 111-5, 123 Stat. 115.

[10] Ibid, § 1101(a)(3).

[11] 89 Fed Reg. 47792 (June 3, 2024) as corrected by 89 FR 58305 (July 18, 2024). The Proposed Regulations define a “qualified facility” for purposes of the CEPTC and CEITC as any facility owned by the taxpayer claiming the credit that (1) is used for the generation of electricity; (2) placed in service active December 31, 2024; and (3) has a GHG emissions rate of not greater than zero.

[12] Prop. Treas. Reg. § 1.45Y-1(b)(2)(ii) and (iii). See Part IV of this Q&A with Andie for a discussion of the PWAP requirements.

[13] Prop. Treas. Reg. § 1.45Y-1(b)(3).

[14] Prop. Treas. Reg. § 1.45Y-1(b)(4). Energy community is defined under Section 45(b)(11)(B) as (1) a brownfield site; (2) a metropolitan or non-metropolitan area that had direct employment above certain thresholds related to the extraction, processing, transport, or storage of coal, oil, or natural gas and an unemployment rate above the national average; or (3) a census tract in which a coal mine was closed after December 31, 1999 or a coal-fired electric generating unit was retired after December 31, 2009.

[15] Prop. Treas. Reg. § 1.48E-1(c)(1). § 45Y(b)(2) defines “greenhouse gas emissions rate” as the amount of GHG “emitted into the atmosphere by a facility in the production of electricity, expressed as grams of CO2 e per kWh. § 48E(b)(3)B)(ii) says that the GHG emissions rate is determined using rules similar to those in Section 211(o)(1)(H) of the Clean Air Act (42 U.S.C. 7545(o)(1)(H)).” The Secretary will annually publish a table setting forth the GHG emissions rates for types or categories of facilities to use  for purposes of  Section 45Y CEPTC. § 45Y(b)(2)(C).

[16] Prop. Treas. Reg. § 1.45Y-1(c)(2).

[17] Ibid.

[18] Prop. Treas. Reg. § 1.45Y-2(a).

[19] Prop. Treas. Reg. § 1.48E-2(b)(2)(ii).

[20] Prop. Treas. Reg. § 1.45Y-2(b)(2)(ii), as corrected, July 18, 2024.

[21] Prop. Treas. Reg. § 1.45Y-4(c)(1).

[22] Prop. Treas. Reg. § 1.45Y-4(d)(1). This is referred to as the “80/20 rule.”

[23] Prop. Treas. Reg. § 1.45Y-2(b)(3)(ii), (iv), and (v).

[24] § 48(a)(3)(B)(i).

[25] § 48(a)(3)(B)(ii).

[26] § 48(a)(3)(C).

[27] § 48(a)(3)(B)(i).

[28] Prop. Treas. Reg. § 1.48-9(e).

[29] Preamble, Proposed Treas. Reg. §1.48-9.

[30] Preamble, Prop. Treas. Reg. §1.48-9.

[31] Prop. Treas. Reg. § 1.48E-2(a).

[32] Prop. Treas. Reg. § 1.48E-2(b)(2) and (3).

[33] Prop. Treas. Reg. § 1.48E-4(a)(1). Proposed § 1.48E-4(a)(2) would define the term “qualified interconnection property.”

[34] Prop. Treas. Reg. § 1.48E-2(e)(1). See also, §§ 1.48E-2(f)(1) and (2).

[35] Prop. Treas. Reg. § 1.48E-2(g)(6)(i).

[36] Prop. Treas. Reg. § 1.48E-2(g)(6)(ii).

[37] Prop. Treas. Reg. § 1.48E-2(d).

[38] Prop. Treas. Reg. § 1.48E-2(d)(1) and (2).

[39] Prop. Treas. Reg. § 1.45Y-5(b)(5), consistent with § 45Y(b)(2)(A).

[40] Prop. Treas. Reg. § 1.45Y-5(b)(1).

[41] Ibid. Proposed § 1.45Y-5(b)(1) would clarify that the term “CO2 e per kWh” means with respect to any greenhouse gas, the equivalent carbon dioxide (as determined based on the 100-year time horizon global warming potential (GWP-100)) per kWh of electricity produced. Proposed § 1.45Y-5(b)(1) would also provide global warming potentials for certain greenhouse gases from the Intergovernmental Panel on Climate Change's Fifth Assessment Report (AR5).

[42] Prop. Treas. Reg. § 1.45Y-5(b)(6).

[43] Prop. Treas. Reg. §§ 1.45Y-5(b)(4) and (7).

[44] Prop. Treas. Reg. § 1.45Y-5(e).

[45] Prop. Treas. Reg. § 1.45Y-5(c)(1)(ii).

[46] Ibid.

[47] Prop. Treas. Reg. § 1.45Y-5(c)(2).

[48] Prop. Treas. Reg. § 1.45Y-5(c)(2)(i)-(viii). WERP is 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.

[49] Prop. Treas. Reg. § 1.45Y-5(c)(1)(ii).

[50] Prop. Treas. Reg. § 1.45Y-5(d)(1).

[51] Prop. Treas. Reg. § 1.45Y-5(d)(2)(i)-(vii).

[52] Prop. Treas. Reg. § 1.45Y-5(d)(ii).

[53] Prop. Treas. Reg. § 1.45Y-5(f)(1), and Code § 45Y(b)(2)(C).

[54] Prop. Treas. Reg. § 1.45Y-5(d)(2)(v)(A)(1).

[55] Prop. Treas. Reg. § 1.45Y-5(d)(2)(v)(A)(5).

[56] Prop. Treas. Reg. § 1.45Y-5(d)(2)(v)(B).

[57] Ibid.

[58] Prop. Treas. Reg. § 1.45Y-5(d)(2)(vi).

[59] Prop. Treas. Reg. § 1.45Y-5(d)(2)(vii)

[60] Prop. Treas. Reg. § 1.45Y-5(d)(2)(vii)

[61] This depends in part on the expected capacity of the project and the investment costs, including capital and financing costs.