Tech-Neutral Tax Credits: What Renewable Energy Developers Need to Know

Key changes, what remains the same and insights.

Aug 13, 2024

Ben Dickson

The Inflation Reduction Act (IRA) introduced two new technology-neutral clean energy tax credits, 48E and 45Y, which will replace existing clean energy tax credits starting in 2025. The credits apply to facilities placed in service after December 31, 2024.

• 48E is an investment tax credit (ITC) for clean electricity projects.
• 45Y is a production tax credit (PTC) based on the amount of clean electricity generated.

One of the most transformative aspects of this update is the shift from specifying qualifying technologies to a more inclusive, technology-neutral approach. Under Sections 48E and 45Y, any facility that produces electricity with net zero greenhouse gas emissions can qualify, regardless of the technology used. This marks a significant departure from the previous guidance, where eligibility was tightly linked to specific technologies.

The change to a technology-neutral framework likely reflects Congress’s desire to avoid “picking winners” amongst renewable technologies, a longstanding issue that economists and other policy professionals have had with the old system, and to more tightly focus the credits on greenhouse gas emission reduction.

As of January 1, 2025, all new projects that haven’t begun construction will be subject to this new technology-neutral framework. However, projects already under construction but not yet in service by this date will have a choice: they can either opt for the old, technology-specific credits under Sections 48 and 45, or they can transition to the new credits.

As we analyze the initial set of regulations and the feedback received, several key insights emerge, along with areas of uncertainty that still linger. Below, we summarize what we’ve learned from the proposed regulations, highlight the challenges ahead, and discuss the changes we anticipate will be adopted—barring any major reversals from the IRS.

What are the key changes? What do they mean?

• Tech-Neutral: 45Y and 48E are available to any clean electricity generation technology that produces zero or negative greenhouse gas emissions. This opens up the credits to a wider range of existing and potential future technologies.
• Emissions-based eligibility: Eligibility is determined by a facility's greenhouse gas emissions rate rather than by specific technology type. Facilities must have zero or negative emissions to qualify.  The IRS will publish an annual list of technologies that meet the zero-emissions threshold for that tax year. The release named seven technologies that will be included on the initial list.
• Immediate expansion to new technologies:  Beyond wind, solar, geothermal, storage and waste energy recovery, newly eligible technologies include hydropower, marine and hydrokinetic (with respect to the investment tax credit), and nuclear fission and fusion.
• Existing technologies in doubt: Technologies previously eligible under the old rules that use combustion to produce electricity—such as biogas/biomass, RNG, and combined heat and power (in the context of investment tax credits)—will now be subject to special eligibility rules. Their qualification will depend on a counterfactual analysis, the specifics of which are yet to be defined. This analysis will assess whether these technologies reduce net emissions, considering factors like the "alternative fate" of their feedstocks if the facility were never built. (We’ll share more details in an upcoming blog post discussing Tech-Neutral Tax Credits and C&G technology.)
• Other requirements have been relaxed: Qualification for the credits will no longer require sale of electricity to an unrelated party, so long as production is properly metered by a third party, and the low-income communities bonus credit is no longer limited to solar and wind projects and connected storage.
• “Energy project” concept may be permanently shelved: The release also does not include any reference to the “energy project” concept, used to aggregate multiple energy properties into one project for purposes of the investment tax credit.

What remained the same?

• Calculation of the credit amount requires determination of the appropriate rate or energy percentage for the facility, as well as, for investment tax credits, the taxpayer’s basis in the energy facility.
• Prevailing wages and apprenticeship requirements
• Energy community and domestic content bonus credits

Key insights:

• Projects already under construction but not yet in service by January 1st, 2025 will have a choice: they can either opt for the old, technology-specific credits under Sections 48 and 45, or they can transition to the new credits.
• Given the complexity of the existing regulations and the numerous undetermined factors, many biomass, biogas, and RNG developers are seeking to begin construction of their projects by December 31, 2024 to avoid the extra hurdles imposed by the new technology-neutral framework.
• If the energy project concept truly is a thing of the past, this may have consequences for determining whether a project satisfies the “less than one megawatt” exception for prevailing wages; the test for this exception under previous guidance relied on this concept.

New technologies eligible for tax credits

In its announcement, the IRS made clear that seven approved technologies will definitely be eligible: solar, wind, nuclear fusion, nuclear fission, marine and hydrokinetic power, geothermal, and conversion of waste heat from the other six technologies. The addition of nuclear in particular is potentially significant, and reflective of a generally pro-nuclear approach in the IRA (separate production tax credits are also available under Sections 45J and 45U of the Code), although the ability of either technology to benefit from these credits may depend on how effectively the federal government can implement permitting reforms for nuclear facilities.

Changes to eligibility and claims criteria

Developers of these technologies can already begin planning for life under the new rules, which will govern all projects beginning construction after December 31st of this year and may govern projects already under construction but not yet in service by January 1st, 2025; developers of those projects will have a choice between the tech-neutral credits and the old, technology-specific credits under Sections 48 and 45. The good news is that life under the new framework should be largely similar to the old guidelines; Section 48E includes similar provisions to the original Section 48 regarding prevailing wages, apprenticeship requirements, bonus credits for projects located in energy communities, and domestic content. However, there are a few key differences, some of which make access to the credit even more accessible.

1. No sale requirement: Taxpayers can get credit for electricity that is consumed, stored or sold to a related party so long as the relevant energy facility is “equipped with a metering device that is owned and operated by an unrelated person.” Sale of electricity to an unrelated party is no longer required under Section 45Y and 48E.

The regulations outline requirements for the metering device, such as (1) being revenue grade, (2) having a +/- 0.5% accuracy, and (3) being properly calibrated. These changes will increase access to the electricity credits for taxpayers who want to use the energy they produce, including, for example, clean hydrogen producers using electrolysis. However, comment letters have raised concerns that the metering requirements should not be too tightly regulated to enable unelectrified areas to participate in the credit.

2. Tech-neutral low-income communities bonus: The new investment tax credit introduces a low-income communities bonus credit in Section 48E(h). Like the old credit, the new credit offers a 10% to 20% increase in the energy percentage for facilities that meet specific criteria, such as being located in low-income census tracts or on Tribal land, being built on low-income residential facilities, or providing more than half of their benefits to low income individuals. The availability of this increased credit is also capped at 1.8GW per year. But notably, the new credit does not seem to be limited to specific technologies; this is a change from the previous credit, which primarily applied to solar and wind projects and connected storage. This aspect will be important to monitor once guidance is released, as truly technology-neutral credits could lead to an even more oversubscribed application process than developers currently face.

3. No “energy project” concept:  The regulations for 48E do not seem to include the same “energy project” concept included in the existing investment tax credit under Section 48.  While this could be an omission, it is likely reflective of how the text of 48E uses the term “qualified facility” (similar to both the new and old production tax credits) instead of “project.” This change is likely permanent and could alter how facilities, particularly solar facilities, are claimed and registered for transfer. Currently, closely related energy properties can be considered one “energy project” and registered together for investment tax credit purposes. However, under the production tax credits, each wind tower must be registered as an individual facility for the transfer of production tax credits under Section 45; the equivalent for solar projects is likely registration for each inverter.

Although this change may seem purely administrative, one interesting question it raises is its implications for the one-megawatt exception to prevailing wage and apprenticeship requirements. The concept of an “energy project” was key to interpretive guidance released in November 2023 on when to aggregate equipment together for purposes of determining whether it constituted a project of at least one megawatt in nameplate capacity.  Projects of less than one megawatt in capacity are exempted from the requirement under Section 48 to use prevailing wages and employ apprentices. Section 48E has similar requirements, and it's unclear whether the IRS will adopt the existing aggregation guidelines from Section 45 or create a new test. In its June 2024 prevailing wage and apprenticeship regulations, the IRS promised to release additional guidance on this matter.

4. Credit Phase-out: The credits will be available for projects that begin construction before 2033 or until emissions fall below 25% of 2022 levels. This update provides more long-term certainty compared to previous credits that had fixed expiration dates. The criteria for determining when the credits will be phased out are still being refined.

Final thoughts

While the new credit framework may not significantly alter the landscape for many existing renewable energy developers—primarily resulting in technical adjustments regarding credit reporting and transfer—it represents a potential game-changer for developers of combustion and gasification technologies. Furthermore, developers of non-renewable resources like nuclear that now qualify under the new zero-emission standard, may find substantial opportunities for growth and innovation. As the industry adapts to these changes, the impact of the new credits will be crucial in shaping the future of clean energy development.