Proposed Rule2024-11719
Section 45Y Clean Electricity Production Credit and Section 48E Clean Electricity Investment Credit
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
June 3, 2024
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains proposed regulations relating to the clean electricity production credit and the clean electricity investment credit established by the Inflation Reduction Act of 2022. The proposed regulations would provide rules for: determining greenhouse gas emissions rates resulting from the production of electricity; petitioning for provisional emissions rates; and determining eligibility for these credits in various circumstances. The proposed regulations would affect all taxpayers who produce clean electricity and claim the clean electricity production credit with respect to a facility or the clean electricity investment credit with respect to a facility or energy storage technology, as applicable, that is placed in service after 2024. This document also provides notice of a public hearing on the proposed regulations.
Full Text
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<title>Federal Register, Volume 89 Issue 107 (Monday, June 3, 2024)</title>
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[Federal Register Volume 89, Number 107 (Monday, June 3, 2024)]
[Proposed Rules]
[Pages 47792-47846]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-11719]
[[Page 47791]]
Vol. 89
Monday,
No. 107
June 3, 2024
Part III
Department of the Treasury
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Internal Revenue Service
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26 CFR Part 1
Section 45Y Clean Electricity Production Credit and Section 48E Clean
Electricity Investment Credit; Proposed Rule
Federal Register / Vol. 89, No. 107 / Monday, June 3, 2024 / Proposed
Rules
[[Page 47792]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-119283-23]
RIN 1545-BR17
Section 45Y Clean Electricity Production Credit and Section 48E
Clean Electricity Investment Credit
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations relating to the
clean electricity production credit and the clean electricity
investment credit established by the Inflation Reduction Act of 2022.
The proposed regulations would provide rules for: determining
greenhouse gas emissions rates resulting from the production of
electricity; petitioning for provisional emissions rates; and
determining eligibility for these credits in various circumstances. The
proposed regulations would affect all taxpayers who produce clean
electricity and claim the clean electricity production credit with
respect to a facility or the clean electricity investment credit with
respect to a facility or energy storage technology, as applicable, that
is placed in service after 2024. This document also provides notice of
a public hearing on the proposed regulations.
DATES: Written or electronic comments must be received by August 2,
2024. The public hearing on these proposed regulations is scheduled to
be held on August 12, 2024, at 10 a.m. (ET) and August 13, 2024, at 10
a.m. (ET). On August 13, 2024, the public hearing will be held by
telephone only. Requests to speak and outlines of topics to be
discussed at the public hearing must be received by August 2, 2024. If
no outlines are received by August 2, 2024, the public hearing will be
cancelled.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically via the Federal eRulemaking Portal at <a href="https://www.regulations.gov">https://www.regulations.gov</a> (indicate IRS and REG-119283-23) by following the
online instructions for submitting comments. Once submitted to the
Federal eRulemaking Portal, comments cannot be edited or withdrawn. The
Department of the Treasury (Treasury Department) and the IRS will
publish for public availability any comments submitted to the IRS's
public docket. Send paper submissions to: CC:PA:01:PR (REG-119283-23),
Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin
Station, Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning these proposed regulations,
the Office of Chief Counsel (Passthroughs and Special Industries) at
(202) 317-6853 (not a toll-free number); concerning submissions of
comments or the public hearing, Vivian Hayes at (202) 317-6901 (not a
toll-free number) or by email to <a href="/cdn-cgi/l/email-protection#f9898c9b95909a919c988b90979e8ab9908b8ad79e968f"><span class="__cf_email__" data-cfemail="512124333d383239343023383f3622113823227f363e27">[email protected]</span></a> (preferred).
SUPPLEMENTARY INFORMATION:
Background
This notice of proposed rulemaking contains proposed amendments to
the Income Tax Regulations (26 CFR part 1) to implement sections 45Y
and 48E of the Internal Revenue Code (Code), which generally replace
sections 45 and 48 of the Code with respect to qualified facilities,
and for section 48E, with respect to energy storage technology, that is
placed in service after December 31, 2024.
The renewable electricity production credit determined under
section 45 of the Code (section 45 credit) is generally available for
qualified facilities described in section 45(d), which provides that
the construction of the qualified facilities must begin before January
1, 2025. Similarly, other than for geothermal heat pump equipment
(described in section 48(a)(3)(vii) \1\), the energy credit determined
under section 48 of the Code (section 48 credit), which is an
investment credit under section 46 of the Code, is generally available
for energy property the construction of which begins before January 1,
2025. Therefore, as long as construction begins on the relevant
qualified facility or energy property before January 1, 2025, a
taxpayer may be able to claim a section 45 credit or section 48 credit,
respectively, even if the taxpayer places the qualified facility or
energy property in service after December 31, 2024.
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\1\ Section 48(a)(3)(vii) includes as energy property equipment
that uses the ground or ground water as a thermal energy source to
heat a structure or as a thermal energy sink to cool a structure
(geothermal heat pump property), but only with respect to property
the construction of which begins before January 1, 2035.
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Sections 45Y and 48E were added to the Code, respectively, by
sections 13701(a) and 13702(a) of Public Law 117-169, 136 Stat. 1818,
1982 (August 16, 2022), commonly referred to as the Inflation Reduction
Act of 2022 (IRA). Section 13701(c) of the IRA provides that the clean
electricity production credit determined under section 45Y (section 45Y
credit) applies to facilities placed in service after December 31,
2024. Similarly, section 13702(c) of the IRA provides that the clean
electricity investment credit determined under section 48E (section 48E
credit) applies to property placed in service after December 31, 2024.
Thus, in some cases, if a taxpayer places in service a qualified
facility or energy property after 2024, the construction of which
begins before 2025, the qualified facility or energy property may be
eligible for more than one of the credits determined under section 45,
45Y, 48, or 48E, although a taxpayer can only claim one of these
credits with respect to such qualified facility or energy property.
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.
I. Overview of Section 45Y
Section 45Y(a)(1) provides that for purposes of the general
business credit under section 38 of the Code, the section 45Y credit
for any taxable year is an amount equal to the product of the kilowatt
hours (kWh) of eligible electricity produced by the taxpayer at a
qualified facility, multiplied by the applicable amount with respect to
such qualified facility. For this purpose, eligible electricity is
electricity that is either (1) sold by the taxpayer to an unrelated
person during the taxable year or (2) in the case of a qualified
facility that is equipped with a metering device that is owned and
operated by an unrelated person, sold, consumed, or stored by the
taxpayer during the taxable year.
A. Amount of Credit
For purposes of the applicable amount used in calculating the
section 45Y credit, section 45Y(a)(2) provides a base amount and a
higher alternative amount. Section 45Y(a)(2)(A) provides that the
applicable amount will be the base amount of 0.3 cents in the case of a
qualified facility that does not satisfy the requirements for the
higher alternative amount. Section 45Y(a)(2)(B) provides that the
alternative amount of 1.5 cents applies in the case of any qualified
facility (1) with a maximum net output of less than 1 megawatt (as
measured in alternating current), (2) the construction of which begins
prior to the date that is 60 days after the Secretary of the Treasury
or her delegate
[[Page 47793]]
(Secretary) publishes guidance on the requirements of section 45Y(g)(9)
(wage requirements) and section 45Y(g)(10) (apprenticeship
requirements),\2\ or (3) that satisfies section 45Y(g)(9) and, with
respect to the construction of such facility, satisfies section
45Y(g)(10).
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\2\ To meet this requirement, the construction of the qualified
facility must begin prior to January 29, 2023. See proposed Sec.
1.45Y-3 as proposed in the notice of proposed rulemaking (REG-
100908-23) published in the Federal Register (88 FR 60018) on August
30, 2023, and corrected at 88 FR 73807 on October 27, 2023.
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Section 45Y(c)(1) provides for an inflation adjustment for both the
base and alternative amounts. Section 45Y(c)(1) provides that in the
case of a calendar year beginning after 2024, the 0.3 cent amount in
section 45Y(a)(2)(A) and the 1.5 cent amount in section 45Y(a)(2)(B)
will each be adjusted by multiplying such amount by the inflation
adjustment factor for the calendar year in which the sale, consumption,
or storage of the electricity occurs. Section 45Y(c)(1) also addresses
the rounding rules to be applied to this computation. Section 45Y(c)(2)
provides that the Secretary will, not later than April 1 of each
calendar year, determine and publish in the Federal Register the
inflation adjustment factor for such calendar year in accordance with
section 45Y(c).
Section 45Y(g)(7) provides for an increase in the section 45Y
credit amount for any qualified facility located in an energy
community, and section 45Y(g)(11) provides for an increase in the
section 45Y credit amount if the domestic content bonus requirement is
satisfied.
Section 45Y(g)(7) provides that in the case of any qualified
facility that is located in an energy community (as defined in section
45(b)(11)(B)), for purposes of determining the amount of the credit
under section 45Y(a) with respect to any electricity produced by the
taxpayer at such facility during the taxable year, the applicable
amount under section 45Y(a)(2) will be increased by an amount equal to
10 percent of the amount otherwise in effect under such paragraph.
Section 45Y(g)(11) provides that in the case of any qualified
facility that satisfies the domestic content bonus requirement under
section 45Y(g)(11)(B)(i), the amount of the credit determined under
section 45Y(a) will be increased by an amount equal to 10 percent of
the amount so determined (as determined without application of section
45Y(g)(7)). Section 45Y(g)(11)(B)(i) generally provides that the
domestic content bonus requirement is satisfied with respect to any
qualified facility if the taxpayer certifies to the Secretary (at such
time, and in such form and manner, as the Secretary may prescribe) that
any steel, iron, or manufactured product that is a component of such
facility (upon completion of construction) was produced in the United
States (as determined under section 661 of title 49, Code of Federal
Regulations). Section 45Y(g)(11)(B)(iii) provides that for purposes of
the domestic content bonus requirement, the manufactured products that
are components of a qualified facility upon completion of construction
will be deemed to have been produced in the United States if not less
than the adjusted percentage (as determined under section
45Y(g)(11)(C)) of the total cost of all such manufactured products of
such facility are attributable to manufactured products (including
components) that are mined, produced, or manufactured in the United
States.
B. Qualified Facility
Section 45Y(b) provides guidance on the meaning of a qualified
facility for purposes of section 45Y. Subject to section 45Y(b)(1)(B)
through (D), section 45Y(b)(1)(A) defines a qualified facility to mean
a facility owned by the taxpayer that is used for the generation of
electricity, that is placed in service after December 31, 2024, and for
which the greenhouse gas emissions rate (as determined under section
45Y(b)(2)) is not greater than zero.
Section 45Y(b)(1)(B) provides that for purposes of section 45Y, a
facility will only be treated as a qualified facility during the 10-
year period beginning on the date the facility was originally placed in
service.
Section 45Y(b)(1)(C) provides that a qualified facility will
include a new unit or any additions of capacity that are placed in
service after December 31, 2024, if in connection with a facility
described in section 45Y(b)(1)(A) (without regard to section
45Y(b)(1)(A)(ii) describing the requirement that the facility be placed
in service after December 31, 2024) that was placed in service before
January 1, 2025, but only to the extent of the increased amount of
electricity produced at the facility due to the new unit or addition of
capacity.
Section 45Y(b)(1)(D) provides that a qualified facility will not
include any facility for which a credit determined under section 45,
45J, 45Q, 45U, 48, 48A, or 48E of the Code is allowed under section 38
for the taxable year or any prior taxable year.
Section 45Y(b)(2) describes the greenhouse gas emissions rate
referenced in section 45Y(b)(1)(A)(iii). Section 45Y(b)(2)(A) defines
greenhouse gas emissions rate for purposes of section 45Y to mean the
amount of greenhouse gases emitted into the atmosphere by a facility in
the production of electricity, expressed as grams of CO<INF>2</INF>e
per kWh. Section 45Y(e)(1) defines CO<INF>2</INF>e per kWh for purposes
of section 45Y to mean, with respect to any greenhouse gas, the
equivalent carbon dioxide (as determined based on global warming
potential) per kWh of electricity produced. Section 45Y(e)(2) defines
greenhouse gas for purposes of section 45Y to have the same meaning
given such term under section 211(o)(1)(G) of the Clean Air Act (CAA)
(42 U.S.C. 7545(o)(1)(G)) as in effect on August 16, 2022.
Section 45Y(b)(2)(B) provides that in the case of a facility that
produces electricity through combustion or gasification, the greenhouse
gas emissions rate (GHG emissions rate) for such facility is equal to
the net rate of greenhouse gases emitted into the atmosphere by such
facility (taking into account lifecycle greenhouse gas emissions, as
described in section 211(o)(1)(H) of the CAA (42 U.S.C. 7545(o)(1)(H)))
in the production of electricity, expressed as grams of CO<INF>2</INF>e
per kWh.
Section 45Y(b)(2)(C) provides for the establishment of GHG
emissions rates for facilities either through the publication of
emissions rates described in section 45Y(b)(2)(C)(i) or a provisional
emissions rate as described in section 45Y(b)(2)(C)(ii). Section
45Y(b)(2)(C)(i) states that the Secretary will annually publish a table
that sets forth the GHG emissions rates for types or categories of
facilities, that a taxpayer will use for purposes of section 45Y.
Section 45Y(b)(2)(C)(ii) provides that in the case of any facility for
which a GHG emissions rate has not been established by the Secretary, a
taxpayer that owns such facility may file a petition with the Secretary
for determination of the GHG emissions rate with respect to such
facility.
Section 45Y(b)(2)(D) provides that for purposes of section 45Y(b)
the amount of greenhouse gases emitted into the atmosphere by a
facility in the production of electricity cannot include any qualified
carbon dioxide that is captured by the taxpayer and either (1) disposed
of by the taxpayer in secure geological storage pursuant to any
regulations established under section 45Q(f)(2), or (2) utilized by the
taxpayer in a manner described in section 45Q(f)(5). Section 45Y(e)(3)
defines qualified carbon dioxide for purposes of
[[Page 47794]]
section 45Y to mean carbon dioxide captured from an industrial source
that would otherwise be released into the atmosphere as industrial
emission of greenhouse gas, is measured at the source of capture and
verified at the point of disposal or utilization, and is captured and
disposed or utilized within the United States (within the meaning of
section 638(1) of the Code) or a United States territory, which for
purposes of section 45Y and the section 45Y regulations has the meaning
of the term ``possession'' of the United States (within the meaning of
section 638(2)).
C. Credit Phase-Out
Section 45Y(d) describes the credit phase-out. Section 45Y(d)(1)
provides generally that the amount of the clean electricity production
credit under section 45Y(a) for any qualified facility the construction
of which begins during a calendar year described in section 45Y(d)(2)
is equal to the product of the amount of the credit determined under
section 45Y(a) without regard to section 45Y(d), multiplied by the
phase-out percentage under section 45Y(d)(2). Section 45Y(d)(2)
provides that the phase-out percentage is 100 percent for a facility
the construction of which begins during the first calendar year
following the applicable year; 75 percent for a facility the
construction of which begins during the second calendar year following
the applicable year; 50 percent for a facility the construction of
which begins during the third calendar year following the applicable
year; and 0 percent for a facility the construction of which begins
during any calendar year subsequent to the calendar year described in
section 45Y(d)(2)(C). Section 45Y(d)(3) defines the ``applicable year''
for purposes of section 45Y(d) to mean the later of the calendar year
in which the Secretary determines that the annual greenhouse gas
emissions from the production of electricity in the United States are
equal to or less than 25 percent of the annual greenhouse gas emissions
from the production of electricity in the United States for calendar
year 2022, or 2032.
D. Special Rules
Section 45Y(g) provides special rules for section 45Y. Section
45Y(g)(1) provides that consumption, sales, or storage is taken into
account under section 45Y only with respect to electricity the
production of which is within the United States (within the meaning of
section 638(1)), or a United States territory, which for purposes of
section 45Y and the section 45Y regulations has the meaning of the term
``possession'' of the United States (within the meaning of section
638(2)).
Section 45Y(g)(2) provides a rule for combined heat and power
system (CHP) property. For purposes of section 45Y(a), section
45Y(g)(2)(A) generally provides that the kWh of electricity produced by
a taxpayer at a qualified facility will include any production in the
form of useful thermal energy by any CHP property within such facility,
and the amount of greenhouse gases emitted into the atmosphere by such
facility in the production of such useful thermal energy will be
included for purposes of determining the GHG emissions rate for such
facility. Section 45Y(g)(2)(B) defines CHP property for purposes of
section 45Y(g)(2) to have the same meaning given such term by section
48(c)(3) (without regard to section 48(c)(3)(A)(iv), (B), and (D)
thereof). Section 45Y(g)(2)(C) provides the necessary conversion from
BTU to kWh for a taxpayer to calculate a section 45Y credit for useful
thermal energy produced by a CHP property.
Section 45Y(g)(3) provides that in the case of a qualified facility
in which more than one person has an ownership interest, except to the
extent provided in regulations prescribed by the Secretary, production
from the facility will be allocated among such persons in proportion to
their respective ownership interests in the gross sales from such
facility.
Section 45Y(g)(4) provides that persons will be treated as related
to each other if such persons would be treated as a single employer
under the regulations prescribed under section 52(b). In the case of a
corporation that is a member of an affiliated group of corporations
filing a consolidated return, such corporation will be treated as
selling electricity to an unrelated person if such electricity is sold
to such a person by another member of such group.
Section 45Y(g)(5) provides that under regulations prescribed by the
Secretary, rules similar to the rules of section 52(d) will apply to a
pass-thru in the case of estates and trusts.
Section 45Y(g)(6) provides for the allocation of the credit to
patrons of an agricultural cooperative.
Section 45Y(g)(8) provides that rules similar to the rules of
section 45(b)(3) will apply to a credit reduced for tax-exempt bonds.
Section 45Y(g)(9) provides that rules similar to the rules of
section 45(b)(7) apply with respect to wage requirements. Section
45Y(g)(10) provides rules similar to the rules of section 45(b)(8)
apply with respect to apprenticeship requirements.
II. Overview of Section 48E
For purposes of the general business credit under section 38, which
includes the investment credit under section 46, section 48E(a)(1)
provides a credit for any taxable year in which a qualified investment
is made with respect to any qualified facility and any energy storage
technology (EST).
A. Amount of Credit
The amount of the section 48E credit is equal to the applicable
percentage of the qualified investment in any qualified facility and
any EST. Section 48(E)(a)(2) provides a base rate and a higher
alternative rate for the applicable percentage. Section 48E(a)(2)(A)(i)
provides that in the case of a qualified facility that does not satisfy
the requirements for the higher alternative rate, the base rate will be
6 percent. Section 48E(a)(2)(A)(ii) provides that the alternative rate
of 30 percent applies in the case of any qualified facility (1) with a
maximum net output of less than 1 megawatt (as measured in alternating
current), (2) the construction of which begins prior to the date that
is 60 days after the Secretary publishes guidance on the prevailing
wage requirements of section 48E(d)(3) and the apprenticeship
requirements of section 48E(d)(4),\3\ or (3) that satisfies the
prevailing wage requirements of section 48E(d)(3) and, with respect to
the construction of such facility, satisfies the apprenticeship
requirements of section 48E(d)(4).
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\3\ To meet this requirement, the construction of the qualified
facility must begin prior to January 29, 2023. See proposed Sec.
1.48E-3 as proposed in the notice of proposed rulemaking (REG-
100908-23) published in the Federal Register (88 FR 60018) on August
30, 2023, and corrected at 88 FR 73807 on October 27, 2023.
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Similarly, section 48E(a)(2)(B)(ii) provides that the alternative
rate of 30 percent applies in the case of an EST (1) with a capacity of
less than 1 megawatt, (2) the construction of which begins prior to the
date that is 60 days after the Secretary publishes guidance on the
requirements of section 48E(d)(3) and (4) \4\ (prevailing wage and
apprenticeship requirements, respectively), or (3) that satisfies
section 48E(d)(3) and with respect to the construction of such EST,
satisfies section 48E(d)(4). Section 48E(a)(2)(B)(i) provides that in
the case of an EST that does not satisfy the requirements for the
[[Page 47795]]
alternative rate, the base rate will be 6 percent.
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\4\ To meet this requirement, the construction of the EST must
begin prior to January 29, 2023. See proposed Sec. 1.48E-3 as
proposed in the notice of proposed rulemaking (REG-100908-23)
published in the Federal Register at 88 FR 60018 on August 30, 2023,
and corrected at 88 FR 73807 on October 27, 2023.
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Section 48E(a)(3)(A) provides for an increase in credit rate for a
qualified facility or EST located in an energy community (as defined in
section 45(b)(11)(B)) and section 48E(a)(3)(B) similarly provides for
an increase in credit rate for a qualified facility or EST that meets
the domestic content bonus requirements.
B. Qualified Investment With Respect to a Qualified Facility
Section 48E(b) describes a qualified investment with respect to a
qualified facility. Generally, for purposes of section 48E(a), section
48E(b)(1)(A) and (B)(i) provide that the qualified investment with
respect to a qualified facility for any taxable year is the sum of the
basis of any qualified property placed in service by the taxpayer
during such taxable year that is part of a qualified facility, plus the
amount of expenditures that are paid or incurred by the taxpayer for
qualified interconnection property that is properly chargeable to
capital account of the taxpayer.
Section 48E(b)(2) provides that for purposes of section 48E,
qualified property means property that is tangible personal property,
or other tangible property (not including a building or its structural
components), but only if such property is used as an integral part of
the qualified facility; with respect to which depreciation (or
amortization in lieu of depreciation) is allowable; and the
construction, reconstruction, or erection of which is completed by the
taxpayer, or that is acquired by the taxpayer provided the original use
of such property commences with the taxpayer.
Section 48E(b)(1)(B)(i)(I) and (II) provide that qualified
interconnection property must be in connection with a qualified
facility that has a maximum net output of not greater than 5 megawatts
(as measured in alternating current) and be placed in service during
the taxable year of the taxpayer. Section 48E(b)(4) provides that the
term ``qualified interconnection property'' has the meaning given such
term in section 48(a)(8)(B).
Section 48E(b)(3)(A) provides that for purposes of section 48E, the
term ``qualified facility'' means a facility that is used for the
generation of electricity, which is placed in service after December
31, 2024, and for which the anticipated GHG emissions rate (as
determined under section 48E(b)(3)(B)(ii)) is not greater than zero.
Section 48E(b)(3)(B) provides additional rules for a qualified
facility. Section 48E(b)(3)(B)(i) provides rules on an expansion of
facility and incremental production stating that rules similar to the
rules of section 45Y(b)(1)(C) apply for purposes of section 48E(b)(3).
Section 48E(b)(3)(B)(ii) provides rules to determine the GHG emissions
rate of a qualified facility by stating that rules similar to the rules
of section 45Y(b)(2) apply for purposes of section 48E(b)(3).
Section 48E(b)(3)(C) provides that a qualified facility will not
include any facility for which a renewable electricity production
credit determined under section 45, an advanced nuclear power facility
production credit determined under section 45J, a carbon oxide
sequestration credit determined under section 45Q, a zero-emission
nuclear power production credit determined under section 45U, a clean
electricity production credit determined under section 45Y, an energy
credit determined under section 48, or a qualifying advanced coal
project credit under section 48A, is allowed under section 38 for the
taxable year or any prior taxable year. Section 48E(b)(5) provides a
rule for coordination with the rehabilitation credit stating that the
qualified investment with respect to any qualified facility for any
taxable year will not include that portion of the basis of any property
that is attributable to qualified rehabilitation expenditures (as
defined in section 47(c)(2) of the Code).
Section 48E(b)(6) provides that for purposes of section 48E(b), the
terms ``CO<INF>2</INF>e per kWh'' and ``greenhouse gas emissions rate''
have the same meaning given such terms under section 45Y. Section
48E(f) provides that, in section 48E, the term ``greenhouse gas'' has
the same meaning given such term under section 45Y(e)(2).
C. Qualified Investment With Respect to an Energy Storage Technology
Section 48E(c) describes a qualified investment with respect to
EST. For purposes of section 48E(a), section 48E(c)(1) provides that
the qualified investment with respect to EST for any taxable year is
the basis of any EST placed in service by the taxpayer during such
taxable year. Section 48E(c)(2) provides that for purposes of section
48E, the term ``energy storage technology'' has the meaning given such
term in section 48(c)(6) (except that section 48(c)(6)(D) will not
apply). Section 48(c)(6)(A)(i) defines ``energy storage technology'' to
mean property (other than property primarily used in the transportation
of goods or individuals and not for the production of electricity) that
receives, stores, and delivers energy for conversion to electricity
(or, in the case of hydrogen, which stores energy), and has a nameplate
capacity of not less than 5 kWh. Section 48(c)(6)(A)(ii) provides that
the term ``energy storage technology'' also includes thermal energy
storage property. Section 48(c)(6)(B) describes a rule for
modifications of certain property.
Section 48(c)(6)(C)(i) defines ``thermal energy storage property''
to mean for purposes of section 48(c)(6), subject to section
48(c)(6)(C)(ii), property comprising a system that is directly
connected to a heating, ventilation, or air conditioning system,
removes heat from, or adds heat to, a storage medium for subsequent
use, and provides energy for the heating or cooling of the interior of
a residential or commercial building. Section 48(c)(6)(C)(ii) describes
the exclusion that thermal energy storage property will not include a
swimming pool, combined heat and power system property, or a building
or its structural components.
Section 48E(d) provides special rules for section 48E, all of which
refer to other provisions. Section 48E(d)(1) provides a rule for
qualified progress expenditures, stating that rules similar to the
rules of former section 46(c)(4) and (d) (as in effect on the day
before the date of the enactment of the Revenue Reconciliation Act of
1990) apply for purposes of section 48E(a).\5\ Section 48E(d)(2)
provides a special rule for property financed by subsidized energy
financing or private activity bonds, stating that rules similar to the
rules of section 45(b)(3) apply. Section 48E(d)(3) provides a rule for
prevailing wage requirements, stating that rules similar to the rules
of section 48(a)(10) apply. Likewise, section 48E(d)(4) provides a rule
for apprenticeship requirements stating that rules similar to the rules
of section 45(b)(8) apply. Lastly, section 48E(d)(5) provides a rule
for the domestic content requirement for elective payment stating that
in the case of a taxpayer making an election under section 6417 with
respect to a credit under section 48E, rules similar to the rules of
section 45Y(g)(12) apply.
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\5\ The rules provided by Sec. 1.46-5 related to qualified
progress expenditures apply for purposes of section 48E(a).
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D. Credit Phase-Out
Section 48E(e) describes the credit phase-out. Section 48E(e)(1)
provides generally that the amount of the clean electricity investment
credit under section 48E(a) for any qualified investment with respect
to any qualified facility or EST the construction of which begins
during a calendar year described in section 48E(e)(2) is equal to
[[Page 47796]]
the product of the amount of the credit determined under section 48E(a)
without regard to section 48E(e), multiplied by the phase-out
percentage under section 48E(e)(2). Section 48E(e)(2) provides that the
phase-out percentage is 100 percent for any qualified investment with
respect to any qualified facility or EST the construction of which
begins during the first calendar year following the applicable year; 75
percent for any qualified investment with respect to any qualified
facility or EST the construction of which begins during the second
calendar year following the applicable year; 50 percent for any
qualified investment with respect to any qualified facility or EST the
construction of which begins during the third calendar year following
the applicable year; and 0 percent for any qualified investment with
respect to any qualified facility or EST the construction of which
begins during any calendar year subsequent to the calendar year
described in section 48E(e)(2)(C). Section 48E(e)(3) defines the
``applicable year'' for purposes of section 48E(e) to have the same
meaning given such term in section 45Y(d)(3).
E. Recapture Rules
For purposes of the recapture rules under section 50(a), section
48E(g) provides a special recapture rule applicable to qualified
facilities. Specifically, section 48E(g) provides that, for purposes of
section 50, if the Secretary determines that the GHG emissions rate for
a qualified facility is greater than 10 grams of CO<INF>2</INF>e per
kWh, any property for which a credit was allowed under section 48E with
respect to such facility ceases to be investment credit property in the
taxable year in which the determination is made.
III. Notice 2022-49
On October 24, 2022, the Treasury Department and the IRS published
Notice 2022-49, 2022-43 I.R.B. 321. The notice requested general
comments on issues arising under sections 45Y and 48E, as well as on
issues relating to three other credits. For section 45Y, the notice
specifically requested comments concerning (1) industry standards for
taxpayer eligibility for the credit, (2) what the Treasury Department
and the IRS should consider, including around the scope and factors,
for the annual GHG emissions rate table, (3) whether guidance is needed
to clarify cases in which a metering device is owned and operated by an
unrelated person or in which electricity produced at such a qualified
facility with such a device is sold, consumed or stored by the
taxpayer, and (4) what procedures the Treasury Department and the IRS
should provide for a taxpayer whose facility does not have an emissions
rate established by the annual rate table, and what should the
Secretary consider in making such a determination. For section 48E, the
notice specifically requested comments concerning what industry
mechanisms currently exist for a taxpayer to demonstrate eligibility
for the credit.
The Treasury Department and the IRS received over 100 comments
specifically addressing sections 45Y and 48E from industry participants
and other stakeholders. The Treasury Department and the IRS appreciate
the commentors' interest and engagement on these issues. These comments
have been carefully considered in the preparation of these proposed
regulations.
IV. Prior Guidance
On August 30, 2023, the Treasury Department and the IRS published a
notice of proposed rulemaking and a notice of public hearing (REG-
100908-23) in the Federal Register (88 FR 60018), providing guidance on
the prevailing wage and registered apprenticeship (PWA) requirements
under sections 45, 45Y, 48, 48E and several other sections of the Code
(August Proposed Regulations). The August Proposed Regulations also
proposed guidance on the one-megawatt exception under sections 45, 45Y,
48, and 48E (One-Megawatt Exception). Under this exception, with
respect to certain facilities with a maximum net output (or capacity
for energy storage technology under section 48E) of less than one
megawatt, increased credit amounts are available.
On November 22, 2023, the Treasury Department and the IRS published
a notice of proposed rulemaking and a notice of public hearing (REG-
132569-17) in the Federal Register (88 FR 82188), providing guidance
under section 48 of the Code. Among other matters, the proposed
regulations under section 48 (Section 48 Proposed Regulations) withdrew
and reproposed the regulations in Sec. 1.48-13 from the August
Proposed Regulations regarding the PWA requirements under section 48,
the One-Megawatt Exception under section 48(a)(9)(B)(i), and the
recapture rules under section 48(a)(10)(C).
Explanation of Provisions
I. Rules Applicable to the Clean Electricity Production Tax Credit
The proposed regulations under section 45Y are organized in five
sections, proposed Sec. Sec. 1.45Y-1 through 1.45Y-5 (section 45Y
regulations). Proposed Sec. 1.45Y-1 would provide an overview of the
section 45Y regulations, generally applicable definitions, and general
rules applicable to section 45Y, including a rule for calculating the
credit for a CHP property. Proposed Sec. 1.45Y-2 would provide rules
relating to qualified facilities for purposes of the section 45Y
credit. Section 1.45Y-3 is reserved for rules relating to the increased
credit amount for meeting the prevailing wage and apprenticeship
requirements. A cross reference will be added to Sec. 1.45Y-3 in the
final regulations after Sec. 1.45Y-3 is finalized. Proposed Sec.
1.45Y-4 would provide the rules of general application under section
45Y, including rules that attribute production to the taxpayer, rules
for the expansion of a facility and incremental production, and rules
for retrofits of an existing facility. Proposed Sec. 1.45Y-5 would
provide rules pertaining to the determination of a GHG emissions rate
for a facility under section 45Y.
A. Amount of Credit
Proposed Sec. 1.45Y-1 would provide an overview of the section 45Y
regulations and definitions of terms for purposes of the section 45Y
regulations, including the terms ``combined heat and power system (CHP)
property,'' ``metering device,'' ``related person,'' ``unrelated
person,'' and ``qualified facility.''
Proposed Sec. 1.45Y-1(a)(5)(i) would define, for purposes of
section 45Y(a)(1)(A)(ii)(II), the term ``metering device'' as equipment
that is owned and operated by an unrelated person (as defined in
paragraph (a)(11) of this section) for energy revenue metering to
measure and register the continuous summation of an electricity
quantity with respect to time. Further, proposed Sec. 1.45Y-
1(a)(5)(ii) would provide standards for maintaining and operating a
metering device for purposes of section 45Y(a)(1)(A)(ii)(II) and
proposed Sec. 1.45Y-1(a)(5) by requiring a metering device to be
maintained in proper working order according to the instructions of its
manufacturer. Proposed Sec. 1.45Y-1(a)(5)(ii) would also provide that
a metering device should meet the requirements of the American National
Standards Institute C12.1-2022 standard, or subsequent revisions, be
revenue grade with a +/-0.5% accuracy, and be properly calibrated.
Proposed Sec. 1.45Y-1(a)(5)(iii) would provide that for purposes of
monitoring the metering device, the unrelated person may share network
equipment, such as spare fiber optic cable owned by the taxpayer that
produces the electricity, and may co-locate network
[[Page 47797]]
equipment in the taxpayer's facilities. Proposed Sec. 1.45Y-
1(a)(5)(iv) would provide examples illustrating the proposed rules
provided by proposed Sec. 1.45Y-1(a)(5).
Proposed Sec. 1.45Y-1(a)(7)(i) would provide that for purposes of
section 45Y(a), the term ``related person'' means a person who is
related to another person if such person would be treated as a single
employer under the regulations in 26 CFR chapter 1 under section 52(b)
of the Code. Proposed Sec. 1.45Y-1(a)(7)(ii) would provide that in the
case of a corporation that is a member of a consolidated group (as
defined in Sec. 1.1502-1(h)), such corporation will be treated as
selling electricity to an unrelated person if such electricity is sold
to an unrelated person by another member of such group.
Proposed Sec. 1.45Y-1(a)(11) would provide that for purposes of
section 45Y(a), the term ``unrelated person'' means a person who is not
a related person as defined in section 45Y(g)(4) and proposed Sec.
1.45Y-1(a)(7). In the case of sales of electricity to an individual
consumer, such sales will be treated as sales to an unrelated party for
purposes of the section 45Y credit. Proposed Sec. 1.45Y-1(a)(11)
provides an example illustrating the application of these rules.
Proposed Sec. 1.45Y-1(b)(1) would describe the calculation of the
section 45Y credit, providing that the credit is an amount equal to the
product of the kWh of electricity that is produced by the taxpayer at a
qualified facility (as defined in proposed Sec. 1.45Y-2(a)) and sold
by the taxpayer to an unrelated person during the taxable year,
multiplied by the applicable amount (as described in proposed Sec.
1.45Y-1(b)) with respect to such qualified facility. Proposed Sec.
1.45Y-1(b)(1) would further provide that in the case of a qualified
facility that is equipped with a metering device that is owned and
operated by an unrelated person, the section 45Y credit for any taxable
year is an amount equal to the product of the kWh of electricity that
is both produced at the qualified facility (as defined in proposed
Sec. 1.45Y-2(a)) and sold, consumed, or stored by the taxpayer during
the taxable year, multiplied by the applicable amount with respect to
such qualified facility. Proposed Sec. 1.45Y-1(b)(1) would also
provide that only one section 45Y credit may be claimed for each kWh of
electricity produced by the taxpayer at a qualified facility.
Proposed Sec. 1.45Y-1(b)(2)(i) would define the applicable amount
as the base amount described in Sec. 1.45Y-1(b)(2)(ii) or the
alternative amount described in Sec. 1.45Y-1(b)(2)(iii). Proposed
Sec. 1.45Y-1(b)(2)(i) would further provide that the applicable amount
is subject to the inflation adjustment as provided in section 45Y(c)(1)
and proposed Sec. 1.45Y-1(b)(3), and that the applicable amount may
also be increased as provided in section 45Y(g)(7)) and proposed Sec.
1.45Y-1(b)(4), in the case of a qualified facility that is located in
an energy community. Proposed Sec. 1.45Y-1(b)(2)(ii) would describe
the base amount as 0.3 cents in the case of any qualified facility that
does not satisfy the requirements provided in section 45Y(a)(2)(B).
Proposed Sec. 1.45Y-1(b)(2)(iii) would describe the alternative amount
as 1.5 cents if prevailing wage and apprenticeship requirements are
satisfied as provided in section 45Y(a)(2)(B).
Proposed Sec. 1.45Y-1(b)(3) would provide the rules related to the
inflation adjustment factor applicable to the section 45Y credit.
Proposed Sec. 1.45Y-1(b)(4) would provide the rules applicable to the
energy communities increase in credit. Proposed Sec. 1.45Y-1(b)(5)
would provide the domestic content bonus credit amount.
Proposed Sec. 1.45Y-1(c) would provide the credit phase-out rules.
Generally, proposed Sec. 1.45Y-1(c)(1) would provide that the amount
of the clean electricity production credit under section 45Y(a) for any
qualified facility the construction of which begins during a calendar
year described in section 45Y(d)(2) is equal to the product of the
amount of the credit determined under section 45Y(a) without regard to
the credit phaseout rules of section 45Y(d) (credit phase-out),
multiplied by the phase-out percentage provided in section 45Y(d)(2).
Proposed Sec. 1.45Y-1(c)(2) would provide that the phase-out
percentage is 100 percent for a facility the construction of which
begins during the first calendar year following the applicable year; 75
percent for a facility the construction of which begins during the
second calendar year following the applicable year; 50 percent for a
facility the construction of which begins during the third calendar
year following the applicable year; and 0 percent for a facility the
construction of which begins during any calendar year subsequent to the
calendar year described in section 45Y(d)(2)(C).
Proposed Sec. 1.45Y-1(c)(3) would define the ``applicable year''
for purposes of proposed Sec. 1.45Y-1(c) to mean the later of the
calendar year in which the Secretary makes the determination that the
annual greenhouse gas emissions from the production of electricity in
the United States are equal to or less than 25 percent of the annual
greenhouse gas emissions from the production of electricity in the
United States for calendar year 2022, or 2032. Proposed Sec. 1.45Y-
1(c)(4) would provide that, for the purposes of determining the
applicable year, the annual greenhouse gas emissions from the
production of electricity in the United States for any year must be
assessed separately using both the Energy Information Administration's
(EIA) Electric Power Annual, using the sum of the annual carbon dioxide
emissions data from conventional power plants and combined heat and
power plants as currently listed in Table 9.1 and the Monthly Energy
Review annual carbon dioxide emissions from the combustion of biomass
to produce electricity in the electric power sector as currently listed
in Table 11.7, and the U.S. Environmental Protection Agency (EPA)
Inventory of U.S. Greenhouse Gas Emissions and Sinks (GHGI) annual
electric power-related carbon dioxide, methane, and nitrous oxide
emissions data including carbon dioxide emissions from the combustion
of biomass to produce electricity. In the most current version of the
GHGI, annual fossil and biogenic CO<INF>2</INF> from electricity
production in the electric power sector is available in Table 2-11 and
Tables 3-120 and 3-122, respectively; and CH<INF>4</INF> and
N<INF>2</INF>O from electricity production in the electric power sector
is available in Table 3-8 and Table 3-9, respectively. Based on current
and publicly available data in the 2024 GHGI, the estimate for 2022 GHG
emissions associated with the production of electricity is 1,613
million metric tons (MMT) CO<INF>2</INF>e. Currently, explicit data on
industrial and commercial sector GHG emissions from the production of
electricity is not disaggregated from overall sectoral totals. See
GHGI, <a href="https://www.epa.gov/ghgemissions/inventory-us-greenhouse-gas-emissions-and-sinks">https://www.epa.gov/ghgemissions/inventory-us-greenhouse-gas-emissions-and-sinks</a>.
For 2022, the EIA Electric Power Annual states that the annual
carbon dioxide emissions from conventional power plants and combined
heat and power plants are 1,650 MMT, and the Monthly Energy Review
annual carbon dioxide emissions from the combustion of biomass to
produce electricity in the electric power sector are 35 MMT. Thus, the
EIA's data reflects a total of 1,685 MMT in 2022. See EIA Electric
Power Annual (<a href="https://www.eia.gov/electricity/annual">https://www.eia.gov/electricity/annual</a>); MER (<a href="https://eia.gov/totalenergy/monthly/">https://eia.gov/totalenergy/monthly/</a>).
Proposed Sec. 1.45Y-1(c)(5) would provide that, for the purposes
of determining the applicable year, the Secretary will make such
determination only if the annual greenhouse gas emissions from the
production of
[[Page 47798]]
electricity in the United States, as determined separately under both
of the data sources described in proposed Sec. 1.45Y-1(c)(4), for the
year is equal to or less than 25 percent of the annual greenhouse gas
emissions from the production of electricity in the United States for
calendar year 2022. Proposed Sec. 1.45Y-1(c)(5) would provide that if
a data source described in proposed Sec. 1.45Y-1(c)(4) becomes
unavailable (for example, it is no longer published or it does not
provide the specified data), the Secretary must designate a similar
data source to replace the unavailable data source. Requiring the
applicable year to be determined using data from the EIA's Electric
Power Annual and Monthly Energy Review and the EPA's GHGI ensures that
this important determination is made transparently and based on
reliable information. Both well-established data sources are
representative of the annual greenhouse gas emissions from the
production of electricity in the United States, but there are slight
differences in the greenhouse gases and the emissions sources covered
by each data source.
There are other United States Government greenhouse gas datasets
that could serve as the basis for the Secretary's determination as to
whether the annual greenhouse gas emissions from the production of
electricity in the United States are equal to or less than 25 percent
compared to 2022. Two such datasets are the EPA Greenhouse Gas
Reporting Program (GHGRP) and Emissions & Generation Resource
Integrated Database (eGRID). The Treasury Department and the IRS
request comment on which datasets are most appropriate to determine the
applicable year and why.
Proposed Sec. 1.45Y-1(d) would provide requirements for CHP
property and special rules for calculating the section 45Y credit for
CHP property. Proposed Sec. 1.45Y-1(d)(1) would provide that CHP
property must produce at least 20 percent of its total useful energy in
the form of thermal energy that is not used to produce electrical or
mechanical power (or combination thereof), and at least 20 percent of
its total useful energy in the form of electrical or mechanical power
(or combination thereof). Proposed Sec. 1.45Y-1(d)(1) would further
provide that the energy efficiency percentage of CHP property must
exceed 60 percent, and that these percentages are determined on a
British thermal unit (Btu) basis. Section 45Y(g)(2)(B) incorporates
these requirements by providing that the term ``combined heat and power
system property'' has the same meaning given such term by section
48(c)(3) (without regard to section 48(c)(3)(A)(iv), (B), and (D)).
Proposed Sec. 1.45Y-1(d)(2) would describe the energy efficiency
percentage of a CHP property stating that it is the fraction the
numerator of which is the total useful electrical, thermal, and
mechanical power produced by the system at normal operating rates, and
expected to be consumed in its normal application, and the denominator
of which is the lower heating value of the fuel sources for the system,
which is a measure of heat content based on the net energy content of a
combustible fuel.
Proposed Sec. 1.45Y-1(d)(3) would provide a special rule for
calculating electricity produced by CHP property. For purposes of
section 45Y(a) and proposed Sec. 1.45Y-1(b), the kWh of electricity
produced by a taxpayer at a qualified facility will include any
production in the form of useful thermal energy by any CHP property
within such facility, and the amount of greenhouse gases emitted into
the atmosphere by such facility in the production of such useful
thermal energy will be included for purposes of determining the GHG
emissions rate for such facility.
Proposed Sec. 1.45Y-1(d)(3)(ii)(A) would provide a conversion from
Btu to kWh. Proposed Sec. 1.45Y-1(d)(3)(ii))(A) would provide that for
purposes of section 45Y(g)(2)(A)(i) and Sec. 1.45Y-1(d)(3), the amount
of kWh of electricity produced in the form of useful thermal energy is
equal to the quotient of the total useful thermal energy produced by
the CHP property within the qualified facility, divided by the heat
rate for such facility.
Proposed Sec. 1.45Y-1(d)(3)(ii)(B) would define the term ``heat
rate'' to mean the amount of energy used by the qualified facility to
generate 1 kWh of electricity, expressed as Btus per net kWh generated.
In calculating the heat rate of a qualified facility that includes CHP
property that uses combustion, a taxpayer must use the annual average
heat rate, defined as the total annual fuel consumption of the CHP
property (in Btus, using the lower heating value of the fuel) during
the taxable year for which the section 45Y credit is claimed, divided
by the annual net electricity generation (in kWh) of the CHP property
during such taxable year.
Section 45Y(g)(2), by cross reference to section 48(c)(3), requires
that the energy efficiency percentage of the CHP property must exceed
60 percent, calculated as (1) the total useful electrical, thermal, and
mechanical power produced by the system at normal operating rates, and
expected to be consumed in its normal application, divided by (2) the
lower heating value (LHV) of the fuel sources for the system. The LHV
is calculated based on combustion. Some CHP property may not involve
combustion, such as nuclear cogeneration. In these scenarios, because
there is no calculable LHV, the energy efficiency percentage of the CHP
property cannot be determined using the calculation provided in the
statute.
The Treasury Department and the IRS request comments regarding the
application of the energy efficiency percentage requirements to CHP
property for which there is no combustion. Relatedly, comment is
requested on whether the existing definition of heat rate provided in
section 45Y(g)(2)(C)(ii) for purposes of calculating the section 45Y
credit for CHP property that does not use combustion should be
clarified.
B. Qualified Facility
Proposed Sec. 1.45Y-2(a) would define a ``qualified facility'' to
mean a facility owned by the taxpayer and used for the generation of
electricity, that is placed in service after December 31, 2024, and has
a GHG emissions rate of not greater than zero (as determined under
rules provided in proposed Sec. 1.45Y-5).
1. Property Included in Qualified Facility
Proposed Sec. 1.45Y-2(b) would provide a description of the
property included in a qualified facility. Proposed Sec. 1.45Y-2(b)(1)
would provide that a qualified facility includes a unit of qualified
facility (as defined in proposed Sec. 1.45Y-2(b)(2)(i)) that meets the
requirements of proposed Sec. 1.45Y-2(b)(2)(ii). Proposed Sec. 1.45Y-
2(b)(1) would provide that a qualified facility also includes qualified
property owned by the taxpayer that is an integral part of a qualified
facility (as defined in proposed Sec. 1.45Y-2(b)(3)). Section 45Y is
silent regarding the credit eligibility of components that are part of
a qualified facility but located in different locations. Proposed Sec.
1.45Y-2(b)(1) would clarify that any property that meets the
requirements of a qualified facility described in proposed Sec. 1.45Y-
2(b) is part of a qualified facility, regardless of where such property
is located. Proposed Sec. 1.45Y-2(b)(1) would provide that a qualified
facility also generally does not include equipment that is an addition
or modification to an existing qualified facility, however, proposed
Sec. 1.45Y-2(b)(1) would reference proposed Sec. 1.45Y-4(c) for rules
regarding the expansion of a facility or incremental production and
proposed Sec. 1.45Y-4(d) for rules regarding a retrofitted qualified
facility (80/20 Rule).
[[Page 47799]]
2. Unit of Qualified Facility
Proposed Sec. 1.45Y-2(b)(2)(i) would provide that for purposes of
the section 45Y credit, the unit of qualified facility includes all
functionally interdependent components of property (as defined in
proposed Sec. 1.45Y-2(b)(2)(ii)) owned by the taxpayer that are
operated together and that can operate apart from other property to
produce electricity. Proposed Sec. 1.45Y-2(b)(2)(i) would clarify that
no provision of proposed Sec. 1.45Y-1, or proposed Sec. 1.45Y-4
through Sec. 1.45Y-5 uses the term ``unit'' in respect of a qualified
facility with any meaning other than that provided in proposed Sec.
1.45Y-2(b)(2)(i). A reference to Sec. 1.45Y-3 will also be added to
the previous sentence in proposed Sec. 1.45Y-2(b)(2)(i) when proposed
Sec. 1.45Y-2(b)(2)(i) is finalized, but it cannot be added until Sec.
1.45Y-3 is finalized.
Proposed Sec. 1.45Y-2(b)(2)(ii) would provide that components are
functionally interdependent if placing in service each component is
dependent upon placing in service other components to produce
electricity. See the discussion in section I.A. of the Explanation of
Provisions regarding the special rule for CHP property.
3. Integral Part
Proposed Sec. 1.45Y-2(b)(3)(i) would provide that for purposes of
thesection 45Ycredit, a component of property owned by a taxpayer is an
integral part of a facility if it is used directly in the intended
function of the qualified facility and is essential to the completeness
of such function.
Proposed Sec. 1.45Y-2(b)(3)(ii) would provide that components of
property that are an integral part of a qualified facility include
power conditioning equipment and transfer equipment. Proposed Sec.
1.45Y-2(b)(3)(ii) would provide that power conditioning equipment
includes equipment that modifies the characteristics of electricity
into a form suitable for use or transmission or distribution. Proposed
Sec. 1.45Y-2(b)(3)(ii) would provide that parts related to the
functioning or protection of power conditioning equipment are also
treated as power conditioning equipment and includes examples.
Proposed Sec. 1.45Y-2(b)(3)(ii) would provide that transfer
equipment includes components that permit the aggregation of
electricity generated by components of qualified facilities and
components that alter voltage in order to permit transfer to a
transmission or distribution line. Proposed Sec. 1.45Y-2(b)(3)(ii)
would also clarify that transfer equipment does not include
transmission or distribution lines. Proposed Sec. 1.45Y-2(b)(3)(ii)
would provide that examples of transfer equipment include, but are not
limited to, wires, cables, and combiner boxes that conduct electricity.
Proposed Sec. 1.45Y-2(b)(3)(ii) would provide that parts related to
the functioning or protection of transfer equipment are also treated as
transfer equipment and include examples.
Proposed Sec. 1.45Y-2(b)(3)(iii) would provide that roads that are
an integral part of a qualified facility are those roads integral to
the intended function of the qualified facility, such as onsite roads
that are used to operate and maintain the qualified facility. Proposed
Sec. 1.45Y-2(b)(3)(iii) would also clarify that roads used primarily
for access to the site, or roads used primarily for employee or visitor
vehicles, are not integral to the intended function of the qualified
facility and thus are not an integral part of a qualified facility.
Proposed Sec. 1.45Y-2(b)(3)(iv) and (v) would also provide that
fences and buildings (also referred to as structures) are generally not
integral parts of a qualified facility because they are not integral to
the intended function of the qualified facility. However, a building
(or structure) may be an integral part of a qualified facility if it is
essentially an item of machinery or equipment and a structure that
houses components of property that are integral to the intended
function of the qualified facility if the use of the structure is so
closely related to the use of the housed components of property therein
that the structure clearly can be expected to be replaced if the
components of property it initially houses are replaced.
Proposed Sec. 1.45Y-2(b)(3)(vi) would provide a rule for shared
integral property by stating that multiple qualified facilities
(whether owned directly by one or more taxpayers), including qualified
facilities with respect to which a taxpayer has claimed a credit under
section 45Y or section 48E, may include shared property that can be
considered an integral part of each qualified facility. Proposed Sec.
1.45Y-2(b)(3)(vi) would also provide that a component of property that
is shared by a qualified facility (as defined in section 45Y(b)) (45Y
Qualified Facility) and a qualified facility (as defined in section
48E(b)(3)) (48E Qualified Facility) that is an integral part of both
qualified facilities will not affect the eligibility of the section 45Y
Qualified Facility to claim the section 45Y credit or the section 48E
Qualified Facility to claim a section 48E credit. Proposed Sec. 1.45Y-
2(b)(3)(vii) would provide examples illustrating proposed Sec. 1.45Y-
2(b)(3).
4. Coordination With Other Credits
Proposed Sec. 1.45Y-2(c)(1) would provide that the term
``qualified facility'' (as defined in section 45Y(b)) will not include
any facility for which a credit determined under section 45, 45J, 45Q,
45U, 48, 48A, or 48E is allowed under section 38 of the Code for the
taxable year or any prior taxable year. Proposed Sec. 1.45Y-2(c)(1)
would further clarify that a taxpayer that directly owns a qualified
facility (as defined in section 45Y(b)) that is eligible for both a
section 45Y credit and another Federal income tax credit is eligible
for the section 45Y credit only if the other Federal income tax credit
was not allowed with respect to the qualified facility. Proposed Sec.
1.45Y-2(c)(1) would also add that nothing in Sec. 1.45Y-2(c) precludes
a taxpayer from claiming a section 45Y credit with respect to a
qualified facility (as defined in section 45Y(b)) that is co-located
with another facility for which a credit determined under section 45,
45J, 45Q, 45U, 48, 48A, or 48E is allowed under section 38 for the
taxable year or any prior taxable year. Proposed Sec. 1.45Y-2(c)(2)
would clarify that for purposes of proposed Sec. 1.45Y-2(c)(1), the
term ``allowed'' only includes credits that taxpayers have claimed on a
Federal income tax return or Federal return, as appropriate, and that
the IRS has not challenged in terms of the taxpayer's eligibility.
Proposed Sec. 1.45Y-2(c)(3) includes several examples illustrating the
rules of Sec. 1.45Y-2(c).
C. Rules of General Application to Section 45Y
1. Only Production in the United States Taken Into Account
Proposed Sec. 1.45Y-4(a) would provide that consumption, sales, or
storage of electricity are taken into account for purposes of the
section 45Y credit only with respect to electricity produced within the
United States (as defined in section 638(1)), or a United States
territory, which for purposes of section 45Y and the section 45Y
regulations has the meaning of the term ``possession'' of the United
States (as defined in section 638(2)).
2. Production Attributable to the Taxpayer and Section 761(a) Elections
Proposed Sec. 1.45Y-4(b)(1) would provide that in the case of a
qualified facility in which more than one person has an ownership share
(and such arrangement is not treated as a partnership for Federal tax
purposes), production from the qualified facility is
[[Page 47800]]
allocated among such persons in proportion to their respective
ownership share in the gross sales from such qualified facility during
the taxable year. The respective owners each determine their respective
section 45Y credit under section 45Y(a) based on their respective
ownership shares in the gross sales from such qualified facility.
Proposed Sec. 1.45Y-4(b)(2) would provide an example demonstrating the
application of this rule.
Proposed Sec. 1.45Y-4(b)(3) would provide that if a qualified
facility is owned through an unincorporated organization that has made
a valid election under section 761(a) of the Code, each member's
undivided ownership share in the qualified facility will be treated as
a separate qualified facility owned by such member.
3. Expansion of Facility; Incremental Production
Proposed Sec. 1.45Y-4(c)(1) would provide, solely for purposes of
proposed Sec. 1.45Y-4(c), that the term ``qualified facility''
includes either a new unit or an addition of capacity placed in service
after December 31, 2024, in connection with a facility described in
section 45Y(b)(1)(A) (without regard to clause (ii) of such paragraph),
which was placed in service before January 1, 2025, but only to the
extent of the increased amount of electricity produced at the facility
by reason of such new unit or addition of capacity. Proposed Sec.
1.45Y-4(c)(1) would also provide that a new unit or an addition of
capacity will be treated as a separate qualified facility. Proposed
Sec. 1.45Y-4(c)(1) would provide for purposes of proposed Sec. 1.45Y-
4(c), that a new unit or an addition of capacity require the addition
or replacement of components of property, including any new or
replacement integral property, added to a facility necessary to
increase capacity. If applicable for purposes of proposed Sec. 1.45Y-
4(c), taxpayers must use modified or amended facility operating
licenses or the International Standard Organization (ISO) conditions to
measure the maximum electrical generating output of a facility to
determine its nameplate capacity. Additionally, proposed Sec. 1.45Y-
4(c)(1) would provide that for purposes of section 45Y(a)(2)(B)(i)
(that is, the One-Megawatt Exception), the capacity for a new unit or
an addition of capacity is the sum of the nameplate capacity of the
added qualified facility and the nameplate capacity of the facility to
which the qualified facility was added.
Proposed Sec. 1.45Y-4(c)(2) would provide that solely for purposes
of Sec. 1.45Y-4(c), a facility that is decommissioned or in the
process of decommissioning and restarts can be considered to have
increased capacity if the following conditions are met: (1) the
existing facility must have ceased operations; (2) the existing
facility must have a shutdown period of at least one calendar year
during which it is without a valid operating license from its
respective Federal regulatory authority (that is, the Federal Energy
Regulatory Commission (FERC) or the Nuclear Regulatory Commission
(NRC)); and (3) the increased capacity of the restarted facility must
have a new, reinstated, or renewed operating license issued by either
FERC or NRC.
Proposed Sec. 1.45Y-4(c)(3) would describe how to compute the
increased amount of electricity produced as a result of a new unit or
an addition of capacity. Proposed Sec. 1.45Y-4(c)(3) would provide
that to determine the increased amount of electricity produced by a
facility by reason of a new unit or an addition of capacity, a taxpayer
must multiply the amount of electricity that the facility produces
during a taxable year after the new unit or addition of capacity is
placed in service by a fraction, the numerator of which is the added
nameplate capacity that results from the new unit or addition of
capacity, and the denominator of which is the total nameplate capacity
of the facility with the new unit or addition of capacity added.
Proposed Sec. 1.45Y-4(c)(4) would illustrate the application of
these rules to determine the increased amount of electricity
attributable to a new unit or an addition of capacity described in
Sec. 1.45Y-4(c).
4. Retrofit of an Existing Facility (80/20 Rule)
Proposed Sec. 1.45Y-4(d)(1) would provide that for purposes of
section 45Y(b)(1)(B), a facility may qualify as originally placed in
service even if it contains some used components of property within the
unit of qualified facility, provided the fair market value of the used
components of the unit of qualified facility is not more than 20
percent of the total value of the unit of qualified facility (that is,
the cost of the new components of property plus the fair market value
of the used components of property within the unit of qualified
facility) (80/20 Rule). Proposed Sec. 1.45Y-4(d)(1) would further
provide that if a facility satisfies the requirements of the 80/20
Rule, then the date on which such qualified facility is considered
originally placed in service for purposes of section 45Y(B)(1)(b) is
the date on which the new components of property of the unit of
qualified facility are placed in service. Proposed Sec. 1.45Y-4(d)(2)
would provide that, for purposes of this 80/20 Rule, the cost of new
components of the unit of qualified facility includes all costs
properly included in the depreciable basis of the new components of
property. Lastly, proposed Sec. 1.45Y-4(d)(3) would provide examples
demonstrating the 80/20 Rule.
D. Greenhouse Gas Emissions Rates
Section 45Y(b)(2) provides rules for determining GHG emissions
rates. Proposed Sec. 1.45Y-5(a) would provide an overview of the rules
pertaining to GHG emissions rates for facilities under section 45Y.
1. Definitions Related to Greenhouse Gas Emissions Rates
Proposed Sec. 1.45Y-5(b) would provide definitions of terms
relevant to determining GHG emissions rates. Section 45Y(e)(1) defines
the term ``CO<INF>2</INF>e per kWh'' as, with respect to any greenhouse
gas, the equivalent carbon dioxide (as determined based on global
warming potential) per kWh of electricity produced. Proposed Sec.
1.45Y-5(b)(1) would clarify that the term ``CO<INF>2</INF>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 Sec.
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).
Proposed Sec. 1.45Y-5(b)(8) would provide that the term ``fuel''
means material directly used to produce electricity or energy inputs
that are used to produce electricity. Proposed Sec. 1.45Y-5(b)(9)
would provide that the term ``feedstock'' means any raw material used
in a process for electricity generation or to produce an intermediate
product or finished fuel used for electricity generation.
Section 45Y(b)(2)(B) provides rules for determining a GHG emissions
rate for a facility that produces electricity through combustion or
gasification. Proposed Sec. 1.45Y-5(b)(2) would provide that the term
``combustion'' means a rapid exothermic chemical reaction, specifically
the oxidation of a fuel, which liberates energy including heat and
light. This proposed definition of ``combustion'' would include, for
example, burning fossil fuels, but it would not include the reaction
that produces electricity inside a fuel cell.
[[Page 47801]]
Gasification produces fuel but not electricity. Proposed Sec.
1.45Y-5(b)(3) would provide that the term ``gasification'' means a
thermochemical process that converts carbon-containing materials into
syngas, a gaseous mixture that is composed primarily of carbon
monoxide, carbon dioxide, and hydrogen. Because gasification does not
produce electricity, the inclusion of the term ``gasification'' as a
category separate from ``combustion'' in section 45Y(b)(2)(B) would
have no independent significance unless it is interpreted as applying
to the production of an energy source that is ultimately used by the
facility to generate electricity (for example, syngas used to make
electricity). Thus, proposed Sec. 1.45Y-5(b)(4) would interpret the
phrase ``facility which produces electricity through combustion or
gasification'' in section 45Y(b)(2)(B) as applying to facilities that
produce electricity through combustion or use an input energy source to
produce electricity, which energy source was produced through a
fundamental transformation, or multiple transformations, of one energy
source into another using combustion or gasification. The Treasury
Department and the IRS request comment on this proposed interpretation,
including whether the application of this proposed interpretation
should be clarified with respect to any type of fundamental
transformation of an energy source and any related activities or
operations. Comment is also requested on supply chain tracing
requirements that the Treasury Department and the IRS may apply to
verify whether or not a feedstock or fuel (including energy inputs)
used by a facility to produce electricity was produced using combustion
or gasification.
Section 45Y(b)(2)(B) provides that in the case of electricity
produced through combustion or gasification, the GHG emissions rate for
such facility is equal to the net rate of greenhouse gases emitted into
the atmosphere by such facility (taking into account lifecycle
greenhouse gas emissions, as described in section 211(o)(1)(H) of the
CAA (42 U.S.C. 7545(o)(1)(H)) in the production of electricity.
Proposed Sec. 1.45Y-5(b)(4) would provide that a ``facility that
produces electricity through combustion or gasification'' (C&G
Facility) means a facility that produces electricity through combustion
or uses an input energy source to produce electricity, if the input
energy source was produced through a fundamental transformation, or
multiple transformations, of one energy source into another using
combustion or gasification. Under proposed Sec. 1.45Y-5(b)(4), a
facility that produces electricity using any fuel that was produced
using electricity that had been produced, in whole or in part, from the
combustion of fossil fuels would be considered a C&G Facility. For
example, a hydrogen fuel cell would be considered a C&G Facility if it
produced electricity using hydrogen that was produced by an
electrolyzer powered, in whole or in part, by electricity from the grid
because some of the electricity from the grid was produced through
combustion or gasification. A fuel cell facility such as a solid oxide
fuel cell, which uses methane as fuel, would be considered a C&G
Facility, because the methane reforming reaction that produces syngas
within the fuel cell prior to the production of electricity would be
considered a gasification reaction. In contrast, a hydrogen fuel cell
facility using hydrogen produced exclusively using electricity from a
new solar array or wind farm co-located with the hydrogen fuel cell
facility would not be considered a C&G Facility, because the input
energy source was not produced through a transformation of one energy
source into another using combustion or gasification.
The Treasury Department and the IRS request comment on whether the
proposed definitions of gasification, combustion, and C&G Facility
would result in certain types of fuel cells that use fossil or biogenic
fuel inputs (via combustion or gasification) to produce electricity
being unable to demonstrate a net rate of greenhouse gas emissions that
is not greater than zero with a lifecycle analysis because they are not
classified as a C&G Facility as defined in proposed Sec. 1.45Y-
5(b)(4). Because the energy transformation that produces electricity in
a fuel cell would not be considered combustion under the definition in
proposed Sec. 1.45Y-5(b)(2), a fuel cell facility would only qualify
as a C&G Facility if the fuel it used to produce electricity was
produced through combustion or gasification under these proposed
regulations.
Proposed Sec. 1.45Y-5(b)(7) would provide that a ``Non-C&G
Facility'' means a facility that produces electricity and is not
described in proposed Sec. 1.45Y-5(b)(4).
Proposed Sec. 1.45Y-5(b)(5) would provide that, consistent with
section 45Y(b)(2)(A), the term ``greenhouse gas emissions rate'' means
the amount of greenhouse gases emitted into the atmosphere by a
facility in the production of electricity, expressed as grams of
CO<INF>2</INF>e per kWh.
Proposed Sec. 1.45Y-5(b)(6) would provide that, for the purposes
of section 45Y(b)(2)(A), for both C&G Facilities and Non-C&G
Facilities, the term ``greenhouse gases emitted into the atmosphere by
a facility in the production of electricity'' means emissions from a
facility that directly occur from the process that transforms the input
energy source into electricity. Proposed Sec. 1.45Y-5(b)(6)(i) through
Sec. 1.45Y-5(b)(6)(vi) would exclude emissions that may relate to a
facility but do not occur ``in the production of electricity'' as
specified in section 45Y(b)(2)(A). Proposed Sec. 1.45Y-5(c)(1) would
provide, for Non-C&G Facilities only, additional types of excluded
emissions under section 45Y(b)(2)(A). Proposed Sec. 1.45Y-5(d)(2)
would provide, for C&G Facilities only, that additional rules on
included and excluded emissions apply in order to conduct a lifecycle
analysis as required by section 45Y(b)(2)(B).
Proposed Sec. 1.45Y-5(b)(6)(i) through Sec. 1.45Y-5(b)(6)(vi)
would clarify that for the purposes of both Non-C&G and C&G Facilities
this definition excludes: (1) emissions from back-up generators that
are primarily used in maintaining critical systems in case of a power
system outage or for supporting restart of a generator after an outage;
(2) emissions from routine operational and maintenance activities that
are integral to the production of electricity, including, but not
limited to, emissions from internal combustion vehicles used to access
and perform maintenance on remote electricity generating facilities or
emissions occurring from heating and cooling control rooms or dispatch
centers; (3) emissions from a step-up transformer that conditions the
electricity into a form suitable for productive use or sale; (4)
emissions that occur before commercial operations commence or after
commercial operations terminate, including, but not limited to, on-site
emissions occurring from construction or manufacturing of the facility
itself, emissions from the off-site manufacturing of facility
components, or emissions occurring due to siting or decommissioning;
(5) emissions from infrastructure associated with the facility,
including, but not limited to, emissions from road construction for
feedstock production; and (6) emissions from the distribution of
electricity to consumers.
2. Greenhouse Gas Emissions Rates for Non-C&G Facilities
Proposed Sec. 1.45Y-5(c) would provide the rules for determining a
GHG emissions rate for Non-C&G Facilities, including by the Secretary
when
[[Page 47802]]
publishing a table described in section 45Y(b)(2)(C)(i) or determining
an emissions rate as provided in section 45Y(b)(2)(C)(ii). Proposed
Sec. 1.45Y-5(c)(1) would provide that GHG emissions rates for Non-C&G
Facilities must be determined under proposed Sec. 1.45Y-5(c) and (e).
In addition, proposed Sec. 1.45Y-5(c)(1)(i) would provide that, with
respect to Non-C&G Facilities only, greenhouse gases emitted into the
atmosphere by a facility in the production of electricity excludes
emissions of greenhouse gases that are not directly produced by the
fundamental transformation of the input energy source into electricity,
including, but not limited to, the following: (1) emissions from
hydropower reservoirs due to anoxic conditions; (2) ebullitive,
diffuse, and degassing emissions from hydropower operations; (3)
emissions of non-condensable gases from underground reservoirs during
geothermal operations; (4) emissions from a step-up transformer that
conditions the electricity into a form suitable for productive use or
sale; and (5) emissions occurring due to activities and operations
occurring off-site, including but not limited to, the production and
transportation of fuels used by the facility, or land use change from
siting or changes in demand. Proposed Sec. 1.45Y-5(c)(1)(i) would thus
exclude emissions that may relate to a Non-C&G Facility but do not
occur ``in the production of electricity'' as specified in section
45Y(b)(2)(A) because such emissions do not arise directly from the
transformation of the input energy source into electricity. For
example, emissions from land use change from siting or changes in
demand would be excluded because such emissions do not occur ``in the
production of electricity'' for Non-C&G Facilities under section
45Y(b)(2)(A), but this exclusion does not apply to C&G Facilities
because section 45Y(b)(2)(B) requires a broader standard for assessing
GHG emissions than section 45Y(b)(2)(A).
Proposed Sec. 1.45Y-5(c)(1)(ii) would provide that, subject to
proposed Sec. 1.45Y-5(b)(6) and (c)(1), a GHG emissions rate for a
Non-C&G Facility must be determined through a technical and engineering
assessment of the fundamental energy transformation into electricity,
and that such assessment must consider all input and output energy
carriers and chemical reactions or mechanical processes taking place at
the facility in the production of electricity. Proposed Sec. 1.45Y-
5(c)(1)(iii) would provide an example of a GHG emissions rate
determination for a Non-C&G Facility.
Proposed Sec. 1.45Y-5(c)(2) would identify certain types or
categories of facilities that are categorically Non-C&G Facilities with
a GHG emissions rate that is not greater than zero. Proposed Sec.
1.45Y-5(c)(2)(i) through (viii) would provide that these include wind
facilities (including small wind properties), hydropower facilities
(including retrofits adding power production to non-powered dams,
conduit hydropower, hydropower using new impoundments, and hydropower
using diversions such as a penstock or channel), marine and
hydrokinetic facilities, solar facilities (including photovoltaic and
concentrating solar power), geothermal facilities (including flash and
binary plants), nuclear fission facilities, nuclear fusion facilities,
and waste energy recovery property (WERP) that derives energy from any
of the energy sources described in proposed Sec. 1.45Y-5(c)(2)(i)
through (vii) (including geothermal or solar waste heat recovery such
as from a district geothermal heating system, and waste heat recovery
such as from a nuclear reactor dedicated to heat production for an
industrial facility).
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. Examples of buildings
or equipment the primary purpose of which is not the generation of
electricity include, but are not limited to, manufacturing plants,
medical care facilities, facilities on school campuses, pipeline
compressor stations, and associated equipment. The Treasury Department
and the IRS request comment on whether this definition of WERP is
appropriate. Comment is further requested on whether and why it would
be appropriate to revise proposed Sec. 1.45Y-5(c)(2)(viii) to include
additional energy sources (such as energy from exothermic chemical
reactions or pressure drop technologies) that do not rely on combustion
or gasification but could include equipment related to the transport of
fossil fuels (for example, natural gas).
For purposes of proposed Sec. 1.45Y-5(c)(2)(ii), hydropower
includes retrofits that add electricity production to non-powered dams,
conduit hydropower, hydropower using new impoundments, and hydropower
using diversions such as a penstock or channel. Greenhouse gas
emissions are not created by the fundamental transformation of
electricity needed to produce electricity in a hydropower facility. A
hydropower facility converts the potential energy of flowing water into
electricity. The potential energy results from changes in gravitational
potential energy from the flowing water, which the hydropower facility
captures with a turbine which spins a rotor within a generator to
produce electricity. Hydropower facilities may release greenhouse gas
emissions from the hydropower reservoir due to diffusion at the water
surface or due to ebullition, and from degassing when water passes
through a pump house or turbine. Such emissions from hydropower
facilities would not be considered greenhouse gases emitted into the
atmosphere by a Non-C&G Facility in the production of electricity under
proposed Sec. 1.45Y-5(b)(6)(C), because emissions of greenhouse gasses
are not created by the fundamental transformation of potential energy
in flowing water into electricity, but rather from processes that are
not fundamental to the transformation of potential energy into
electricity.
Similarly, greenhouse gas emissions are not created by the
fundamental transformation of energy from high-pressure hot water into
electricity in a flash geothermal facility, which is included in
proposed Sec. 1.45Y-5(c)(2)(v). A flash geothermal facility uses high-
pressure hot water from deep inside the earth and converts it directly
to steam that drives a turbine and generator. After the steam passes
through the turbine, it is released into the atmosphere and any non-
condensable gases including greenhouse gases dissolved in the steam are
also released. Such emissions from flash geothermal facilities would
not be considered greenhouse gases emitted into the atmosphere by a
facility in the production of electricity under proposed Sec. 1.45Y-
5(c)(1)(i)(C), because the greenhouse gases are already present in the
underground water and are not created by the fundamental transformation
of the thermal energy in the water into electricity, but rather by
processes that are not fundamental to the transformation of the thermal
energy into electricity. This proposed treatment of flash geothermal
facilities is supported by surveys indicating that underground carbon
dioxide in certain geothermal reservoirs is emitted passively into the
atmosphere even in the absence of geothermal electricity generation.
The Treasury Department and the IRS request comment on whether the
identification of flash geothermal facilities as Non-C&G Facilities
with a GHG emissions rate that is not greater than zero in proposed
Sec. 1.45Y-5(c)(2)(v) is appropriate.
[[Page 47803]]
For purposes of proposed Sec. 1.45Y-5(c)(2)(iv), solar includes
concentrated solar power. Concentrated solar power facilities may have
auxiliary burners that in some cases use combustion exclusively for the
purposes of cold starts or freeze protection of thermal working fluids,
but in other cases, may also be used to generate electricity in hybrid
configurations. The Treasury Department and the IRS request comment on
whether the existing definitions of C&G Facilities and Non-C&G
Facilities is sufficient to distinguish between these two categories of
facilities, or whether additional clarification is needed.
3. Greenhouse Gas Emissions Rates for C&G Facilities
Section 45Y(b)(2)(B) provides that in the case of electricity
produced through combustion or gasification, the GHG emissions rate for
such facility is equal to the net rate of greenhouse gases emitted into
the atmosphere by such facility (taking into account lifecycle
greenhouse gas emissions, as described in section 211(o)(1)(H) of the
CAA) in the production of electricity.
Section 211(o)(1)(H) of the CAA provides that ``lifecycle
greenhouse gas emissions'' means the aggregate quantity of greenhouse
gas emissions (including direct emissions and significant indirect
emissions such as significant emissions from land use changes) related
to the full fuel lifecycle, including all stages of fuel and feedstock
production and distribution, from feedstock generation or extraction
through the distribution and delivery and use of the finished fuel to
the ultimate consumer, if the mass values for all greenhouse gases are
adjusted to account for their relative global warming potential.
The EPA promulgated its interpretation of section 211(o)(1)(H) of
the CAA in a 2010 notice-and-comment rulemaking establishing the
regulatory framework for the updated renewable fuel standard (RFS2)
program. The EPA interpreted section 211(o)(1)(H) of the CAA in the
context of the facts and policy framework of the RFS program and based
on information available at that time; however, the EPA's analysis and
implementation of the RFS2 rule offer relevant precedent for the
Treasury Department's and the IRS's interpretation of section
45Y(b)(2)(B). In the RFS2 rulemaking, the EPA interpreted 211(o)(1)(H)
of the CAA as requiring the agency to account for the real-world
emissions consequences of increased production of biofuels. Thus, the
EPA determined in the RFS2 context that the inclusion of direct
emissions and significant indirect emissions such as significant
emissions from land-use changes in section 211(o)(1)(H) of the CAA
requires a consequential approach to considering the real-world
emissions associated with biofuel production. A ``consequential''
approach considers the real-world greenhouse gas emissions associated
with biofuel production, including secondary or indirect emissions
resulting from market interactions induced by expanded biofuel
production and use. Such an approach includes consideration of market
interactions induced by expanded biofuel production and use that may
result in secondary or indirect greenhouse gas emissions, domestically
and globally.
Proposed Sec. 1.45Y-5(d) would provide the rules applicable to
determining a net rate of GHG emissions for C&G Facilities, including
by the Secretary when publishing a table described in section
45Y(b)(2)(C)(i) or determining an emissions rate as provided in section
45Y(b)(2)(C)(ii). Proposed Sec. 1.45Y-5(d)(1) would provide that GHG
emissions rates for C&G Facilities must be determined by a lifecycle
analysis (LCA) that complies with proposed Sec. 1.45Y-5(d) and (e),
and that such rate equals the net rate of greenhouse gases emitted into
the atmosphere by such facility (taking into account lifecycle
greenhouse gas emissions, as described in section 211(o)(1)(H) of the
CAA) in the production of electricity, expressed as grams of
CO<INF>2</INF>e per kWh.
Proposed Sec. 1.45Y-5(d)(2) would provide that an LCA used for
determining the net rate of greenhouse gases emitted into the
atmosphere by a facility must comply with the requirements provided in
proposed Sec. 1.45Y-5(d)(2)(i) through (vii). Proposed Sec. 1.45Y-
5(d)(2)(i) would provide that the starting boundary of the LCA for an
LCA involving generation-derived feedstocks (such as biogenic
feedstocks) is feedstock generation, and the starting boundary of the
LCA for an LCA involving extraction-derived feedstocks (such as fossil
fuel feedstocks) is feedstock extraction. Under proposed Sec. 1.45Y-
5(d)(2)(i), the starting boundaries would include the processes
necessary to produce and collect or extract the raw materials used to
produce electricity from combustion or gasification technologies,
including those used as energy inputs to electricity production. This
includes the emissions effects of relevant land management activities
or changes related to or associated with feedstock production. The
starting conditions are the material and energy flows, including
associated direct and indirect greenhouse gas emissions, of the
processes associated with the extraction or production of raw feedstock
materials or fuel.
Proposed Sec. 1.45Y-5(d)(2)(ii) would provide that the ending
boundary of an LCA for electricity that is transmitted to the grid or
electricity that is used on-site is the meter at the point of
production of the C&G Facility. The distribution, transmission, and use
of such electricity generated by a C&G Facility (and other types of
energy sources it may displace while in use) are outside of the LCA
boundary; therefore, such emissions would not be taken into account
because they do not occur in the ``production of electricity'' as
described in section 45Y(b)(2)(B). Given the particular context of
section 45Y(b)(2)(B) (that is, a tax credit for the production of clean
electricity), proposed Sec. 1.45Y-5(d)(2)(ii) is consistent with
section 45Y(b)(2)(B) of the Code (and the term ``ultimate consumer'' in
section 211(o)(1)(H) of the CAA referenced therein) because it would
treat the C&G Facility as the ultimate consumer of the fuel used to
produce electricity.
Proposed Sec. 1.45Y-5(d)(2)(iii) would provide that an LCA must be
based on a future anticipated baseline, which projects future status
quo in the absence of the availability of the sections 45Y and 48E
credits (taking into account anticipated changes in technology,
policies, practices, and environmental and other socioeconomic
conditions).
Proposed Sec. 1.45Y-5(d)(2)(iv) would provide that offsets and
offsetting activities that are unrelated to the production of
electricity by a C&G Facility, including the production and
distribution of any input fuel, may not be taken into account in an
LCA.
Proposed Sec. 1.45Y-5(d)(2)(v) would interpret the reference to
section 211(o)(1)(H) of the CAA as requiring that an LCA must take into
account direct emissions, significant indirect emissions in the United
States or other countries, emissions associated with market-mediated
changes in related commodity markets, emissions associated with
feedstock generation or extraction, emissions consequences of increased
production of feedstocks, emissions at all stages of fuel and feedstock
production and distribution, and emissions associated with
distribution, delivery, and use of feedstocks to and by a C&G Facility.
Proposed Sec. 1.45Y-5(d)(2)(v) would interpret section 45Y(b)(2)(B) of
the Code (and the term ``ultimate consumer'' in section 211(o)(1)(H) of
the CAA referenced therein) as applying to the C&G Facility because it
is the
[[Page 47804]]
ultimate consumer of the fuel used to produce electricity.
Proposed Sec. 1.45Y-5(d)(2)(v)(A) would provide that direct
emissions include, but are not limited to: (1) emissions from feedstock
generation, production, and 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); (2) emissions from feedstock and fuel transport
(including emissions from transporting the raw or processed feedstock
to the fuel processing facility); (3) emissions from transporting and
distributing fuels to the electricity production facility; (4)
emissions from handling, processing, upgrading, and/or storing
feedstocks, fuels and intermediate products (including emissions from
on/offsite storage and preparation/pre-treatment for use (for example,
torrefaction or pelletization) and emissions from process additives);
and (5) emissions from combustion and gasification at the electricity
generating facility (including emissions from the combustion and/or
gasification process and emissions from gasification or combustion
additives). Proposed Sec. 1.45Y-5(d)(2)(v)(B) would provide examples
of significant indirect emissions including, but not limited to,
emissions from indirect land use and land use change and other 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.
Proposed Sec. 1.45Y-5(d)(2)(vi) would provide principles for
excluded emissions by listing types of emissions that the LCA must not
take into account.
Proposed Sec. 1.45Y-5(d)(2)(vii) would provide that an LCA may
consider alternative fates and may account for 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. 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.
4. Additional Issues Regarding Greenhouse Gas Emissions Rates for C&G
Facilities
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 request 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.
a. Treatment of Biogas, Renewable Natural Gas (RNG), or Fugitive
Sources of Methane
The Treasury Department and the IRS intend to provide rules
addressing facilities that produce electricity using biogas, renewable
natural gas (RNG), or fugitive sources of methane (for example, from
coal mine operations) for purposes of the section 45Y credit or the
section 48E credit, collectively referred to as the ``Clean Electricity
Tax Credits.'' In the context of this guidance, the term ``RNG'' refers
to biogas that has been upgraded to be equivalent in nature to fossil
natural gas. Fugitive methane refers to the release of methane through,
for example, equipment leaks during the extraction, processing,
transformation, and delivery of fossil fuels to the point of final use,
such as coal mine methane. Such rules would apply to all biogas, RNG,
or fugitive methane used for the purposes of the Clean Electricity Tax
Credits and would provide requirements that must be met to account for
any greenhouse gas emissions benefits from biogas, RNG, or fugitive
methane in determining GHG emissions rates for purposes of the Clean
Electricity Tax Credits. Such requirements would be designed to reflect
the ways in which additional demand for biogas, RNG or fugitive methane
can impact greenhouse gas emissions outcomes.
The Treasury Department and the IRS anticipate requiring that for
purposes of the Clean Electricity Tax Credits, in order for biogas,
biogas-based RNG, or fugitive methane to receive an emissions value
consistent with such gases (and not standard natural gas), the biogas
or RNG used to produce electricity or to produce a feedstock or fuel
that is used to produce electricity must originate from the first
productive use of the relevant methane. For any specific source of
biogas, RNG, or fugitive methane, productive use is generally defined
as any valuable application of the relevant methane (including to
provide heat or cooling, generate electricity, or upgraded to RNG in
the case of biogas or fugitive methane), and specifically excludes
venting to the atmosphere or capture and flaring. The Treasury
Department and the IRS further propose to define first productive use
of the relevant methane as the time when a producer of that gas first
begins using or selling it for productive use in the same taxable year
as (or after) the electricity production facility was placed in
service. The implication of this proposal is that biogas, for example,
from any source that had been productively used in a taxable year prior
to the taxable year in which the relevant electricity production
facility was placed in service would not include GHG emissions benefits
that might otherwise be attributable to biogas-based RNG, but would
instead receive a value consistent with natural gas. This proposal
would limit emissions associated with the diversion of biogas, RNG, or
fugitive methane from other pre-existing productive uses.
For existing biogas sources that typically productively use or sell
a portion of the biogas and flare or vent the remaining excess, the
flared or vented portion may be eligible for first productive use as
defined above if the flaring or venting volume can be adequately
demonstrated and verified. In such circumstances, the flared or vented
volume may be determined based on the previous taxable year's flared or
vented volume as demonstrated via reported data to programs such as the
Greenhouse Gas Reporting Program. Requirements would be established to
reduce the risk that entities will deliberately generate additional
biogas for purposes of the Clean Electricity Tax Credits, above
historic and expected future levels or an equivalent metric, for
example by
[[Page 47805]]
generating biogas through the intentional generation of waste, and to
ensure that other factors affecting the emissions rate of electricity
produced with biogas, biogas-based RNG or RNG procurement via RNG
certificates are taken into account. The Treasury Department and the
IRS request comment on these and other potential conditions. Any
fugitive sources of methane would be treated in the same fashion as
biogas or RNG with respect to these requirements, albeit with different
considerations in development of the counterfactual.
The Treasury Department and the IRS also recognize that different
sources of methane may have significantly different characteristics
(for example, counterfactuals, alternative fates, baseline
characteristics, upstream leakage rates, etc.) and therefore
significantly different lifecycle emissions. For this reason, the
Treasury Department and the IRS are considering requiring an LCA to be
conducted for electricity produced by each category of feedstock,
rather than across all feedstocks used for the production of
electricity by a facility. The Treasury Department and the IRS request
comment on whether LCAs should be conducted on a feedstock-by-feedstock
basis or averaged across feedstocks, and how to determine the
appropriate categories of feedstock.
For purposes of the Clean Electricity Tax Credits, producers using
biogas, RNG, or fugitive methane would be required to acquire and
retire corresponding energy attribute certificates (EACs) through a
book-and-claim system that can verify in an electronic tracking system
that all applicable requirements are met.
Electricity producers would also be required to have a pipeline
interconnection and measurement capability using a revenue grade meter.
These rules would apply to the use of EACs with both direct and non-
direct claims of biogas, RNG, or fugitive methane use. Direct use would
involve a direct exclusive pipeline connection to a facility that
generates biogas or RNG or from which fugitive methane is being
sourced, while non-direct use would involve production using biogas,
RNG, or fugitive methane sourced from a commercial or common-carrier
natural gas or other specified pipeline. In all cases, EACs would need
to document the biogas, RNG, or fugitive methane procurement use claims
and that the energy attributes of the RNG or fugitive methane being
used are not sold to other parties or used for compliance with other
policies or programs.
The Treasury Department and the IRS request comments on these and
other approaches related to biogas, RNG and fugitive methane. Regarding
these sources of methane, the Treasury Department and the IRS request
comment on the appropriate LCA considerations associated with them,
such as counterfactual scenarios (that is, appropriate baselines), to
account for direct and significant indirect emissions, and also the
manner in which to assess methane from these sources if the current
practice is flaring. In particular, the Treasury Department and the IRS
request comments on the following questions:
(1) What data sources and peer reviewed studies provide information
on fugitive methane, biogas, and RNG production systems (including
biogas production and reforming systems), markets, monitoring,
reporting, and verification processes, and greenhouse gas emissions
associated with these production systems and markets?
(2) What conditions for the use of biogas, RNG, and fugitive
methane would ensure that emissions accounting for purposes of the
Clean Electricity Tax Credits reflect and reduce the risk of indirect
emissions effects from electricity production using biogas and RNG? How
can taxpayers verify that they have met these requirements?
(3) How broadly available and reliable are existing electronic
tracking systems and verification protocols and practices for biogas,
RNG, or fugitive methane certificates in book and claim systems? What
developments may be required, if any, before such systems are
appropriate for use with biogas or RNG certificates used to claim the
Clean Electricity Tax Credits?
(4) How should biogas, RNG or fugitive methane resulting from the
first productive use of methane be defined, documented, and verified?
What industry best practices or alternative methods would enable such
verification to be reflected in a biogas, RNG or methane certificate or
other documentation? What additional information should be included in
such EACs to help certify compliance?
(5) What are the emissions associated with different methods of
transporting biogas, RNG or fugitive methane to electricity producers
(for example, vehicular transport, pipeline)?
(6) How can the final regulations reflect and mitigate indirect
emissions effects from the diversion of biogas, RNG, or fugitive
methane from potential future productive uses? What other new uses of
biogas, RNG, or fugitive methane could be affected in the future if
more gas from new capture and productive use of methane from these
sources is used in the electricity production process?
(7) How can the potential for the generation of additional
emissions from the production of additional waste, waste diversion from
lower-emitting disposal methods, and changes in waste management
practices be limited through emissions accounting or rules for biogas
and RNG use established for purposes of the Clean Electricity Tax
Credits?
(8) To limit the additional production of waste, should the final
regulations limit eligibility to methane sources that existed as of a
certain date or waste or waste streams that were produced before a
certain date, such as the date that the IRA was enacted? If so, how can
that be documented or verified? How should any changes in volumes of
waste and waste capacity at existing methane sources be documented and
treated for purposes of the Clean Electricity Tax Credits? How should
additional capture of existing waste or waste streams be documented and
treated?
(9) Are geographic or temporal deliverability requirements needed
to reflect and reduce the risk of indirect emissions effects from
biogas, RNG, or fugitive methane use in the electricity production
process? If so, what should these requirements be and are electronic
tracking systems able to capture these details?
(10) How should variation in methane leakage across the existing
natural gas pipeline system be taken into account in estimating the
emissions from the transportation of RNG or fugitive methane or
establishing rules for RNG or fugitive methane use? How should methane
leakage rates be estimated based on factors such as the location where
RNG or fugitive methane is injected and withdrawn, the distance between
the locations where RNG or fugitive methane is injected and withdrawn,
season of year, age of pipelines, or other factors? Are data or
analysis available to support this?
(11) What counterfactual assumptions and data should be used to
assess the net greenhouse gas emissions of facilities that rely on
biogas, RNG, or fugitive methane (for example, venting, flaring, or
other practice)? Is venting an appropriate counterfactual assumption in
some cases? If not, what other factors should be considered?
(12) What criteria should be used in assessing biogas, fugitive
methane, or RNG-based provisional emissions rates? What practices
should be put in place to reduce the risk of unintended consequences
(for example, gaming)? Should conservative default parameters
[[Page 47806]]
and counterfactuals be used unless proven otherwise by a third party?
(13) What are the effects on greenhouse gas emissions of capturing
methane emissions for use as biogas or RNG, such as on livestock farms?
The Treasury Department and the IRS recognize that sufficient
tracking and verification mechanisms for biogas, RNG, or fugitive
methane are not yet available, and existing systems have limited
capabilities for tracking and verifying RNG pathways, especially in the
part of the production process before the methane has been reformed to
RNG. Existing tracking and verification systems do not clearly
distinguish between inputs, verify or require verification of
underlying practices claimed by biogas or RNG production sources,
require proof of generator interconnection or revenue-quality metering,
provide validation of generation methodology, include exclusively
United States based-generation, verify generator registration, and
track the vintage of generator interconnection. The Treasury Department
and the IRS are considering providing rules to address whether or how
book-and-claim systems with sufficient tracking and verification
mechanisms may be used to attribute the environmental benefits of
biogas, RNG, or fugitive methane in the final regulations.
The treatment of biogas, RNG, and fugitive methane presents a range
of complex issues that the Treasury Department and the IRS will
consider in the development of the final regulations.
b. Analytical LCA Parameters, Including Spatial Scales and Time
Horizons
An LCA may require decisions on a wide range of analytical
parameters that may have a meaningful impact on the accuracy and
utility of its results. The Treasury Department and the IRS request
comment on the analytical LCA parameters that are most relevant to
particular types of categories of facilities that may be eligible for
the Clean Electricity Tax Credits.
The Treasury Department and the IRS specifically request comment
regarding spatial and temporal scales, including the factors that
should be considered in setting the spatial and temporal scales for
LCAs conducted for the Clean Electricity Tax Credits. Spatial scale
involves defining the area over which emissions impacts will be
evaluated. Temporal scale involves defining the time period over which
emissions impacts will be evaluated. The decision of setting the
spatial scale should be considered in conjunction with decisions on
temporal scale, as the two can interact in ways that affect greenhouse
gas assessment outcomes.
In conducting a greenhouse gas assessment for biomass feedstocks,
for example, carbon stocks or flows that have high variability at fine
spatial or temporal scales may have much less variability if averaged
over larger areas or longer temporal scales. Averaging over long
temporal scales may reduce the variability observed at small spatial
scales, and averaging over large areas may reduce the variability
observed over small temporal scales. However, it is not safe to assume
that integrating over large areas and long timeframes is always
preferable. Large spatial scales and long temporal scales are not
necessarily the most accurate way to conduct specific policy or program
assessments because the combination of the two may obscure important
information (for example, biophysical differences in species or
landscapes, or shorter time frames or subregional analysis needed for
policy analysis) or may mask important smaller-scale impacts. It is
important to note that utilizing a large spatial scale and a short
temporal scale could yield the same result as a small spatial scale
combined with a longer temporal scale.
The Treasury Department and the IRS acknowledge that it may be
appropriate to utilize different spatial and temporals scales for
different feedstocks given their heterogeneity. The Treasury Department
and the IRS request comment on the following questions regarding
spatial and temporal scale:
(1) What factors should be considered in establishing the timeframe
for the LCA analysis? What timeframe would provide confidence that
significant emissions have been accounted for?
(2) Should the LCA distinguish between an ``emissions horizon''
(the timeframe over which emissions effects from the feedstock use
persist into the future) and an ``assessment horizon'' (the timeframe
over which the emissions effects are included in the analysis), and how
would that be reflected in the choice of temporal scale? What
assessment horizon will provide reasonable confidence that significant
LCA emissions have been incorporated? Should the modeled future
anticipated baseline include estimated emissions from electricity
production to reflect the effects of the anticipated phase out of the
Clean Electricity Tax Credits?
(3) If the assessment horizon is shorter than the emissions
horizon, should an estimate of the emissions beyond the assessment
horizon be included in the LCA?
(4) What considerations should be reflected in the choice(s) of
spatial scale? For example, the increased use of some fuels/feedstocks
may have global effects (for example, changes in commodity production
and ensuing land use and greenhouse gas changes), though this may not
be the case for all feedstocks or fuels. What factors should be
considered to assess whether a global scale is necessary for certain
feedstocks to ensure that significant emissions are captured? Should
all feedstock/fuels assessments be conducted with the same spatial
scale to determine the extent to which increased use has estimated
global ramifications?
(5) The choice of spatial scale can be greatly influenced by the
availability and accuracy of data and the precision with which one can
measure and model feedstock production as well as market dynamics. What
sources of data would be most important to consider for modeling? What
strengths or weaknesses do these sources have?
c. Distinguish Between Co-Products, Byproducts, and Waste Products and
How Emissions Should Be Allocated to Each in LCAs
The categorization and assessment of products as co-products,
byproducts, or waste products in an LCA may affect the LCA's results.
Products, co-products, byproducts, and wastes may all be produced in
the full fuel cycle or used as inputs to the same. A co-product is a
product produced together with another product, both of which are
economic drivers of the process. A byproduct is a product that is
produced together with another product, and which has a productive use
but is not the primary economic driver of the process from which it is
produced. It is not solely or separately produced. A waste product is a
substance or object that the holder intends or is required to dispose
of. See ISO:14040, ``Environmental management--Life cycle assessment--
Principles and framework. For biogenic sources, scientific literature
often classifies byproducts, wastes, and residues together in one
category.
The categorization of products as co-products, byproducts, and
waste products may be relevant to an LCA's assessment of the greenhouse
gas emissions related to the production of inputs to electricity
generation or in the generation of electricity itself if the LCA
modeling approach or approaches used for purposes of the Clean
Electricity Tax Credits have the ability to distinguish between such
categories. For example, in certain circumstances, the use of a waste
product as a feedstock or fuel for
[[Page 47807]]
electricity production may generate more, less, or the same greenhouse
gas emissions than relevant disposal practices for that waste material.
The emissions released in the production process during which a waste
product is created could be fully allocated to the main product, co-
products, and byproducts of that process meaning that the emissions
associated with the production of the waste could be considered zero in
the LCA assessment pending further analysis, potentially reducing the
overall LCA GHG emissions rates for the electricity production.
Alternatively, if the waste product were considered to have a
productive use and therefore instead categorized as a co-product it
would be considered as a driver of the production process and could
have a positive emissions value. A material may initially have no
economic value or useful purpose, but if that material later gains an
economic value, its categorization may shift to a byproduct or co-
product.
The Treasury Department and the IRS intend to clarify the
principles for categorizing products as co-products, byproducts, or
waste input materials and products and assessing the emissions impacts
for such products in an LCA for C&G Facilities in the final regulations
for the Clean Electricity Tax Credits if such categorization is
relevant to the LCA model or models used. Under such principles, if
byproducts are produced concurrently with electricity production, then
a portion of the process emissions may be allocated to those
byproducts. If applying an analytical approach that considers the
consequences of the material being used for electricity production and
byproducts are produced concurrent with electricity production, the LCA
may consider the market impacts associated with the byproducts. In
addition, if wastes are produced concurrently with electricity
production, then no process emissions may be allocated to those wastes;
all emissions must be associated with the electricity produced. Whether
alternative productive uses of a byproduct-derived feedstock exist
would be determined by expert analysis of the likely alternative uses
of the byproduct, taking into account technological and economic
capabilities and common practice. The alternative fate of waste-derived
feedstocks would be determined by expert analysis, literature review,
and historical practice.
To inform the development of these categorization principles for
the final regulations, the Treasury Department and the IRS request
comment on the following:
(1) What principles should be used to distinguish between co-
products, byproducts, and waste products for the purposes of the Clean
Electricity Tax Credits? Are there common scientific or industry
definitions that can be relied upon to distinguish between co-products,
byproducts, and waste products?
(2) What principles should be used to determine whether a product
has sufficient value to be considered a co-product or byproduct?
(3) The Clean Electricity Tax Credits may provide additional
economic incentive for the consumption of a product categorized as
waste prior to the availability of the incentive provided by the Clean
Electricity Tax Credits. How should this additional economic incentive
be considered to determine if a product is a waste product, byproduct,
or co-product? Should this categorization be reevaluated and, if so,
how often?
(4) To limit the additional production of waste, should the final
regulations limit eligible waste sources that existed as of a certain
date, or waste or waste streams that were produced before a certain
date, such as the date that the IRA was enacted? If so, how could that
be documented or verified? How should any changes in volumes of waste
and waste capacity at existing sources be documented and treated for
purposes of the Clean Electricity Tax Credits? How should additional
capture of existing waste or waste streams be documented and treated?
(5) More generally, how could the potential for the intentional
generation of waste or co-products for the purposes of lowering the
allocated process emissions to electricity be addressed?
(6) Would the classification of feedstocks as products, co-
products, byproducts, or waste change depending on the technology? For
example, would products, co-products, byproducts, and waste be
described and accounted for differently if derived from biogenic
sources, such as biogenic biomass?
d. Attributing Emissions to the Heat Produced by Facilities Using CHP
Property
Section 45Y(g)(2)(A) provides that the kWh of electricity produced
by a taxpayer at a qualified facility includes any production in the
form of useful thermal energy by any CHP property within such facility,
and the amount of greenhouse gases emitted into the atmosphere by such
facility in the production of such useful thermal energy will be
included for purposes of determining the GHG emissions rate for such
facility. See Explanation of Provisions section I.A. for the definition
of CHP property. The inclusion of thermal energy production-related
emissions in an LCA for a CHP facility introduces additional
considerations, such as how to set an appropriate baseline for useful
energy production-related emissions and what rules should govern the
attribution of emissions for thermal energy production. The Treasury
Department and the IRS intend to clarify the principles for assessing
the emissions related to the generation of useful thermal energy by a
CHP facility in an LCA in the final regulations for the Clean
Electricity Tax Credits. Accordingly, the Treasury Department and the
IRS request comment on the following:
(1) To determine the amount of greenhouse gases emitted by a CHP
facility, the LCA must include the greenhouse gas emissions emitted by
that facility in the production of useful thermal energy. For purposes
of the LCA of a CHP facility, what principles should govern how
emissions from the production of useful thermal energy are calculated?
(2) What principles should be used to determine the baseline for
useful thermal energy production by a CHP facility? For example, should
the baseline for the heat production for a CHP facility be an
alternative form of thermal energy production such as natural gas
boilers, such that emissions from the production of thermal energy from
the boilers would be subtracted from the facility's emissions?
Alternatively, is it more appropriate if the baseline for a CHP
facility is no thermal energy production by the facility?
(3) There may be scenarios in which a facility generates
electricity that is used (a) by the electricity generation facility in
the production of electricity or (b) in the production of fuel
ultimately consumed by that facility to generate electricity. For
example, a wastewater treatment plant's post-processing materials are
digested to produce biogas; this biogas is then used in a CHP facility
that produces electricity; this electricity is consumed by the
wastewater treatment facility. In such scenarios, what principles
should be used to determine how emissions from the consumption of
electricity in the production of electricity or in the production of
the fuel consumed by the facility are calculated? Similarly, there may
be scenarios in which a facility self-consumes thermal energy that it
produces, for example, if a facility generates steam as a byproduct
that is
[[Page 47808]]
used (a) by the facility to turn a turbine that generates electricity
or (b) to clean or compress fuel ultimately consumed by that facility
to generate electricity. What principles should be used be used to
determine emissions from the self-consumption of thermal energy by the
CHP facility?
e. Certain Issues Related to LCA Baselines and Modeling
The Treasury Department and the IRS intend to provide additional
rules and principles addressing what factors must be considered to
assess the emissions associated with feedstocks used by C&G Facilities
to produce electricity for purposes of the Clean Electricity Tax
Credits.
Such rules would apply to all feedstocks used for the purposes of
the Clean Electricity Tax Credits and would provide conditions that
must be met in determining GHG emissions rates for purposes of the
Clean Electricity Tax Credits. The CAA explicitly defines the term
``lifecycle greenhouse gas emissions'' to include ``the aggregate
quantity of greenhouse gas emissions (including direct emissions and
significant indirect emissions such as significant emissions from land
use changes).'' Given the highly interconnected economic, energy, and
agricultural and other lands-based systems involved in electricity
production, the Treasury Department and the IRS recognize that
electricity production may have effects, including emissions effects,
beyond the direct supply chain. The Treasury Department and the IRS
think that the provision ``including direct emissions and significant
indirect emissions'' requires any LCA for the Clean Electricity Tax
Credits to adopt an approach that considers the consequential, or
market-mediated, impacts of increased demand for the input feedstocks
or fuels used in electricity production.
The EPA interpreted CAA 211(o)(1)(H) as requiring the agency in the
RFS context to account for the real-world emissions consequences of
increased production of biofuels. Thus, the EPA determined that CAA
section 211(o)(1)(H)'s inclusion of ``direct emissions and significant
indirect emissions such as significant emissions from land-use
changes'' requires a ``consequential'' approach to considering the
real-world emissions associated with biofuel production. Such an
approach includes consideration of market interactions induced by
expanded biofuel production and use that may result in secondary or
indirect greenhouse gas emissions.
The Treasury Department and the IRS propose to use a future
anticipated baseline approach for analyzing the greenhouse gas
emissions associated with the production of electricity by C&G
Facilities and feedstocks used by such facilities. This approach would
require generating a baseline projection of the future, which reflects
estimated future conditions under a business-as-usual (BAU) trajectory
that incorporates key drivers and trends informed by historical data
and other considerations. This baseline would then serve as the
``reference'' against which another scenario in which specific
conditions or changes, such as implementation of the policy embodied by
the Clean Electricity Tax Credits, can be projected. This construct
would allow for the evaluation of the projected estimated change or
difference of emissions outcomes between the two scenarios. These
scenarios would include (1) the baseline scenario (that is, without the
Clean Electricity Tax Credits) and (2) a policy scenario (that is, with
the Clean Electricity Tax Credits).
These scenarios would require, to the extent possible, data on: (1)
feedstock or fuel production systems (including fuel/feedstock
generation or extraction, etc.); (2) associated greenhouse gas
emissions and, if applicable, carbon pool fluxes; (3) the feedstock or
fuel's sector details; (4) feedstock or fuel demand and prices; (5)
energy market projections, including electricity demand and supply and
prices, if applicable; (6) future macroeconomic factors (for example,
EIA Annual Energy Outlook-derived population growth, gross domestic
product projections, demand functions tied to population or income);
(7) technological progress assumptions, especially if applicable to
stationary sources for which efficiency improvements are possible and
anticipated; and (8) other parameters (for example, representation of
current and anticipated, energy, environmental, or other policies
including expected outcomes from other parts of the IRA or other
policies, if relevant, that can inform or constrain BAU trajectories).
For example, the list that follows identifies proposed key modeling
approach elements and considerations for simulation of a future
anticipated baseline and policy scenarios specific to biomass-based
feedstocks: (1) model function types and model dynamics (for example,
economic optimization, intertemporal and/or recursive dynamic); (2)
anticipated future conditions (for example, macroeconomic, biophysical,
chemical); (3) greenhouse gas emissions representation, by including
the different greenhouse gases and the relevant greenhouse gas
emissions and sequestration sources (for example, how greenhouse gases
and their effects on the environment are incorporated and represented,
such as what emissions sources and factors are reflected in the model
or models); (4) forest sector representation (for example, how are
forestry and forest industries reflected in the model and how are they
tied to the rest of the economy); (5) agricultural sector
representation; (6) land use competition; (7) energy sector
representation; and (8) the appropriate spatial scale (for example,
international representation) for all of these considerations.
There may be different ways to model or estimate greenhouse gas
emissions associated with the production of electricity by a C&G
Facility. Consistent with the parameters in proposed Sec. 1.45Y-5(d),
the Treasury Department and the IRS seek comment on general principles
and factors to be considered to estimate net greenhouse gas emissions
associated with electricity production by C&G Facilities, including the
selection or creation of an assessment or modeling approach for the
purposes of Clean Electricity Tax Credits. Comment is specifically
requested on the following topics:
(1) What factors should be considered in deciding how to create and
maintain LCA baseline scenarios?
(2) What factors should be considered in deciding how to create and
maintain LCA scenarios other than the baseline?
(3) What existing model or suite of models are capable of
completing an LCA consistent with the section 45Y(b)(2)(B) and proposed
Sec. 1.45Y-5(d) and (e)? Please explain whether any such model or
models are open source or proprietary including what type of
documentation is publicly available detailing the model design, data,
inputs, and assumptions, as well as whether such models are able to
link with external data sources or models. Please also explain which
entities own, manage, or update such models. Furthermore, because some
LCA models may be used for only a certain aspect of the total required
analysis (for example, a model may solely assess the agriculture
sector) or only include certain feedstocks or technologies, please
specify what technologies, feedstocks, or type of impacts are included
or are not included in the recommended model or models. Please also
explain how widely and for what purposes the recommended model or
models are used, including whether the model has previously been used
by a Federal or State agency or national
[[Page 47809]]
laboratory. Please explain whether and how the model has been peer-
reviewed. Finally, please explain whether the recommended model or
models would need to be updated or combined with another model in order
to be fully consistent with section 45Y(b)(2)(B) and proposed Sec.
1.45Y-5(d) and (e).
(4) What data sources and peer-reviewed studies provide information
on different feedstock production systems that would be most important
to consider for gathering data for LCA modeling? These sources and
studies should provide information on the feedstock production process
(ideally, beginning with the extraction or generation of the feedstock
and ending at the electrical meter) and on markets related to the
feedstock production process. Appropriate sources and studies should
also describe the greenhouse gas emissions associated with these
production systems and markets, as well as any monitoring, reporting,
and verification processes used in the creation of the source or study.
If recommending data sources or peer-reviewed studies, please specify
whether they are open source or proprietary; their temporal and spatial
scale (for example, regional versus national studies); whether they are
regularly updated and with what frequency; whether they are collected
by a Federal or State agency or statistical agency or national
laboratory; and whether they employ direct measurements or modeling or
use remote sensing data. Finally, please assess overall the strengths
and weaknesses of the recommended sources or studies with respect to
their usefulness as modeling data inputs.
(5) The availability of the Clean Electricity Tax Credits may
create an incentive to use a given material differently than in the
past (for example, a material that was not typically used for
electricity production is initially used or used more broadly after the
credits are available). How could an LCA or LCAs establish and account
for whether the incentives created by the Clean Electricity Tax Credits
have resulted in a reduction, removal of, or increase in greenhouse gas
emissions beyond the emissions that would have occurred in the absence
of the Clean Electricity Tax Credits? For example, consider a scenario
in which, in the absence of the incentive provided by the Clean
Electricity Tax Credits, an amount of woody biomass would be either
left standing or laying in a forest, pile burned, or used to create
timber products, such as charcoal or mulch, each an ``alternative
fate.'' In the presence of the Clean Electricity Tax Credits, that
amount of woody biomass is now being used to generate electricity. How
should the possible fates of the feedstock in the absence of the Clean
Electricity Tax Credits (for example, left in standing or laying in a
forest, pile burned, or used to create a timber product, such as
charcoal or mulch) be represented in an LCA, including the different
potential direct and indirect greenhouse gas effects of those fates?
(6) How could an LCA account for alternative fates stemming from
events such as potential future greenhouse gas emissions from wildfires
that could be associated with woody biomass feedstocks that may be left
on the landscape in the absence of the incentive created by the Clean
Electricity Tax Credits? How would these considerations be affected if,
in the absence of the incentive provided by the Clean Electricity Tax
Credits, a feedstock is used productively but not in electricity
production?
(7) Which feedstock classification categories should be established
for purposes of LCA analyses, if any? To what extent should the LCA or
LCAs differentiate between the sources and subtypes of a given
feedstock for electricity production or not (for example, all forest-
derived materials as one category, or subcategories such as logging
residues)? If applied, should subcategories of feedstocks be aggregated
in modeling, or should they be should they be separately modeled? How
could the LCA or LCAs account for the emissions attributed to
feedstocks that include a mixture of sub-types of feedstocks, such as
products, coproducts, byproducts and residues? Should LCAs be
standardized or provide average estimates for feedstocks and how could
such standardization best be done?
(8) What factors should be considered to determine the appropriate
scale(s) of feedstock demand changes or other shocks to evaluate the
extent to which the production, processing, and use of the feedstocks
used for electricity production results in net greenhouse gas
emissions?
(9) Should the shock reflect a small incremental increase in use of
the feedstock to reflect the marginal impact, or a large increase to
reflect the average effect of all potential users?
(10) What could the general increment of the shock be? Should it be
specified as an absolute or relative increase?
(11) What factors should be considered to determine whether shocks
for different feedstocks should be implemented in isolation (separate
model runs), in aggregate (for example, as an across-the-board increase
in biomass usage endogenously allocated by the model across
feedstocks), or something in between (for example, separately model
agriculture-derived and forest-derived feedstocks, but endogenously
allocate within each category)?
(12) How should variation and uncertainty be considered in
evaluating model estimates of the GHG emissions associated with an
increase in the use of a feedstock for electricity generation?
Feedstock modeling will likely involve uncertainties and variabilities
associated with data, parameterization, scenario, and model choices.
For example, if the modeling reports a range of GHG emissions changes
that are greater and less than zero, how should such a range of
outcomes be evaluated under section 45Y(b)(2)(B)?
f. Book and Claim Accounting
The Treasury Department and the IRS are considering whether to
allow and provide rules governing the use of book and claim accounting
in the final regulations for the Clean Electricity Tax Credits. Under
these proposed regulations, the methods used, and emissions associated
with the production of fuels and feedstocks used in the generation of
electricity are essential to determining whether a facility is a C&G
Facility and assessing its GHG emissions rate. See Explanation of
Provisions sections I.D.1 and I.D.3 for discussion of tracking fuel or
feedstock production to determine whether a facility is a C&G Facility
or Non-C&G Facility. EACs are a form of book-and-claim accounting that
conveys information about the attributes associated with a unit of
energy, including the fuel or feedstock used to create the energy. EACs
may also include information about the location of the facility that
generated the unit of energy, when that facility began operations, and
when the unit of energy was produced. Because EACs can serve as a
system for tracking the attributes associated with the production of a
unit of energy and as a means to avoid double-counting, the Treasury
Department and the IRS are considering whether to provide rules that
address the use of book-and-claim systems as a means of verifying the
emissions profile of a facility's use of fuel and electricity
production. The Treasury Department and the IRS request comment on
whether and how it may be appropriate for such systems to be used in
determining GHG emissions rates in the final regulations for the Clean
Electricity Tax Credits. In particular, comment is requested regarding
what types of
[[Page 47810]]
energy inputs, including fuels and feedstocks, have or may develop
sufficiently robust book-and-claim systems that may be suitable for use
in substantiating and verifying claims of use of such energy inputs for
purposes of the Clean Electricity Tax Credits. The Treasury Department
and the IRS are considering providing rules that may permit the use of
book and claim accounting in the final regulations if there are
sufficient assurances that the energy attributes claimed under such
system are verifiable and not susceptible to double counting.
5. Carbon Capture and Sequestration
Proposed Sec. 1.45Y-5(e) would provide that, for purposes of
proposed Sec. 1.45Y-5(c) and (d), the GHG emissions rate for a Non-C&G
Facility or C&G Facility must exclude any qualified carbon dioxide in
such facility's production of electricity that is captured by the
taxpayer, and, pursuant to any regulations established under section
45Q(f)(2), disposed of by the taxpayer in secure geological storage, or
utilized by the taxpayer in a manner described in section 45Q(f)(5) and
any regulations established under such section. The Treasury Department
and the IRS request comment on the following:
(1) What requirements should apply to substantiate and verify that
carbon dioxide that is captured by the taxpayer is (a) disposed of by
the taxpayer in secure geological storage pursuant to any regulations
established under section 45Q(f)(2), disposed of by the taxpayer in
secure geological storage, or (b) utilized by the taxpayer in a manner
described in section 45Q(f)(5)? For example, would it be appropriate to
limit the carbon dioxide that may be considered to be qualified carbon
dioxide under section 45Y(e)(3), and thus excluded under section
45Y(b)(2)(D), to carbon dioxide that has been reported to the U.S.
Greenhouse Gas Reporting Program (GHGRP)? If so, which GHGRP subpart or
subparts should be used?
(2) In the event that carbon dioxide that was captured and
sequestered as required by section 45Y(e)(3) subsequently escapes into
the atmosphere after such carbon dioxide was taken into account by a
taxpayer that claimed a Clean Electricity Tax Credit, what enforcement
mechanisms or regulatory regimes should be used to identify when such
emissions leakages have occurred? How should such emissions leakages be
taken into account in determining compliance with the GHG emissions
rate requirements under sections 45Y and 48E? Are the existing
recapture provisions under section 45Q sufficient for this purpose?
(3) Should carbon capture and sequestration that occurs in the
production of fuel that is used by a facility to produce electricity be
taken into account under proposed Sec. 1.45Y-5(e) and section
45Y(e)(3)? If so, how should such use of carbon capture and
sequestration (for example, emissions from CO<INF>2</INF> capture,
purification and compression, transportation, and CO<INF>2</INF> site
injection) be assessed in an LCA? Should emissions that occur from
carbon capture and sequestration be taken into account in determining
the net rate of greenhouse gases emitted into the atmosphere by a C&G
Facility in the production of electricity? What verification and
substantiation requirements would be appropriate to establish that
carbon capture and sequestration that met the requirements of proposed
Sec. 1.45Y-5(e) and section 45Y(e)(3) were met in the production of a
fuel or feedstock? Are the existing recapture provisions under section
45Q sufficient for this purpose?
6. Annual Table
Proposed Sec. 1.45Y-5(f)(1) would provide that, as required by
section 45Y(b)(2)(C)(i), the Secretary will annually publish a table
that sets forth the GHG emissions rates for types or categories of
facilities (Annual Table), which a taxpayer must use for purposes of
section 45Y. Proposed Sec. 1.45Y-5(f)(1) would further provide that,
except as provided in proposed Sec. 1.45Y-5(h), a taxpayer that owns a
facility that is described in the Annual Table on the first day of the
taxpayer's taxable year in which the section 45Y or section 48E credit
is determined with respect to such facility must use the Annual Table
as of such date to determine an emissions rate for such facility for
such taxable year. Types or categories of facilities must be added or
removed from the Annual Table consistent with, for Non-C&G Facilities,
a technical assessment of the fundamental energy transformation into
electricity as provided in proposed Sec. 1.45Y-5(c)(1)(ii), and, for
C&G Facilities, an LCA that complies with proposed Sec. 1.45Y-5(d) and
(e). Proposed Sec. 1.45Y-5(f)(2) would also provide that in connection
with the publication of the Annual Table, the Secretary must publish an
accompanying expert analysis that addresses any types or categories of
facilities added or removed from the Annual Table since its last
publication. Such analysis must be prepared by one or more of the
National Laboratories, in consultation with other agency experts, such
as experts from DOE, the Treasury Department, the United States
Department of Agriculture (USDA), and the EPA, as appropriate, and must
address whether the addition or removal of types or categories of
facilities from the Annual Table complies with section 45Y(b)(2)(A) and
45Y(b)(2)(B) (which refers to the definition of lifecycle greenhouse
gas emissions in section 211(o)(1)(H) of the CAA) of the Code and
proposed Sec. 1.45Y-5. The Treasury Department and the IRS view the
requirement to publish an expert analysis prepared by the National
Laboratories of changes to the Annual Table as essential to ensuring
public accountability and adherence to sound scientific principles.
This requirement would also ensure that the Secretary has a robust
record to inform any changes to the Annual Table.
The Treasury Department and the IRS intend to include in the Annual
Table the types or categories of facilities that are described in the
final regulations as having a GHG emissions rate that is not greater
than zero. The Treasury Department and the IRS intend to publish the
first Annual Table after the publication of the final regulations.
Until the first publication of the Annual Table, taxpayers may treat
the types or categories of facilities that are listed in proposed Sec.
1.45Y-5(c)(2)(i) through (viii) as being described in an Annual Table
as having a GHG emissions rate that is not greater than zero. Further,
any types or categories of facilities that are added or removed from
this list in the first publication of the Annual Table must be
accompanied by the publication of an expert analysis of such change as
provided in proposed Sec. 1.45Y-5(f)(2).
7. Provisional Emissions Rates
Proposed Sec. 1.45Y-5(g) would provide the rules applicable to
provisional emissions rates. Proposed Sec. 1.45Y-5(g)(1) would provide
that, in the case of any facility that is of a type or category for
which an emissions rate has not been established by the Secretary under
proposed Sec. 1.45Y-5(g), a taxpayer that owns such facility may file
a petition with the Secretary for the determination of the emissions
rate with respect to such facility (Provisional Emissions Rate or PER).
Proposed Sec. 1.45Y-5(g)(2) would provide that an emissions rate
has not been established by the Secretary for a facility for purposes
of section 45Y(b)(2)(C)(ii) if such facility is not described in the
Annual Table. Proposed Sec. 1.45Y-5(g)(2) would further provide that
if a taxpayer's request for an emissions value pursuant to proposed
Sec. 1.45Y-5(g)(5) is pending at
[[Page 47811]]
the time such facility is or becomes described in the Annual Table, the
taxpayer's request for an emissions value will be automatically denied.
Proposed Sec. 1.45Y-5(g)(3) would provide the process for filing a
PER petition. Proposed Sec. 1.45Y-5(g)(3) would provide that to file a
PER petition with the Secretary, a taxpayer must submit a PER petition
by attaching it to the taxpayer's Federal income tax return or Federal
return, as appropriate, for the first taxable year in which the
taxpayer claims the section 45Y credit with respect to the facility to
which the PER petition applies. Proposed Sec. 1.45Y-5(g)(3) would
further provide that a PER petition must contain an emissions value
and, if applicable, the associated DOE letter. An emissions value may
be obtained from DOE or by using the LCA model designated in proposed
Sec. 1.45Y-5(g)(6). An emission value obtained from DOE will be based
on an analytical assessment of the emissions rate associated with the
facility, performed by one or more National Laboratories, in
consultation with other agency experts as appropriate, consistent with
proposed Sec. 1.45Y-5. A taxpayer would be required to retain in its
books and records the request to DOE for an emissions value, including
any information provided by the taxpayer to DOE pursuant to the
emissions value request process provided in proposed Sec. 1.45Y-
5(g)(5). Alternatively, an emissions value can be determined by the
taxpayer for a facility using the most recent version of an LCA model
or models, as of the time the PER petition is filed, that have been
designated by the Secretary for such use under proposed Sec. 1.45Y-
5(g)(6). If an emissions value is determined using the designated
model, a taxpayer is required to provide to the IRS information to
support its determination of the emissions value in the form and manner
prescribed in IRS forms or instructions or in publications or guidance
published in the Internal Revenue Bulletin. A taxpayer may not request
an emissions value from DOE for a facility for which an emissions value
can be determined by using the most recent version of an LCA model or
models that have been designated by the Secretary for such use under
proposed Sec. 1.45Y-5(g)(6).
Proposed Sec. 1.45Y-5(g)(4) would provide that, upon the IRS's
acceptance of the taxpayer's Federal income tax return or Federal
return, as appropriate, containing a PER petition, the emissions value
of the facility specified on such petition will be deemed accepted.
Proposed Sec. 1.45Y-5(g)(4) would further provide that a taxpayer
would be able to rely upon an emissions value provided by DOE for
purposes of calculating and claiming a section 45Y credit, provided
that any information, representations, or other data provided to DOE in
support of the request for an emissions value are accurate. If
applicable, a taxpayer may rely upon an emissions value determined for
a facility using the most recent version of the LCA model or models
that, as of the time the PER petition is filed, have been designated by
the Secretary for such use under proposed Sec. 1.45Y-5(g)(6), provided
that any information, representations, or other data used to obtain
such emissions value are accurate. The IRS's deemed acceptance of an
emissions value is the Secretary's determination of the PER. Finally,
proposed Sec. 1.45Y-5(g)(4) would provide that the taxpayer must still
comply with all applicable requirements for the section 45Y credit and
any information, representations, or other data supporting an emissions
value are subject to later examination by the IRS.
Proposed Sec. 1.45Y-5(g)(5) would provide the rules applicable to
the emissions value request process. Proposed Sec. 1.45Y-5(g)(5) would
provide that an applicant that submits a request for an emissions value
must follow the procedures specified by DOE to request and obtain such
emissions value, and that emissions values will be determined
consistent with the rules provided in proposed Sec. 1.45Y-5. Proposed
Sec. 1.45Y-5(g)(5) would further provide that an applicant may request
an emissions value from DOE only after a front-end engineering and
design (FEED) study or similar indication of project maturity, as
determined by DOE, such as the completion of a project specification
and cost estimation sufficient to inform a final investment decision
for the facility. Proposed Sec. 1.45Y-5(g)(5) would provide that DOE
may decline to review applications that are non-responsive and those
applications that relate to a facility that is described in the Annual
Table (consistent with proposed Sec. 1.45Y-5(g)(2)) or a facility that
can determine an emissions value using a designated LCA model under
proposed Sec. 1.45Y-5(g)(6) (consistent with proposed Sec. 1.45Y-
5(g)(3)), or applications that are incomplete. Proposed Sec. 1.45Y-
5(g)(5) would also provide that applicants must follow DOE's guidance
and procedures for requesting and obtaining an emissions value from
DOE. DOE will publish guidance and procedures that applicants must
follow to request and obtain an emissions value from DOE. DOE's
guidance and procedure will include a process, under limited
circumstances, for a taxpayer to request a revision to DOE's initial
assessment of an emissions value on the basis of revised technical
information or facility design and operation. The Treasury Department
and the IRS anticipate that the emissions value request process will
open after the publication of the final regulations.
Proposed Sec. 1.45Y-5(g)(6) would provide that the Secretary may
designate one or more LCA models for a taxpayer to determine an
emissions value for C&G Facilities that are not described in the Annual
Table. Proposed Sec. 1.45Y-5(g)(6) would further provide that a model
may only be designated if it complies with section 45Y(b)(2)(B) and
proposed Sec. 1.45Y-5(d) and (e). The Secretary may revoke the
designation of an LCA model or models. In connection with the
designation or revocation of a designation of an LCA model or models,
the Secretary would be required to publish an accompanying expert
analysis of the model prepared by one or more of the National
Laboratories, in consultation with other agency experts as appropriate,
and such analysis must address the model's compliance with section
45Y(b)(2)(B) of the Code and proposed Sec. 1.45Y-5(d) and (e). The
Treasury Department and the IRS view the requirement to publish an
expert analysis prepared by the National Laboratories of the
designation or revocation of designation of an LCA model or models as
essential to ensuring public accountability and adherence to sound
scientific principles. This requirement would also ensure that the
Secretary has a robust record to inform any designations or revocations
of an LCA model or models.
Proposed Sec. 1.45Y-5(g)(7) would provide the rules governing the
effect of a PER. Proposed Sec. 1.45Y-5(g)(7) would provide that a
taxpayer may use a PER determined by the Secretary to determine the
section 45Y credit for the facility to which the PER applies, provided
all other requirements of section 45Y are met. Proposed Sec. 1.45Y-
5(g)(7) would further provide that the Secretary's PER determination is
not an examination or inspection of books of account for purposes of
section 7605(b) of the Code and does not preclude or impede the IRS
(under section 7605(b) or any administrative provisions adopted by the
IRS) from later examining a return or inspecting books or records with
respect to any taxable year for which the section 45Y credit is
claimed. Finally, proposed Sec. 1.45Y-5(g)(7) would provide that a PER
determination does not signify that the IRS has determined that the
[[Page 47812]]
requirements of section 45Y have been satisfied for any taxable year.
8. Reliance on Annual Table or Provisional Emissions Rate
Proposed Sec. 1.45Y-5(h) would provide that taxpayers may rely on
the Annual Table in effect as of the date a facility began construction
or the provisional emissions rate that has been determined by the
Secretary for the taxpayer's facility under proposed Sec. 1.45Y-
5(g)(4) to determine the facility's GHG emissions rate for that
facility for any taxable year that is within the 10-year period
described in section 45Y(b)(1)(B), provided that the facility continues
to operate as a type of facility that is described in the Annual Table
or the facility's emissions value request, as applicable, for the
entire taxable year.
9. Substantiation
Taxpayers have a general obligation to substantiate and verify that
they have met the requirements of any tax credits claimed on their tax
returns. Section 6001 of the Code provides that every person liable for
any tax imposed by the Code, or for the collection thereof, must keep
such records as the Secretary may from time to time prescribe. Section
1.6001-1(a) provides that any person subject to income tax must keep
such permanent books of account or records as are sufficient to
establish the amount of gross income, deductions, credits, or other
matters required to be shown by such person in any return of such tax.
Section 1.6001-1(e) provides that the books and records required by
Sec. 1.6001-1 must be retained so long as the contents thereof may
become material in the administration of any internal revenue law.
In addition to this general obligation to substantiate eligibility
for a claimed tax credit, taxpayers may also be required to keep
specific records as prescribed by the Secretary. This may be
appropriate for purposes of the section 45Y credit because certain
types of facilities may depend on operational choices, such as the use
of certain types of feedstocks or fuels or engaging in carbon capture
and sequestration, to achieve a net GHG emissions rate that is not
greater than zero for a taxable year, and these operational choices may
vary by year. Proposed Sec. 1.45Y-5(i)(1) would provide that a
taxpayer must maintain in its books and records documentation regarding
the design, operation, and if applicable, feedstock or fuel source used
by the facility that establishes that such facility had a GHG emissions
rate, as determined under Sec. 1.45Y-5, that is not greater than zero
for the taxable year. The Treasury Department and the IRS intend to
require in the final regulations that taxpayers maintain specific types
of documentation to substantiate that a facility for which a section
45Y credit is claimed has a net GHG emissions rate that is not greater
than zero. The Treasury Department and the IRS request comment on the
types of documentation taxpayers should be required to maintain to
substantiate eligibility for the section 45Y credit.
Proposed Sec. 1.45Y-5(i)(2) would further provide that
documentation that is sufficient to substantiate that a facility had a
GHG emissions rate of not greater than zero includes documentation or a
report prepared by an unrelated party that verifies that a facility had
such an emissions rate. Proposed Sec. 1.45Y-5(i)(2) would also provide
that facilities described in Sec. 1.45Y-5(c)(2) can maintain
sufficient documentation to demonstrate a GHG emissions rate showing
that the facility is described in Sec. 1.45Y-5(c)(2). Finally,
proposed Sec. 1.45Y-5(i)(2) would provide that future guidance may
describe sufficient documentation to substantiate that certain
facilities have a GHG emissions rate of not greater than zero. Because
certain types or categories of facilities may have emissions rates that
are highly variable and dependent on complex interactions between
design choices, operational choices, and fuel and feedstock sourcing
choices, the Treasury Department and the IRS seek comment on the
relative risk of inadvertently crediting above-zero-emissions
electricity generation for types or categories of facilities that may
potentially be eligible for the section 45Y credit. In addition,
comment is also requested on supply chain tracing and substantiation
requirements that the Treasury Department and the IRS may require in
the final regulations to demonstrate whether a facility used a specific
fuel to produce electricity and that such fuel has the emissions
attributes claimed by the taxpayer. Specifically, to inform the
development of the substantiation rules for the Clean Electricity Tax
Credits, comment is requested on the following topics:
(1) What types of documentation or substantiation should a taxpayer
maintain to establish that an input in the supply chain of a fuel/
feedstock used for electricity production has the energy attributes or
other relevant characteristics (for example, source and production
process) that were taken into account in determining a GHG emissions
rate?
(2) What existing systems, industry standards, or practices may be
used to substantiate that a facility's operations and the supply chain
for the inputs it used to produce electricity resulted in a GHG
emissions rate that is not greater than zero for a taxable year? If
existing systems, standards, or practices are currently not
sufficiently developed to serve as a form of substantiation, how should
such tracking and verification systems be developed and how long might
such development take?
(3) What supply chain tracing systems or verification bodies
address fuels or feedstocks that may be commonly used by facilities
that may be eligible for the Clean Electricity Tax Credits? What fuels
or feedstocks could these systems or bodies address and for what
purpose?
E. One-Megawatt Exception for Section 45Y
The Treasury Department and the IRS intend to provide a more
detailed definition for the One-Megawatt Exception in section
45Y(a)(2)(B)(i) by expanding upon the definition provided in the August
Proposed Regulations. The final regulations would provide that, for
purposes of section 45Y(a)(2)(B)(i), the determination of whether a
qualified facility has a maximum net output of less than one megawatt
of electricity (as measured in alternating current) is determined based
on the nameplate capacity. If applicable, taxpayers must use the
International Standard Organization (ISO) conditions to measure the
maximum electrical generating output of a qualified facility. For
purposes of this measurement, the nameplate capacity is the maximum
electrical generating output in MW (as measured in alternating current)
that the qualified facility is capable of producing on a steady state
basis and during continuous operation under standard conditions, as
measured by the manufacturer and consistent with the definition of
nameplate capacity provided in 40 CFR 96.202. The Treasury Department
and the IRS request comment on this proposed definition. This rule is
proposed to apply to qualified facilities placed in service after
December 31, 2024, and during taxable years ending on or after the date
of publication of the final regulations in the Federal Register.
II. Rules Applicable to the Clean Electricity Investment Tax Credit
These proposed regulations are organized in five sections, proposed
Sec. Sec. 1.48E-1 through 1.48E-5 (section 48E regulations). Proposed
Sec. 1.48E-1 would provide an overview of the section 48E regulations,
generally applicable definitions, and the rules applicable to the
calculation of section 48E credit. Proposed Sec. 1.48E-2 would provide
rules
[[Page 47813]]
relating to a qualified facility, a qualified investment, a qualified
property, and an energy storage technology (EST). Section 1.48E-3 is
reserved for rules relating to the increased credit amount for meeting
the prevailing wage and apprenticeship requirements. A cross reference
will be added to Sec. 1.48E-3 in the final regulations when Sec.
1.48E-3 is finalized. Proposed Sec. 1.48E-4 would provide the rules of
general application under section 48E, including the rules regarding
the inclusion of qualified interconnection costs in the basis of a low-
output associated qualified facility, rules for expansion of a facility
and incremental production, rules for retrofitting an existing
facility, rules for the ownership of a qualified facility or an EST,
rules regarding the coordination of the section 48E credit with other
Federal income tax credits, and rules for credit recapture. Proposed
Sec. 1.48E-5 would provide rules pertaining to the determination of a
GHG emissions rate for a facility under section 48E.
A. Amount of Credit
Proposed Sec. 1.48E-1(a) would provide an overview of the section
48E regulations and provide definitions of terms for purposes of the
section 48E regulations. Proposed Sec. 1.48E-1(b) would explain how to
calculate the amount of the section 48E credit for any taxable year.
Proposed Sec. 1.48E-1(b)(1) would provide that the credit is an
amount equal to the applicable percentage of the qualified investment
for such taxable year with respect to any qualified facility (as
defined in proposed Sec. 1.48E-2(a)) and any EST (as defined in
proposed Sec. 1.48E-2(g)). Proposed Sec. 1.48E-1(b)(2) would define
the applicable percentage as the base rate in proposed Sec. 1.48E-
1(b)(3) or the alternative rate in proposed Sec. 1.48E-1(b)(4).
Proposed Sec. 1.48E-1(b)(2) would also propose that the applicable
percentage may be increased as provided in section 48E(a)(3)(A) and
proposed Sec. 1.48E-1(b)(5) in the case of a qualified facility that
is located in an energy community. Similarly, Sec. 1.48E-1(b)(2) would
propose that the applicable percentage may be increased as provided in
section 48E(a)(3)(B) and proposed Sec. 1.48E-1(b)(6) in the case of a
qualified facility that satisfies the domestic content requirements.
Proposed Sec. 1.48E-1(b)(3) would describe the base rate as 6
percent. Proposed Sec. 1.48E-1(b)(4) would describe the alternative
rate as 30 percent if certain prevailing wage and apprenticeship
requirements are satisfied.
Proposed Sec. 1.48E-1(b)(5) would provide rules applicable to the
energy communities increase in credit rate. Proposed Sec. 1.48E-
1(b)(6) would provide rules applicable to the domestic content increase
in credit rate.
Proposed Sec. 1.48E-1(c) would provide the credit phase-out rules.
Generally, proposed Sec. 1.48E-1(c)(1) would provide that the amount
of the clean electricity investment credit under section 48E for any
qualified facility or EST the construction of which begins during a
calendar year described in section 48E(e)(2) is equal to the product of
the amount of the credit determined under section 48E(a) and proposed
Sec. 1.48E-1(b) without regard to section 48E(e), multiplied by the
phase-out percentage under section 48E(e)(2) and proposed Sec. 1.48E-
1(c)(2). Proposed Sec. 1.48E-1(c)(2) would provide that the phase-out
percentage is 100 percent for any qualified investment with respect to
any qualified facility or EST the construction of which begins during
the first calendar year following the applicable year; 75 percent for
any qualified investment with respect to any qualified facility or EST
the construction of which begins during the second calendar year
following the applicable year; 50 percent for any qualified investment
with respect to any qualified facility or EST the construction of which
begins during the third calendar year following the applicable year;
and 0 percent for any qualified investment with respect to any
qualified facility or EST the construction of which begins during any
calendar year subsequent to the calendar year described in section
48E(e)(2)(C). Proposed Sec. 1.48E-1(c)(3) would define ``applicable
year'' for purposes of proposed Sec. 1.48E-1(c) as having the same
meaning as provided in proposed Sec. 1.45Y-1(c)(3).
B. Qualified Facility
Proposed Sec. 1.48E-2(a) would define a ``qualified facility'' to
mean a facility that is used for the generation of electricity; is
placed in service by the taxpayer after December 31, 2024; and has a
GHG emissions rate of not greater than zero (as determined under rules
provided in Sec. 1.45Y-5).
1. Property Included in Qualified Facility
Proposed Sec. 1.48E-2(b) would provide that a qualified facility
includes a unit of qualified facility (as defined in proposed Sec.
1.48E-2(b)(2)(i)) and property owned by the same taxpayer that is
integral to the unit of qualified facility (as described in proposed
Sec. 1.48E-2(b)(3)). Proposed Sec. 1.48E-2(b)(1) would provide that
any component of property that meets the requirements of proposed Sec.
1.48E-2(b) is part of a qualified facility regardless of where such
component of property is located. Proposed Sec. 1.48E-2(b)(1) would
provide that a qualified facility does not include any electrical
transmission equipment, such as transmission lines and towers, or any
equipment beyond the electrical transmission stage. Proposed Sec.
1.48E-2(b)(1) would also provide that a qualified facility generally
does not include equipment that is an addition or modification to an
existing qualified facility. However, proposed Sec. 1.48E-2(b)(1)
would reference proposed Sec. 1.48E-4(b) regarding the expansion of a
facility or incremental production and proposed Sec. 1.48E-4(c) for
rules regarding retrofitted facilities (80/20 Rule).
2. Functionally Interdependent
Proposed Sec. 1.48E-2(b)(2)(i) would provide that the unit of a
qualified functionally interdependent components of a property (as
defined in Sec. 1.48E-2(b)(2)(ii) owned by the taxpayer that are
operated together and that can operate apart from other property to
produce electricity. Proposed Sec. 1.48E-2(b)(2)(i) would further
provide that no provision of this section, Sec. 1.48E-1, or Sec.
1.48E-4 through 1.48E-5 uses the term ``unit'' in respect of a
qualified facility with any meaning other than that provided in Sec.
1.48E-2(b)(2)(ii). A reference to Sec. 1.48E-3 will also be added to
the previous sentence in proposed Sec. 1.48E-2(b)(2)(i) when that
regulation is finalized, but it cannot be added until Sec. 1.48E-3 is
finalized. Proposed Sec. 1.48E-2(b)(2)(ii) would define components as
``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.
3. Integral Part
Proposed Sec. 1.48E-2(b)(3)(i) would provide that property owned
by a taxpayer is an integral part of a qualified facility owned by the
same taxpayer if it is used directly in the intended function of the
qualified facility and is essential to the completeness of the intended
function. Proposed Sec. 1.48E-2(b)(3)(i) would also clarify that
property that is an integral part of a qualified facility is part of
the qualified facility. Lastly, proposed Sec. 1.48E-2(b)(3)(i) would
explain that a taxpayer may not claim the section 48E credit for any
property that is an integral part of a qualified facility that is not
owned by the taxpayer.
[[Page 47814]]
Proposed Sec. 1.48E-2(b)(3)(ii) would describe power conditioning
equipment and transfer equipment as integral parts of a qualified
facility. Proposed Sec. 1.48E-2(b)(3)(ii) would further provide that
power conditioning equipment includes equipment that modifies the
characteristics of electricity into a form suitable for use or
transmission or distribution. Proposed Sec. 1.48E-2(b)(3)(ii) would
also provide that parts related to the functioning or protection of
power conditioning equipment are also treated as power conditioning
equipment and include examples.
Proposed Sec. 1.48E-2(b)(3)(ii) would further provide that
transfer equipment includes components that permit the aggregation of
electricity generated by components of qualified facilities and
components that alter voltage to permit transfer to a transmission or
distribution line and would clarify that transfer equipment does not
include transmission or distribution lines. Proposed Sec. 1.45Y-
2(b)(3)(ii) would provide examples of transfer equipment that include,
but are not limited to, wires, cables, and combiner boxes that conduct
electricity. Proposed Sec. 1.45Y-2(b)(3)(ii) would provide that parts
related to the functioning or protection of transfer equipment are also
treated as transfer equipment and include examples.
Proposed Sec. 1.48E-2(b)(3)(iii) would provide that roads that are
an integral part of a qualified facility are those roads integral to
the intended function of the qualified facility such as onsite roads
that are used to operate and maintain the qualified facility. Proposed
Sec. 1.48E-2(b)(3)(iii) would also clarify that roads primarily for
access to the site, or roads used primarily for employee or visitor
vehicles, are not integral to the intended function of the qualified
facility, and thus are not an integral part of a qualified facility.
Proposed Sec. 1.48E-2(b)(3)(iv) and (v) would provide that fences
and buildings (also referred to as structures) are generally not
integral parts of a qualified facility because they are not integral to
the intended function of the qualified facility. However, a building
(or structure) may be an integral part of a qualified facility if it is
essentially an item of machinery or equipment and a structure that
houses property that is integral to the intended function of the
qualified facility, if the use of the structure is so closely related
to the use of the housed components of property therein that the
structure clearly can be expected to be replaced if the components of
property it initially houses are replaced.
Proposed Sec. 1.48E-2(b)(3)(vi) would provide a rule for shared
integral property stating that multiple qualified facilities (whether
owned by one or more taxpayers), including qualified facilities with
respect to which a taxpayer has claimed a credit under section 48E or
another Federal income tax credit, may include shared property that may
be considered an integral part of each qualified facility so long as
the cost basis for the shared property is properly allocated to each
qualified facility and the taxpayer only claims a section 48E credit
with respect to the portion of the cost basis properly allocable to a
facility for which the taxpayer is claiming a section 48E credit.
Proposed Sec. 1.48E-2(b)(3)(vi) would further clarify that the total
cost basis of such shared property divided among the qualified
facilities may not exceed 100 percent of the cost of such shared
property. Lastly, proposed Sec. 1.48E-2(b)(3)(vi) specifies that
property that is shared by a qualified facility (as defined in section
48E(b)(3)) (48E Qualified Facility) and a qualified facility (as
defined by section 45Y(b) (45Y Qualified Facility) that is an integral
part of both qualified facilities will not affect the eligibility of
the 48E Qualified Facility for the section 48E credit or the 45Y
Qualified Facility for the section 45Y credit.
4. Coordination With Other Credits
Proposed Sec. 1.48E-2(c)(1) would provide that the term
``qualified facility'' (as defined in section 48E(b)(3)) will not
include any facility for which a credit determined under section 45,
45J, 45Q, 45U, 45Y, 48, or 48A is allowed under section 38 for the
taxable year or any prior taxable year. Proposed Sec. 1.48E-2(c)(1)
would further clarify that a taxpayer that directly owns a qualified
facility (as defined in section 48E(b)(3)) that is eligible for both a
section 48E credit and another Federal income tax credit is eligible
for the section 48E credit only if the other Federal income tax credit
was not allowed with respect to the qualified facility. Proposed Sec.
1.48E-2(c)(1) would provide that nothing in proposed Sec. 1.48E-2(c)
precludes a taxpayer from claiming a section 48E credit with respect to
a qualified facility (as defined in section 48E(b)(3)) that is co-
located with another facility for which a credit determined under
section 45, 45J, 45Q, 45U, 45Y, 48, or 48A is allowed under section 38
for the taxable year or any prior taxable year.
Proposed Sec. 1.48E-2(c)(2) would clarify that for purposes of
proposed Sec. 1.48E-2(c)(1), the term ``allowed'' only includes
credits that taxpayers have claimed on a Federal income tax return or
Federal return, as appropriate, and that the IRS has not challenged in
terms of the taxpayer's eligibility.
Proposed Sec. 1.48E-2(c)(3) would include several examples that
illustrate the application of the rules provided in proposed Sec.
1.48E-2(c).
5. Qualified Investment With Respect to a Qualified Facility
Proposed Sec. 1.48E-2(d) would describe a qualified investment
with respect to any qualified facility for any taxable year as the sum
of the basis of any qualified property (as defined in proposed Sec.
1.48E-2(e)(1)) placed in service by the taxpayer during such taxable
year that is part of a qualified facility (as defined in proposed Sec.
1.48E-2(a)) and the amount of any expenditures paid or incurred by the
taxpayer for qualified interconnection property (as defined in proposed
Sec. 1.48E-4(a)(2)).
6. Qualified Property
a. Generally
Proposed Sec. 1.48E-2(e) would define ``qualified property'' for
purposes of proposed Sec. 1.48E-2(a) to mean property that meets three
requirements. First, proposed Sec. 1.48E-2(e)(1)(i) would require that
the property is tangible personal property (as defined in proposed
Sec. 1.48E-2(f)(1)) or other tangible property (not including a
building or its structural components) (as defined in proposed Sec.
1.48E-2(f)(2)), but only if such other tangible property is used as an
integral part (as defined proposed Sec. 1.48E-2(b)(3)) of the
qualified facility (as defined in proposed Sec. 1.48E-2(a)).
Second, proposed Sec. 1.48E-2(e)(1)(ii) would require that
depreciation (or amortization in lieu of depreciation) be allowable (as
defined in proposed Sec. 1.48E-2(f)(6)) with respect to the property.
Third, proposed Sec. 1.48E-2(e)(1)(iii) would require that the
taxpayer either constructs, reconstructs, or erects the property (as
defined in proposed Sec. 1.48E-2(f)(3)) or acquires the property (as
defined in proposed Sec. 1.48E-2(f)(4)) if the original use of the
property (as defined in proposed Sec. 1.48E-2(f)(5)) commences with
the taxpayer.
Proposed Sec. 1.48E-2(e)(2) would provide that any component of a
qualified property that meets the requirements of proposed Sec. 1.48E-
2(e) is part of a qualified facility regardless of where such component
of property is located.
[[Page 47815]]
b. Definitions Related to Qualified Property
Tangible Personal Property
Proposed Sec. 1.48E-2(f)(1) would define the term ``tangible
personal property'' for purposes of section 48E and proposed Sec.
1.48E-2(b) to mean any tangible property except land and improvements
thereto, such as buildings or other inherently permanent structures
(including items that are structural components of such buildings or
structures). Proposed Sec. 1.48E-2(f)(1) would further provide that
tangible personal property includes all property (other than structural
components) that is contained in or attached to a building and that all
property that is in the nature of machinery (other than structural
components of a building or other inherently permanent structure) is
considered tangible personal property even though located outside a
building. Finally, proposed Sec. 1.48E-2(f)(1) would clarify that
local law is not controlling for purposes of determining whether
property is or is not tangible property or tangible personal property.
Therefore, proposed Sec. 1.48E-2(f)(1) would explain that tangible
property may be personal property for purposes of the section 48E
credit even though under local law the property is considered a fixture
and therefore real property.
Other Tangible Property
Proposed Sec. 1.48E-2(f)(2) would define the term ``other tangible
property'' to mean tangible property other than tangible personal
property (not including a building and its structural components), that
is used as an integral part of furnishing electricity by a person
engaged in a trade or business of furnishing any such service.
Construction, Reconstruction, or Erection of Qualified Property
Proposed Sec. 1.48E-2(f)(3) would define the term ``construction,
reconstruction, or erection of qualified property'' to mean work
performed to construct, reconstruct, or erect qualified property either
by the taxpayer or for the taxpayer in accordance with the taxpayer's
specifications.
Acquisition of Qualified Property
Proposed Sec. 1.48E-2(f)(4) would define the term ``acquisition of
qualified property'' to mean a transaction by which a taxpayer obtains
rights and obligations with respect to qualified property including
title to the qualified property under the law of the jurisdiction in
which the qualified property is placed in service, unless the qualified
property is possessed or controlled by the taxpayer as a lessee, and
physical possession or control of the qualified property.
Original Use of Qualified Property
Proposed Sec. 1.48E-2(f)(5)(i) would provide that the term
``original use of qualified property'' means the first use to which
qualified property is put, whether or not such use is by the taxpayer.
Proposed Sec. 1.48E-2(f)(5)(ii) would clarify that a retrofitted
qualified facility acquired by the taxpayer will not be treated as
being put to original use by the taxpayer unless the rules in proposed
Sec. 1.48E-4(c) regarding retrofitted qualified facilities (80/20
Rule) apply. Proposed Sec. 1.48E-2(f)(5)(ii) explains that the
question of whether a qualified facility meets the 80/20 Rule is a
facts and circumstances determination.
Depreciation Allowable
Proposed Sec. 1.48E-2(f)(6)(i) would provide a general rule for
purposes of applying proposed Sec. 1.48E-2(b), that depreciation (or
amortization in lieu of depreciation) is allowable with respect to
qualified property if such property is of a character subject to the
allowance for depreciation under section 167 of the Code and the basis
or cost of such property is recovered using a method of depreciation
(for example, the straight line method), which includes any additional
first year depreciation deduction method of depreciation (for example,
under section 168(k) of the Code). Proposed Sec. 1.48E-2(f)(6)(i)
would further clarify that if an adjustment with respect to the Federal
income tax or Federal return for such taxable year requires the basis
or cost of such qualified property to be recovered using a method of
depreciation, depreciation is allowable to the taxpayer with respect to
the qualified property. Proposed Sec. 1.48E-2(f)(6)(ii) would describe
exclusions from allowable depreciation stating that for purposes of
proposed Sec. 1.48E-2(b), depreciation is not allowable with respect
to a qualified facility if the basis or cost of such qualified facility
is not recovered through a method of depreciation but, instead, such
basis or cost is recovered through a deduction of the full basis or
cost of the qualified facility in one taxable year (for example, under
section 179 of the Code).
Placed in Service
Proposed Sec. 1.48E-2(f)(7)(i) would provide the general rule for
determining when a qualified facility has been placed in service for
purposes of the section 48E credit. Proposed Sec. 1.48E-2(f)(7)(ii)
would provide that notwithstanding the general placed in service rules
provided in proposed Sec. 1.48E-2(b)(7)(i), a qualified facility with
respect to which an election is made under Sec. 1.48-4 to treat the
lessee as having purchased such qualified facility is considered placed
in service by the lessor in the taxable year in which possession is
transferred to such lessee.
Claim
Proposed Sec. 1.48E-2(f)(8) would provide that with respect to a
section 48E credit determined with respect to qualified facility of a
taxpayer, the term ``claim'' would be defined to mean filing a
completed Form 3468, Investment Credit, or any successor form(s), with
the taxpayer's timely filed (including extensions) Federal income tax
return or Federal return, as appropriate, for the taxable year in which
the qualified facility is placed in service, and includes making an
election under section 6417 or 6418 of the Code and corresponding
regulations with respect to such section 48E credit and made on the
taxpayer's filed return.
C. Energy Storage Technology
1. General Rule
Proposed Sec. 1.48E-2(g)(1) would provide that an EST includes a
unit of EST that meets the requirements of proposed Sec. 1.48E-
2(g)(2)(i). An EST also would include property owned by the taxpayer
that is an integral part (as defined in proposed Sec. 1.48E-2(g)(3))
of the unit of EST. Proposed Sec. 1.48E-2(g)(1) would provide that
equipment that is an addition or modification to an existing EST is not
eligible for the section 48E credit. Proposed Sec. 1.48E-2(g)(1) would
further provide that, an EST would include electrical energy storage
property described in proposed Sec. 1.48E-2(g)(6)(i), thermal energy
storage property described in proposed Sec. 1.48E-2(g)(6)(ii), and
hydrogen energy storage property described in proposed Sec. 1.48E-
2(g)(6)(iii).
Proposed Sec. 1.48E-2(g)(2) would provide that a unit of EST
includes all functionally interdependent components of property (as
defined in proposed Sec. 1.48E-2(g)(2)(ii)), owned by the taxpayer
that are operated together and that can operate apart from other
property to perform the intended function of the EST.
2. Functionally Interdependent
Proposed Sec. 1.48E-2(g)(2)(i) would provide that for purposes of
the section 48E credit, a unit of EST includes all functionally
interdependent components of property (as defined in paragraph proposed
Sec. 1.48E-2(g)(2)(ii))
[[Page 47816]]
owned by the taxpayer that are operated together and that can operate
apart from other property to perform the intended function of the EST.
Proposed Sec. 1.48E-2(g)(2)(i) would also provide that no provision of
this section, Sec. 1.48E-1, or Sec. 1.48E-3 through 1.48E-5 uses the
term unit in respect of an EST with any meaning other than that
provided in Sec. 1.48E-2(g)(2)(i). Proposed Sec. 1.48E-2(g)(2)(ii)
would provide that components 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 perform the
intended function of the EST.
3. Integral Part
Proposed Sec. 1.48E-2(g)(3) would provide that property owned by a
taxpayer is an integral part of EST owned by the same taxpayer if it is
used directly in the intended function of the EST and is essential to
the completeness of such function. Proposed Sec. 1.48E-2(g)(3) would
also provide that property that is an integral part of an EST is part
of an EST. Lastly, proposed Sec. 1.48E-2(g)(3) would provide that a
taxpayer may not claim the section 48E credit for any property that is
an integral part of an EST that is not owned by the taxpayer.
4. Qualified Investment With Respect to Energy Storage Technology
Proposed Sec. 1.48E-2(g)(4) would describe the qualified
investment with respect to any EST for any taxpayer year as the basis
of any EST placed in service by the taxpayer during such taxable year.
5. Placed in Service
Proposed Sec. 1.48E-2(g)(5)(i) would provide rules for determining
when an EST has been placed in service for purposes of the section 48E
credit. Proposed Sec. 1.48E-2(g)(5)(ii) also would provide that
notwithstanding the general placed in service rules provided in
proposed Sec. 1.48E-2(g)(5)(i), an EST with respect to which an
election is made under Sec. 1.48-4 to treat the lessee as having
purchased such EST is considered placed in service by the lessor in the
taxable year in which possession is transferred to such lessee.
6. Types of Energy Storage Technologies
Proposed Sec. 1.48E-2(g)(6)(i) would describe electrical energy
storage property as property (other than property primarily used in the
transportation of goods or individuals and not for the production of
electricity) that receives, stores, and delivers energy for conversion
to electricity and has a nameplate capacity of not less than 5 kWh. See
subsection C of Overview of Section 48E. Proposed Sec. 1.48E-
2(g)(6)(i) also would provide examples of such electrical energy
storage property, subject to the exclusion for property primarily used
in the transportation of goods or individuals.
The Treasury Department and the IRS understand that this exclusion
for property primarily used in the transportation of goods or
individuals, at a minimum, would apply to batteries and other EST that
are incorporated into or otherwise physically integrated within motor
vehicles and other modes of transportation of goods or individuals and
from which an electric motor of such vehicle or other mode of
transportation draws electricity for propulsion.
Proposed Sec. 1.48E-2(g)(6)(ii) would describe thermal energy
storage property as property comprising a system that is directly
connected to a heating, ventilation, or air conditioning (HVAC) system;
removes heat from, or adds heat to, a storage medium for subsequent
use; and provides energy for the heating or cooling of the interior of
a residential or commercial building. See section C of Overview of
Section 48E. Proposed Sec. 1.48E-2(g)(6)(ii) would also provide that
thermal energy storage property includes equipment and materials, and
parts related to the functioning of such equipment, to store thermal
energy for later use to heat or cool, or to provide hot water for use
in heating a residential or commercial building. In addition, proposed
Sec. 1.48E-2(g)(6)(ii) would provide that thermal energy storage
property does not include a swimming pool, CHP property, or a building
or its structural components. Lastly, proposed Sec. 1.48E-2(g)(6)(ii)
would provide examples of thermal energy storage property.
Proposed Sec. 1.48E-2(g)(6)(iii) would provide that hydrogen
energy storage property is property (other than property primarily used
in the transportation of goods or individuals and not for the
production of electricity) that stores hydrogen and has a nameplate
capacity of not less than 5 kWh, equivalent to 0.127 kg of hydrogen or
52.7 standard cubic feet (scf) of hydrogen. Proposed Sec. 1.48E-
2(g)(6)(iii) would also provide that hydrogen energy storage property
must store hydrogen that is solely used as energy and not for other
purposes such as for the production of end products such as fertilizer.
Proposed Sec. 1.48E-2(g)(6)(iii) would also provide examples of
hydrogen energy storage property.
Although the list of examples of energy storage technologies that
proposed Sec. 1.48E-2(g)(6) would provide is nonexclusive, and
therefore many other technologies that are not addressed would meet
these functional definitions, there are some examples that do not meet
the functional definition. For example, some technologies are marketed
as ``virtual batteries,'' which are aggregations of controllable
electricity demand providing similar electrical grid services to an
electrical grid battery. Such ``virtual batteries'' receive energy in
the form of electricity, but they do not store it for later discharge
as electricity. The function of ``virtual batteries'' is to shift
demand to different points in time. Because such demand shifting is not
a storage activity for purposes of section 48(c)(6) (and thus for
purposes of section 48E(c)(2)), this technology is not an EST. There
are other technologies for which the determination of whether they meet
the statutory requirements is less clear.
7. Modification of Energy Storage Technology
Proposed Sec. 1.48E-2(g)(7) would provide rules for modification
of EST. Based on the rules in section 48(c)(6)(B), proposed Sec.
1.48E-2(g)(7) would provide that with respect to electrical energy
storage property and hydrogen energy storage property, modified as set
forth in proposed Sec. 1.48E-2(g)(7), such property will be will be
treated as an electrical energy storage property (as described in
proposed Sec. 1.48E-2(g)(6)(i)) or a hydrogen energy storage property
(as described in proposed Sec. 1.48E-2(g)(6)(iii)), except that the
basis of any existing electrical energy storage property or hydrogen
energy storage property prior to such modification is not taken into
account for purposes of proposed Sec. 1.48E-2(g)(7) and section 48E.
8. Claim
Proposed Sec. 1.48E-2(g)(8) would provide that with respect to a
section 48E credit determined with respect to an EST of a taxpayer, the
term ``claim'' means filing a completed Form 3468, Investment Credit,
or any successor form(s), with the taxpayer's timely filed (including
extensions) Federal income tax return or Federal return, as
appropriate, for the taxable year in which the EST is placed in
service, and includes making an election under section 6417 or 6418 and
corresponding regulations with respect to such section 48E credit and
made on the taxpayer's filed return.
[[Page 47817]]
D. Rules of General Application to Section 48E
1. Rules for Certain Lower-Output Qualified Facilities
Proposed Sec. 1.48E-4(a)(1) would provide rules for qualified
facilities with a maximum net output of not greater than 5 megawatts to
include qualified interconnection costs in the basis of an associated
qualified facility. Proposed Sec. 1.48E-4(a)(1) would provide that the
qualified investment for a qualified facility includes amounts paid or
incurred by the taxpayer for qualified interconnection property in
connection with the installation of a qualified facility that has a
maximum net output of not greater than 5 MW (as measured in alternating
current) (Five-Megawatt Limitation). Proposed Sec. 1.48E-4(a)(1) would
provide that the qualified interconnection property must provide for
the transmission or distribution of the electricity produced by a
qualified facility and must be properly chargeable to the capital
account of the taxpayer as reduced by proposed Sec. 1.48E-4(a)(6).
Proposed Sec. 1.48E-4(a)(2) would define the term ``qualified
interconnection property.'' Proposed Sec. 1.48E-4(a)(2) would further
provide that qualified interconnection property is not taken into
account to determine if a qualified facility meets the requirements for
the increase in credit rate for energy communities or domestic content
because qualified interconnection property is not part of a qualified
facility.
Proposed Sec. 1.48E-4(a)(3) would describe the Five-Megawatt
Limitation as a measurement taken at the qualified facility level.
Proposed Sec. 1.48E-4(a)(3)(i) would provide that the maximum net
output of a qualified facility is measured only by the nameplate
generating capacity of the unit of qualified facility, which does not
include the nameplate capacity of any integral property, at the time
that the qualified facility is placed in service. Further, proposed
Sec. 1.48E-4(a)(3)(i) would also provide that the nameplate generating
capacity of the unit of qualified facility is measured independently
from any other qualified facilities that share the same integral
property.
Proposed Sec. 1.48E-4(a)(4) would define the term
``interconnection agreement.'' and proposed Sec. 1.48E-4(a)(5) would
define the term ``utility.''
Proposed Sec. 1.48E-4(a)(6) would provide that expenses paid or
incurred for qualified interconnection property and amounts otherwise
chargeable to capital account with respect to such expenses must be
reduced under rules similar to the rules contained in section 50(c).
The taxpayer must pay or incur the interconnection property costs, and
therefore, any reimbursement, including by a utility, must be accounted
for by reducing the taxpayers' expenditure to determine eligible costs.
A taxpayer that is reimbursed for these costs may not include such
reimbursed costs in the amount paid or incurred by the taxpayer for
qualified interconnection property. Proposed Sec. 1.48E-4(a)(6) would
adopt this rule. In the case of a utility reimbursing a taxpayer for
costs the taxpayer pays or incurs for qualified interconnection
property, the utility should provide the taxpayer with information
regarding such costs by the date on which the project is placed in
service.
The Treasury Department and the IRS are aware of common situations
in which a taxpayer could ultimately receive a payment, credit, or
service from another entity, including a utility, related to the costs
the taxpayer pays or incurs for qualified interconnection property. For
example, one taxpayer may place in service a qualified facility and
make payments to a utility with respect to qualified interconnection
property involving the addition, modification, or upgrade to the
utility's transmission system related to such qualified facility.
Subsequently, a different taxpayer may, at a later date, place in
service a qualified facility and make payments to the same utility
related to the same additions, modifications, or upgrades to the
utility's transmission system that were made in response to the first
taxpayer's interconnection. The utility may pay, credit, or provide
services to the first taxpayer in an amount related to the costs paid
by the second taxpayer. The likely amount or timing of any such
payment, credit, or service would not be known at the time the first
taxpayer interconnects to the utility's transmission system.
The Treasury Department and the IRS request comment on whether such
payment, credit, or service received by the first taxpayer, as the
result of subsequent payments made to a utility by other parties,
should be treated as a reimbursement to the first taxpayer and impact
the amount of the costs of qualified interconnection property that the
first taxpayer may include in its basis for purposes of the section 48E
credit. The Treasury Department and the IRS also request comment on
whether the costs paid by the second taxpayer should be treated as
amounts paid or incurred for qualified interconnection property in
connection with the installation of the second taxpayer's qualified
facility. The Treasury Department and the IRS request comment on
industry practices relevant to the determination of costs paid or
incurred for qualified interconnection property, including the
accounting treatment of costs paid or incurred for qualified
interconnection property. The Treasury Department and the IRS also
request comment on whether any clarifications are needed regarding the
tax treatment of amounts paid or incurred for qualified interconnection
property, including reimbursement of costs paid or incurred by a
taxpayer for qualified interconnection costs.
In section 3.02(1)(b)(ii) of Notice 2022-49, the Treasury
Department and the IRS requested comments concerning what type of
documentation, in addition to interconnection agreements and cost
certification reports, is readily available for a taxpayer to
demonstrate that they have paid or incurred interconnection costs in
the context of the section 48 credit. Taxpayers must retain
documentation in compliance with section 6001. The proposed regulations
do not provide any specific type of required documentation, and any
documentation that satisfies section 6001 will suffice to substantiate
that a taxpayer has paid or incurred qualified interconnection costs.
Commenters to Notice 2022-49 provided feedback on the documentation
that taxpayers may use to substantiate costs paid or incurred for
qualified interconnection property in the context of
[…truncated; see source link]Indexed from Federal Register on June 3, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.