Earlier this week, on December 4, 2024, the U.S. Treasury Department released final regulations for Section 48 – also known as the clean energy investment tax credit.
After much industry push back, of particular note is, that the proposed definition of what qualifies as applicable “energy property” was modified to include functional components of various systems in calculating what the total energy credit is worth.
The revised definition reflects what Treasury intended to be broad but functional descriptions of integral components for various renewable energy technologies eligible under Internal Revenue Code Section 48.
To avoid limiting future energy technologies, Treasury, in consultation with the U.S. Department of Energy, determined that “the best option is to adopt a function-oriented approach to describe the types of components that are considered energy property”.
Per Treasury, the ITC has fueled US clean energy development by providing a tax credit for investments in qualifying clean energy projects – generally 30% of the cost of the project.
The Inflation Reduction Act extended the ITC as well as the production tax credit (the “PTC”), until 2025, at which point the ITC and PTC will switch to a technology neutral approach with investment tax credits that will be available in full for projects beginning construction through at least 2033.
The final rules now allows project owners to include the costs of upgrading equipment in the basis, which is used to calculate the value of the Section 48 credit.
Additional clarity was provided for offshore wind equipment (allowing owners to claim the credit for power conditioning and transfer equipment and cables), geothermal heat pumps (allowing owners of underground coils to claim the ITC if they own at least one heat pumps used in connection with the coils), biogas (clarifies what property is qualified biogas property and what is integral part of the project), co-located energy storage (allows that claimed energy storage technology that is co-located with and shares power conditioning equipment with a qualified facility will also qualify) and hydrogen storage (allows that energy storage property does not need to store hydrogen that is solely used as energy to qualify).
The proposed rules, released November 2023, initially prohibited upgrading equipment to qualify. Moreover, initially, Treasury said in the proposed rules that the ownership of only geothermal components is not considered ownership of the entire unit of the energy property. The final rules modified both of these provisions to allow for upgraded equipment and component ownership to qualify.
The regulations also revised the definition of “energy project” so that multiple properties with the same owner can claim the credit. Such properties must meet at least 4 of the 7 factors of an energy project listed in the final regulations, such as the facilities share a common substation or are financed by the same loan agreement.
Energy storage equipment located in the same area as power conditioning equipment for a facility that claims a related renewable energy production tax credit is also eligible for the credit under the final regulations.
The final regulations implemented start with a base credit of 6% of a renewable energy development’s basis or qualified investment. The value of the credit can increase to 30% for projects that meet certain standards, such as the prevailing wages and apprenticeship requirements. The law also made newer renewable energy technologies, such as electrochromic glass, energy storage, microgrid controllers and biogas properties, eligible for the incentive.
The 2022 law created a new clean electricity ITC that has a much longer expiration date under Section 48E. This new provision will apply to any energy property designed to emit zero greenhouse gas emissions, including nuclear facilities. Section 48E, along with the related clean electricity production tax credit under Section 45Y will take effect in January, 2025 but the effectiveness of those incentives could be scaled back as President-elect Donald Trump and Congress seek revenue sources to offset the renewal of expiring provisions under the 2017 Tax Cuts and Jobs Act.
Duane Morris has a robust industry facing Energy Group focused on incentives, regulatory, permitting, financing and development of energy projects internationally including renewables, solar, wind, geothermal and power purchase agreements and P-3 procurements. If you have any questions or follow ups, please do not hesitate to contact Brad A. Molotsky, Brad Thompson, Phil Cha, Shelton Vaughan or the lawyer in the firm whom you normally deal with on other matters.