via CLA
Summary
A new statutory framework for clean energy tax credits
To make clean energy tax credits more technology-neutral, the Inflation Reduction Act (IRA) introduced a new statutory framework. The credits — designed to be more widely applicable among various clean electricity technologies — include tax incentives for wind, solar, hydropower, marine and hydrokinetic, geothermal, nuclear fission, fusion energy, and waste energy recovery properties.
Specifically, the production tax credit (PTC) under Section 45 was replaced with Section 45Y, and the investment tax credit under Section 48 was replaced with Section 48E. The changes are effective January 1, 2025.
The new Section 45Y and 48E qualification standards and their impacts
Qualification standards under Sections 45Y and 48E are different than those under historical Sections 45 and 48. Generally, the new framework only applies to electricity-producing technologies and systems, with the notable exception of energy storage technology which also qualifies for the Section 48E credit. Technologies such as microgrid controllers and electrochromic glass that qualified for the ITC under Section 48 will not qualify under Section 48E, since they do not actually generate electricity.
The new requirements also impact biogas and renewable natural gas facilities, which often do not generate electricity but rather create biofuels, and do not qualify for Section 45Y or Section 48E credits. However, facilities generating biofuels may be eligible for the Section 45Z clean fuel production credit, also created by the IRA.
The new framework only incentivizes projects achieving zero greenhouse gas (GHG) emissions, meaning technologies such as combined heat and power systems and certain types of biomass facilities — which could qualify under the old rules — will no longer qualify since they partly rely on combustion and thus create GHG emissions.
While the shift to the new credit regime is intended to simplify project qualification and provide certainty to taxpayers, like any major tax law change, the transition may involve some complexity and challenges as organizations seek to understand the new rules and apply them to their clean energy projects. In some cases, organizations may be encouraged to change their projects’ investment and technical focus to generate the valuable tax credits that have long been at the heart of the renewables sector.
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