Highlights from the Technology-Neutral Clean Energy PTC and ITC Proposed Regulations

On June 3, 2024, the Treasury released proposed regulations providing guidance on the technology-neutral PTC and ITC under Code Sections 45Y and 48E (the “Technology-Neutral Energy Credits”) scheduled to begin phasing in for qualifying projects placed in service after December 31, 2024, eventually replacing the existing PTC and ITC under Code Sections 45 and 48 for applicable energy projects (“Current Energy Credits”).

The Technology-Neutral Tax Credit regime, introduced by the Inflation Reduction Act, largely tracks the rules applicable to the Current Energy Credits. The fundamental difference is that, while Current Energy Credits are available to facilities based on the type of technology in question (e.g., solar, wind, storage and geothermal), Technology-Neutral Energy Credits are available to generation facilities with respect to which the greenhouse gas emissions rate is not greater than zero (as discussed further below), irrespective of the type of facility (the “Zero GHG Requirement”).¹

While there are still a number of open questions with respect to qualifying for the Technology-Neutral Energy Credits, the proposed regulations provide helpful guidance on several issues. Some of the key highlights are discussed below.

“Safe Harbored” Technologies.

• A number of categories of facilities eligible for Current Energy Credits would be unaffected by the transition to Technology Neutral Credits, as the proposed regulations identify eight types of facilities that would be deemed to satisfy the Zero GHG Requirement: (1) wind; (2) hydropower; (3) marine and hydrokinetic; (4) solar; (5) geothermal; (6) nuclear fission; (7) nuclear fusion; and (8) waste energy recovery property.

Overlapping Credit Eligibility.

• The Technology-Neutral Energy Credit regime is applicable to projects placed in service after December 31, 2024. However, qualification for Current Energy Credits is based on the date on which construction of the project began. For instance, solar and wind projects qualify for Current Energy Credits if construction of the project begins prior to January 1, 2025. The preamble to the proposed regulations states that if a project qualifies for both Current Energy Credits (based on its begun-construction date) and Technology-Neutral Energy Credits (as a result of being placed in service after 2024), the taxpayer may choose which credit to claim (although, as is the case with ITC and PTC generally, the Current Energy Credits and Technology-Neutral Energy Credits cannot be claimed with respect to the same project). 

Greenhouse Gas Emissions Determination Processes.

• For purposes of determining the greenhouse gas emissions of a facility and whether the facility satisfies the Zero GHG Requirement, the statute and the proposed regulations distinguish between and apply different rules to facilities that produce electricity through combustion or gasification (“C&G Facilities”) versus any other generation facility (“Non-C&G Facilities”). The statute provides only limited guidance as to the manner in which greenhouse gas emissions will be determined for purposes of applying the Zero GHG Requirement. The proposed regulations elaborate on the manner in which the Treasury would evaluate a facility’s satisfaction of the Zero GHG Requirement in this context.
• In the case of both C&G Facilities and Non-C&G Facilities, the proposed regulations would provide that the determination of greenhouse gas emissions with respect to a facility generally is based on the emissions attributable to the process that transforms the input energy source into electricity. The proposed regulations specifically identify a number of excluded emissions, including those emissions arising from back-up generators, routine maintenance activities, the construction of the facility and emissions resulting from the distribution of electricity to consumers. However, as discussed below, the evaluation of a C&G Facility would require a broader analysis than might be suggested by this general rule.
• The greenhouse gas emissions analysis with respect to Non-C&G Facilities would also exclude emissions that do not result directly from the fundamental transformation of the energy input source into electricity, including (i) off-site activities, such as the production and transportation of fuel for use at the facility, (ii) the operation of a facility’s step-up transformer and (iii) the release of gases from underground reservoirs during the operation of a geothermal facility. Therefore, as a general rule, the determination of whether a Non-C&G Facility satisfies the Zero GHG Requirement under the proposed regulations would focus on the generation activities taking place at the facility itself and exclude emissions that arise from activities more tangentially related to the generation of electricity at the facility site.
• The analysis would be broader and more complex in the case of C&G Facilities. In particular, to determine the greenhouse gas emissions for C&G Facilities, the proposed regulations would require a greenhouse gas emissions lifecycle analysis (an “LCA”) to be conducted in a manner consistent with Section 211(o)(1)(H) of the Clean Air Act and using an LCA model to be designated by the Treasury. In contrast to the analysis of a Non-C&G Facility, an LCA model would be required to account for emissions across a wider chain of the production cycle—essentially taking into account emissions resulting from activities in the production lifecycle beginning with the feedstock extraction and production and ending at the meter at the point of production at the generating facility. Among these additional activities are (i) feedstock generation, production and extraction, (ii) feedstock transport, (iii) the handling, processing and storing of feedstock and (iv) the combustion and gasification at the facility itself. Emissions arising from the transmission, distribution or use of the electricity produced at a C&G Facility are outside of the scope of the LCA and not included in the emissions calculation.
• In the case of both C&G and Non-C&G Facilities, the greenhouse gas emissions rate determination would exclude carbon oxide produced in connection with the generation of electricity at the facility that is captured and sequestered in a manner consistent with the requirements of Code Section 45Q (i.e., the carbon capture credit).² Other offsets generally would not be permitted under the proposed regulations for purposes of determining emissions.

Identifying Technology-Neutral Energy Credit Qualifying Technologies.

• The statute implementing Technology-Neutral Energy Credits contemplates that the Treasury will publish a table of greenhouse gas emissions for various types of technologies to facilitate the determination of whether a project satisfies the Zero GHG Requirement. In addition, the statute and proposed regulations provide that taxpayers may petition the Treasury for a determination of the greenhouse gas emissions rates for facilities not identified by the Treasury.
• The proposed regulations provide that the above-referenced table would be published annually and that facilities may be added or removed from the annual table, but, critically, the proposed regulations would provide that taxpayers are entitled to rely on the annual table in effect on the date the taxpayer begins construction of the facility—including for the entire 10-year credit period with respect to the facility in the case of a facility for which the PTC is claimed. Unfortunately, although this allowance is helpful, in practice, a developer often will not be treated as having “begun construction” on a project until after preliminary development activities have been largely completed—this may limit the value of this rule in some cases involving novel or evolving technologies where there may be additional uncertainty as to qualification under the rules outlined by the Treasury.
• The proposed regulations would also provide a framework for taxpayers seeking to submit such a petition for categories of projects not included on the table published by the Treasury. At a high level, the taxpayer would submit with their tax return claiming the applicable Technology-Neutral Energy Credit an emissions value demonstrating the facility’s satisfaction of the Zero GHG Requirement. An emissions value may be obtained from the Department of Energy (utilizing procedures to be established in future guidance). Alternatively, in the case of a C&G Facility, the taxpayer would be able to submit an LCA with respect to the facility’s greenhouse gas emissions using an LCA model designated by the Treasury. 

The Treasury has solicited comments on the proposed regulations, which must be provided no later than August 2, 2024. Public hearings are scheduled to occur on August 12 and 13, 2024. We will continue to monitor any further developments, comments and guidance with respect to the Technology-Neutral Energy Credits and provide updates with respect to such matters.

¹ In addition to generating projects, qualifying storage and interconnection property is eligible for the ITC under both the Current Energy Credit and Technology-Neutral Energy Credit provisions of the Code.
² We note that the Code Section 45Q credit for carbon capture is not available to facilities with respect to which a Technology-Neutral Energy Credit is claimed.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Junaid Chida, an O'Melveny partner licensed to practice law in California and New York; Arthur V. Hazlitt, an O'Melveny partner licensed to practice law in New York; Jeff Hoffner, an O'Melveny partner licensed to practice law in California; and Alexander Roberts, an O'Melveny partner licensed to practice law in New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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