Treasury Finalizes Highly Anticipated Guidance on the Investment Tax Credit

These Final Regulations directly address some of the most pressing questions remaining from last year’s “Proposed Regulations” including updates to: the definition of “energy property;” qualification of “qualified biogas property” and “hydrogen storage property;” ITCs for “qualified interconnection property;” and the method for prevailing wage recapture\for a transferred ITC. While section 48 expires this year, for property that has begun construction using the prescribed methods, the Final Regulations will be relevant for a number of years. It should be noted that taxpayers may instead utilize section 48E (the “clean electricity investment credit”) for projects “placed in service” beginning on January 1, 2025.

Below is a high-level summary of some of the most significant changes in the Final Regulations. Our prior coverage of the Proposed Regulations regarding the ITC rules can be found here.

• Types of Energy Property: Treasury generally left the definitions of “energy property” unchanged, but it did revise the definition of “qualified biogas property” and “hydrogen energy storage property.”
  • Qualified Biogas Property – The Final Regulations make welcome changes to the definition of qualified biogas property which directly address many of the concerns that stakeholders expressed with respect to the original Proposed Regulations.
    • The original Proposed Regulations made a surprising distinction between “cleaning and conditioning equipment” and “upgrading equipment” and generally treated upgrading equipment as merely “integral.” These Final Regulations remove this distinction and now include any collection, mixing, upgrading equipment, or pumping equipment in the definition of qualified biogas property—this change permits utilizing 80/20 strategies with upgrading equipment, which comes as a relief to much of the RNG industry.
    • The Final Regulations ease the application of the single ownership rules for qualified biogas property by classifying “waste feedstock collection systems,” “landfill gas collection systems,” and “mixing or pumping equipment” as “integral” property.
    • The Final Regulations also change the measurement of methane concentration for qualified biogas property from the point at which gas exits the biogas production system to the point at which the biogas exits the qualified biogas property.
    • A new “flaring allowance” has been added, which clarifies that qualified biogas property may perform flaring as needed without losing the ITC as long as the flaring is in compliance with federal, state, or local laws.
  • Hydrogen Energy Storage Property – The Final Regulations make two major changes: (i) hydrogen energy storage property no longer has an end-use requirement (i.e., it is no longer limited to storing hydrogen that is solely used for energy and not for other end products such as fertilizer), and (ii) the definition of property integral to a hydrogen energy storage property now explicitly includes (but is not limited to) hydrogen liquefaction equipment and gathering and distribution lines within the hydrogen energy storage property.
  • Thermal Energy Storage Property – The Final Regulations clarify that equipment involved in “adding, or transferring, already-existing heat from one medium to the storage medium” is thermal energy storage property.
• Modifications of Energy Storage Property – Under section 48, a taxpayer can claim an ITC for an augmentation to an energy storage system as long as the nameplate capacity increases (i) by at least 5 kWh for energy storage placed in service after December 31, 2022 or (ii) from below 5 kWh to not less than 5 kWh for energy storage property originally placed in service prior to the enactment of the IRA.
  • The Final Regulations confirm that the appropriate measurement is the “nameplate” capacity, not the actual capacity.
• Energy Project Defined – The Final Regulations update the definition of energy property to now require four common factors (instead of two as required under the Proposed Regulations) to be treated as a single project. This change is meant to protect taxpayers from illogical or impractical outcomes where different energy properties might inadvertently be treated as one project—an outcome that could be problematic for a taxpayer attempting to claim a domestic content bonus credit or energy community bonus credit.
  • The Final Regulations allow a taxpayer to make the determination of whether multiple energy properties are one energy project either (i) at any point during the construction of the multiple energy properties or (ii) during the taxable year in which the last such energy property is placed in service.
  • The Final Regulations also state that an energy project is considered placed in service on the date the last of the energy properties within the energy project is placed in service.
  • Taxpayers should consider the impact of these timing rules on their current projects.
• Interconnection ITC – 5 MW Limitation
  • Both the preamble to the Final Regulations and the regulations themselves provide taxpayer favorable guidance and certainty on the ability to claim an interconnection ITC for energy properties within a larger energy project (g., blocks within a utility scale solar project, circuits within a storage project, or individual wind turbines within a wind project, etc.)
  • Notably, the Final Regulations provide a new example that makes it clear that Treasury approves of a solar energy project being able to meet the 5 MW Limitation if each individual solar energy property (delineated at the inverter) has a nameplate capacity less than 5 MW. Based on the example, even if the interconnection agreement allows for a maximum output much higher than the 5 MW Limitation, the qualified interconnection costs can be included for each of the energy properties because each has a maximum net output of not greater than 5 MW.
  • Additionally, the Final Regulations clarify that since the qualified interconnection property is not actually a part of the energy property, the qualified interconnection property is not considered for determining whether an energy property meets the prevailing wage and apprenticeship requirements, the energy community bonus credit, or the domestic content bonus credit.
  • The Final Regulations also state that in the case of electrical energy storage property, the 5 MW Limitation is determined by using the energy storage property’s maximum net output as its nameplate capacity.
• PWA Requirements – 1 MW Exception
  • The Final Regulations clarify that unlike the 5 MW Limitation (which is determined at the level of energy property – see above) the 1 MW Exception to the prevailing wage and apprenticeship requirements is determined by calculating the sum of the nameplate capacity of each energy property that is within an energy project.
• Updates to the 80/20 Rule –
  • The Final Regulations include a new example clarifying the application of the 80/20 rule to a hydropower facility which had never (but could have) taken the section 45 PTC (the “PTC”) in a previous taxable year. According to the preamble to the Final Regulations, this example is meant to clarify that the limitation in 48(a)(3) that bars property that has taken the PTC from claiming an ITC would not apply to a facility that could have claimed PTC’s in a previous taxable year but never actually did.
• Separate Ownership of Geothermal Heat Pump Property (“GHP Property”) –
  • The Final Regulations provide a new example clarifying that for GHP Property, a taxpayer may only claim the ITC if they own an entire unit of energy property and not just some of the components that make up the energy property. In this example, the taxpayer must own at least some of the coils and heat pumps to take the ITC for the coils and heat pumps, while a taxpayer that owns heat pumps (but not coils) that are just components of the GHP Property cannot claim the ITC.
• ITC Recapture for failure to satisfy the prevailing wage requirements –
  • The Proposed Regulations appeared to put all liability for failure to satisfy the prevailing wage requirements on a tax credit buyer. The Final Regulations clarify that if there is a recapture of the ITC due to a failure to meet the prevailing wage requirements, the loss of credit is shared proportionally between the transferor and the transferee based on the amount of credit actually claimed by the transferor and the transferee.

*Trey Frye is a law clerk in our New York office.

¹ The Final Regulations are expected to be effective on December 12, 2024 (i.e., the date of publication in the Federal Register).