`[Federal Register Volume 90, Number 9 (Wednesday, January 15, 2025)]
[Rules and Regulations]
[Pages 4006-4127]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-00196]



[[Page 4005]]

Vol. 90

Wednesday,

No. 9

January 15, 2025

Part II





 Department of Treasury





-----------------------------------------------------------------------





Internal Revenue Service





-----------------------------------------------------------------------





26 CFR Part 1





Section 45Y Clean Electricity Production Credit and Section 48E Clean 
Electricity Investment Credit; Rule

  Federal Register / Vol. 90, No. 9 / Wednesday, January 15, 2025 / 
Rules and Regulations  

[[Page 4006]]


-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 10024]
RIN 1545-BR17


Section 45Y Clean Electricity Production Credit and Section 48E 
Clean Electricity Investment Credit

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

-----------------------------------------------------------------------

SUMMARY: This document sets forth final regulations regarding the clean 
electricity production credit and the clean electricity investment 
credit established by the Inflation Reduction Act of 2022. These final 
regulations 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 final regulations affect all 
taxpayers that claim the clean electricity production credit with 
respect to a qualified facility or the clean electricity investment 
credit with respect to a qualified facility or energy storage 
technology, as applicable, that is placed in service after 2024.

DATES: 
    Effective date: These regulations are effective on January 15, 
2025.
    Applicability dates: For dates of applicability, see Sec. Sec.  
1.45Y-1(e), 1.45Y-2(d), 1.45Y-3(d) 1.45Y-4(e), 1.45Y-5(j), 1.48E-1(e), 
1.48E-2(h), 1.48E-3(f), 1.48E-4(j), and 1.48E-5(l).

FOR FURTHER INFORMATION CONTACT: Maksim Berger, John M. Deininger, 
Martha M. Garcia, Boris Kukso, Nathaniel Kupferman, and Alexander Scott 
at (202) 317-6853 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Authority

    This Treasury decision amends the Income Tax Regulations (26 CFR 
part 1) to implement the statutory provisions of sections 45Y and 48E 
of the Internal Revenue Code (Code). The regulations contained in this 
Treasury decision are issued by the Secretary of the Treasury or her 
delegate (Secretary) pursuant to the authority granted under sections 
45Y(f), 48E(i) and 7805(a) of the Code (final regulations).
    Section 45Y(f) provides an express delegation of authority to the 
Secretary to prescribe rules to implement section 45Y, ``including 
calculation of greenhouse gas emissions rates for qualified facilities 
and determination of clean electricity production credits under section 
45Y.'' Section 48E(i) provides an express delegation of authority to 
prescribe rules ``regarding implementation of [section 48E].''
    Finally, section 7805(a) authorizes the Secretary ``to prescribe 
all needful rules and regulations for the enforcement of [the Code], 
including all rules and regulations as may be necessary by reason of 
any alteration of law in relation to internal revenue.''

Background

    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), corrected in 88 FR 
73807 (Oct. 27, 2023), and 89 FR 25550 (April 11, 2024), providing 
guidance on the Prevailing Wage and Apprenticeship (PWA) requirements 
under sections 30C, 45, 45L, 45Q, 45U, 45V, 45Y, 45Z, 48, 48C, 48E, and 
179D (PWA proposed regulations).
    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), corrected in 89 FR 
2182 (January 12, 2024), proposing rules that would provide guidance 
under section 48 (section 48 proposed regulations). On February 22, 
2024, the Treasury Department and the IRS published a second correction 
to the proposed regulations in the Federal Register (89 FR 13293) that 
re-opened the comment period through March 25, 2024. Among other 
matters, the section 48 proposed regulations withdrew and reproposed 
Sec.  1.48-13 of the PWA proposed regulations addressing the PWA 
requirements under section 48, the rules under section 48(a)(9)(B)(i) 
related to an energy project with a maximum net output of less than one 
megawatt of electrical (as measured in alternating current) or thermal 
energy (One Megawatt Exception), and the recapture rules under section 
48(a)(10)(C) related to the prevailing wage requirements. Although the 
section 48 proposed regulations withdrew certain portions of the PWA 
proposed regulations, the section 48 proposed regulations incorporated 
the preamble to the PWA proposed regulations for generally applicable 
rules.
    On June 3, 2024, a notice of proposed rulemaking (REG-119283-23) 
relating to the clean electricity production credit determined under 
section 45Y (section 45Y credit) and the clean electricity investment 
credit determined under section 48E (section 48E credit) was published 
in the Federal Register (89 FR 47792) proposing amendments to 26 CFR 
part 1 (proposed regulations). See the Background and Explanation of 
Provisions sections of the preamble to the proposed regulations, which 
is incorporated in this preamble to the extent consistent with the 
following Summary of Comments and Explanation of Revisions. 
Additionally, the Treasury Department and the IRS requested comments on 
the proposed definition of a qualified facility with a maximum net 
output of less than one megawatt (as measured in alternating current) 
for purposes of the One Megawatt Exception under section 
45Y(a)(2)(B)(i). The proposed regulations incorporated the preamble to 
the PWA proposed regulations for generally applicable rules.
    On June 25, 2024, the Treasury Department and the IRS published 
final regulations (T.D. 9998) in the Federal Register (89 FR 53184) 
adopting the PWA proposed regulations (PWA final regulations) with 
certain modifications and revisions in response to public comments on 
the PWA proposed regulations. Comments received on generally applicable 
rules in response to the PWA proposed regulations, including rules that 
merely referenced section 48 or 48E, are addressed in the PWA final 
regulations. The preamble to the PWA final regulations explained that 
comments received regarding the specific PWA requirements related to 
the One Megawatt Exception under sections 45Y, 48, and 48E, and the 
recapture rules in section 48(a)(10)(C), whether received in response 
to the PWA proposed regulations or the section 48 proposed regulations, 
would be addressed in future guidance. Because proposed Sec.  1.48E-3 
of the PWA proposed regulations generally incorporated the rules of 
proposed Sec.  1.48-13, the PWA final regulations did not include final 
regulations under section 48E. Proposed Sec.  1.48E-3 of the PWA 
proposed regulations and the provisions relating to section 48E of the 
proposed regulations would be addressed in future guidance.
    On December 12, 2024, the Treasury Department and the IRS published 
final regulations (T.D. 10015) in the Federal Register (89 FR 100598) 
adopting the section 48 proposed regulations, including the rules for 
the PWA requirements in Sec.  1.48-13 (section 48 final regulations). 
The Treasury Department and the IRS addressed the comments related to 
the PWA requirements with respect to section 48 including the One 
Megawatt Exception

[[Page 4007]]

under section 48(a)(9)(B)(i), the recapture rules under section 
48(a)(10)(C), and the definition of an energy project in the section 48 
final regulations.
    As described in the Summary of Comments and Explanation of 
Revisions, this Treasury decision adopts the proposed regulations with 
certain modifications after full consideration of all comments 
received, including comments pertaining to the One Megawatt Exception 
under section 45Y(a)(2)(B)(i) and to issues related to the PWA 
requirements under section 48E and proposed Sec.  1.48E-3.

Summary of Comments and Explanation of Revisions

I. Overview

    The Treasury Department and the IRS received over 1,800 written 
comments timely submitted by the August 2, 2024, comment submission 
deadline, in response to the proposed regulations, which are available 
for public inspection at https://www.regulations.gov or upon request. A 
public hearing was held in person on August 12, 2024, and 
telephonically on August 13, 2024, at which 36 speakers provided 
testimony over the two days. After careful consideration of the 
comments and testimony, the proposed regulations are adopted with 
modifications as described in this Summary of Comments and Explanation 
of Revisions.
    Comments summarizing the statute or the proposed regulations, 
recommending statutory revisions to sections 45Y and 48E or other 
statutes, or addressing issues that are outside the scope of this 
rulemaking (such as revising other Federal regulations and recommending 
changes to IRS forms) are generally not described in this Summary of 
Comments and Explanation of Revisions or adopted in these final 
regulations. In addition to modifications described in this Summary of 
Comments and Explanation of Revisions, the final regulations also 
include non-substantive grammatical or stylistic changes to the 
proposed regulations. Unless otherwise indicated in this Summary of 
Comments and Explanation of Revisions, provisions of the proposed 
regulations with respect to which no comments were received are adopted 
without substantive change.
    The Treasury Department and the IRS consulted extensively with 
scientific and technical experts from across the Federal government, 
including personnel from the Department of Energy (DOE), the 
Environmental Protection Agency (EPA), and the Department of 
Agriculture (USDA), in developing and drafting these final regulations. 
The Treasury Department and the IRS had regular working group meetings 
with these experts from the time that sections 45Y and 48E were enacted 
by the Inflation Reduction Act (IRA) through the drafting and 
publication of the proposed and final regulations. These meetings 
included discussions on the full range of issues related to determining 
greenhouse gas emissions rates for the production of electricity, 
petitioning for provisional emissions rates, and determining 
eligibility for the section 45Y and 48E credits in various 
circumstances. These meetings also included comprehensive briefing and 
full consideration of the issues raised in the comments received on the 
proposed regulations and proposed Sec.  1.48E-3 of the PWA proposed 
regulations. In addition, experts from the DOE, the EPA, and the USDA 
reviewed multiple drafts of the proposed and final regulations in their 
entirety. The conclusions reached in these final regulations and 
explained in this Summary of Comments and Explanation of Revisions were 
deeply informed by these working group meetings and the scientific and 
technical expertise that was shared in those meetings.
    For purposes of this preamble, a provision of the proposed 
regulations, for example, Sec.  1.45Y-1 of the proposed regulations, is 
referred to as ``proposed Sec.  1.45Y-1.''

II. Rules Specific to Section 45Y

    Proposed Sec.  1.45Y-1 provided an overview of proposed Sec. Sec.  
1.45Y-1 through 1.45Y-5 and definitions of terms for purposes of 
proposed Sec. Sec.  1.45Y-1 through 1.45Y-5, including the terms 
``combined heat and power system (CHP) property,'' ``metering device,'' 
``related person,'' ``unrelated person,'' and ``qualified facility.''
A. Metering Device
    Proposed Sec.  1.45Y-1(a)(5)(i) through (iii) defined, for purposes 
of section 45Y(a)(1)(A)(ii)(II), the term ``metering device;'' provided 
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), 
including by providing that a metering device should meet certain 
standards and be properly calibrated, and provided rules related to 
monitoring and locating the metering device. Proposed Sec.  1.45Y-
1(a)(5)(iv) provided examples illustrating the rules provided by 
proposed Sec.  1.45Y-1(a)(5).
    Commenters provided feedback on the definition of ``metering 
device.'' Two commenters noted that the proposed regulations defined a 
``metering device'' related to ``energy revenue metering,'' and 
asserted that metering devices typically measure energy production, not 
revenue. The commenters recommended revising the term ``energy revenue 
metering'' to ``energy production metering'' in the final regulations.
    The Treasury Department and the IRS have determined that, because 
energy revenue metering encompasses energy production measurement as 
part of its function, the commenters' concern is addressed by the 
proposed regulations. Therefore, these final regulations adopt the 
definition of metering device as proposed.
    Another commenter requested that the final regulations provide 
clarifications regarding third-party metering requirements. The 
commenter requested that the Treasury Department and the IRS clarify 
whether operation of the metering device by a third party could be 
fully remote, or if the meter owner must be granted access to the site. 
The commenter further requested that the final regulations clarify 
whether the meter can be located prior to energy delivery to storage, 
or whether it must be located at the point of interconnection. Finally, 
the commenter requested clarification regarding whether the section 45Y 
credit amount is determined at the point of sale or where the 
electricity is metered.
    Section 45Y(a)(1)(A) provides, in part, that the amount of the 
credit is the kilowatt hours of electricity produced by the taxpayer at 
a qualified facility and in the case of a qualified facility which is 
equipped with a metering device which is owned and operated by an 
unrelated person, sold, consumed or stored by the taxpayer during the 
taxable year. Proposed Sec.  1.45Y-1(a)(5)(ii) required a metering 
device to 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 and 
maintained in proper working order according to the instructions of its 
manufacturer. If a metering device satisfies the requirements in Sec.  
1.45Y-1(a)(5)(ii), the statutory language of section 45Y(a)(1)(A) would 
not prevent operation by a third party to be fully remote. As to 
whether the metering device can be located prior to energy delivery to 
storage or whether it must be located at the point of interconnection, 
the location of the meter should not matter provided the meter meets 
the requirements in Sec.  1.45Y-1(a)(5)(ii). Accordingly, the final 
regulations adopt

[[Page 4008]]

proposed Sec.  1.45Y-1(a)(5) without change, and do not impose a 
specific location requirement for such metering device based on the 
lack of such a requirement in the statutory language.
B. Related and Unrelated Persons
    Proposed Sec.  1.45Y-1(a)(7) provided a definition of the term 
``related person'' and special rules for the treatment of corporations 
that are members of a consolidated group (as defined in Sec.  1.1502-
1(h)).
    Proposed Sec.  1.45Y-1(a)(11) provided a definition of the term 
``unrelated person;'' rules for the sales of electricity to individual 
consumers; and an example illustrating the application of these rules.
    A commenter requested clarification regarding the sale to an 
unrelated person requirement. The commenter pointed to Notice 2008-60, 
2008-30 I.R.B. 178, which provides guidance on the section 45 credit by 
clarifying that the requirement of a sale to an unrelated person will 
be treated as satisfied if the producer of electricity sells 
electricity to a related person for resale by the related person to a 
person that is not related to the producer. The commenter requested 
that the Treasury Department and the IRS likewise confirm that under 
section 45Y, a sale to a related person for the purposes of resale to 
an unrelated person will also be treated as a sale to an unrelated 
person if there is no metering device owned and operated by a third 
party.
    The Treasury Department and the IRS disagree that the rule in 
Notice 2008-60 that is applicable to the section 45 credit, under which 
the sale of electricity to a related party with a subsequent sale to an 
unrelated party is treated as a sale to an unrelated party, should 
apply to the section 45Y credit. Section 45 does not include a 
provision similar to section 45Y(a)(1)(A)(ii), which provides that 
either (I) a taxpayer must sell the electricity to an unrelated party, 
or (II) the taxpayer's qualified facility must be equipped with a 
metering device owned and operated by an unrelated person, and the 
electricity must be sold, consumed or stored by the taxpayer during the 
taxable year. The inclusion of section 45Y(a)(1)(A)(ii) demonstrates 
that Congress intended to allow the section 45Y credit for related 
party sales only if the taxpayer produces electricity at a qualified 
facility that has a metering device owned and operated by an unrelated 
person. Congress did not carve out an exception for related party sales 
for purposes of resale to unrelated persons and the final regulations 
cannot create one. To allow taxpayers to apply the concepts provided in 
Notice 2008-60 to the section 45Y credit for sales to unrelated parties 
would undermine the metering obligation in section 
45Y(a)(1)(A)(ii)(II). Accordingly, the Treasury Department and the IRS 
cannot adopt the commenter's recommendation and the rule will be 
adopted as proposed.
C. Credit Phase Out
    Proposed Sec.  1.45Y-1(c) provided rules for calculating the amount 
of the credit under section 45Y(a) and the applicable phase-out 
percentages; defined the term ``applicable year'' and provided rules 
for determining the applicable year, including rules regarding the use 
of certain datasets in determining the applicable year. The definition 
of ``applicable year'' also applies for purposes of the section 48E 
credit phase-out rules. In the preamble to the proposed regulations, 
the Treasury Department and the IRS requested comments on which 
datasets are most appropriate to determine the applicable year and why.
    Commenters generally agreed with the Treasury Department and the 
IRS that the Energy Information Administration's (EIA) Electric Power 
Annual and Monthly Energy Review, the EPA Inventory of U.S. Greenhouse 
Gas Emissions and Sinks (GHGI), the EPA Greenhouse Gas Reporting 
Program (GHGRP), and the Emissions and Generation Resource Integrated 
Database (eGrid) are suitable datasets to determine the applicable year 
and recommended the final rules adopt one or more of these dataset(s) 
as providing the timeliest assessment of emissions to minimize 
potential confusion. One commenter suggested using a single annually 
published government data source, and recommended the EIA Monthly 
Energy Review that delineates electricity sector greenhouse gas (GHG) 
emissions for 2022 and the following years.
    Review of the comments confirmed that the EIA Electric Power Annual 
and the EPA GHGI are well-established data sources that are 
representative of the annual GHG emissions from the production of 
electricity in the United States. Moreover, the requirement in Sec.  
1.45Y-1(c)(4) that both the EIA Electric Power Annual and the EPA GHGI 
must be assessed separately increases certainty that emissions from the 
power sector meet the required levels.
    Another commenter requested that the Treasury Department and the 
IRS consider whether a single year drop in GHG emissions of less than 
the applicable year threshold followed by GHG emissions increases in 
subsequent years should trigger the phase-out of the credits.
    Section 45Y(d)(3) describes the term ``applicable year'' as the 
later of 2032, or the calendar year in which the Secretary determines 
that the annual GHG emissions from the production of electricity in the 
United States are equal to or less than 25 percent of the annual GHG 
emissions from the production of electricity in the United States for 
calendar year 2022. Section 45Y(d)(2) provides that the section 45Y 
credit phases out over a four-year period subsequent to the applicable 
year. The statutory language describes the applicable year as a single 
year, and the credit phase-out begins subsequent to the applicable 
year. Based on the statutory language, the phase-out period is a 
continual period. Therefore, the statutory language does not grant the 
Treasury Department and the IRS authority to reverse a determination 
that GHG emissions were at a sufficient level to meet the definition of 
the applicable year. For this reason, the comment is not adopted.
D. Qualified Facility
    The proposed regulations adopted the statutory definition of a 
``qualified facility.'' Section 45Y(b)(1)(A) provides, in part, that a 
qualified facility is a facility for which the GHG emissions rate is 
not greater than zero. The GHG emissions rate is further defined in 
section 45Y(b)(2). Section 45Y(b)(1)(B) provides that a facility is 
only treated as a qualified facility during the 10-year period 
beginning on the date the facility was originally placed in service.
    A commenter asked for clarification regarding changes to a facility 
that impact its GHG emissions rate from electricity generation and 
whether such changes impact a qualified facility's credit eligibility. 
The commenter requested confirmation that a facility that initially 
operates with greater than zero GHG emissions but later operates with 
not greater than zero GHG emissions can still be considered a qualified 
facility under section 45Y. The commenter suggested clarifying that in 
the case of such a facility, the 10-year credit period begins when the 
facility first becomes a ``qualified facility'' operating at commercial 
scale with not greater than zero GHG emissions. The commenter asserted 
that providing a different interpretation would disincentivize 
facilities that are built with the capacity to produce power with 
greater than zero GHG emissions from undertaking such investment.
    The Treasury Department and the IRS note that section 45Y(b)(1)(B) 
treats a facility as a qualified facility only

[[Page 4009]]

during the 10-year period beginning on the date the facility was 
originally placed in service. Generally, a qualified facility is 
considered placed in service in the earlier of (i) the taxable year in 
which, under the taxpayer's deprecation practice, the period for 
depreciation with the respect to such property begins; or (ii) the 
taxable year in which the qualified facility is placed in a condition 
or state of readiness and availability to produce electricity, whether 
in a trade or business or in the production of income. Accordingly, a 
facility that initially operates with greater than zero GHG emissions 
may later be treated as a qualified facility if it meets the 
requirements under section 45Y(b) in a taxable year, but only during 
the 10-year period beginning on the date the facility was originally 
placed in service. For example, taxpayer places in service a facility 
in year 1 that has GHG emission that are greater than zero. In year 6, 
the facility has GHG emissions that are not greater than zero and is a 
qualified facility under section 45Y. If the facility continues to have 
not greater than zero GHG emissions, the facility continues to be a 
qualified facility under section 45Y and taxpayer may claim the section 
45Y credit until year 10 (years 6 through 10), provided the facility 
continues to have not greater than zero GHG emissions for each of the 
remaining years. The Treasury Department and the IRS cannot adopt the 
commenter's recommendation and the rule will be adopted as proposed.
    A commenter asserted that a facility qualifying for a section 45Y 
credit should not cease to be a qualified facility if, for a limited 
time or in a limited amount, it has a GHG emissions rate above zero 
(for example, as a result of a temporary change in fuel or feedstock). 
The commenter referenced Notice 2008-60, which it described as allowing 
the use of minimal fossil fuels for flame startup and stabilization in 
an open-loop biomass facility that qualifies under section 45. The 
commenter stated that zero-carbon fuels are not always available. The 
commenter emphasized that the proposed regulations under section 48E, 
in contrast to those under section 45Y, provide flexibility for 
purposes of recapture for those facilities that produce 10 grams of 
CO2e per kWh. As a result, the commenter requested that the 
final regulations allow a facility to claim the section 45Y credit for 
the days or months of the year during which the facility produces 
electricity with a GHG emissions rate of zero. The commenter asserted 
that flexibility is needed for de minimis emissions or periods during 
the tax year.
    Section 45Y(b)(1)(A) defines a qualified facility as having a GHG 
emissions rate from the production of electricity of not greater than 
zero. The statute does not provide a de minimis exception and the final 
regulations cannot create one. Accordingly, a facility cannot qualify 
for the section 45Y credit in a taxable year during the 10-year credit 
period after such facility is originally placed in service if such 
facility has a GHG emissions rate from the production of electricity of 
greater than zero, even if for a limited time or in a limited amount. 
However, the Treasury Department and the IRS note that a facility's 
failure to qualify for the section 45Y credit in one or more taxable 
years does not prevent such facility from qualifying for the section 
45Y credit in any other taxable years during the 10-year credit period 
after such facility is originally placed in service. The statute allows 
a facility a 10-year credit period from the date the facility is 
originally placed in service, and a facility can be considered a 
qualified facility for any taxable year during such 10-year credit 
period in which it satisfies the requirements of the section 45Y 
credit.
E. Combined Heat and Power (CHP) Property
    Proposed Sec.  1.45Y-1(a)(2) defined ``combined heat and power 
(CHP) property.'' Proposed Sec.  1.45Y-1(d) set forth the credit 
eligibility requirements for CHP property; provided rules for 
determining the energy efficiency percentage of CHP property and for 
calculating electricity produced by CHP property; and defined the term 
``heat rate'' and provided rules for its calculation.
    Section 45Y(g)(2) generally provides special rules for the 
calculation of the credit with respect to CHP property. Section 
45Y(g)(2)(A)(i) states that ``the kilowatt hours of electricity 
produced by a taxpayer at a qualified facility shall include any 
production in the form of useful thermal energy by any combined heat 
and power system property within such facility.'' Section 
45Y(g)(2)(A)(i) requires the thermal energy output from a CHP property 
to be included in determining the energy that qualifies for the credit 
in contrast to a non-CHP facility, for which only the electricity 
generation should be credited. For example, if a CHP property produces 
1 kWh of electricity output and 1 kWh of thermal output, then the 
taxpayer that owns the CHP property may compute a credit based on 
production of 2 kWh of electricity.
    Section 45Y(g)(2)(B) provides that the term ``combined heat and 
power property'' has the same meaning given such term by section 
48(c)(3) (without regard to subparagraphs (A)(iv), (B), and (D) 
thereof). Section 48(c)(3)(C)(i) and proposed Sec.  1.45Y-1(d)(2) 
define the energy efficiency percentage for purposes of a CHP property 
as a fraction--(I) 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 (II) the denominator of which is the lower heating 
value of the fuel sources for the system. Section 45Y(g)(2)(C)(ii) 
provides that the term ``heat rate'' means the amount of energy used by 
the qualified facility to generate 1 kilowatt hour of electricity, 
expressed as British thermal units per net kilowatt hour generated. 
Proposed Sec.  1.45Y-1(d)(3)(ii) addressed how to determine the ``heat 
rate'' for a qualified facility that includes CHP property that uses 
combustion. In the preamble to the proposed regulations, the Treasury 
Department and the IRS requested comments regarding the application of 
the energy efficiency percentage requirements to CHP property for which 
there is no combustion and whether the statutory definition of ``heat 
rate'' for this property should be further clarified in the final 
regulations.
    One commenter addressed the application of the energy efficiency 
percentage requirements to CHP property involving nuclear power and 
recommended the final regulations adopt the EIA's definition of ``heat 
content'' as a substitute for the lower heating value used to calculate 
the energy efficiency of a CHP property. The commenter emphasized that 
the lower heating value usually applies to combustion fuels, not fuels 
such as uranium that are non-combustible, and for non-combustion fuels 
the lower heating value should be the same as the heat content. Another 
commenter made a similar request that the final regulations permit the 
use of a nuclear reactor's maximum licensed thermal output to serve as 
the functional equivalent of the lower heating value of fuel sources, 
in recognition that nuclear fission does not involve combustion.
    A separate commenter requested the final regulations establish a 
methodology for taxpayers to determine the energy efficiency percentage 
for CHP property using non-combustible fuel sources for which there is 
no lower heating value. With respect to the definition of heat rate, 
the commenter asserted that the methodology in proposed Sec.  1.45Y-
1(d)(3)(ii)(B) to calculate heat rate does not take into account that 
there is no lower heating

[[Page 4010]]

value for CHP property using non-combustible fuel sources. The 
commenter further questioned the accuracy of the formula for converting 
from BTU to kWh to calculate electricity produced by CHP property 
because the formula relies upon a definition of heat rate that does not 
account for CHP property using non-combustion fuel sources. The 
commenter recommended providing a conversion formula in the final 
regulations for CHP property using non-combustion fuel sources.
    The Treasury Department and the IRS recognize there is a gap in the 
current guidance regarding how to calculate the energy efficiency 
percentage and heat rate for fuels without lower heating values as 
referenced in section 48(c)(3)(C)(i)(II) and the proposed methodology 
in proposed Sec.  1.45Y-1(d)(3)(ii)(B). The lower heating value is 
intended to provide a measure for the energy released when a fuel is 
combusted under certain conditions. Fuels that are not combusted will 
not have a lower heating value, but the amount of energy such fuels 
could release under certain conditions can still be measured.
    The Treasury Department and the IRS agree with commenters that the 
final regulations should permit the use of a nuclear reactor's thermal 
output to serve as the functional equivalent of the lower heating value 
of fuel sources, in recognition that nuclear fission does not involve 
combustion. The final regulations are amended accordingly. With respect 
to other technologies, the Treasury Department and the IRS will 
continue to consult with experts in order to develop additional 
approaches that are either generally applicable or appropriate for 
other particular technologies. The final regulations are therefore also 
amended to reflect this continuing consideration and to provide 
flexibility to prescribe these additional approaches in guidance 
published in the Internal Revenue Bulletin. Section 1.45Y-1(d)(2) and 
(d)(3)(ii)(B) of the final regulations are revised accordingly.
    In addition, for organizational purposes, the definition under 
proposed Sec.  1.45Y-1(a)(2) of a unit of a qualified facility for 
purposes of CHP property, has been moved within the definition of a 
unit of a qualified facility under Sec.  1.45Y-2(b)(2)(i).
F. 80/20 Rule
    The 80/20 Rule is designed to broaden the availability of 
investment and production tax credits by providing a new original 
placed in service date for a qualified facility that includes some 
components of property previously placed in service, rather than 
requiring the qualified facility to be composed entirely of new 
components of property. In the context of section 45Y, the 80/20 Rule 
applies at the qualified facility level to the components of property 
within the unit of qualified facility. Proposed Sec.  1.45Y-4(d)(1) 
provided 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).
    Although this section focuses on the 80/20 Rule in the section 45Y 
context, section III.E. of this Summary of Comments and Explanation of 
Revisions describes some comments received on both sections 45Y and 
48E. This includes discussion of the interaction between the rule for 
addition of a new unit or an addition of capacity (Incremental 
Production Rule) and the 80/20 Rule. As described in that section, the 
Treasury Department and the IRS agree that the statutory provisions 
allowing for new units and additions of capacity provided in sections 
45Y(b)(1)(C) and 48E(b)(3)(B)(i) are separate and distinct from the 80/
20 Rule. If a retrofitted facility satisfies the 80/20 Rule, the final 
regulations provide that the facility will be treated as newly placed 
in service even if the taxpayer also satisfies the provisions regarding 
new units and additions of capacity. These final regulations provide an 
additional example, in Sec.  1.45Y-4(c)(5)(v) that specifically 
addresses decommissioned and restarted facilities. In response to a 
comment, the Treasury Department and the IRS removed the reference to a 
decommissioned nuclear facility in Example 3 in Sec.  1.45Y-
4(c)(6)(iii) to avoid referring to decommissioned and restarted nuclear 
facilities in the additions of capacity rule and the 80/20 Rule. 
Additionally, Sec.  1.45Y-4(d)(1) is clarified to confirm that a 
qualified facility that meets the requirements of section 45Y(b)(1)(A) 
may claim the full section 45Y credit rather than the credit resulting 
from the addition of a new unit or an addition of capacity.
    While commenters generally supported the need for the 80/20 Rule 
for the section 45Y credit, commenters also asked for clarity regarding 
the application of the 80/20 Rule. A commenter requested clarification 
that a facility that previously qualified for a credit under section 45 
or 48 and is later retrofitted may be eligible for a section 45Y or 48E 
credit if it satisfies the 80/20 Rule. The Treasury Department and the 
IRS agree that if a qualified facility under section 45 or an energy 
property under section 48 is later retrofitted in a manner that 
satisfies the 80/20 Rule, it will be considered a new qualified 
facility and may be eligible for a section 45Y or 48E credit so long as 
the qualified facility meets all requirements of section 45Y or 48E.
    Another commenter generally stated that under Notice 2018-59, 2018-
28 I.R.B. 196, the 80/20 Rule applies at the property level and not the 
project or system level. The commenter requested that the 80/20 Rule 
similarly only apply at the property level for the section 45Y credit. 
In response to this comment, the Treasury Department and the IRS 
confirm that for purposes of the section 45Y credit, the 80/20 Rule 
does not apply to a project or system but instead to a qualified 
facility. Proposed Sec.  1.45Y-4(d)(1) set forth the 80/20 Rule for 
purposes of the section 45Y credit and applies the rule to a 
retrofitted qualified facility. The 80/20 Rule applies at the qualified 
facility level to the components of property within the unit of 
qualified facility. The final regulations retain this application of 
the 80/20 Rule to the section 45Y credit.
    Another commenter requested clarification regarding how the 80/20 
Rule is applied for purposes of section 45Y by comparing its 
application to section 48E. The commenter pointed out that proposed 
Sec.  1.48E-4(c)(4) looked only to functionally interdependent 
components of property (and not integral property) to determine what is 
considered new components of the unit of qualified facility, while 
proposed Sec.  1.45Y-4(d) did not. This commenter requested 
clarification regarding which components are included in the 
determination under the 80/20 Rule for purposes of the section 45Y 
credit. Similarly, another commenter recommended that the final 
regulations define a ``unit of qualified facility'' as the specific 
components necessary for the production of electricity and not the 
integral property essential to the completeness of that function. With 
respect to dam-based hydropower facilities, another commenter supported 
proposed Sec.  1.45Y-4(d) permitting existing dam-based hydroelectric 
facilities to qualify for the 80/20 Rule. The commenter asked to 
confirm that the 80/20 Rule is applied on a turbine-by-turbine basis 
and not the whole facility, because individual turbines may be 
repowered separately. As noted

[[Page 4011]]

earlier, the 80/20 Rule applies at the qualified facility level to the 
components of property within the unit of qualified facility and 
therefore in the context of a hydropower facility the 80/20 Rule cannot 
be applied on a turbine-by-turbine basis.
    The Treasury Department and the IRS decline to modify the proposed 
rule in response to these requests for specific applications to 
particular technologies. Proposed Sec.  1.45Y-2(b)(2)(i) provided 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. Sec.  1.45Y-4(d)(2) and 1.48E-4(c)(3) both provided 
that 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 of the unit of qualified facility. Under 
both proposed Sec. Sec.  1.45Y-2(b)(2) and 1.48E-2(b)(2), a unit of 
qualified facility only includes functionally interdependent components 
of property and not integral property. Thus, the Treasury Department 
and the IRS agree with the commenter that only functionally 
interdependent property is taken into account to determine whether a 
retrofitted qualified facility satisfies the 80/20 Rule for purposes of 
sections 45Y and 48E. Proposed Sec.  1.48E-4(c)(4) provided a rule 
allowing costs for integral property to be included in determining the 
section 48E credit after it has been determined that the qualified 
facility has satisfied the 80/20 Rule. Because the section 45Y credit 
is a production tax credit calculated based on electricity produced and 
not the amount of investment in the qualified facility, there is no 
need for a rule similar to proposed Sec.  1.48E-4(c)(4) in the final 
regulations under section 45Y.

III. Rules Specific to Section 48E

    Proposed Sec.  1.48E-1(b)(1) provided rules for determining the 
amount of the credit; defined the term ``applicable percentage;'' and 
explained how to determine the applicable percentage for a qualified 
facility. Proposed Sec.  1.48E-1(c) provided the credit phase-out rules 
and proposed Sec.  1.48E-1(c)(3) defined applicable year for purposes 
of the credit phase-out rules by reference to proposed Sec.  1.45Y-
1(c)(3). See section II.C. of this Summary of Comments and Explanation 
of Revisions for a discussion of those rules.
A. Organization of Proposed Sec.  1.48E-2
    Proposed Sec.  1.48E-2(a) defined a qualified facility for purposes 
of section 48E. Proposed Sec.  1.48E-2(b) described the property 
included in a qualified facility for purposes of section 48E, defined 
the terms ``unit of qualified facility'' as well as ``functionally 
interdependent'' and ``integral part'' (both as they apply to a 
qualified facility), and provided several examples to illustrate the 
rules. Proposed Sec.  1.48E-2(c) provided rules for the coordination of 
the section 48E credit with certain other Federal income tax credits 
with respect to qualified facilities. Proposed Sec.  1.48E-2(d) 
provided rules for determining the qualified investment with respect to 
a qualified facility. Proposed Sec.  1.48E-2(e) defined the term 
``qualified property.'' Proposed Sec.  1.48E-2(f) defined certain terms 
related to requirements for qualified property, including ``tangible 
personal property,'' ``other tangible property,'' ``construction, 
reconstruction, or erection of qualified property,'' ``acquisition of 
qualified property,'' ``original use of qualified property,'' 
``depreciation allowable,'' ``placed in service'' and ``claim.'' 
Proposed Sec.  1.48E-2(g) provided rules for energy storage technology 
(EST).
    The Treasury Department and the IRS determined that the 
organization of proposed Sec.  1.48E-2, as it related to qualified 
facilities, did not adhere to the organization of section 48E. The 
final regulations reorganize Sec.  1.48E-2 to more clearly follow the 
organization of section 48E. The Treasury Department and the IRS do not 
intend for the reorganization of Sec.  1.48E-2 to create any 
substantive differences from the rules as they were provided in the 
proposed regulations.
    As reorganized, Sec.  1.48E-2(a) of these final regulations 
provides the rules for determining the qualified investment with 
respect to a qualified facility. Section 1.48E-2(b) defines the term 
``qualified facility'' as it relates to section 48E, as well as the 
term ``placed in service.'' Section 1.48E-2(c) defines the term 
``qualified property.'' Section 1.48E-2(d) provides the rules for 
property included in a qualified facility, including a description of 
``unit of qualified facility'' and ``integral part,'' and provides 
examples illustrating these rules. Section 1.48E-2(e) provides 
definitions related to the requirements for qualified property. Section 
1.48E-2(f) provides rules for the coordination of the section 48E 
credit with certain other Federal income tax credits with respect to 
qualified facilities and includes examples to illustrate those rules. 
Section 1.48E-2(g) provides rules relating to EST. Finally, the 
definition of the term ``claim'' for both a qualified facility and EST 
is moved to Sec.  1.48E-1(a)(2) and is modified to also apply to the 
other Federal income tax credits described in section 48E(b)(3)(C).
B. Qualified Investment With Respect to a Qualified Facility and 
Qualified Property
    Proposed Sec.  1.48E-2(d) described a qualified investment with 
respect to any qualified facility. Proposed Sec.  1.48E-2(e) defined 
``qualified property'' for purposes of proposed Sec.  1.48E-2(a).
    A commenter requested that the final regulations clarify that the 
qualified property included in a qualified investment in a qualified 
hydropower facility includes all the components and property identified 
as qualified property in prior guidance under section 48, up through 
and including the substation at which the electrical voltage is stepped 
up to transmission voltage. Similarly, another commenter asked whether 
the scope of qualified property under section 48E(b)(2) includes all 
property identified as energy property under section 48(a)(3), unless 
explicitly excluded under section 48E.
    The Treasury Department and the IRS recognize that some 
technologies may be creditable under both sections 48 and 48E. Although 
the rules for eligibility differ between the two sections, they share 
many overlapping concepts (for example, functional interdependence and 
integral property). For those facilities that generate electricity and 
for EST that are eligible for both the section 48 and 48E credits, the 
Treasury Department and the IRS expect similar property to be eligible. 
However, the application of these concepts to a specific facility or 
EST is ultimately a fact-specific determination.
    That said, unlike section 48, these final regulations are 
technology neutral, and the rules are meant to apply to all qualified 
facilities. A definitive response to these comments would require the 
Treasury Department and the IRS to conduct a complete factual analysis 
of the property in question, which may include information beyond that 
which was provided by the commenters. Because more information is 
needed to make the determinations requested by the commenters, the 
requested clarifications are not addressed in these final regulations.
C. Energy Storage Technology Overview
1. In General
    Proposed Sec.  1.48E-2(g) provided rules defining a unit of EST. 
Section 48E(c)(2)

[[Page 4012]]

defines the term ``energy storage technology'' by reference to section 
48(c)(6) (noting that the beginning of construction requirement in 
section 48(c)(6)(D) does not apply). A commenter suggested clarifying 
that EST may include either ``property . . . which receives, stores, 
and delivers energy for conversion,'' or ``thermal energy storage 
property,'' by reading the ``and'' between sections 48(c)(6)(A)(i) and 
(ii) as disjunctive. The Treasury Department and the IRS confirm that 
the term ``and'' between sections 48(c)(6)(A)(i) and (ii) is 
disjunctive for purposes of section 48E(c)(2) and property described in 
section 48(c)(6)(A)(i) or (ii) are included as EST.
2. Functionally Interdependent
    Proposed Sec.  1.48E-2(g)(2)(i) provided that, for purposes of the 
section 48E credit, 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. Proposed Sec.  1.48E-2(g)(2)(ii) provided 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.
    A commenter requested that the Treasury Department and the IRS 
explicitly clarify that the section 48E credit can be claimed with 
respect to EST that is co-located and used in conjunction with 
electricity generation equipment for which the section 45 or 45Y 
credits are claimed, without regard to whether the EST would be 
considered a functionally interdependent component or an integral part 
of the electricity generation equipment under other rules or whether 
the EST and electricity generation equipment are owned by the same or 
different taxpayers.
    Section 48E(a) provides that the clean electricity investment 
credit is determined separately with respect to any qualified facility 
and any EST. This statutory text establishes an important categorical 
distinction between qualified facilities and ESTs. While integral 
property may be shared by a co-located qualified facility and an EST, a 
unit of qualified facility and a unit of EST cannot share components 
for purposes of section 48E. Further, the Treasury Department and the 
IRS confirm that an EST is eligible for the section 48E credit if it 
satisfies the requirements of section 48E, even if the EST is co-
located with a qualified facility that has claimed the section 45 or 
45Y credits. See section III.C.6. of this Summary of Comments and 
Explanation of Revisions for additional discussion of comments on co-
located, or ``hybrid,'' projects that include an EST and qualified 
facility.
3. Qualified Investment With Respect to Energy Storage Technology
    Proposed Sec.  1.48E-2(g)(4) provided that the qualified investment 
with respect to any EST for a taxable year is the basis of any EST 
placed in service by the taxpayer during such taxable year. Commenters 
requested clarification that the entire cost basis of EST property that 
converts energy to electricity is eligible for the section 48E credit, 
even if some functionally interdependent property is used to produce 
heat. The commenters asserted that there is no statutory requirement 
that the energy stored be exclusively converted to electricity and that 
the Code is silent about any minimum percentage requirement of energy 
being converted to electricity.
    Proposed Sec.  1.48E-2(g)(6)(i) described 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. 
This definition is adopted from section 48E(c)(2), which defines 
``energy storage technology'' including electrical energy storage 
property by reference to section 48(c)(6). Because the purpose of an 
electrical energy storage property is to receive, store and deliver 
energy for conversion to electricity, not to produce thermal energy, 
components of property of an energy storage property used to produce 
thermal energy would be subject to the incremental cost rule discussed 
in section III.G. of this Summary of Comments and Explanation of 
Revisions.
4. Placed in Service
    Proposed Sec.  1.48E-2(g)(5)(i) provided rules for determining when 
an EST has been placed in service for purposes of the section 48E 
credit. Notwithstanding the general rules provided in proposed Sec.  
1.48E-2(g)(5)(i), an EST with respect to which an election is made 
under section 50(d)(5) of the Code and 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.
    Commenters suggested expanding the definition of placed in service 
for EST because ``energy storage may charge and discharge prior to 
being ready for commercial operation.'' Specifically, a commenter 
suggested that EST property should be treated as placed in service when 
(i) such property has all licenses, permits, and approval required to 
store and dispatch power, (ii) pre-operational testing is complete, 
(iii) the taxpayer has title to the property, and (iv) the property is 
available to store and discharge power on a regular, commercial basis.
    Instead of providing specific indicia of when an EST is treated as 
being placed in service, the rule in proposed Sec.  1.48E-2(g)(5)(ii) 
provided general principles for a taxpayer to determine when an EST has 
been placed in service that are broadly applicable to all types of EST. 
These principles are based upon the placed in service rules provided by 
Sec.  1.48-9(b)(5), which generally adopt the placed in service rules 
of Sec.  1.46-3(d)(1). The general principles under Sec.  1.46-3(d)(1) 
have applied to the section 48 credit since its enactment. These 
principles are well-understood, general standards for determining when 
property is placed in service, and they are widely relied upon by 
industry. The Treasury Department and the IRS view the general 
principles provided by the proposed rule as adequate for determining 
when EST is placed in service, and as sufficiently broad to address 
these commenters' concerns. Therefore, the final regulations adopt the 
placed in service rules as proposed.
5. Electrical Energy Storage Property
    Proposed Sec.  1.48E-2(g)(6)(i) described 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. For 
example, subject to the exclusion for property primarily used in the 
transportation of goods or individuals, electrical energy storage 
property includes but is not limited to rechargeable electrochemical 
batteries of all types (such as lithium-ion, vanadium redox flow, 
sodium sulfur, and lead-acid); ultracapacitors; physical storage such 
as pumped storage hydropower, compressed air storage, and flywheels; as 
well as reversible fuel cells.
    Commenters asked for clarification regarding what constitutes 
property ``primarily used'' in the transportation of goods or 
individuals. One commenter suggested that the final regulations

[[Page 4013]]

provide a bright line rule and clarify that property that receives, 
stores, and delivers energy for conversion to electricity and is 
intended to be used for less than 35 percent of its hours of use in a 
calendar year for transporting goods or individuals is not considered 
``primarily used in the transportation of goods or individuals.'' In 
this commenter's view, property, including a school bus, that receives, 
stores, and delivers energy for conversion to electricity that is used 
less than 35 percent of its hours of use in a calendar year for 
transporting goods or individuals is not primarily used for 
transportation. However, the commenter clarified that if electric 
school buses paired with a bidirectional vehicle-to-grid (V2G) charger 
are permitted to qualify as EST, then the charger itself should not be 
considered part of the electrical energy storage property.
    The final regulations mirror the language of section 48E(c)(2), 
which adopts the definition of EST provided in section 48(c)(6)(A), and 
excludes property primarily used in the transportation of individuals 
or goods. The Treasury Department and the IRS consider school buses as 
primarily used in transportation because the primary reason for a 
taxpayer to acquire school buses is to transport individuals, not store 
energy, notwithstanding the overall amount of time buses are used to 
actually transport individuals. A ``bright line'' test requested by the 
commenter is not feasible because any given situation and determination 
is fact dependent.
    In addition, there are other IRA tax incentives intended to benefit 
some technologies for which these commenters seek section 48E credit 
eligibility. For instance, section 45W of the Code provides a tax 
credit for vehicles such as electric school buses. Furthermore, a 
notice of proposed rulemaking (REG-118269-23) published in the Federal 
Register (89 FR 76759) on September 19, 2024, regarding the section 30C 
alternative fuel vehicle refueling property credit (September 2024 
proposed regulations) proposed a definition for property primarily used 
in the transportation of goods or individuals and not for the 
production of electricity for purposes of sections 48 and 48E. In 
particular, proposed Sec.  1.48E-2 provided that energy storage 
property is primarily used in the transportation of goods or 
individuals and not for the production of electricity, and therefore is 
not EST eligible for the section 48E credit, if a credit is claimed 
under section 30C for such property. Comments regarding this proposed 
definition will be further addressed in the Treasury decision that 
finalizes the September 2024 proposed regulations. The Treasury 
Department and IRS note that energy storage property for which the 
section 30C credit is not claimed may be creditable as EST under 
sections 48 and 48E if that property meets the requirements of those 
tax credits.
6. Hybrid Systems (Qualified Facility + EST)
    Several commenters addressed the treatment of qualified facilities, 
such as solar generation facilities, and EST that are co-located, or 
so-called ``hybrid'' projects. At least one commenter supported 
treating a qualified facility and EST as separate for purposes of the 
section 48E credit. The commenter emphasized that such an approach is 
critical for the long-term success of the section 45Y and 48E credits, 
and importantly, will align with the goal of the domestic content bonus 
credit amount to reshore clean energy supply chains.
    Other commenters requested that taxpayers be able to elect a single 
section 48E credit for hybrid systems, consisting of a qualified 
facility and an EST, and sought clarification of whether property 
included in a unit of EST may be included in a unit of qualified 
facility. A commenter noted that for purposes of rooftop solar and 
storage hybrid systems, the EST and the solar energy property are 
dependent upon each being placed in service because both are essential 
to the completeness of the intended function of the hybrid system. 
Commenters asserted that including EST in the definition of ``integral 
part'' of a qualified facility and providing examples of dual 
eligibility for section 48 and 48E credits during the transition period 
would help maintain consistency and reduce administrative burdens. One 
commenter recommended modifying proposed Sec.  1.48E-2(b) to clarify 
that EST may (but is not required to) be considered an integral part of 
a qualified facility. Commenters stated that such a clarification would 
align with current guidance for the domestic content bonus credit 
amount and the test for determining whether multiple energy properties 
will be considered an energy project under the section 48 proposed 
regulations. Another commenter stated that this approach would allow 
for increased technological flexibility for purposes of the section 48E 
credit and would allow residential solar energy developers to continue 
claiming a single credit for hybrid systems. A commenter claimed that 
adding EST as an integral part of a qualified facility would allow 
utility scale solar energy developers the option to claim separate 
credits for the EST and the qualified facility under the section 48E 
proposed regulations.
    Another commenter suggested permitting a taxpayer developing a 
hybrid system and claiming the section 48E credit on both the qualified 
facility and EST to elect to treat them as a single energy project. 
Other commenters requested that the final regulations clarify that even 
if qualified facilities and EST are separate categories under section 
48E, a taxpayer developing a hybrid system that incorporates both may 
file a single Form 3468, Investment Credit, and register only once for 
purposes of section 6418 of the Code relating to transfer elections for 
eligible credits (section 6418 credit transfer elections).
    As noted earlier in section III.C.2. of this Summary of Comments 
and Explanation of Revisions, the statutory framework of section 48E 
does not support treating a qualified facility and EST as a single 
creditable property. Instead, the text of section 48E repeatedly treats 
a qualified facility and EST as separately creditable properties. 
Accordingly, there is no statutory basis to allow taxpayers an option 
to claim a single credit for hybrid systems that include both qualified 
facilities and EST. In addition, although beyond the scope of these 
final regulations, the Treasury Department and the IRS note that, 
because a hybrid system would be considered two separate eligible 
credit properties, a taxpayer would need to register them separately 
for purposes of making section 6418 credit transfer elections. See 
Sec. Sec.  1.6418-1(d) and 1.6418-4.
    Some commenters also requested that the final regulations provide 
an option to claim a single credit for a hybrid system rather than two 
credits, one for the EST and one for the qualified facility, in part, 
because those commenters currently enter into a single leasing 
agreement with customers for both a solar qualified facility and an 
EST. These commenters expressed concern about whether, under the 
proposed regulations, they would need to enter into separate contracts 
for the solar qualified facility and the EST. These commenters noted 
that if they are able to use a single contract, the contract will need 
to have separate term lengths for the solar qualified facility and the 
EST to satisfy the leasing rules for tax purposes. These commenters 
raised the issue that since a solar qualified facility and an EST 
generally have different useful lives the leasing rules could not cover 
both the solar qualified facility and the EST if they claimed separate 
credits.

[[Page 4014]]

    The Treasury Department and the IRS are not aware of any case law 
or guidance related to leasing rules that would require a taxpayer to 
break up the scope of a lease into components before analyzing whether 
there is a true lease for tax purposes regardless of the useful life of 
different assets included in the lease. In order to claim section 48E 
credits for both the solar qualified facility and an EST that are part 
of a combined solar qualified facility and EST, a taxpayer must retain 
ownership of both at the time such property is placed in service. This 
is true regardless of whether there are separate credits or separate 
credit calculations required for a solar qualified facility and an EST. 
While the final regulations define a unit of property as a qualified 
facility or an EST for purposes of section 48E, the final regulations 
are not intended to apply more broadly to define what comprises a unit 
of property for any other purpose of the Code.
    Another commenter requested that the section 48E credit be made 
available for pumped storage hydropower property, including if such 
property overlaps or shares property with a qualified hydropower 
facility that has claimed or will claim the credit under section 45 or 
45Y, and that no allocation of costs is required with respect to such 
overlapping property.
    The Treasury Department and the IRS confirm that an EST is eligible 
for a separate section 48E credit if it satisfies the requirements of 
section 48E and the section 48E regulations. A taxpayer that makes a 
qualified investment with respect to a qualified facility or an EST is 
eligible for the section 48E credit only to the extent of the 
taxpayer's eligible investment in the qualified facility or EST. As 
described in proposed Sec.  1.48E-2(b)(3)(vi), 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, 45, or 45Y or another Federal income tax 
credit, may include shared property that may be considered part of a 
qualified investment for 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 the qualified 
facility for which the taxpayer is claiming a section 48E credit. The 
proposed rule addresses the commenter's concerns and will be adopted as 
proposed.
7. Thermal Energy Storage Property
    Proposed Sec.  1.48E-2(g)(6)(ii) defined 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. 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. Thermal energy storage property does not include a 
swimming pool, CHP property, or a building or its structural 
components.
    Several commenters requested additional examples of thermal energy 
storage property and asked whether specific property would be 
considered part of thermal energy storage. For example, a commenter 
recommended including an example of thermal energy storage property 
that includes phase change materials operating as a battery in place of 
a refrigeration cycle to reduce energy consumption in cold storage. 
Several commenters requested an example allowing for solar thermal 
systems to be treated as thermal energy storage property and noted that 
solar thermal systems are explicitly eligible under the section 48 
credit. A commenter specifically contended that solar thermal systems 
that collect energy from the sun to heat a storage medium (for example, 
water) and then provide energy through an HVAC system for a residential 
or commercial building should be treated as thermal energy storage 
systems under section 48E.
    Another commenter suggested clarifying that energy storage 
technology includes property capable of discharging both heat and 
electricity regardless of how the facility's heat is utilized as long 
as the facility has an electrical nameplate capacity of at least 5 kWh 
and the taxpayer claims a section 48E credit only on the parts of the 
facility that are essential to receiving, storing, and delivering 
energy for the conversion to electricity (that is, excluding components 
related to discharging heat). A different commenter suggested 
clarifying that thermal energy storage property includes property 
directly connected to a refrigeration system given that refrigeration 
systems are a subset of HVAC systems. Another commenter requested 
clarifying that otherwise-qualifying property that operates squarely 
within an HVAC ecosystem, or directly in connection with such a system, 
and that directly impacts the temperature of air being conditioned by 
an HVAC system, is ``directly connected'' to such system within the 
meaning of section 48E (and section 48); and non-structural, energy-
saving, portable products that are incorporated into building elements 
specifically because of their energy-saving properties are not 
themselves ``a building or its structural components,'' and remain non-
structural even if integrated into a ceiling.
    Another commenter suggested providing examples of thermal energy 
storage property that include thermal ice or chilled water storage 
systems that use electricity to run a refrigeration cycle to produce 
ice or chilled water that is later connected to the HVAC system as an 
exchange medium for air conditioning the building, heat pump systems 
that store thermal energy in an underground tank or borehole field to 
be extracted for later use for heating and/or cooling, and electric 
furnaces that use electricity to heat bricks to high temperatures and 
later use this stored energy to heat a building through the HVAC 
system. Similarly, a commenter recommended several modifications to the 
examples of thermal energy storage in proposed Sec.  1.48E-2(g)(6)(ii): 
(i) replace the reference to ``thermal ice storage systems'' with 
``chilled water or ice storage systems,'' (ii) acknowledge that tanks 
could be above or below ground, and (iii) include ``electric boilers 
that use electricity to heat water and later use this stored energy to 
provide heat and/or domestic hot water to a building through the HVAC 
system.'' Several other commenters suggested clarifying whether the 
phrase ``directly connect to'' in proposed Sec.  1.48E-2(g)(6)(ii) 
means that thermal storage systems that function as self-contained 
heating or cooling systems qualify as thermal energy storage property.
    The Treasury Department and the IRS agree that the definition of 
thermal energy storage property requires clarification. Proposed Sec.  
1.48E-2(g)(6)(ii) defined thermal energy storage property, in part, as 
a system which ``removes heat from, or adds heat to, a storage medium 
for subsequent use.'' The Treasury Department and the IRS understand 
the phrase ``adds heat to'' as including equipment that is involved in 
adding, or transferring, already-existing heat from one medium to the 
storage medium, but not equipment involved in transforming other forms 
of energy into heat in the first instance. Equipment that just adds (or 
removes) heat includes technologies, like heat pumps, that draw heat 
from the ambient air or other stores of heat and adds that heat to a 
storage medium.

[[Page 4015]]

By contrast, equipment that transforms other forms of energy into heat 
in the first instance, for example through combustion or electric 
resistance, is not property that ``removes heat from, or adds heat to'' 
a storage medium and is therefore not an eligible component of a 
thermal energy storage property. For example, a conventional gas boiler 
with an integrated storage tank would not generally be thermal energy 
storage property, as it would generate new heat in the first instance 
through combustion and subsequently add that heat to the storage 
medium, rather than merely adding existing heat to the storage medium. 
While the gas boiler elements would not be part of such property, the 
integrated storage tank, may be thermal energy storage property if it 
otherwise meets the thermal energy storage property definition. 
Further, an air-to-water heat pump with a thermal storage tank, for 
example, would generally be thermal energy storage property provided it 
otherwise meets the definition of thermal energy storage. This could be 
the case even if the heat pump also serves a purpose in the connected 
HVAC system's real-time heating or cooling of a building. In that case, 
the thermal storage tank would be thermal energy storage property and 
the heat pump may also qualify as part of the thermal energy storage 
property to the extent the taxpayer's costs exceed the cost of an HVAC 
system without thermal storage capacity that would meet the same 
functional heating or cooling needs as the heat pump system with a 
storage medium, other than time shifting of heating or cooling. See 
section III.G. of the Summary of Comments and Explanation of Revisions 
for discussion of the Incremental Cost Rule.
    Proposed Sec.  1.48E-2(g)(6)(ii) included an example of electric 
furnaces that use electricity to heat bricks to high temperatures and 
later use this stored energy to heat a building through the HVAC 
system. The Treasury Department and the IRS acknowledge that this 
example needs to be refined to more precisely delineate the scope of 
eligible thermal energy storage property. Whereas the heated bricks and 
equipment that adds heat generated by the furnace to those bricks, or 
removes heat from the bricks, is eligible thermal energy storage 
property, the electric furnace equipment that transforms energy into 
the thermal energy via electrical resistance in the first instance is 
not. Section 1.48E-2(g)(6)(ii) of the final regulations provides that 
thermal energy storage property does not include property that 
transforms other forms of energy into heat in the first instance.
    With respect to subsequent use, the Treasury Department and the IRS 
also agree that additional clarity is warranted. The statute requires 
that thermal energy storage property must be able to perform certain 
functions, not simply perform heat transfer. Any heat transfer may take 
some amount of time and heat does not immediately dissipate even if no 
effort is made to store it. While some commenters asserted that such 
heat transfer is subsequent use, the Treasury Department and the IRS 
disagree. A plain reading of the statute supports the conclusion that 
thermal energy storage property does not include property that simply 
engages in heat transfer. The thermal energy storage property must be 
able to store the thermal energy. The Treasury Department and the IRS 
find that a minimum time interval for subsequent use provides certainty 
for taxpayers and sound tax administration.
    Accordingly, the final regulations clarify that property that 
``removes heat from, or adds heat to, a storage medium for subsequent 
use'' is property that is designed with the particular purpose of 
substantially altering the time profile of when heat added to or 
removed from the thermal storage medium can be used to heat or cool the 
interior of a residential or commercial building. The final regulations 
also provide a safe harbor for thermal energy storage property. If the 
thermal energy storage property can store energy that is sufficient to 
provide heating or cooling of the interior of a residential or 
commercial building for a minimum of one hour, it is deemed to have the 
purpose of substantially altering the time profile of when heat added 
to or removed from the thermal storage medium can be used to heat or 
cool the interior of a residential or commercial building.
    These final regulations also add that thermal energy storage 
property may store thermal energy in an artificial pit, an aqueous 
solution, or a solid-liquid phase change material, in addition to the 
underground tank or a borehole field already included in the proposed 
regulations, in order to be extracted for later use for heating and/or 
cooling. The final regulations clarify that sources of thermal energy 
that transform other forms of energy into heat, such as electric 
boilers, are not thermal energy storage property.
    The Treasury Department and the IRS clarified the definition of 
thermal energy storage property and the examples in the final 
regulations to illustrate what constitutes thermal energy storage 
property. The final regulations provide revised examples of thermal 
energy storage property, and those examples are intended to be a non-
exhaustive list. The Treasury Department and the IRS have also 
determined that the revised description of thermal energy storage 
property in Sec.  1.48E-2(e)(6)(ii) provides taxpayers with a 
sufficient means to determine whether specific property qualifies as 
thermal energy storage property. To the extent that commenters asked 
whether additional systems, configurations, or technologies would 
qualify as thermal energy storage property, such a determination would 
require the Treasury Department and the IRS to conduct a complete 
factual analysis of the system, configuration, or technology, which may 
include information beyond that which was provided by the commenters. 
Because more information is needed to make any such determinations 
requested by the commenters, the final regulations do not provide such 
additional requested clarifications.
    Several commenters recommended clarifying that thermal energy 
storage property includes property providing energy for the heating or 
cooling of the interior of an industrial building, or other types of 
buildings. A commenter asserted that a wide variety of buildings are 
served by thermal energy storage, such as city halls, libraries, and 
jails, and that the definition of thermal energy storage property 
should not be limited to residential or commercial settings. Commenters 
requested that property used to convey stored energy and deliver it to 
building spaces (such as pipes and pumps), used to distribute stored 
thermal energy for heating or cooling or to supply domestic hot water 
for consumption in a residential or commercial building, be included 
within the definition of thermal energy storage property. One commenter 
recommended defining thermal energy storage property to include 
equipment, including pipes and pumps, used to distribute stored thermal 
energy to and within buildings. The commenter noted that such a 
clarification would necessitate incorporation of a dual use rule 
consistent with Sec.  1.48-14(b), because thermal energy storage may 
use pipes to distribute stored thermal energy to and within buildings 
that are also used by non-qualifying sources.
    One commenter requested clarifying whether thermal energy storage 
property includes liquid desiccant storage systems that use electricity 
to store energy in liquid desiccants that remove latent heat from the 
air for use in a connected HVAC system. Another

[[Page 4016]]

commenter noted that most solar thermal systems are combination or 
hybrid systems that provide thermal storage in the form of water or 
another fluid for a variety of applications. Regarding such combination 
systems, other commenters recommended clarifying that thermal energy 
property includes water heating applications and providing an example 
of such applications.
    Section 48E(c)(2) defines EST as having the same meaning as under 
section 48(c)(6), and section 48(c)(6) defines EST to include thermal 
energy storage property. The statutory definition of thermal energy 
storage property under section 48(c)(6)(C) provides that such property 
is directly connected to a HVAC, 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. To 
maintain consistency with the statutory text, the final regulations 
maintain the wording regarding eligible building applications set forth 
in section 48(c)(6)(C)(i)(III). With respect to property used to 
distribute stored thermal energy, such as pipes and pumps, the final 
regulations provide a function-oriented method to evaluate whether 
property is a functionally interdependent or an integral part of 
thermal energy storage property. Beyond the examples included in the 
proposed regulations and additional examples added here, commenters 
have described a number of additional innovative technologies that 
might qualify as thermal energy storage property. However, application 
of the functional definition of thermal energy storage property 
provided at section 48E(c)(2) (by reference to section 48(c)(6)) would 
be necessary to determine if these technologies are, in fact, examples 
of qualifying thermal energy storage property. Moreover, the examples 
contained in proposed Sec.  1.48E-2(g)(6)(ii) are a non-exhaustive 
list. Therefore, the final regulations do not adopt all the recommended 
additional examples.
    Because section 48E(c)(2) provides that the term ``energy storage 
technology'' has the meaning given such term in section 48(c)(6), the 
final regulations incorporate modifications made to the section 48 
proposed regulations by the section 48 final regulations to clarify the 
definition of EST, including with respect to thermal energy property.
8. Hydrogen Energy Storage Property
    Proposed Sec.  1.48E-2(g)(6)(iii) provided 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) also 
provided 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 (for example, fertilizer), and set forth 
examples of hydrogen energy storage property.
    A commenter stated that property storing hydrogen should be at 
least 1 GWh in capacity (which is equivalent to 96,554 gallons of 
liquid hydrogen storage capacity or about 25.4 metric tons) in order to 
qualify as hydrogen energy storage property. The Treasury Department 
and the IRS note that section 48E(c)(2) defines ``energy storage 
technology'' as having the meaning given such term in section 48(c)(6) 
(without the application of the beginning of construction deadline). 
Section 48(c)(6) defines ``energy storage technology'' as, in part, 
having a nameplate capacity of not less than 5 kilowatt hours. 
Accordingly, the final regulations do not adopt the commenter's 
suggestion, as doing so would be inconsistent with the statute.
a. End Use Requirement
    Numerous commenters disagreed with the requirement that hydrogen 
energy storage property must store hydrogen that is solely used as 
energy and not for other purposes, which the commenters referred to as 
the ``end use requirement.'' Commenters noted that the end use 
requirement is not statutorily prescribed and asserted that it would be 
difficult, if not impossible, to implement. Commenters asserted that a 
single industrial customer may have multiple uses for hydrogen, 
sometimes for energy and sometimes for other purposes such as stripping 
pollutants from flue gas streams, and that customers are not generally 
willing to restrict their use in order to indemnify the hydrogen energy 
storage property against investment credit recapture risk. Commenters 
also pointed out that hydrogen storage projects may sell to 
intermediaries in which case the end use of hydrogen is not necessarily 
known, and ensuring that the end use requirement is respected by export 
markets would be impossible. A commenter contended that the limited 
number of examples and use cases offered in the proposed regulations 
raise several questions for taxpayers and hydrogen storage developers.
    Some commenters also maintained that the end use requirement would 
be inconsistent with the Biden Administration's U.S. National Clean 
Hydrogen Roadmap. One of these commenters stated that a major build-out 
of hydrogen storage facilities targeting exclusively power sector end 
use makes little sense from a strategic perspective. A commenter 
asserted that the definition of EST in section 48(c)(6)(A)(i), which 
includes ``hydrogen, which stores energy,'' simply recognizes that 
hydrogen is inherently a form of energy itself. A commenter also 
claimed that section 48(c) only sets out affirmative requirements for 
EST and that, therefore, hydrogen storage property that is not 
primarily used in the transportation of goods or individuals should 
qualify for the section 48E credit regardless of where the stored 
hydrogen ends up. Commenters further noted that some energy uses may be 
indirect (for example, via intermediary molecules), further 
complicating application of an end use requirement.
    Commenters also asserted that an end use requirement would 
bifurcate and adversely affect the hydrogen market, and that additional 
uses for hydrogen, such as feedstock for industrial processes, could 
present significant decarbonization opportunities. A commenter asserted 
that disallowing the section 48E credit for hydrogen storage from 
serving applications such as steel production and iron refining would 
be a significant disservice to America and delay or prevent massive 
reductions in carbon emissions while hindering U.S. manufacturing of 
essential construction materials. Commenters noted that a hydrogen end 
use requirement would disadvantage large-scale hydrogen storage 
facilities relative to smaller ones.
    Commenters expressed concern that hydrogen energy storage is being 
unfairly singled out for disadvantageous treatment as compared to other 
EST, noting that the proposed regulations do not place an end use 
restriction on electricity stored within and discharged from batteries 
or other storage technologies; noting that energy withdrawn from 
batteries may be used for any purpose without losing its eligibility 
status. Commenters contended that the end use requirement would unduly 
push potential customers towards using battery-focused solutions 
instead of letting batteries and hydrogen solutions compete on equal 
footing, or in cases in which no alternative exists, would continue to 
extend the use of

[[Page 4017]]

existing technologies, fuels, and processes.
    Some commenters supported the principle of an energy-based end use 
requirement for hydrogen energy storage property. One commenter sought 
clarification that ``energy'' was not limited to electricity 
production. Another commenter supported the principle of an energy-
based end use limitation by comparing the statutory text of section 
48(c)(6) from three legislative bills, including the version ultimately 
enacted by Congress, but opposed the ``solely'' criteria and cited 
practical challenges including administrability. Commenters generally 
requested that if an end use requirement is maintained that it be 
clarified and altered, and safe harbors provided. For example, a 
commenter suggested providing a rebuttable presumption of meeting the 
end use requirement if a taxpayer can demonstrate that it stored 
hydrogen predominantly for energy use.
    Commenters also suggested creating a safe harbor as long as the 
facility itself uses some of the stored hydrogen for energy or the 
facility is an open access facility. A commenter requested flexible 
rules for determining the end use of hydrogen, including permitting 
taxpayers to assign withdrawn hydrogen based on commercial sales 
arrangements, or, alternatively, being able to rely on a mass balance 
approach based on the inputs and outputs to the storage property during 
the year. Commenters also suggested that the end use requirement 
conclude with the end of the 5-year recapture period provided by 
section 50. Several commenters suggested inverting the end use 
requirement to only disqualify property used to store hydrogen that is 
solely used for non-energy end products, or to exempt common carrier 
infrastructure from the end use requirement. Another commenter 
recommended a rule under which a facility that uses ``qualified clean 
hydrogen'' as defined under section 45V of the Code is deemed to 
qualify under section 48E if such hydrogen is used to create 
electricity.
    Several commenters recommended implementing a dual use safe harbor 
to permit a taxpayer to claim a reduced section 48E credit when a 
portion of stored hydrogen is used for a purpose other than energy. 
Commenters noted that a dual use safe harbor could apply if at least 
half of the hydrogen in hydrogen energy storage property is used for 
energy purposes. In contrast, other commenters were opposed to any dual 
use approach to the end use limitation and asserted that such an 
approach would be unworkable, requiring ``unknowable, unprovable, 
unmonitorable, unauditable facts.''
    Commenters asked for clarification regarding what constitutes 
energy use of stored hydrogen and what documentation is needed to 
demonstrate such energy use. Several commenters were opposed to any 
recordkeeping requirements related to the end use of hydrogen and 
contended that such requirements would be unduly burdensome to 
taxpayers given the fungibility of hydrogen. Another commenter noted 
that there are currently no recordkeeping or documentation precedents 
available for a taxpayer to efficiently demonstrate the final end use 
of hydrogen stored in such taxpayer's hydrogen energy storage property. 
The commenter asserted that, as there is no available documentation 
pathway for tracking hydrogen molecules through to their end use, it 
would be both impractical and prohibitively costly for a taxpayer to 
develop and implement such recordkeeping practices.
    After consideration of the comments received, the Treasury 
Department and the IRS agree that section 48(c)(6)(A)(i) does not 
require that hydrogen energy storage property store hydrogen that will 
be used for the production of energy. The Treasury Department and the 
IRS recognize commenters' concerns regarding the administrative 
challenges the end use requirement could present for taxpayers and 
agree that it should be removed. The final regulations therefore do not 
adopt the requirement that hydrogen energy storage property store 
hydrogen that is solely used as energy and not for other purposes such 
as for the production of end products like fertilizer.
b. Hydrogen Storage Media
    Many commenters provided feedback regarding the qualifying types of 
hydrogen storage media. Specifically, a commenter requested expanding 
the definition of hydrogen energy storage to include storage of ammonia 
and electrolytic hydrogen derivative e-fuels. A commenter also 
requested that the Treasury Department and the IRS recognize and 
clarify that, unlike electricity, hydrogen is a chemical building block 
for other molecules that are capable of more efficiently carrying 
hydrogen. According to the commenter, this means that hydrogen can be 
stored as a physical material medium such as a metal hydride. The 
commenter also requested confirmation that the examples of hydrogen 
storage mediums provided in the preamble to the proposed regulations 
are non-exhaustive and that the type of storage medium is intentionally 
unlimited.
    The Treasury Department and the IRS decline to adopt comments 
requesting that the final regulations provide that chemical storage 
(that is, equipment used to store hydrogen carriers (such as ammonia 
and methanol)) is hydrogen energy storage property. Section 48E(c)(2) 
provides that the term ``energy storage technology'' has the meaning 
given to such term in section 48(c)(6). Section 48(c)(6)(A)(i) defines 
``energy storage technology'' as property (other than property 
primarily used in the transportation of goods or individuals and not 
for the production of electricity) which 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 
kilowatt hours. Section 48(c)(6)(A) references hydrogen, but not 
compounds containing hydrogen.
c. Hydrogen Storage Components and Equipment
    Several commenters requested clarifications regarding the 
components included in the definition of hydrogen energy storage. 
Commenters generally requested that the final regulations expand the 
list of integral and functionally interdependent equipment to be more 
inclusive of existing and future hydrogen energy storage property 
technologies. One commenter noted that while the functional 
interdependence test provided by the proposed regulations is helpful, 
specifying further what components are considered part of hydrogen 
energy storage is paramount. The commenter requested additional 
examples that address specific components including equipment needed to 
functionally store hydrogen, equipment used to change the phase of 
matter, equipment used to liquify hydrogen prior to storage, equipment 
used to convert stored hydrogen to ammonia to be used as a carrier of 
that stored hydrogen, equipment used to store electrolytic hydrogen 
derivative e-fuels, and any related and necessary pipelines. Similarly, 
commenters requested that additional components and equipment be 
specifically identified as eligible parts of hydrogen energy storage 
property, including hydrogen liquefaction and related equipment and 
other equipment required to operate underground hydrogen storage 
property.
    A commenter requested that the final regulations demarcate between 
equipment used for hydrogen production, conditioning, transportation, 
and storage. The commenter emphasized that a clear demarcation is 
necessary to prevent

[[Page 4018]]

gaming the system if storage property would qualify for the section 48E 
credit under section 48(c)(6) and the production equipment will, in 
many or most cases, be associated with the production tax credit under 
section 45V. The commenter suggested that the proper demarcation 
between hydrogen production and conditioning, transportation, or 
storage equipment is the point at which any post-production 
conditioning to remove impurities or to put the hydrogen into a 
saleable form is completed. The commenter stated that, in 
distinguishing hydrogen production equipment from storage equipment, 
the associated conditioning equipment should include all equipment 
necessary to treat, process, compress, pump, or perform other physical 
action on hydrogen prior to its storage or delivery. The commenter 
noted that equipment used to convert hydrogen into ammonia, methanol, 
or another hydrogen carrier also should be associated with post-
production processing of hydrogen and not eligible for the section 48E 
credit. Similarly, the commenter asserted that equipment, such as 
compressors, used to liquify hydrogen (liquefaction) to put it into a 
deliverable and salable form should not qualify as hydrogen energy 
storage property, including the equipment necessary for liquefaction, 
conversion to ammonia, methanol, or other hydrogen carrier, and 
dissociation or cracking equipment necessary to convert a hydrogen 
carrier back into hydrogen. The commenter emphasized that if 
compressors are used in direct connection with storage devices, rather 
than to change the form of the hydrogen (for example, from gas to 
liquid), compressors are integral to the storage equipment and should 
qualify for the section 48E credit. Another commenter stated that the 
definition of hydrogen storage property should be limited to tanks and 
caverns of scale, and the associated equipment necessary to fill or 
discharge hydrogen from those tanks or caverns.
    Commenters also requested further guidance on the eligibility of 
pipelines as hydrogen energy storage property noting that there are 
specific cases in which hydrogen pipelines that are directly connected 
to an energy storage facility can operate as hydrogen storage, by 
providing additional volumes that can adjust pressure in direct 
coordination with the storage facility compression system. One 
commenter requested clarification of the term ``primarily'' in the 
phrase ``other than property primarily used in the transportation of 
goods or individuals'' as applied to pipelines that can be used to 
store hydrogen. Another commenter suggested clarifying the scope of 
hydrogen storage property with respect to transportation, customer 
delivery, and use.
    One commenter that opposed the inclusion of pipelines, rail cars, 
and truck trailers in the definition of hydrogen storage property, 
noted that if hydrogen has been stored in qualified storage property, 
such as tanks or underground storage salt caverns, the energy storage 
property should end at the valve where the stored hydrogen is delivered 
into a pipeline system. Additional commenters recommended limiting the 
treatment of hydrogen pipelines as integral or interdependent to 
hydrogen storage property. Commenters pointed to Federal Energy 
Regulatory Commission (FERC) rulings and applicable case law, such as 
Hawaiian Independent Refinery, Inc. v. U.S., 697 F.2d 1063 (Fed. Cir. 
1983), which delineate the circumstances under which pipeline systems 
would be considered part of the storage facility. One commenter 
recommended only including pipelines directly linked to storage 
facilities and further recommended that the final regulations more 
precisely define the boundary between storage and transportation 
infrastructure. This commenter's proposed guideline would define the 
boundary between storage and transportation infrastructure by only 
considering specific interconnected pipeline segments as part of the 
storage system: point-to-point lines starting from the storage facility 
and ending at the first intersection point with explicit compression 
equipment. Commenters also requested a safe harbor for interconnecting 
pipelines whereby the pipelines would be deemed integral or 
interdependent to a hydrogen storage facility if (i) the complex is 
conceived and designed concurrently, and all offsite interconnecting 
pipeline components are placed into service within twenty four months 
of the date on which the first such component is placed into service, 
and (ii) the offsite interconnecting components are within 100 miles of 
the storage facility or within the same State as the storage facility.
    Commenters proposed the inclusion of additional examples that would 
provide additional specific eligible components and provide 
capitalization rules; establish eligibility of pipelines connecting 
storage facilities if exclusive to use of those facilities; and 
establish eligibility of purification equipment intended to return the 
purity of hydrogen post-storage to its purity level upon entering 
storage.
    A commenter suggested allowing tanks and associated equipment for 
the storage of ammonia when used as a hydrogen carrier to qualify for 
the section 48E credit but stated that equipment used to disassociate 
ammonia into hydrogen (referred to as cracking) is a separate function 
from hydrogen storage and should not be treated as hydrogen energy 
storage property.
    The Treasury Department and the IRS agree that clarifying the 
definition of hydrogen energy storage property is warranted. Hydrogen 
liquefaction equipment may prepare hydrogen for storage in the hydrogen 
energy storage property, making such property an integral part of 
hydrogen energy storage property. The final regulations provide that 
property that is an integral part of hydrogen energy storage property 
includes, but is not limited to, hydrogen liquefaction equipment.
    Section 48E(c)(2) generally defines ``energy storage technology'' 
as having the meaning given such term in section 48(c)(6). Section 
48(c)(6)(A)(i) defines ``energy storage technology'' as excluding 
property primarily used in the transportation of goods or individuals 
and not for the production of electricity. In general, whether property 
is ``primarily'' used in the transportation of goods or individuals and 
not for the production of electricity, is dependent on the facts and 
circumstances. Pipelines, trailers, and railcars are property primarily 
used in the transportation of goods or individuals and not for the 
production of electricity. Accordingly, such property generally would 
not be considered part of hydrogen energy storage property for purposes 
of section 48E.
    The Treasury Department and the IRS recognize that there are 
specific cases in which hydrogen pipelines that are directly connected 
to an energy storage facility can operate as hydrogen storage. Hydrogen 
energy storage property may have hydrogen pipelines that are used as 
gathering and distribution lines to transport hydrogen within the 
hydrogen energy storage property, making such hydrogen pipelines an 
integral part of the hydrogen energy storage property. These gathering 
and distribution lines are not pipelines used to transport hydrogen 
outside of the hydrogen energy storage property. The final regulations 
clarify that property that is an integral part of hydrogen energy 
storage property includes, but is not limited to, gathering and 
distribution lines within a hydrogen energy storage property.

[[Page 4019]]

    The Treasury Department and the IRS decline to provide additional 
examples of integral equipment and functionally interdependent 
equipment in the context of hydrogen energy storage property. The final 
regulations provide a function-oriented method to determine whether a 
technology is EST that is broad enough to encompass nascent 
technologies without rendering the regulations quickly obsolete. It is 
impossible to enumerate every technology that may be eligible for the 
section 48E credit given the ever-changing nature of the industry and 
pace of technological development. Although these regulations do not 
list all technologies that may qualify for the section 48E credit, the 
final regulations provide adequate guidance and examples to illustrate 
the application of the rules for taxpayers to analyze a particular 
technology. The Treasury Department and the IRS, therefore, do not 
adopt commenters' requests concerning specific technologies.
9. Modification of Energy Storage Technology
    Proposed Sec.  1.48E-2(g)(7) provided 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 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 the 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.
    Commenters noted that taxpayers often replace energy storage 
equipment to manage the natural degradation of storage assets over time 
and to prolong the useful life of these projects, even if such 
improvements do not meet a 5-kWh capacity threshold. One commenter 
therefore contended that references to nameplate capacity in section 
48E are best read to disregard any degradation of the EST between when 
it is placed in service and when capacity is added. The same commenter 
contended that modifications to EST should be eligible for the section 
48E credit if one of the 5kWh nameplate measurement tests under 
proposed Sec.  1.48E-2(g)(7)(i) and (ii) are met, regardless of any 
degradation that has occurred to the EST's nameplate capacity since its 
original in-service date. The commenter requested clarifying that the 
nameplate capacity after a modification is the nameplate capacity of 
such property before the modification plus the capacity added by the 
modification. Another commenter suggested permitting a ``modification 
that leads to a demonstrated increase in capacity (measured and 
recorded immediately before such modifications) of not less than 
5kWh,'' to be eligible for the section 48E credit.
    Another commenter explained that nameplate capacity of EST is 
typically defined when initial interconnection is approved, meaning 
that taxpayers who wish to claim the estimated expenditures of storage 
augmentation under section 48E will need to modify the original 
interconnection agreement or oversize their assets before placing them 
into service. The commenter requested that the section 48E rules 
recognize the eligibility of storage augmentation beyond nameplate 
capacity and suggested that the estimated expenditures associated with 
augmentation of qualifying EST be fully eligible for the section 48E 
credit. Another commenter suggested clarifying that augmentation of EST 
over time is eligible for the section 48E credit, either by treating 
estimated future augmentation costs at the time the EST is originally 
placed in service as eligible, with recapture provisions if estimated 
costs are not realized, or by treating any costs related to 
augmentation that are incurred as part of the upfront investment to 
construct an energy storage site as eligible. The commenter described 
augmentation as the periodic upgrade to capacity over a project's 
lifetime by either adding new inverters and enclosures or recycling 
batteries to old enclosures and adding new batteries behind an existing 
inverter.
    Section 48E(c)(2) defines EST by reference to section 48(c)(6). 
Proposed Sec.  1.48E-2(g)(7)(i) and (ii) applied the rules for 
modification of EST described in section 48(c)(6)(A)(i). In defining 
EST, section 48(c)(6)(A)(i) uses the term ``nameplate capacity.'' 
Accordingly, the rules for modification of EST apply with respect to 
the nameplate capacity of EST, and do not take into account potential 
degradation of the EST prior to its modification. The final regulations 
clarify that for purposes of the modification rules, the increase in 
nameplate capacity is equal to the difference between nameplate 
capacity immediately after the modification and nameplate capacity 
immediately prior to the modification. To maintain consistency with the 
statute, the final regulations do not adopt commenters' suggestions to 
measure an increase in nameplate capacity in a different manner.
    A commenter also suggested clarifying that a modification is taken 
into account whether the increase in capacity is within an existing 
enclosure, the existing enclosure is expanded, a new enclosure is added 
for the increased capacity, or a new enclosure is constructed to 
include both the existing capacity and the added capacity.
    Section 48(a)(6)(B) defines modifications of EST without any 
reference to physical space limitations. Proposed Sec.  1.48E-2(g)(7) 
also does not address limiting modifications of EST based on physical 
space. The Treasury Department and the IRS conclude that a modification 
of EST is not limited by the physical space occupied by the EST before 
or after the modification and adopt the proposed regulations without 
change.
D. Rules for Certain Lower-Output Qualified Facilities
    Proposed Sec.  1.48E-4(a)(1) provided 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) provided 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) also 
provided 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 the rules in proposed Sec.  
1.48E-4(a)(6). Proposed Sec.  1.48E-4(a)(2) defined the term 
``qualified interconnection property.'' Proposed Sec.  1.48E-4(a)(2) 
further provided 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) described the 
Five-Megawatt Limitation as a measurement taken at the qualified 
facility level. Proposed Sec.  1.48E-4(a)(3)(i) provided 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

[[Page 4020]]

not include the nameplate capacity of any integral property, at the 
time that the qualified facility is placed in service. Proposed Sec.  
1.48E-4(a)(3)(i) additionally provided 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)(3)(ii) provided how the nameplate 
capacity at a qualified facility is measured. Proposed Sec.  1.48E-
4(a)(4) defined the term ``interconnection agreement'' and proposed 
Sec.  1.48E-4(a)(5) defined the term ``utility.'' Proposed Sec.  1.48E-
4(a)(6) provided 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). Proposed Sec.  1.48E-
4(a)(6) provided that 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. The preamble to 
proposed Sec.  1.48E-4(a)(6) explained that 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. 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 preamble to the proposed regulations explained that 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 be 
unknown at the time the first taxpayer interconnects to the utility's 
transmission system.
    Additionally, in the preamble to the proposed regulations, the 
Treasury Department and the IRS requested comments on several issues 
related to reimbursements. The Treasury Department and the IRS 
requested comment on whether such payment, credit, or service received 
by the first taxpayer, as a 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 requested 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 requested 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 requested 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 addition to updates discussed in Sections III.D.1 through 6, the 
final regulations clarify the definition of an interconnection 
agreement in Sec.  1.48E-4(a)(4) by stating that in the case of the 
election provided under section 50(d)(5) (relating to certain leased 
property), the term includes an agreement regarding a qualified 
facility leased by such taxpayer.
1. Qualified Interconnection Property
    Some commenters requested clarification on whether certain costs 
are considered amounts paid or incurred for qualified interconnection 
property. A commenter requested that the final regulations confirm that 
equipment required to modify and upgrade transmission or distribution 
systems beyond the point of interconnection would be considered 
qualified interconnection property.
    Section 48E(b)(4) provides that the term ``qualified 
interconnection property'' has the meaning given such term in section 
48(a)(8)(B). Section 48(a)(8)(B) defines, in relevant part, the term 
``qualified interconnection property'' to mean, with respect to an 
energy project that is not a microgrid controller, any tangible 
property that is part of an addition, modification, or upgrade to a 
transmission or distribution system that is required at or beyond the 
point at which the energy project interconnects to such transmission or 
distribution system in order to accommodate such interconnection. 
Proposed Sec.  1.48E-4(a)(2) adopted this definition. The Treasury 
Department and the IRS confirm that under this definition, tangible 
property required to modify and upgrade transmission or distribution 
systems beyond the point of interconnection would (provided the 
property satisfies the other requirements of section 48(a)(8)(B)) be 
considered qualified interconnection property and eligible for 
inclusion in basis for purposes of the section 48E credit.
    Another commenter requested that the final regulations expand the 
definition of qualified interconnection property to include grid-
enhancing property. A definitive response to this comment would require 
the Treasury Department and the IRS to conduct a complete factual 
analysis of the property in question, which would include information 
beyond that which was provided by the commenter. Because more 
information is needed to make the determinations requested by the 
commenter, the requested clarifications are not addressed in these 
final regulations.
    A commenter requested that, in instances in which the taxpayer 
funds network upgrades and is then later reimbursed by the transmission 
owner, taxpayers not be required to account for any reimbursements of 
interconnection-related expenses paid in later years to the taxpayer. 
Another commenter requested that in such a scenario, the final 
regulations should disregard reimbursements to the extent that the 
reimbursement is includable in the taxpayer's gross income. The 
commenter also asserted that in circumstances in which the taxpayer 
receives a later payment from a customer utilizing the qualified 
interconnection property, the taxpayer be permitted to treat the 
payments as revenue, rather than reimbursement. One of the commenters 
also requested confirmation that taxpayers can include in their basis 
qualifying interconnection costs recovered through ``Transmission

[[Page 4021]]

Owner Initial Funding.'' According to the commenters, in certain 
regional markets, the transmission owner funds the costs of 
interconnection upgrades for which a taxpayer is responsible, and the 
taxpayer then reimburses the transmission owner over a certain period, 
typically 20 years. The commenters requested that a taxpayer with such 
an arrangement be allowed to include the full amount of interconnection 
costs that it will ultimately pay over that period in calculating their 
section 48E credit for the taxable year that the qualified facility is 
placed in service.
    The Treasury Department and the IRS note that the statute limits 
qualified interconnection property to tangible property. In the case of 
a taxpayer that pays costs over 20 years, the commenters do not 
describe whether these amounts paid may include amounts that are not 
tangible property. To the extent commenters are asking generally about 
the inclusion of the full allocated cost of interconnection upgrades 
and, therefore, any amounts paid or incurred by the taxpayer for 
qualified interconnection property, the Treasury Department and the IRS 
recognize these payments could include a number of markups that the 
utility that builds and owns the relevant interconnection property 
might charge for that property (whether currently or over a later 
reimbursement period), such as the markup for a rate of return or other 
costs (for example, a tax gross-up). Whether specific costs are 
allowable would be a fact-specific inquiry related to, among other 
things, whether such costs are incurred with respect to eligible 
tangible property. Therefore, the final regulations do not adopt 
commenters' suggestion to provide that the full allocated cost of 
interconnection upgrades is always eligible, although in many cases it 
may be. However, the Treasury Department and the IRS clarify that it is 
not determinative whether such costs are charged upfront or over time.
    The final regulations under Sec.  1.48E-4(a)(2) also clarify that 
for purposes of determining the original use of interconnection 
property in the context of a sale-leaseback or lease transaction, the 
principles of section 50(d)(4) must be taken into account, as 
applicable, with such original use determined on the date of the sale-
leaseback or lease.
2. Interaction With Other Bonus Credit Amounts
    Commenters requested that the final regulations clarify the 
interaction between the rules for qualified interconnection costs and 
the computation of the domestic content bonus credit amount and the 
increased credit amount for energy projects located in an energy 
community since this clarification was provided in section 48.
    Section 48E(b)(4) provides that the term ``qualified 
interconnection property'' has the meaning given such term in section 
48(a)(8)(B). Section 48(a)(8)(B) defines qualified interconnection 
property as distinct from the definition of ``energy property'' 
provided in section 48(a)(3). Additionally, section 48(a)(8)(A) 
includes amounts paid or incurred for qualified interconnection 
property meeting certain requirements for purposes of determining the 
credit under section 48(a). Similarly, section 48E(b)(1) includes 
expenditures paid or incurred by the taxpayer for qualified 
interconnection property meeting certain requirements for purposes of 
determining a qualified investment under section 48E(a) and defines 
qualified interconnection property discretely from a qualified facility 
eligible under section 48E(a)(1). Given that qualified interconnection 
property is not part of a qualified facility, Sec.  1.48E-4(a)(2) 
provides 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. 
Therefore, no further clarification is needed in the final regulations.
    Additionally, because the credit under section 48E(a) is calculated 
by multiplying the applicable percentage--which includes any domestic 
content bonus credit amount--by the basis of the qualified facility--
which includes amounts paid or incurred by the taxpayer for qualified 
interconnection property, qualified interconnection costs are taken 
into account in calculating the domestic content bonus credit amount 
and the increased credit amounts for energy projects located in an 
energy community and for certain facilities placed in service in 
connection with low-income communities.
3. Basis Reduction
    For purposes of section 48E(b), the term ``qualified 
interconnection property'' has the meaning given such term in section 
48(a)(8)(B). There are no additional references to section 48(a)(8) 
other than section 48(a)(8)(B). As a result, the basis reduction 
language in section 48(a)(8)(E), which provides that in the case of 
expenses paid or incurred for interconnection property, amounts 
otherwise chargeable to capital account with respect to such expenses 
are to be reduced under rules similar to the rules of section 50(c), is 
not explicitly incorporated. However, the Treasury Department and the 
IRS determined that the section 50(c) basis reduction rules apply 
because section 50(c) provides for basis adjustments to investment 
credit property generally. Section 50(c) has two basis adjustment rules 
that could apply to interconnection property, section 50(c)(1) or (3). 
Although interconnection property is not part of a qualified facility 
as provided in proposed Sec.  1.48E-4(a)(2), qualified interconnection 
costs are included in the basis used to calculate the section 48E 
credit. Therefore, the Treasury Department and the IRS confirm the 
special rule in section 50(c)(3)(A), which provides for a basis 
reduction of 50 percent in the case of any section 48E credit, applies 
to qualified interconnection property that is properly chargeable to 
capital account of the taxpayer which is the amount included in the 
basis used to calculate the section 48E credit.
4. Reimbursements and Other Cost Reductions
    The proposed regulations requested comment on several issues 
related to reimbursement. Generally, the proposed regulations requested 
feedback on treatment of reimbursements in 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. The proposed 
regulations also requested comments on the outcome when a different 
taxpayer makes payments to a utility for the same additions, 
modifications, or upgrades of another taxpayer. Comments were also 
requested on industry practices and tax implications of reimbursements. 
In response to these requests, a commenter requested the final 
regulations clarify that a taxpayer is not required to reduce its 
section 48E credit on account of any reimbursement of interconnection 
costs in the absence of a fixed right (that is specific in amount and 
time) to receive the reimbursement at the time the taxpayer incurs the 
interconnection costs. This commenter recommended that the final 
regulations include rules that are administrable and provide only a 
single credit on qualified interconnection costs (for example, a case 
in which another possible section 48E claimant reimburses directly or 
indirectly a first claimant).
    Other commenters requested clarification of the reimbursement rules 
under specific scenarios. One commenter suggested that for cases in

[[Page 4022]]

which the taxpayer funds network upgrades and is later reimbursed by 
the transmission owner, the final regulations should avoid accounting 
for any reimbursements of interconnection-related expenses paid in 
later years to the taxpayer.
    Another commenter suggested that including reimbursed 
interconnection costs in the credit basis should be based on whether 
the amounts are includible in gross income. The commenter stated that 
in circumstances in which a utility reimburses a qualified facility 
owner under a set schedule, the final rule should disregard the 
utility's reimbursements to the extent that the reimbursement is 
includable in a taxpayer's gross income. The commenter added that if a 
subsequent interconnection customer's use of the qualified 
interconnection property results in a later payment or credit to the 
taxpayer, the payment or credit should be treated as revenue rather 
than reimbursement. The commenter also requested clarification that in 
circumstances in which a qualified facility owner pays for qualified 
interconnection property without reimbursement, the owner should be 
able to utilize the full cost of those facilities in determining its 
investment tax credit.
    The Treasury Department and the IRS recognize that situations may 
arise in which the initial amount paid or incurred for qualified 
interconnection property is reduced after the taxable year in which the 
taxpayer claims the section 48E credit. The Treasury Department and the 
IRS also recognize that other complicated situations may arise in 
determining whether a taxpayer has paid or incurred qualified 
interconnection costs. The comments received confirmed that these 
questions are not unique to the reimbursement of qualified 
interconnection costs and may also arise in the context of other tax 
credits. Therefore, the determination of whether qualified 
interconnection costs have been paid or incurred by the taxpayer and 
whether such amounts are reduced by virtue of transactions with the 
utility or with a third party should be based on generally applicable 
Federal tax principles.
    In consideration of the comments, the final regulations revise the 
rule under Sec.  1.48E-4(a)(6) regarding reduction to amounts 
chargeable to capital account to reflect the application of Federal tax 
principles to such transactions in determining the amount a taxpayer 
paid or incurred for qualified interconnection costs. The final 
regulations at Sec.  1.48E-4(a)(1) explain that if the costs borne by 
the taxpayer are reduced by utility or non-utility payments, Federal 
tax principles may require the taxpayer to reduce the amount treated as 
paid or incurred for qualified interconnection property to determine a 
section 48E credit. The final regulations at Sec.  1.48E-4(a)(7) also 
include two additional examples related to reducing costs borne by the 
taxpayer.
5. Five-Megawatt Limitation
    Some commenters provided feedback on the measurement rule for the 
Five-Megawatt Limitation provided at proposed Sec.  1.48E-4(a)(3). Two 
commenters suggested that the Five-Megawatt Limitation be modified to 
clarify the relevant measurement is performed at the point of output 
(that is, 5 MW AC at the inverter) rather than nameplate generation 
capacity to better align with section 48E(b)(1)(B). As described by one 
of the commenters, the text of section 48E(b)(1)(B) does not contain 
the words ``nameplate'' or ``capacity'' and instead it specifically 
refers to the 5 MW limit by reference to ``output . . . measured in 
alternating current'' which, for solar photovoltaic systems can only be 
read to refer to post-inverter measurement. Another commenter 
recommended that the final regulations refer only to output measured in 
alternating current, without presuming that the direct current 
nameplate capacity is identical. Additionally, this commenter requested 
that the final regulations specifically clarify that qualified 
facilities be defined at the inverter level for the limited purpose of 
evaluating if they meet the Five-Megawatt Limitation, as this is the 
source of any alternating current output.
    Measuring output with accuracy and consistency must be done using a 
defined standard. The Treasury Department and the IRS conclude that 
nameplate generating capacity is the best and most practical measure of 
the maximum net output of a unit of qualified facility. Nameplate 
generating capacity is an objective and identifiable standard that can 
be accurately measured with consistency. Therefore, the Treasury 
Department and the IRS do not adopt the comment suggesting changes to 
the use of nameplate capacity. The final regulations at Sec.  1.48E-
4(a)(3)(ii) retain the rule that the determination of whether a 
qualified facility has a maximum net output of not greater than 5 MW 
(as measured in alternating current) is based on the nameplate capacity 
of the unit of qualified facility.
    Regarding measurement of the Five-Megawatt Limitation in 
alternating or direct current, the Treasury Department and the IRS 
understand the commenter's concerns and agree that the rule provided in 
the proposed regulations should be revised. Section 48E(b)(1)(B)(i)(I) 
refers to a maximum net output of not greater than five megawatts (as 
measured in alternating current). Proposed Sec.  1.48E-4(a)(3)(ii) 
provided for nameplate capacity in alternating current, without 
addressing types of qualified facilities, such as solar facilities, 
that generate electricity in direct current. Nameplate capacity for 
these types of qualified facilities is measured before the facility's 
output is converted to alternating current by an inverter. Because an 
inverter would be considered property that is an integral part of the 
qualified facility and not part of the unit of qualified facility 
itself, measuring the nameplate capacity of a qualified facility that 
generates electricity in direct current would be difficult under the 
proposed regulations.
    However, in response to comments, the final regulations provide a 
method of measuring nameplate capacity for a qualified facility that 
generates electricity in direct current. The final regulations at Sec.  
1.48E-4(a)(3)(iii) provide that, for qualified facilities that generate 
electricity in direct current, the taxpayer determines whether a 
qualified facility has a maximum net output of not greater than 5 MW 
(in alternating current) by using the lesser of: (i) the sum of the 
nameplate generating capacities within the unit of qualified facility 
in direct current, which is deemed the nameplate generating capacity of 
the unit of qualified facility in alternating current; or (ii) the 
nameplate capacity of the first component of the qualified facility 
that inverts the direct current electricity generated into alternating 
current. This rule provides flexibility for taxpayers while ensuring 
that the maximum net output (in alternating current) of a qualified 
facility can be determined in an administrable and reasonably accurate 
manner for qualified facilities that generate electricity in direct 
current.
    A few commenters suggested providing additional examples to 
illustrate output rules for interconnection property. Another commenter 
recommended finalizing Example 1 in proposed Sec.  1.48E-4(a)(7)(i) 
which specified that two section 48E facilities, each with a maximum 
output of 5 MW AC, can share--and treat as qualified interconnection 
property--a step-up transformer, which is integral to both properties.
    In response to commenters that requested additional clarification 
of the Five-Megawatt Limitation, the final

[[Page 4023]]

regulations add an additional example under Sec.  1.48E-4(a)(7) as well 
as provide clarifications to the existing examples. These 
clarifications illustrate the revised method of measuring nameplate 
capacity for a qualified facility that generates electricity in direct 
current. The clarifications also demonstrate the application of the 
Five-Megawatt Limitation in cases in which the nameplate capacity 
differs from the maximum output provided in the interconnection 
agreement. Specifically, the newly added example describes the 
application of the Five-Megawatt Limitation to separate interconnection 
agreements for a single qualified facility made up of units of a 
qualified facility owned by a single taxpayer. In that example, 
although the taxpayer has interconnection agreements with the utility 
that each allow for a maximum output of 10 MW (as measured in 
alternating current), the taxpayer may include the costs taxpayer paid 
or incurred for qualified interconnection property, subject to the 
terms of the interconnection agreement, to calculate the taxpayer's 
section 48E credits for each of the qualified facilities because each 
has a maximum net output of not greater than 5 MW (alternating 
current).
6. Energy Storage Technology
    Two commenters suggested that the final regulations permit 
interconnection costs for stand-alone EST. Both commenters explained 
that although sections 48E(b) and (c) do not mention eligible 
interconnection costs in the context of stand-alone EST, the term 
``qualified interconnection property'' is defined by reference to 
section 48(a)(8). Therefore, according to the commenters, this result 
is supported because the statutory text of that section expressly 
includes ``amounts paid or incurred by the taxpayer for qualified 
interconnection property . . . to provide for the transmission or 
distribution of the electricity produced or stored by such property.'' 
These commenters also added that this result would reconcile sections 
48 and 48E and would advance the IRA's express policy of encouraging 
storage deployment.
    Based on the explicit language of section 48E, the Treasury 
Department and the IRS disagree that including costs for qualified 
interconnection property for a standalone EST is supported by the 
statute. Section 48E(c)(1), which describes the qualified investment 
with respect to EST, does not refer to qualified interconnection 
property.
    Section 48E(b)(1) generally provides, in part, that the qualified 
investment with respect to any qualified facility for any taxable year 
includes the amount of any expenditures which are both paid or incurred 
by the taxpayer for qualified interconnection property in connection 
with a qualified facility which has a maximum net output of not greater 
than 5 megawatts (as measured in alternating current), and placed in 
service during the taxable year of the taxpayer. The amount of any 
expenditures which are paid or incurred by the taxpayer for qualified 
interconnection property must also be properly chargeable to capital 
account of the taxpayer. Section 48E(b)(4) defines qualified 
interconnection property by reference to section 48(a)(8)(B). While 
commenters are correct that the reference to qualified interconnection 
property in section 48(a)(8)(A) also refers to ``electricity stored,'' 
the cross-reference applicable for qualified facilities is to section 
48(a)(8)(B) (the definition of qualified interconnection property) and 
there is no similar cross-reference in section 48E to support including 
the costs of qualified interconnection property for an EST. The overt 
omission of a reference to qualified interconnection property in 
section 48E(c), which provides rules for determining qualified 
investment with respect to an EST is instructive. The clear exclusion 
of qualified interconnection property for EST under section 48E(c)(1), 
particularly when compared to its inclusion in section 
48E(b)(1)(B)(i)(I), demonstrates Congressional intent. Therefore, the 
final regulations do not adopt commenters' recommendation that 
expenditures paid or incurred by the taxpayer for qualified 
interconnection property are includible in the section 48E credit for 
EST.
    As discussed earlier, the Treasury Department and the IRS 
understand that some hybrid systems (such as those for a solar 
qualified facility and EST) operate under a single interconnection 
agreement.\1\ In these situations, while expenditures paid or incurred 
by a taxpayer for qualified interconnection property are not includible 
in the section 48E credit for an EST, those expenditures paid or 
incurred for qualified interconnection property that are properly 
allocated to the qualified facility (for example, the solar qualified 
facility) may be included in the credit base for the qualified 
facility's qualified investment for the section 48E credit.
---------------------------------------------------------------------------

    \1\ In some configurations, the addition of EST to a qualified 
facility may have no or limited impact on the interconnection costs 
of that hybrid facility.
---------------------------------------------------------------------------

E. 80/20 Rule
    As noted earlier, the 80/20 Rule is designed to broaden the 
availability of the investment credit by providing a new original 
placed in service date for a qualified facility that includes some 
components of property previously placed in service, rather than 
requiring the qualified facility to be composed entirely of new 
components of property. In the context of section 48E, the 80/20 Rule 
applies at the qualified facility level to the components of property 
within the unit of qualified facility or unit of EST.
    Proposed Sec.  1.48E-4(c)(1) provided that for purposes of section 
48E(b)(3)(A)(ii), 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 that the fair market value of the 
used components of the unit of qualified facility is not more than 20 
percent of the unit of qualified facility's total value (that is, the 
cost of the new components of property plus the value of the used 
components of property within the unit of qualified facility). In 
addition to providing a new placed in service date for a qualified 
facility that includes some components of property that have previously 
been placed in service, the 80/20 Rule also encourages investment in 
the retrofitting of existing facilities.
    Although this section focuses on the 80/20 Rule in the section 48E 
context, section II.F. of this Summary of Comments and Explanation of 
Revisions describes comments received on both sections 45Y and 48E. As 
described in that section, the Treasury Department and the IRS confirm 
that if a qualified facility under section 45 or energy property or EST 
under section 48 is later retrofitted in a manner that satisfies the 
80/20 Rule, it will be considered a new qualified facility or a new EST 
and may be eligible for a section 48E credit so long as the qualified 
facility or EST meets all requirements of section 48E. Additionally, 
the Treasury Department and the IRS confirm that section 48E does not 
refer to a project or system but in the case of section 48E to a 
qualified facility and an EST.
1. Relevance of Prior Section 48 Guidance
    Prior guidance and regulations under section 48 are not binding for 
purposes of section 48E. However, several commenters stated that 
application of the 80/20 Rule as proposed violated longstanding 
precedent under section 48. These commenters stated that under section 
48 as previously applied,

[[Page 4024]]

taxpayers would be allowed to claim the section 48E credit for capital 
improvements as well as additions or modifications to existing property 
without regard to the 80/20 Rule. Further, some commenters suggested 
that the 80/20 Rule as originally applied in the section 48 context was 
only relevant for addressing the ``original use requirement'' for 
property and was not intended to prevent additions of new property from 
qualifying for a credit. These commenters pointed to Example 2 in Sec.  
1.48-2(b)(7) and Examples 4 and 5 in Sec.  1.48-2(c), to illustrate 
that, in the context of the section 48 credit, the 80/20 Rule was 
intended to address the ``original use requirement.'' Consistent with 
this view, several commenters asserted that the prohibition against 
claiming the section 48E credit for additions that do not meet the 80/
20 Rule (Excluded Costs Rule) is inconsistent with the statute and 
regulations and should be removed.
    One commenter, like many others that asserted that the application 
of the 80/20 Rule for purposes of section 48E is contrary to historical 
precedent, also focused on the negative economic impact. The commenter 
stated that the proposed regulations would negatively impact the 
economics of both existing and future development of clean energy 
projects and that existing project investments were based on reasonable 
reliance that future capital improvements would be eligible for the 
section 48E credit without regard to the 80/20 Rule. Similarly, another 
commenter stated it did not see a policy rationale for application of 
the 80/20 Rule in the manner provided in the proposed regulations, as 
it would lead to uneconomic decisions, such as favoring demolition and 
rebuilding instead of capital expenditures to modify an existing energy 
property and, like others, pointed to what they view as inconsistency 
with more than 60 years of prior investment tax credit (ITC) precedent.
    The Treasury Department and the IRS understand the concerns raised 
by commenters. However, prior guidance and regulations based on section 
48 are not binding for purposes of section 48E. Section 48E provides a 
credit only for a qualified investment with respect to a qualified 
facility or an EST and not for components of property within a 
qualified facility or an EST. For the reasons provided here, the 
Treasury Department and the IRS believe that the best interpretation of 
``qualified investment with respect to a qualified facility or an EST'' 
is that if a taxpayer does not place in service a qualified facility or 
an EST, a taxpayer is not eligible for a credit. Therefore, the 
application of the 80/20 Rule to the section 48E credit in the proposed 
regulations benefits taxpayers by providing a path to access the 
section 48E credit when less than an entirely new qualified facility or 
EST is placed in service.
    Section 48E contains several features that require the credit to be 
analyzed at the level of a qualified facility or an EST. The PWA 
requirements are applied to a qualified facility or an EST under 
section 48E(a)(2)(A) and (B). Likewise, determining whether the 
increased credit amounts for domestic content and energy communities 
also apply to a qualified facility or an EST. Finally, determining 
whether a taxpayer may include qualified interconnection property 
expenditures is tied to the maximum net output of a qualified facility. 
These determinations cannot be made with respect to individual 
components of property. This statutory construction clearly 
contemplates calculating the credit on the basis of an entire qualified 
facility or EST. Applying the 80/20 Rule for purposes of section 48E 
provides taxpayers with an opportunity for additions of property to an 
existing facility or an EST to be eligible for the section 48E credit 
if the rule is satisfied.
    Other commenters pointed to what they describe as longstanding 
rules that otherwise ITC-eligible improvements made to existing energy 
property may qualify for the ITC. One commenter stated that the IRA did 
not change this rule in any way. According to this commenter, 
application of the 80/20 Rule has always uniquely been relevant for 
purposes of the production tax credit (PTC) and is simply not relevant 
for purposes of the ITC. The Treasury Department and the IRS affirm the 
role of the 80/20 Rule in the ITC context to allow for additions of new 
property to an existing facility or EST to be eligible for the section 
48E credit if the rule is satisfied.
2. Excluded Costs
    Several commenters asserted that section 48E allows a credit for 
adding components or making capital additions to a qualified facility. 
One commenter concluded that capital improvements should not be 
penalized under the 80/20 Rule. According to the commenter, owners of a 
qualified facility, such as a solar qualified facility, should be 
allowed to upgrade or replace components and claim new section 48E 
credits. The commenter pointed to two examples in the existing Treasury 
Regulations under section 48 that the commenter stated illustrate the 
proper interpretation of the original use requirement in Sec.  1.48-
2(b)(7) and the difference between a reconditioned or rebuilt unit of 
property previously placed in service and/or the use of ``some used 
parts,'' on the one hand, and the addition of new property or capital 
improvements, on the other.
    Another commenter stated that the excluded costs described in 
proposed Sec.  1.48E-4(c)(5) are unclear because a taxpayer is always 
adding new components to used components, and it should be reworded to 
clarify that it does not imply that the taxpayer must exclude the cost 
of new components when a taxpayer adds them to used components.
    Some of these commenters requested that the 80/20 Rule and the 
Excluded Costs Rule provided at proposed Sec.  1.48E-4(c)(5) not apply 
for section 48E purposes to additions of otherwise eligible new 
components of property added to an existing qualified facility on which 
a PTC was not claimed. As an example, the commenter asserted that the 
owner of a solar qualified facility should be able to make capital 
improvements to upgrade or replace existing solar modules or inverters 
and claim a new section 48E credit without regard to the 80/20 Rule on 
such capital improvements. This commenter stated that the 80/20 Rule 
should only apply when a new category of components is added to an 
existing qualified facility comprised of different categories of 
components (such as wind being added to solar), then that new category 
of component should be treated as a separate ``unit of qualified 
facility.'' The commenter stated that this result is also consistent 
with the IRA generally, which does not prevent a taxpayer from claiming 
both a PTC with respect to the output of a qualified facility and an 
ITC with respect to any associated EST. The commenter stated that this 
is also consistent with Notice 2018-59.
    Another commenter explained that the 80/20 Rule has its origins 
under the section 48 credit and in the context of the section 48 
regulations the phrase, ``some used parts,'' that has been the focus of 
the IRS's administrative practice for almost 60 years. According to the 
commenter, Rev. Rul. 68-111, 1968-1 C.B. 29, reflects the proper 
application of the 80/20 Rule albeit under a prior version of the 
section 48 credit. The commenter asserted that the Excluded Costs Rule 
in proposed Sec.  1.48E-4(c)(5) distorts the 80/20 Rule by shifting the 
focus from the use of ``used parts'' at the time the unit of property 
is originally placed in service to ``new'' property and capital 
improvements that are added later.

[[Page 4025]]

    The Treasury Department and the IRS note that the application of 
the 80/20 Rule clarifies that expenditures for components of property 
that are not a unit of qualified facility can only qualify if the 80/20 
Rule is satisfied, and thus any new property and capital improvements 
added later that are not a unit of qualified facility are ineligible 
for a section 48E credit unless the 80/20 Rule is satisfied. In 
response to the commenters that asserted that section 48E allows a 
credit for a component of property rather than a qualified facility, 
the Treasury Department and the IRS disagree with commenters' 
interpretation of the statutory language. The Treasury Department and 
the IRS also emphasize that existing regulations under Sec.  1.48-2 do 
not reflect the current version of section 48 and are not applicable to 
section 48E. Additionally, a taxpayer who makes a capital improvement 
to an existing facility should consider the application of the 
Incremental Production Rule provided in Sec.  1.45Y-4(d). Similarly, a 
taxpayer that makes modifications to an EST should consider the 
application of the rule provided at Sec.  1.48E-2(g)(7).
    Another commenter suggested that the purpose of the 80/20 Rule is 
to allow a facility that was placed in service prior to January 1, 
2025, to nevertheless satisfy the requirement in section 
48E(b)(3)(A)(ii) that a qualified facility be placed in service after 
December 31, 2024, if a substantial portion of the facility is 
reconstructed after 2024.
    The Treasury Department and the IRS disagree that the 80/20 Rule is 
tied to a particular year. The 80/20 Rule allows a taxpayer to treat an 
existing facility as originally placed in service at a later date by 
adding new components of property that represent at least 80 percent of 
the value of the unit of qualified facility. A retrofitted qualified 
facility or EST will be eligible for the section 48E credit if it meets 
the requirements of the 80/20 Rule before the section 48E credit phases 
out.
3. Recapture
    A commenter stated that if the Treasury Department and the IRS 
retain the Excluded Costs Rule as written, the final regulations should 
further clarify that investment tax credit recapture rules will not 
apply to additions of property that do not satisfy the 80/20 Rule. 
Generally, recapture under section 48E is governed by section 
50(a)(1)(A), which provides for recapture of the credit if property 
ceases to be investment credit property. Additions of property that do 
not satisfy the 80/20 Rule and that are thus subject to the Excluded 
Costs Rule are not included in the calculation of the section 48E 
credit. Accordingly, there is no credit to recapture with respect to 
such additions of property.
4. Original Use Requirement
    Some commenters asserted that the original use requirement applies 
only to acquired property, and therefore, the 80/20 Rule is unnecessary 
for other types of property. These commenters pointed to section 
48E(b)(2)(C), which provides, in part, that qualified property means 
property (i) the construction, reconstruction, or erection of which is 
completed by the taxpayer, or (ii) which is acquired by the taxpayer if 
the original use of such property commences with the taxpayer. This 
language was incorporated at proposed Sec.  1.48E-2(f)(3) through (5). 
The commenters cited this language to support their view that the 
original use requirement applies only to acquired property. Therefore, 
according to the commenters, the ``original use'' requirement applies 
to property acquired by a taxpayer, but does not apply to property the 
construction, reconstruction, or erection of which is completed by the 
taxpayer. The commenters concluded that this statutory language 
supports the position that capital additions to an existing qualified 
facility or EST qualify for the section 48E credit.
    The Treasury Department and the IRS disagree with the commenters' 
interpretation of the statutory language and corresponding language in 
the proposed regulations. The commenters are correct that section 
48E(b)(2)(C)(ii) requires original use for acquired property, whereas 
section 48E(b)(2)(C)(i) does not mention original use with respect to 
property that is constructed, reconstructed, or erected by or for the 
taxpayer, however, that is because an original use requirement is 
unnecessary in the latter context. The taxpayer that is claiming a 
credit for property that it constructed, reconstructed, or erected by 
or for such taxpayer will necessarily be the original user of such 
property. Although some commenters suggested the 80/20 Rule has 
historically been applied in the section 48 context with respect to the 
original use requirement, the Treasury Department and the IRS emphasize 
that the 80/20 Rule was first applied to the section 48 credit through 
guidance issued in the Internal Revenue Bulletin providing beginning of 
construction guidance. The Treasury Department and the IRS reiterate 
that for section 48E purposes, the 80/20 Rule allows a taxpayer that 
retrofits an existing facility to treat such facility as a new 
qualified facility or EST.
5. EST
    In the context of section 48E, the proposed regulations discussed 
the 80/20 Rule for purposes of retrofitting a qualified facility but 
did not specifically address the application of the 80/20 Rule to EST. 
Some commenters asked if the 80/20 Rule applied to EST. Commenters 
requested that the final regulations clarify that the 80/20 Rule also 
applies to EST, including battery energy storage systems and pumped 
storage hydropower. Another commenter stated that new component 
categories, like EST, added to existing facilities should be treated as 
separate units of qualifying facility and exempted from the 80/20 Rule.
    In response to these comments, the Treasury Department and the IRS 
note that the 80/20 Rule applies to EST. The 80/20 Rule, as it is 
applied to EST, is a separate rule from the modification of EST 
provided by the section 48E(c)(2) reference incorporating section 
48(c)(6)(B) (modifications of EST). The final regulations adopt the 
application of the 80/20 Rule for EST, and this Summary of Comments and 
Explanation of Revisions addresses EST in regard to the 80/20 Rule. 
With respect to the addition of EST to a site with an existing 
qualified facility, the Treasury Department and the IRS note that an 
EST is separate from a qualified facility as discussed in section 
III.C.2. of this Summary of Comments and Explanation of Revisions. As a 
result, merely adding an EST to a site with an existing qualified 
facility does not require application of the 80/20 Rule.
6. Specific Technologies
    Some commenters asked for specific clarifications regarding the 80/
20 Rule and particular technologies. A commenter suggested that in the 
case of a hydropower facility combined with a pumped storage hydropower 
facility, each powerhouse generating unit (turbine or pump turbine, 
generator and controls) should be considered a unit of qualified 
facility for purposes of the final regulations. Additionally, this 
commenter asserted, that, in the case of a wind facility, the 
functionally interdependent components of a unit of qualified facility 
should be the turbine, tower, and foundation pad. In both cases, the 
commenter requested that the 80/20 Rule apply to the functionally 
interdependent components of the unit of qualified facility.
    For purposes of the section 45Y and section 48E credits, the unit 
of qualified facility includes all functionally interdependent 
components of property (as defined in proposed Sec.  1.48E-

[[Page 4026]]

2(d)(2)(ii)) owned by the taxpayer that are operated together and that 
can operate apart from other property to produce electricity. The final 
regulations adopt these rules, which provide a function-oriented 
approach to determine if property is considered part of the qualified 
facility that generates electricity, to ensure that the final 
regulations are broad enough to encompass nascent technologies without 
rendering the regulations quickly obsolete. After consideration of the 
comments, an example of the application of the 80/20 Rule to a 
qualified hydropower production facility has been added to the final 
regulations under Sec.  1.48E-4(c)(6)(v). Additionally, the Treasury 
Department and the IRS made revisions to Example 3 of Sec.  1.48E-
4(c)(6)(iii), similar to those made for Sec.  1.45Y-4(d)(3)(iii), that 
removed the reference to a decommissioned nuclear facility to avoid 
referring to decommissioned and restarted nuclear facilities in the 
Incremental Production Rule and the 80/20 Rule.
    Another commenter specifically asked that the 80/20 Rule be 
eliminated for certain types of facilities such as power generation, 
thermal generation, or CHP facilities upgraded to be carbon neutral. To 
support this request, the commenter noted that the 80/20 Rule 
discourages the use of existing infrastructure in CHP applications. 
While the Treasury Department and the IRS appreciate the concerns 
raised for particular technologies, as described in the preamble to the 
proposed regulations, a qualified facility generally does not include 
equipment that is an addition or modification to an existing qualified 
facility or EST. However, see Sec.  1.48E-4(b) regarding the 
Incremental Production Rule.
7. Interaction Between the Incremental Production Rule and the 80/20 
Rule
    Some commenters were concerned about the interaction of the 
Incremental Production Rule and the 80/20 Rule and the provided at 
proposed Sec. Sec.  1.45Y-4(c) and 1.48E-4(b). One commenter requested 
that the Treasury Department and the IRS make clear that the provision 
for retrofitted facilities is separate and distinct from the 
requirements for the Incremental Production Rule, and that if there is 
any overlap between the two, the 80/20 Rule should control. The 
commenter stated that a retrofitted facility that results in the 
addition of capacity should be treated as newly placed in service if it 
meets the 80/20 Rule (rather than requiring the retrofitted facility to 
follow the Incremental Production Rule).
    Another commenter recommended clarifying when to apply one rule or 
the other in situations in which both the 80/20 and Incremental 
Production rules could apply. A commenter also asserted that the 
statutory text under sections 45Y(b)(1)(C) and 48E(b)(3)(B)(i), 
regarding the Incremental Production Rule, is without regard to the 80/
20 Rule or the facility's original placed in service date, and that, 
therefore, Congress sought to incentivize investment in existing 
facilities without requiring taxpayers to meet the 80/20 Rule. 
Similarly, commenters recommended providing an example of a 
decommissioned facility without any reference to the 80/20 Rule, and to 
revise Example 3 in proposed Sec.  1.45Y-4(d)(3)(iii), regarding the 
80/20 Rule, to remove the reference to decommissioning.
    The Treasury Department and the IRS agree that the Incremental 
Production Rule provided in sections 45Y(b)(1)(C) and 48E(b)(3)(B)(i) 
are separate and distinct from the 80/20 Rule. If a retrofitted 
facility satisfies the 80/20 Rule, the final regulations provide that 
the facility will be treated as newly placed in service even if the 
taxpayer also satisfies the Incremental Production Rule. Separately, 
these final regulations provide an additional example, in Sec.  1.48E-
4(b)(5), which specifically addresses decommissioned and restarted 
facilities. Additionally, Sec.  1.48E-4(c)(1) is clarified to confirm 
that a qualified facility or EST may claim the full available credit 
rather than the credit resulting from an addition of capacity. Finally, 
Example 3 in Sec.  1.45Y-4(d)(3)(iii) is modified to remove the 
reference to decommissioning.
    Another commenter requested clarification that even if a facility 
placed in service before 2025 (pre-2025 facility) fails the 80/20 Rule, 
property that is added to the facility may still qualify for the 
section 48E credit under the Incremental Production Rule in section 
48E(b)(3)(B)(i). Proposed Sec.  1.48E-4(b)(1) provided, in part, 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 48E(b)(3)(A) (without regard to 
section 48E(b)(3)(A)(ii)), 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. Thus, a pre-2025 facility that fails the 80/20 Rule may still 
qualify for the section 48E credit under the Incremental Production 
Rule. Additionally, the Treasury Department and the IRS confirm that 
this rule will apply to a pre-2025 facility regardless of whether it 
satisfies the 80/20 Rule.
8. Other Comments
    While the majority of commenters that opposed the 80/20 Rule 
suggested eliminating it, particularly the Excluded Costs Rule, one 
commenter provided an additional recommendation. This commenter 
recommended that the proposed regulations be revised to permit 
taxpayers to elect either the 80/20 Rule or a rule based on the 
original cost of the qualified facility (Original Cost Rule). Under the 
Original Cost Rule as proposed by the commenter, a qualified facility 
would be treated as originally placed in service, even though it 
contains some used components of property, provided the cost of the new 
components of the unit of qualified facility is at least 50 percent of 
the original cost of the unit of qualified facility. Original cost 
would be defined as the unadjusted GAAP book basis at the time the 
qualified facility was originally placed in service. The commenter also 
explained that this new rule could be limited in its application and 
stated that outside of sections 45 and 48 an 80/20 Rule currently 
applies to determine eligibility for bonus depreciation under section 
168(k)(7) and the carbon oxide sequestration credit under section 45Q 
of the Code. Therefore, the commenter requested that the final 
regulations adopt an optional Original Cost Rule limited to section 45Y 
and section 48E qualified facilities, which would limit the effect to 
the section 45Y and 48E credits and permit the 80/20 Rule adopted in 
other contexts to remain in place.
    The Treasury Department and the IRS understand the commenter's 
desire for a less restrictive standard than what the proposed 80/20 
Rule provides, but the Treasury Department and the IRS think the 80/20 
Rule strikes the appropriate balance between allowing taxpayers 
flexibility and creating an incentive for new investment. Therefore, 
the final regulations do not adopt the commenter's proposal.
    After consideration of all comments expressing opposition to the 
80/20 Rule in the context of section 48E, the Treasury Department and 
the IRS decline to modify or abandon the 80/20 Rule as requested. 
Section 48E(b)(1) provides that the section 48E credit is available for 
the qualified investment with respect to any qualified facility for any 
taxable year that includes the basis of any qualified property placed 
in service by the taxpayer during such

[[Page 4027]]

taxable year which is part of a qualified facility. Section 48E(c)(1) 
provides that a credit for the qualified investment with respect to an 
EST for any taxable year is the basis of any EST placed in service by 
the taxpayer during such taxable year. The 80/20 Rule is designed to 
broaden the availability of the section 48E credit to provide a new 
original placed in service date for a qualified facility or EST that 
includes some components of a qualified facility or EST that have 
already been placed in service, rather than requiring the entire unit 
of qualified facility or EST to be composed of only new property. The 
80/20 Rule also encourages retrofitting an existing qualified facility 
or EST provided there is sufficient new investment. As described 
earlier in this section on the 80/20 Rule, if a qualified facility 
under section 45 or energy property under section 48 is retrofitted in 
a manner that satisfies the 80/20 Rule, it will be considered a new 
qualified facility and may be eligible for the section 45Y or 48E 
credits if the qualified facility meets all of the sections 45Y and 48E 
requirements.
    Section 48E(c)(2) incorporates the lone express rule for 
modification of existing energy property that is found in section 
48(c)(6)(B). This special rule is limited to modifications of existing 
EST. The inclusion of this specific provision suggests that 
modifications of existing EST that do not meet the 80/20 Rule or the 
Incremental Production Rule are ineligible for the section 45Y or 48E 
credits. Adopting the 80/20 Rule for the section 48E credit is 
favorable to taxpayers and encourages substantial additional investment 
in existing qualified facilities and EST.
    As discussed in section IV.G. of this Summary of Comments and 
Explanation of Revisions, the ownership rules provided that the section 
45Y and 48E credits are available for an entire unit of qualified 
facility or unit of EST and not for individual components of property. 
The 80/20 Rule is consistent with the ownership rules because it 
ensures that a qualified facility or EST that is retrofitted to a 
sufficient extent is considered a new qualified facility or EST, 
whereas the addition of mere components is not eligible for the section 
48E credit.
F. Qualified Progress Expenditures
    Section 48E(d)(1) provides 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). Footnote 5 of the proposed regulations 
explained that the rules provided by Sec.  1.46-5 related to qualified 
progress expenditures apply for purposes of section 48E(a).
    Several commenters requested that the final regulations provide 
additional clarifications related to whether qualified progress 
expenditures are allowable for purposes of elective payment elections 
under section 6417 (section 6417 elective payment elections). 
Commenters requested clarifying the application of qualified progress 
expenditure payments to ``applicable entities,'' as defined in section 
6417(d)(1), and confirming that progress expenditures permitted by 
section 48E are allowable for purposes of section 6417 elective payment 
elections. Commenters noted that, while section 6418(g)(4) provides an 
explicit statutory prohibition on using the section 6418 credit 
transfer election provisions for progress expenditures, a similar 
prohibition was not included for section 6417 elective payment 
elections and that, therefore, permitting applicable entities to use 
the section 48E credit for purposes of section 6417 elective payment 
elections is consistent with the statutory text of section 6417.
    Given the statutory language under section 48E(d)(1), a taxpayer 
can make a qualified progress expenditure election, as provided in 
Sec.  1.46-5, to increase its qualified investment with respect to a 
qualified facility or EST for the taxable year by any qualified 
expenditures made during such taxable year. Section 6417(b)(12) 
provides that the section 48E credit is an applicable credit for 
purposes of making an elective payment election. The statutory text of 
sections 48E(d)(1) and 6417(b)(12), when read in tandem, permit a 
taxpayer to make an elective payment election with respect to a section 
48E credit determined pursuant to a qualified progress expenditure 
election. Therefore, the Treasury Department and the IRS confirm that 
for the section 48E credit, qualified progress expenditures are 
allowable for purposes of section 6417 elective payment elections but 
have determined that no change is necessary in the final regulations. 
The final regulations at Sec.  1.48E-4(g) adopt language similar to 
footnote 5 from the proposed regulations, that the rules provided by 
Sec.  1.46-5 related to qualified progress expenditures apply for 
purposes of section 48E(a).
G. Incremental Cost Rule
    One commenter requested that the final regulations ``clarify the 
application of the `incremental cost''' concept to section 48E. 
Incremental cost is the excess of the total cost of equipment over the 
amount that would have been expended for the equipment if the equipment 
were not used for a qualifying purpose. The regulations under former 
Sec.  1.48-9(k) provided the incremental cost rule. The preamble to the 
Treasury Decision (TD 7765, 46 FR 7291) that implemented this rule 
noted that in many instances one item of property can be used in part 
for a qualifying energy purpose and in part for non-qualifying 
functions. The preamble to TD 7765 explained that the Treasury 
Department and the IRS approached this situation by considering whether 
to deny the credit, provide partial credit, or allow a full credit. The 
preamble stated that simply denying the credit entirely would 
discourage investments, but that, on the other hand, property which 
incidentally serves an energy function should not receive the subsidy 
of a full energy credit. For these reasons, the Treasury Department and 
the IRS viewed the incremental cost rule as the most fair approach.
    The Treasury Department and the IRS have determined that a similar 
approach should be taken in these final regulations. Section 1.48E-
4(h)(1) provides that for purposes of section 48E, if a component of 
qualified property of a qualified facility or a component of property 
of an EST is also used for a purpose other than the intended function 
of the qualified facility or EST, only the incremental cost of such 
component is included in the basis of the qualified facility or EST. 
This section also defines the term ``incremental cost'' to mean the 
excess of the total cost of a component over the amount that would have 
been expended for the component if that component were used for a non-
qualifying purpose. Section 1.48E-4(h)(2) provides an example to 
illustrate this rule.
H. Application of Normalization Opt-Out
    Proposed Sec.  1.48E-4(g)(4) referred taxpayers to section 50(d)(2) 
for application of the normalization rules to the section 48E credit in 
the case of certain regulated companies, including rules regarding the 
election not to apply the normalization rules to EST (as defined in 
section 48(c)(6) of the Code). Several commenters requested that the 
final regulations clarify that the normalization opt-out election 
provided in section 50(d)(2) is available for the section 48E credit 
claimed with respect to an EST, without regard to the date on which 
construction of such EST begins. After consideration of the comments, 
the requested clarification has been adopted in Sec.  1.48E-4(i)(4).

[[Page 4028]]

IV. Combined Qualified Facilities (Sections 45Y and 48E)

    This section covers issues that impact both sections 45Y and 48E 
and includes the topics: beginning of construction, property included 
in a qualified facility, qualified facilities and specific 
technologies, coordination with other credits, integral part, shared 
integral property, ownership, the Incremental Production Rule, and the 
dual use rule.
    Proposed Sec.  1.45Y-2(a) defined a ``qualified facility'' to mean 
a facility owned by the taxpayer that is used for the generation of 
electricity, 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).
    Proposed Sec.  1.48E-2(a) defined 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).
A. Beginning of Construction
    Notice 2022-61, 2022-52 I.R.B. 560, provides guidance regarding the 
prevailing wage and apprenticeship (PWA) requirements and provides 
guidance for determining the beginning of construction of a facility 
for the section 45Y and 48E credits. Section 5 of the Notice provides 
that, to determine when construction begins for purposes of sections 
30C, 45V, 45Y, and 48E, principles similar to those under Notice 2013-
29, 2013-20 I.R.B. 1085, regarding the Physical Work Test and Five 
Percent Safe Harbor apply, and taxpayers satisfying either test will be 
considered to have begun construction.
    Section 5 of Notice 2022-61 also provides that principles similar 
to those provided in certain IRS Notices \2\ regarding the Continuity 
Requirement for purposes of sections 30C, 45V, 45Y, and 48E apply. 
Section 5 further provides that whether a taxpayer meets the Continuity 
Requirement under either test is determined by the relevant facts and 
circumstances. Additionally, section 5 states that principles similar 
to those under section 3 of Notice 2016-31, 2013-44 I.R.B. 431, 
regarding the Continuity Safe Harbor also apply for purposes of 
sections 30C, 45V, 45Y, and 48E. Section 5 also provides that taxpayers 
may rely on the Continuity Safe Harbor provided the facility is placed 
in service no more than four calendar years after the calendar year 
during which construction began. For purposes of the section 45Y and 
48E credits, Notice 2022-61 continues to apply.
---------------------------------------------------------------------------

    \2\ Notice 2013-29, 2013-20 I.R.B. 1085; clarified by Notice 
2013-60, 2013-44 I.R.B. 431; clarified and modified by Notice 2014-
46, 2014-36 I.R.B. 520; updated by Notice 2015-25, 2015-13 I.R.B. 
814; clarified and modified by Notice 2016-31, 2016-23 I.R.B. 1025; 
updated, clarified, and modified by Notice 2017-04, 2017-4 I.R.B. 
541; Notice 2018-59, 2018-28 I.R.B. 196; modified by Notice 2019-43, 
2019-31 I.R.B. 487; modified by Notice 2020-41, 2020-25 I.R.B. 954; 
clarified and modified by Notice 2021-5, 2021-3 I.R.B. 479; 
clarified and modified by Notice 2021-41, 2021-29 I.R.B. 17.
---------------------------------------------------------------------------

    A commenter requested that final regulations clarify that projects 
failing to qualify for the section 45 or 48 credits due to a failure to 
satisfy continuity requirements may still qualify for the section 45Y 
or 48E credits, assuming all other requirements for the section 45Y or 
48E credit are satisfied. The commenter contended that a taxpayer may 
meet the January 1, 2025, beginning of construction requirement to 
qualify for the section 45 and 48 credits, but may not be able to 
satisfy continuity requirements under existing IRS guidance by placing 
the facility in service within four years after construction began. The 
Treasury Department and the IRS confirm that a facility that fails to 
satisfy the requirements (including beginning of construction 
requirements) for the section 45 or 48 credit, is not disqualified from 
claiming either section 45Y or 48E so long as the facility meets all 
requirements under those Code sections.
    The commenter also noted that sections 45Y and 48E employ a ``start 
of construction'' metric for purposes of determining whether a 
qualified facility is eligible for the increase in credit rates for 
satisfying the domestic content or energy communities bonus, and for 
assessing the applicable credit phaseout amounts. The commenter 
recommended resolving what they characterized as uncertainty related to 
application of beginning of construction rules under existing IRS 
guidance to sections 45Y and 48E by adopting modified continuity safe 
harbor requirements for determining the beginning of construction. One 
such modified safe harbor would permit a taxpayer to apply whatever 
rules were applicable to the ``commence construction'' year that 
corresponds to the earliest year that would still meet a continuity 
safe harbor based on when the facility was ultimately placed in 
service.
    The Treasury Department and the IRS have determined that the 
existing Internal Revenue Bulletin guidance (referred to as the IRS 
Notices) adequately addresses the beginning of construction rules 
applicable to sections 45Y and 48E. Additionally, modifications to the 
beginning of construction guidance provided by the IRS Notices for 
sections 45 and 48 are beyond the scope of these final regulations.
B. Property Included in Qualified Facility
    Proposed Sec.  1.45Y-2(b) provided a description of the property 
included in a qualified facility. Proposed Sec.  1.45Y-2(b)(1) provided 
that a qualified facility includes a unit of qualified facility, 
defined in proposed Sec.  1.45Y-2(b)(2)(i), and also includes qualified 
property owned by the taxpayer that is an integral part of a qualified 
facility, 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. Accordingly, 
proposed Sec.  1.45Y-2(b)(1) clarified 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.  1.48E-2(b) provided that a qualified facility 
includes a unit of qualified facility, defined in proposed Sec.  1.48E-
2(b)(2)(i), and also includes property owned by the taxpayer that is 
integral to the unit of qualified facility, which is defined in 
proposed Sec.  1.48E-2(b)(3). For purposes of section 48E, a qualified 
facility does not include any electrical transmission equipment, such 
as transmission lines and towers, or any equipment beyond the 
electrical transmission stage, and generally does not include equipment 
that is an addition or modification to an existing qualified facility. 
However, the proposed regulations provided two specific exceptions to 
that rule: the Incremental Production Rule, and the 80/20 Rule.
    A commenter stated that there are inconsistencies between the 
definitions of a ``property included in a qualified facility'' in 
proposed Sec.  1.45Y-2(b)(1) and ``unit of qualified facility'' in 
proposed Sec.  1.45Y-2(b)(2). The commenter stated that the first 
definition provides that the qualified facility equals the ``unit of 
qualified facility'' plus the ``integral property'', however, the 
second definition provides that a ``unit of qualified facility'' 
equates to ``functionally interdependent components of property.'' The 
commenter stated that proposed Sec.  1.48E-2 had similar 
inconsistencies. The commenter suggested that the final regulations 
include an example to more clearly define a qualified facility. The 
commenter also referred to the coordination with other credits in

[[Page 4029]]

proposed Sec.  1.45Y-2(c) and stated that a taxpayer must assume that 
what constitutes a ``qualified facility'' under section 45Y, namely, 
all functionally interdependent components of property as well as any 
integral property, is the same with respect to all other Federal income 
tax credits that reference a qualified facility, but that this 
definition needs to be made consistent across all the other Code 
sections.
    The Treasury Department and the IRS do not agree that an ambiguity 
exists between the references to a qualified facility. For both 
sections 45Y and 48E, the unit of qualified facility is the narrower 
definition and includes only the functionally interdependent components 
of property. A qualified facility is this ``unit of qualified 
facility'' plus integral property. Multiple examples in the proposed 
regulations illustrate these concepts.
    The Treasury Department and the IRS also do not agree that 
taxpayers must assume that the definition of a ``qualified facility'' 
under sections 45Y and 48E is the same in all other Federal income tax 
credits. Each Code section has its own unique definition of a facility 
that must be considered; addressing definitions in other Code sections 
is beyond the scope of these final regulations. In response to 
commenters' concerns, though, the final regulations add additional 
examples to illustrate the interaction of Federal income tax credits in 
Sec. Sec.  1.45Y-2(c)(3) and 1.48E-2(f)(3). The final regulations at 
Sec. Sec.  1.45Y-2(b)(3)(vii) and 1.48E-2(b)(3)(vii) also change the 
term ``qualified property'' in proposed Sec.  1.45Y-2(b)(1) to 
``property'' as ``qualified property'' is not a term used in section 
45Y.
C. Qualified Facilities and Specific Technologies for Purposes of 
Sections 45Y and/or 48E
1. Biogas
    Commenters stated that the energy feedstock production property 
comprising a feedstock processing and treatment system, when owned by 
the same taxpayer that owns the electric generation facility placed in 
service after December 31, 2024, is either a functionally 
interdependent component property operated together with the electric 
generation facility or an integral part of that facility. Commenters 
asserted that anaerobic digester and gas conditioning components are 
used directly in the intended function of the facility and that, 
without this feedstock treatment, the electricity production component 
would not be able to produce zero or negative GHG electricity. 
Accordingly, commenters requested that the final regulations recognize 
all components of an electricity production facility, including the 
anaerobic digester and gas conditioning equipment as part of a 
qualified facility. The final regulations do not adopt these comments 
because while the energy feedstock production property described is 
generally used to produce fuel that may be used by a qualified facility 
to generate electricity, it is not part of such qualified facility 
based on the definition of qualified facility for purposes of the 
section 45Y and 48E credits.
2. Solar
    A commenter encouraged the Treasury Department and the IRS to 
explicitly define solar photovoltaic panels used to generate 
electricity for an automated shading system as a qualified facility. 
The commenter noted that the example in proposed Sec.  1.45Y-
5(c)(1)(iii) already describes the GHG emissions rate for qualified 
facilities that produce electricity using solar photovoltaic properties 
as not greater than zero and that proposed Sec.  1.45Y-5(c)(2)(iv) also 
describes solar photovoltaic power as a type of non-C&G facility.
    The Treasury Department and the IRS have determined that the 
example in proposed Sec.  1.45Y-5(c)(1)(iii) and the list of non-C&G 
facilities in proposed Sec.  1.45Y-5(c)(2)(iv) are sufficient to 
address commenter's request as the rules adequately provide that 
facilities using solar photovoltaic property to produce electricity are 
eligible for the section 45Y and 48E credits assuming the taxpayer 
satisfies the other statutory requirements. Accordingly, the final 
regulations adopt the proposed rule without change.
3. Nuclear
    A commenter requested that the final regulations confirm that 
nuclear structures, components, and fuel are part of qualified property 
for purposes of section 48E. Similarly, another commenter requested 
confirmation that specific components, such as reactor cores, are 
included in the qualified investment in a qualified facility under 
section 48E. Another commenter suggested adding language to the 
definition of integral part with respect to buildings to specifically 
address a building used for nuclear fusion or fission. The commenter 
specifically requested the final regulations describe a structure or 
building that is integral to the intended function of a qualified 
facility because it is needed to comply with or maintain required 
radiological health and safety conditions as required by a qualified 
facility's regulator.
    Section 48E(b)(1) generally provides that the section 48E credit is 
available for a taxpayer's qualified investment with respect to a 
qualified facility, which is the sum of the basis of any qualified 
property placed in service by the taxpayer during such taxable year 
that is part of such qualified facility and if applicable, qualified 
interconnection costs. Section 48E(b)(2)(A) provides, in relevant part, 
that qualified property is property which 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. Therefore, tangible property, including 
structures (other than buildings or their structural components), 
components, and fuel, that meets the definition of qualified property 
may be included in the credit base of a qualified facility. As provided 
in Sec.  1.48E-2(d)(3)(v), generally buildings are not integral parts 
of a qualified facility because they are not integral to the intended 
function of the qualified facility. Due to the exclusion of a building 
or its structural components, this would exclude, for example, 
buildings that house nuclear reactor control rooms.
    However, as the proposed regulations acknowledged, not all 
structures are considered ``buildings'' for the purpose of excluding 
buildings and their structural components. Proposed Sec.  1.48E-
2(b)(3)(v)(A) and (B) provided that a structure is not considered a 
building if it is essentially an item of machinery or equipment, or if 
it houses components of property that are integral to the intended 
function of the qualified facility and 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. The 
Treasury Department and the IRS confirm that nuclear containment 
structures fall within the exception provided in proposed Sec.  1.48E-
2(b)(3)(v)(A) and (B), which has been adopted and moved to Sec.  1.48E-
2(d)(3)(v)(A) and (B) of the final regulations. Like hydropower dams, 
but unlike control room buildings, nuclear containment structures are 
integral to the intended function of the qualified facility. Moreover, 
given their complexity, technical requirements, Nuclear Regulatory 
Commission-mandated testing requirements, severe limits on the time 
workers and other personnel can spend inside the structure, and 
purpose, nuclear

[[Page 4030]]

containment structures are essentially pieces of specialized equipment. 
They ensure the fulfillment of several safety functions at a nuclear 
power plant, including: (i) confinement of radioactive substances in 
operational states and in accidental conditions; (ii) protection of the 
reactor against natural external events and human induced events; and 
(iii) radiation shielding in operational states and in accident 
conditions.
4. Hydropower
    A commenter requested that the final regulations provide additional 
examples illustrating the scope of a ``qualified investment credit 
facility'' and ``qualified property'' with respect to hydropower. 
Another commenter asked that the final regulations confirm that 
components of project works as identified in FERC licenses (referred to 
by the commenter as physical structures of a project) are integral 
property to a hydropower facility and therefore eligible for the 
section 48E credit. Specifically, the commenter suggested adopting 
principles from the section 48 proposed regulations regarding qualified 
offshore wind facilities, whereby all FERC-licensed components of any 
kind, including remote islanded hydropower generation components, 
including the switchgear or substation housed in an onshore substation, 
are either functionally interdependent components of a unit of the 
qualified facility or integral parts of a qualified facility.
    A definitive response to these comments would require the Treasury 
Department and the IRS to conduct a complete factual analysis of the 
hydropower property in question, which may include information beyond 
that which was provided by the commenters. Because more information is 
needed to make the determinations requested by the commenters, the 
final regulations do not provide these requested clarifications. 
However, further discussion of relevant components of hydropower 
facilities is provided in section IV.E. of this Summary of Comments and 
Explanation of Revisions.
5. Section 48 Energy Properties
    A commenter suggested that, for purposes of the qualified 
investment calculation in section 48E(b), the final regulations should 
clarify that the term ``qualified property'' includes any energy 
property defined in section 48(a)(3), unless it is specifically 
excluded. The Treasury Department and the IRS reiterate that the 
determination of whether a qualified facility is eligible for the 
section 48E credit depends, in part, on the anticipated GHG emissions 
of the facility as determined under section 48E(b)(3)(B)(ii) and Sec.  
1.48E-5 of these regulations rather than the technology used. This is 
distinct from section 48(a)(3), which identified specific types of 
energy property that are eligible for the section 48 credit. See the 
discussion of qualified property for section 48E in section III.B. of 
this Summary of Comments and Explanation of Revisions. Accordingly, the 
Treasury Department and the IRS cannot adopt the commenter's 
recommendation and the rule will be adopted as proposed.
6. Facilities That Are Not Used for the Generation of Electricity
    A commenter requested that the final regulations provide 
flexibility to ensure that the following thermal energy technologies 
would not be prohibited from qualifying for the section 45Y and 48E 
credits: alternative water thermal sourcing, heat recovery systems for 
ventilation air, simultaneous heat recovery, and air source heat pumps. 
Similarly, another commenter suggested that thermal production from 
non-waste energy recovery should be eligible for the section 45Y credit 
and provided sample regulatory language to that effect. Another 
commenter suggested that technologies such as air-source heat pumps and 
building efficiency retrofits should be eligible for the section 45Y 
and 48E credits. Other commenters stated that microgrid controllers, 
which are energy property under section 48, should be eligible for the 
section 48E credit.
    Sections 45Y(b)(1)(A)(i) and 48E(b)(3)(A)(i) define a qualified 
facility as a facility which is used for the generation of electricity. 
A facility cannot be considered a qualified facility under either 
section 45Y or 48E if it does not meet this requirement. However, the 
Treasury Department and the IRS note that the section 48E credit 
applies to both qualified facilities and EST. Section III.C.1. of this 
Summary of Comments and Explanation of Revisions discusses the 
definition of EST for purposes of the section 48E credit.
    Given the earlier-described comments, and a few comments on other 
topics that indirectly suggested that EST that are net consumers of 
electricity were nonetheless ``used for the generation of 
electricity,'' the Treasury Department and the IRS have determined that 
additional clarification of the phrase ``used for the generation of 
electricity'' is warranted. The final regulations at Sec. Sec.  1.45Y-
2(a)(1) and 1.48E-2(b)(1)(i) clarify that, for a facility to meet the 
requirements of sections 45Y(b)(1)(A)(i) and 48E(b)(3)(A)(i), the 
facility must be a net generator of electricity, taking into account 
any electricity consumed by the facility.
D. Coordination With Other Credits
    Proposed Sec. Sec.  1.45Y-2(c) and 1.48E-2(c) provided rules for 
coordination of the section 45Y and 48E credits with other Federal 
income tax credits, including those determined under sections 45, 45J, 
45Q, 45U, 48, and 48A. Proposed Sec.  1.45Y-1(c)(1) provided, in part, 
that a taxpayer that owns a qualified facility 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.
    A commenter suggested clarifying that the reference in proposed 
Sec.  1.45Y-2(c)(1) to ``another Federal income tax credit'' does not 
extend beyond those credits specifically listed in section 45Y(c)(1). 
The commenter stated that, although the reference to ``another Federal 
income tax credit'' follows a specific reference to specific sections 
of the Code, the general reference is ambiguous and may inadvertently 
preclude claiming the section 45Y or 48E credits when a taxpayer claims 
a non-energy credit such as the credit for increasing research 
activities under section 41 of the Code or the advanced manufacturing 
production credit under section 45X of the Code.
    A commenter requested modifying Sec.  1.45Y-2(c)(1) to permit a 
taxpayer to claim the section 45Y credit with respect to a qualified 
facility that is co-located with another facility for which a credit 
determined under section 45V or 45Z of the Code is allowed. Another 
commenter requested that the final regulations clarify that the carbon 
capture portion of a bioenergy and carbon sequestration facility is a 
section 45Q facility separate from the electricity generating portion 
of a qualified facility under section 45Y.
    A commenter asked whether the ``anti-abuse provision'' in the 
section 45V proposed regulations would bar a taxpayer from claiming the 
section 45V credit in addition to either the section 45Y or 48E 
credits. Similarly, commenters requested clarifying whether taxpayers 
claiming the section 48E credit in a taxable year would be unable to 
claim the section 45Q credit in any subsequent year. The commenters 
asserted that section 48E(b)(3)(C) only specifically prohibits a 
taxpayer from claiming a section 48E credit for a facility for which a 
section 45Q credit was claimed ``for the taxable year or any prior 
taxable year,'' but does

[[Page 4031]]

not directly state that a taxpayer cannot claim a section 45Q credit 
for that facility in a future taxable year.
    Some commenters requested that the final regulations prevent 
taxpayers from claiming multiple Federal or State tax incentives based 
on the same investment in or for the production of clean energy. By 
contrast, another commenter requested confirmation that claiming the 
section 45Y and 48E credits would not impact a taxpayer's ability to 
qualify for other subsidies, grants, or loans from DOE's Loans Program 
Office.
    In accordance with the statutory language under section 
45Y(b)(1)(D), the Treasury Department and the IRS confirm that the 
phrases ``another Federal income tax credit'' and ``other Federal 
income tax credit'' in proposed Sec.  1.45Y-2(c)(1) refer solely to the 
credits claimed under sections 45, 45J, 45Q, 45U, 48, 48A, and 48E. 
Similarly, in accordance with section 48E(b)(3)(C), the phrases 
``another Federal income tax credit'' and ``other Federal income tax 
credit'' in proposed Sec.  1.48E-2(c)(1) refer solely to those credits 
claimed under sections 45, 45J, 45Q, 45U, 45Y, 48, and 48A. Moreover, 
the provisions under sections 45Y(b)(1)(D) and 48E(b)(3)(C) do not 
impact the ability of a taxpayer to claim a credit for a qualified 
facility that is co-located with a facility for which a credit under 
any Code section is claimed. In general, a taxpayer may claim a section 
45Y or 48E credit for a qualified facility that is co-located with 
another facility, irrespective of any credit that the co-located 
facility claimed.
    The determination of what constitutes a qualified facility for 
purposes of section 45Q is addressed in regulations under section 45Q 
and thus is beyond the scope of these final regulations. However, as 
described earlier, a taxpayer may not claim the section 45Y credit and 
the section 45Q (or sections 45, 45J, 45U, 48, 48A, and 48E) credit 
with respect to the same qualified facility for the taxable year or any 
prior taxable year. Nor may a taxpayer claim the section 48E credit and 
the section 45Q (or sections 45, 45J, 45U, 45Y, 48, and 48A) credit 
with respect to the same qualified facility for the taxable year or any 
prior taxable year. An examination of the whether the regulations under 
section 45Q prohibit a taxpayer from claiming the section 45Q credit 
with respect to a qualified facility for which the taxpayer has claimed 
a section 45Y or section 48E credit in any prior taxable year is beyond 
the scope of these final regulations. Finally, an examination of the 
application of the anti-abuse provision in the section 45V proposed 
regulations, or an analysis of Federal or State tax incentives, 
including subsidies, grants, or loans from DOE's Loans Program Office, 
are also beyond the scope of these final regulations. The final 
regulations add examples to Sec. Sec.  1.45Y-2(c)(3) and 1.48E-2(f)(3) 
to further illustrate the interaction of sections 45Y and 48E with 
other Federal income tax credits.
E. Integral Part
    Proposed Sec.  1.45Y-2(b)(3)(i) provided that for purposes of the 
section 45Y credit, a component of property owned by a taxpayer is an 
integral part of a qualified facility if it is used directly in the 
intended function of the qualified facility and is essential to the 
completeness of such function. Property that is an integral part of a 
qualified facility is part of the qualified facility. Proposed Sec.  
1.45Y-2(b)(3)(ii) through (v) applied this rule to different types of 
property.
    Proposed Sec.  1.48E-2(b)(3)(i) similarly provided that for 
purposes of the section 48E credit, a component of property owned by a 
taxpayer is an integral part of a qualified facility if it is used 
directly in the intended function of the qualified facility and is 
essential to the completeness of the intended function. Property that 
is an integral part of a qualified facility is part of the qualified 
facility. 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. Proposed Sec.  1.48E-2(b)(3)(ii) through (v) 
applied this rule to different types of property.
    Proposed Sec.  1.48E-2(g)(3) provided that for purposes of the 
section 48E credit, 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. Property that is an integral part of an EST is part of an 
EST. 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.
    A commenter supported the facility-by-facility approach that 
section 48E uses and sought confirmation that taxpayers can determine 
section 48E credits on this basis, rather than under the ``energy 
project'' definition used in section 48 by which multiple energy 
properties would be treated as one energy project if, at any point 
during their construction, they are owned by a single taxpayer and meet 
two or more of seven factors set forth the in section 48 proposed 
regulations.
    Section 48 was amended by the IRA to, among other things, provide a 
definition of the term ``energy project'' and provide increased credit 
amounts for energy property if that property is part of an energy 
project that satisfies specified conditions. While sections 45Y and 48E 
provide for similar increased credit amounts, the sections 45Y and 48E 
apply the increased credit amounts at the level of a qualified facility 
rather than an energy project. As a result, taxpayers can only 
determine section 48E credits on the facility-by-facility approach 
described in the statute and the proposed regulations.
    Commenters requested expanding the scope of power conditioning 
equipment that is considered an integral part of a qualified facility 
to include software that optimizes or automates the function of power 
conditioning equipment. Commenters also requested that the final 
regulations clarify that software performing similar functions to other 
integral parts of the qualified facility, such as energy management 
systems, battery management systems, data acquisition systems, and 
optimization software, are all considered ``power conditioning 
equipment.''
    Section 48E(b)(2) defines qualified property, in part, as 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. 
Software is not tangible property and therefore cannot be integral 
property included in the qualified investment of a section 48E 
qualified facility. Because the statutory definition limits ``qualified 
property'' to tangible property, the final regulations modify the 
language in proposed Sec.  1.48E-2(b)(3)(ii) to remove any reference to 
software. The same language regarding software that was included in 
proposed Sec.  1.48E-2(b)(3)(ii) was also included in proposed Sec.  
1.45Y-2(b)(3)(ii). The Treasury Department and the IRS note that, while 
the inclusion or exclusion of software does not impact the calculation 
of the section 45Y credit, in order to provide uniform definitions that 
are consistent with the statutory structure governing both credits, the 
final regulations also remove the references to software in Sec.  
1.45Y-2(b)(3)(ii).
    Commenters requested retaining the treatment of offshore wind power 
conditioning and transfer equipment as an integral part of an offshore 
wind facility if it is owned by the same taxpayer that owns the unit of 
qualified facility. In addition, commenters stated that the examples in 
proposed Sec.  1.48E-2(b)(3)(ii) were useful in illustrating the

[[Page 4032]]

project components that are integral parts of an offshore wind 
facility. Commenters stated that full eligibility is critically 
important, as power conditioning and transfer equipment represents a 
significant portion (up to 40 percent) of the total cost of an offshore 
wind facility. The final regulations adopt the proposed rule without 
change.
    A commenter expressed concern that special-purpose buildings or 
building-like structures that have long been considered integral 
property under section 48 may be inadvertently excluded under the 
section 48E final regulations. For example, the commenter noted that 
the IRS previously issued revenue rulings (Rev. Rul. 72-223, 1972-1 
C.B. 17; Rev. Rul. 72-96, 1972-1 C.B. 67; Rev. Rul. 84-40, 1984-12 
I.R.B. 4) holding that special-purpose property such as hydroelectric 
power plant structures, reservoirs to be used with steam turbine 
generating plants, and dams were eligible for the section 48 credit as 
other tangible property rather than being considered buildings or their 
structural components. The commenter noted that in only one of the 
revenue rulings was the property not considered a building based on the 
idea that replacement of the turbine and support have to be undertaken 
at the same time. Similarly, commenters requested verification that the 
definition of integral property includes canopies for solar carports, 
racking structures specific to commercial and industrial solar 
projects, rooftop specialized battery housing structures, enclosures 
for densely populated urban environments, and similar components. In 
contrast, a commenter recommended clarifying that containers for 
utility-scale battery energy storage systems, inverter housing, and 
transformer housing are specifically considered buildings or 
equivalents.
    As an alternative, some commenters suggested modifying the rule for 
buildings to generally include structures but exclude buildings of 
particular concern to the IRS (for example, housing or offices for 
maintenance equipment or regular operations staff). A commenter 
requested that, similar to proposed Sec.  1.48E-2(b)(3)(v), the final 
regulations include a permanent building or structure as an integral 
part of an EST to the extent it can be demonstrated that (i) the 
construction of such building or structure would not have occurred but 
for placing the EST in service and (ii) the design and cost of such 
structure is consistent with the requirements of the EST. According to 
the commenter, such a rule would treat the portion of the building or 
structure used to house the EST as an integral part of the EST, whether 
or not permanent in nature. The commenter noted that in harsh 
environments, the taxpayer must construct a permanent structure for 
housing the EST and the applicable HVAC equipment needed to regulate 
the temperature of the structure so that the EST will function 
properly. The commenter also explicitly requested that HVAC equipment 
needed to regulate the temperature of the structure so that the EST 
will function properly be considered an integral part of the EST. 
Another commenter requested modifying proposed Sec.  1.48E-2(b)(3)(v) 
to allow for structures or buildings integral to the intended function 
of the qualified facility if such building or structure is required to 
comply with or maintain required health and safety conditions required 
by the qualified facility's regulator.
    Another commenter requested confirmation that devices used to 
manage load served by EST, such as critical loads panels or load 
controllers, are integral parts of EST. The commenter noted that backup 
batteries need load management devices to function correctly during 
grid failures or for off-grid power.
    The definition of qualified property in section 48E(b)(2)(A)(ii) 
includes tangible property that is used as an integral part of a 
qualified facility, but explicitly excludes buildings or their 
structural components. Proposed Sec.  1.48E-2(b)(3)(v) provides that 
while buildings are generally not integral parts of a qualified 
facility because they are not integral to the intended function of the 
qualified facility (to generate electricity), the following structures 
are not treated as buildings for this purpose: (A) a structure that is 
essentially an item of machinery or equipment; and (B) a structure that 
houses components of 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.
    Although the proposed regulations do not list particular buildings 
that may qualify as an integral part of a qualified facility, the 
Treasury Department and the IRS have concluded that the guidance and 
examples included are adequate to illustrate the intended application 
of the rules. The revenue rulings raised by a commenter with respect to 
special-purpose buildings or building-like structures involved specific 
situations arising under section 48. A definitive response regarding 
the situations in the revenue rulings or other specific situations 
described by the previous comments would require the Treasury 
Department and the IRS to conduct a complete factual analysis of the 
property in question, which may include information beyond that which 
was provided by the commenters. Because more information is needed to 
make the determinations requested by the commenters, the requested 
clarifications are not addressed in these final regulations.
    In the case of hydropower facilities, a commenter stated that it is 
critical that final regulations confirm that costs incurred for new 
property with respect to a hydropower facility qualify for the section 
48E credit even though certain portions of a hydropower project may be 
owned by Federal agencies. This commenter explained that in some cases, 
the U.S. Army Corps of Engineers may own all or a portion of the dam 
and associated property but asserted that this circumstance should not 
affect the credit eligibility of other qualified property (the 
electric-generating assets) within the qualified facility owned by the 
taxpayer.
    While a taxpayer may not claim the section 48E credit for any 
property that is not owned by the taxpayer even if it is an integral 
part of a qualified facility, the inverse is not true. A taxpayer is 
not required to own all the other tangible property that is an integral 
part of a qualified facility to claim a credit for the qualified 
facility. In the case of a hydropower facility, the qualified facility 
consists of a unit of qualified facility including water intake, water 
isolation mechanisms, turbine, pump, motor, and generator. The 
associated impoundment (dam) and power conditioning equipment are 
integral property to the unit of qualified facility. Therefore, in 
response to the commenter's example, the final regulations incorporate 
a new example in Sec. Sec.  1.45Y-2 and 1.48E-3 illustrating that 
property such as a dam being owned by a Federal agency would not 
prevent a taxpayer that owns the hydropower facility from qualifying 
for a section 45Y or 48E credit.
F. Shared Integral Property
    Proposed Sec.  1.45Y-2(b)(3)(vi) provided 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 48E or another Federal income tax credit, may 
include shared property that can be considered an integral part of each 
qualified facility. A component of property that is shared by a 
qualified

[[Page 4033]]

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 45Y Qualified Facility for the 
section 45Y credit or the 48E Qualified Facility for the section 48E 
credit. Proposed Sec.  1.45Y-2(b)(3)(vii) provides examples 
illustrating proposed Sec.  1.45Y-2(b)(3).
    Proposed Sec.  1.48E-2(b)(3)(vi) provided 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 qualified facility for which the taxpayer 
is claiming a section 48E credit. The total cost basis of such shared 
property divided among qualified facilities may not exceed 100 percent 
of the cost of such shared property. Property that is shared by a 48E 
Qualified Facility and a 45Y Qualified Facility that is an integral 
part of both qualified facilities will not affect the eligibility of 
the 48E Qualified Facility to claim the section 48E credit or the 45Y 
Qualified Facility to claim the section 45Y credit. To better 
illustrate the treatment of shared integral property, these final 
regulations add an additional example to Sec.  1.48E-4(d)(5) regarding 
related taxpayers.
    A commenter expressed confusion with what is meant by ``another 
facility'' in proposed Sec.  1.45Y-2(c)(1), in the context of defining 
a qualified facility co-located with another facility. Additionally, as 
explained in section IV.B. of this Summary of Comments and Explanation 
of Revisions, each Code section has its own unique definition of a 
facility that must be considered. Proposed Sec.  1.45Y-2(c)(3) 
(Examples 1 and 2) involve fact patterns addressing the ability of one 
or more taxpayers to claim a section 45Y credit for a solar farm and a 
section 48E credit for a co-located EST. The Treasury Department and 
the IRS view these examples as adequately addressing this comment.
G. Ownership
1. Qualified Facility
    Proposed Sec.  1.48E-4(d) provided rules related to the ownership 
of a qualified facility or EST. In addition to the ownership rules in 
proposed Sec.  1.48E-4(d), proposed Sec.  1.48E-2(b)(3)(i) provided a 
taxpayer may not claim the section 48E credit for any property that is 
an integral part of the taxpayer's qualified facility that is not owned 
by the taxpayer.
    Some commenters opposed the proposed rule that only the taxpayer 
that owns a unit of qualified facility is eligible for a section 48E 
credit with respect to property that is an integral part of that 
qualified facility. These commenters asserted that property that is 
treated as an integral part of a qualified facility should be eligible 
for the section 48E credit regardless of whether the taxpayer also owns 
any interest in the unit of qualified facility. As an example, one 
commenter described a qualified facility in which generation assets and 
transfer equipment are constructed together but owned by separate 
taxpayers and suggested that both taxpayers should be able to claim a 
section 48E credit on the basis of their respectively owned portions. 
This commenter similarly suggested that if a unit of qualified facility 
is constructed and placed in service by a taxpayer, and another 
taxpayer later constructs and places in service an integral part of 
such qualified facility, both taxpayers should be able to claim section 
48E credits on their respective property.
    A commenter opposed to the ownership requirement suggested that, 
under their reading of the proposed regulations and the existing 
section 48 regulations, different components treated as ``integral 
parts'' would still be energy property and, thus, should still qualify 
for the section 48E credit when separately owned. According to this 
commenter, under section 48 taxpayers have the flexibility to own and 
claim credit for separate ``integral parts.'' The commenter stated that 
this flexibility in ownership is essential for many projects because it 
may be impractical (if not impossible) for one taxpayer to own all 
components of a larger system. The commenter stated that the limitation 
in the proposed regulations 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 is not found in the 
statutory text and could have an unnecessary chilling effect on 
investment.
    Raised in the context of offshore wind, commenters requested that 
the final regulations eliminate the requirement that the generating 
facility and the integral power conditioning and transfer equipment be 
owned by the same taxpayer. In the commenters' view, this would allow 
owners of offshore wind power conditioning and transfer equipment that 
do not own an interest in the offshore turbines to claim the section 
48E credit. A commenter stated that the ownership rules, as proposed, 
would result in the buildout of more equipment and cables at a greater 
total expense, be more disruptive of the environment, and cause more 
interference with coastal communities, while at the same time failing 
to achieve the desired resiliency, reliability, flexibility, and 
ability to plan for future expansion of offshore wind. A comment 
submitted jointly by seven states requested that the Treasury 
Department and the IRS reconsider the rule to require that the owner of 
integral power conditioning and transfer equipment to also own the 
offshore wind facility to claim the section 48E credit. This comment 
expressed similar concerns regarding potential impacts of the ownership 
rules.
    A commenter proposed that the Treasury Department and the IRS 
revise the proposed rule to allow owners of integral property that do 
not own an interest in the associated unit of qualified facility to 
claim a section 48E credit if the integral property is used in the 
trade or business of furnishing or selling electrical energy and if a 
regulatory authority determines that ownership of integral property 
separate from ownership of the underlying unit of qualified facility is 
in the public interest.
    The Treasury Department and the IRS have determined that the 
ownership rules provided in the proposed regulations are appropriate. 
Although commenters asserted that property that is treated as an 
integral part of a qualified facility should be eligible for the credit 
regardless whether the taxpayer also owns any interest in the unit of 
qualified facility (as defined in proposed Sec.  1.48E-2(b)(2)), such 
an approach would conflict with the statutory requirement that a credit 
only be available for a qualified facility, that is, a facility that 
generates electricity and for which the anticipated GHG emissions rate 
is not greater than zero. Integral property alone does not constitute a 
qualified facility. Adopting the commenters' recommendation that a 
taxpayer be able claim the section 48E credit for integral property 
alone would conflict with the application of several other provisions 
in the statute that apply to an entire qualified facility rather than 
individual components of property (including the PWA requirements, 
certain bonus credit amounts, and certain rules applicable to lower-
output qualified facilities to

[[Page 4034]]

include expenditures for qualified interconnection property).
    The Treasury Department and the IRS conclude that no section 48E 
credit may be determined with respect to a taxpayer's ownership of 
integral property which is a separate component of a qualified facility 
(or EST) if the same taxpayer does not own the components that 
constitute a unit of qualified facility (as defined in proposed Sec.  
1.48E-2(b)(2)) or unit of EST (as defined in proposed Sec.  1.48E-
2(g)(2)). Additionally, based on similar considerations, the Treasury 
Department and the IRS maintain that no section 48E credit may be 
allowed unless a taxpayer directly owns at least a fractional interest 
in the entire unit of qualified facility or unit of EST. Thus, in the 
case of an offshore wind farm, a taxpayer directly owning power 
conditioning and transfer equipment would only be able to claim a 
section 48E credit on that equipment if the same taxpayer also directly 
owned a fractional interest in at least one qualified facility (wind 
turbine, tower, and pad) for which such power conditioning and transfer 
equipment in is integral property.
    In response to the comment that retaining the common ownership 
requirement will result in the buildout of more equipment and cables at 
a greater total expense, more disruption of the environment, and more 
interference with coastal communities, the Treasury Department and the 
IRS acknowledge the commenters' concerns. However, as explained later, 
retaining the rule is necessary based on legal and administrability 
concerns.
    Section 48E provides an investment credit equal to a specified 
percentage of the taxpayer's qualified investment with respect to a 
qualified facility or EST. Section 48E(b)(1) defines a qualified 
investment with respect to a qualified facility as the sum of ``the 
basis of any qualified property placed in service by the taxpayer 
during such taxable year which is part of a qualified facility, plus 
the amount of any expenditures which are paid or incurred by the 
taxpayer for qualified interconnection property . . .'' Section 
48E(b)(2) provides, in part, that the term qualified property means 
property which 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.
    While the language in section 48E(b)(1) and 48E(b)(2), on its own, 
could be read to suggest that a taxpayer may claim a section 48E credit 
with respect to any property that does not constitute a unit of 
qualified facility, section 48E must be read holistically to give 
effect to its provisions. The statute provides a credit with respect to 
a qualified facility, which is a facility that generates electricity 
and that has a GHG emissions rate not greater than zero. Only once it 
has been determined that a facility is a qualified facility that is 
eligible for a section 48E credit may the amount on which the credit 
will be calculated--the qualified investment in that qualified 
facility--be determined under section 48E(b)(1) and (2). Section 
48E(b)(1) identifies what items comprise that qualified investment--the 
basis of any qualified property that is part of the qualified facility 
plus certain qualified interconnection costs. Section 48E(b)(2) 
specifies what types of property are considered qualified property--
tangible personal property or, only if used as an integral part of the 
qualified facility, other tangible property (not including a building 
or its structural components). The term ``integral part'' specifically 
modifies the term ``other tangible property.'' It serves to include or 
exclude items like fencing that are not directly related to the 
function of the qualified facility. The statutory language thus 
provides that any property that does not meet the definition of 
``qualified property,'' or any property that is not part of the 
qualified facility, is not part of the qualified investment.
    Once the qualified investment has been determined, the credit rate 
by which that qualified investment will be multiplied to calculate the 
credit amount must be determined. The credit rate is the applicable 
percentage under section 48E(a)(2)(A), which is either 6 percent or 30 
percent depending on whether the qualified facility satisfies any of 
the three tests for the alternative rate set forth in section 
48E(2)(A)(ii). The requirements of section 48E apply to the qualified 
facility (rather than components of property comprising such qualified 
facility): a qualified facility is a facility that generates 
electricity and that has a GHG emissions rate not greater than zero; 
the applicable percentage depends on whether the qualified facility 
meets the various requirements for PWA, or the domestic content and 
energy communities bonus credit amounts. Within this statutory 
structure, section 48E(a)(1)(A) and (2)(A) operate to identify what is 
included and what is excluded from the credit base. Accordingly, the 
statute requires ownership of a qualified facility rather than mere 
components of property.
    Section 48E provides a credit for an investment in a qualified 
facility that satisfies the definition of ``qualified facility'' 
provided at section 48E(b)(3). The statute defines a ``qualified 
facility'', in part, by requiring that the facility be used for the 
generation of electricity and that the anticipated GHG emissions rate 
is not greater than zero. The Treasury Department and the IRS view the 
concepts of qualified investment and qualified property as inextricably 
tied to the statutory definition of a qualified facility. As discussed 
throughout this Summary of Comments and Explanation of Revisions, the 
section 48E credit is available for a qualified facility that generates 
electricity for which the anticipated GHG emissions rate is not greater 
than zero. Electricity can only be generated by, and GHG emissions can 
only be determined with respect to, a unit of qualified facility. 
Integral property, by itself, does not satisfy this statutory 
definition because integral property is not property used for the 
generation of electricity, nor can the GHG emissions of a qualified 
facility be determined solely on the basis of integral property.
    Furthermore, a taxpayer who owns only property that is an integral 
part of a qualified facility may not be able to establish the 
anticipated GHG emissions rate for the entire qualified facility. For 
the determination of the anticipated GHG emissions rate of a qualified 
facility, section 48E mandates rules similar to those in section 
45Y(b)(2)(C)(ii), which requires that ``[i]n the case of any facility 
for which an emissions rate has not been established by the Secretary, 
a taxpayer which owns such facility may file a petition with the 
Secretary for determination of the emissions rate with respect to such 
facility'' (emphasis added). The statute does not appear to permit a 
taxpayer who does not own a unit of qualified facility, but instead 
only owns property that is integral to a unit of qualified facility, to 
petition for a determination of the emissions rate. This further 
bolsters the conclusion that ownership interest in a qualified 
facility, not in mere integral part, is required for the credit to 
operate.
    Several other key provisions of section 48E are only applicable to 
a qualified facility: the placed in service date; the applicable 
percentage; application of the PWA requirements, eligibility for the 
domestic content and energy communities bonus credit amounts; and 
inclusion of qualified interconnection expenditures for lower-output 
qualified facilities. These provisions apply at the level of a 
qualified facility, not to components of property within such qualified 
facility or components of property that are an

[[Page 4035]]

integral part of such qualified facility. For example, the owner of a 
component of property within a qualified facility cannot claim a 
domestic content bonus credit amount if another owner of components of 
property included within the unit of qualified facility does not 
satisfy the domestic content requirements with respect to its 
components. The determination requires an analysis of the entire 
qualified facility.
    Unless a taxpayer directly owns at least a fractional interest in 
the entire unit of qualified facility, the taxpayer cannot effectively 
claim the section 48E credit or the bonus or increase credit amounts. 
The availability of the section 48E credit for the taxpayer who owns 
only integral property would depend on whether another taxpayer's 
qualified facility meets the GHG emission requirements. The 
availability of any bonus or increased credit amounts for the taxpayer 
who owns only integral property would also depend on whether other 
taxpayers who invested in the qualified facility satisfy all the adder 
requirements. Similarly, in cases in which one taxpayer's tangible 
property ceases to be eligible for the credit, recapture under sections 
48E(g) and 50(a) would implicate all other taxpayers who invest in the 
qualified facility. All these cases further support the conclusion that 
the statutory scheme applies at the level of a qualified facility, and 
that the owner of only integral property cannot effectively claim the 
credit or the bonus or increased credit amounts.
    Finally, taxpayers would need access to information about all other 
property that is part of the qualified facility to properly determine 
whether the taxpayer's specific investment in integral property is 
eligible for a section 48E credit and to determine the amount of that 
credit. This would impose a high burden of information sharing on the 
taxpayers and increase uncertainty, as one taxpayer's choices would 
impact another taxpayer's eligibility for the credit and bonus or 
increased credit amounts. It would also create corresponding 
administrative problems for the IRS to effectively analyze and, if 
necessary, adjust multi-party credit claims.
    Some commenters pointed to Internal Revenue Bulletin guidance, 
caselaw, and other guidance to support their position that a taxpayer 
that owns property that is an integral part of a qualified facility 
should not be required to also own the qualified facility to be 
eligible for a section 48E credit. Commenters cited Rev. Rul. 78-268, 
1978-2 C.B. 10, PLR 201536017, PLR 201208035, and FAQ 35 of guidance 
from the Treasury Department regarding payments under section 1603 of 
the American Recovery and Reinvestment Act of 2009 \3\ (Section 1603 
Grant Program) to support the premise that ownership of an entire 
qualified facility is not required to be eligible to claim a section 
48E credit.
---------------------------------------------------------------------------

    \3\ Payment for Specified Energy Property in Lieu of Tax Credits 
Under the American Recovery and Reinvestment Act of 2009, Frequently 
Asked Questions and Answers.
---------------------------------------------------------------------------

    The commenters' reliance on Revenue Ruling 78-268, which addressed 
a prior version of the section 48 credit, is misplaced. In Revenue 
Ruling 78-268, four parties, two of which were tax-exempt, owned an 
electric generating facility through a tenancy in common. In other 
words, each taxpayer owned a fractional interest in the entire energy 
property. Revenue Ruling 78-268 held that the presence of the tax-
exempt owners did not disqualify the other owners from claiming a 
section 48 credit because the fractional interests in the tenancy in 
common were treated as separate assets. Because the fractional 
ownership arrangement in Revenue Ruling 78-268 is consistent with the 
fractional ownership rule in proposed Sec.  1.48E-4(d)(2), the Treasury 
Department and the IRS disagree with commenters that the holding of 
Revenue Ruling 78-268 supports their position.
    Commenters' reliance on PLR 201536017 is also misplaced. Private 
letter rulings (PLR) are not precedential and cannot be relied upon by 
a taxpayer other than the one addressed in the letter (see section 
6110(k)(3) of the Code). Furthermore, this PLR involved the section 25D 
credit, which, in relevant part, provides a credit for ``qualified 
solar electric property expenditures,'' rather than the section 48E 
credit. Regardless, like Revenue Ruling 78-268, the PLR involves credit 
eligibility through fractional ownership of an entire energy property, 
not ownership of just certain components. The PLR addresses a factual 
scenario in which a taxpayer purchased solar PV panels in an offsite 
array (that also contains other solar PV panels owned by other 
individuals) as well as a partial ownership in racking equipment, 
inverter equipment, and wiring and other equipment and installation 
services required for the integration of the panels in the array and 
the interconnection of the array to a local utility's electric 
distribution system. The PLR concludes that the taxpayer made a 
``qualified solar electric property expenditure'' under section 
25D(d)(2) and is eligible to claim a section 25D credit. To the extent 
this PLR provides any helpful analysis to a section 48E credit, it 
involves partial ownership in all the equipment necessary to integrate 
the solar PV panels into the array and interconnect the array to a 
local utility's electric distribution system. It does not apply the 
section 25D credit to just certain components of property. Like Revenue 
Ruling 78-268, the PLR involves credit eligibility through fractional 
ownership of a unit of property analogous to a qualified facility under 
section 48E rather than ownership of mere components of property.
    Similarly, commenters' reliance on PLR 201208035 for the 
proposition that taxpayers should be permitted to claim the section 48E 
credit on any portion of eligible property owned by such taxpayer is 
inapposite. The factual scenario in that PLR involved a taxpayer 
seeking to add energy storage property to an existing wind facility for 
which section 48 credits had been claimed with respect to certain 
phases of the facility and a Section 1603 Grant Program payment had 
been received with respect to another phase of the facility. Because 
the same taxpayer owned the existing wind facility and the later added 
energy storage property (which was treated as property integral to the 
wind facility under the relevant version of section 48), the cited PLR 
does not establish that a taxpayer who has no ownership of a unit of a 
qualified facility is entitled to the section 48E credit for ownership 
of integral parts only.
    Finally, commenters also relied on FAQ 35 of the Section 1603 Grant 
Program guidance to support their contention that ownership of an 
entire qualified facility is not required to claim the section 48E 
credit. Under the Section 1603 Grant Program, the Treasury Department 
made payments in lieu of section 45 and 48 credits to eligible 
applicants for specified energy property. FAQ 35 addressed the 
procedural requirements of the Section 1603 Grant Program in a 
situation in which an open-loop biomass facility was owned by one party 
that uses off-site feedstock conversion equipment owned by another 
party. FAQ 35 provided that the party that owns the conversion 
equipment and the party that owns the open-loop biomass facility must 
each submit an application in order to receive Section 1603 Grant 
Program payments. While the Section 1603 Grant Program guidance 
borrowed important concepts from the section 45 and 48 credits, it is 
not based on any specific income tax provisions and is

[[Page 4036]]

not precedential for purposes of the section 48E credit.
    Moreover, FAQ 35 required the multiple parties that owned the 
different components of property to join in each separate application 
for the Section 1603 Grant Program payment and agree to the terms and 
conditions. The Treasury Department would then review those 
applications together and make any determination regarding eligibility 
for a Section 1603 Grant Program payment for the entire facility based 
on information provided with respect to the entire facility rather than 
each party's respective components. This is very different from the 
commenters' requests to allow taxpayers to claim and substantiate 
separate section 48E credits claimed by separate taxpayers on Federal 
income tax returns. This type of tax filing has significantly fewer 
guardrails than Treasury's advance review of Section 1603 Grant Program 
applications. And, as discussed earlier, the statute requires ownership 
of a qualified facility, rather than ownership of mere components of 
property to claim the credit.
    Other commenters cited Cooper v. Comm'r, 88 T.C. 84 (1987), to 
support allowing a taxpayer to claim a section 48E credit with respect 
to components of property they own that are an integral part of a 
qualified facility owned by a different taxpayer. Cooper, which was 
decided under prior versions of sections 46 and 48 and the regulations 
thereunder, does not directly support the commenters' contention. In 
Cooper, the taxpayer asserted that owning specific components of solar 
water heating system was sufficient to claim the section 48 credit for 
solar energy property. Acknowledging that the taxpayer did not own the 
entire working solar water heating system, the Tax Court held that the 
definition of a solar energy property provided by the regulations under 
former section 48(l)(4) were sufficiently broad to provide a credit for 
component parts of a solar water heating system. In a subsequent case, 
the Tax Court distinguished Cooper, explaining that ``the property in 
Cooper consisted of integrated water-heating systems that were ready 
for installation to discharge their designated function.'' Olsen v. 
Commissioner, T.C. Memo 2021-41, *14, aff'd, 52 F.4th 1039 (10th Cir., 
2022). Conversely, in the Olsen case, the taxpayer owned certain solar 
lenses that the Tax Court described as ``mere components of a system'' 
that were ``intended to operate as part of a complicated solar energy 
system and were incapable of performing any useful function in 
isolation.'' Id. at 13-14. The Tax Court held that the solar lenses 
``were not `placed in service' because the solar energy system as a 
whole was not `in a condition or state of readiness and availability 
for a specifically assigned function.''' Id. at 13. Thus, the taxpayer 
was not entitled to claim a section 48 credit.
    Finally, the IRS has no authority to compel taxpayers to coordinate 
tax credit claims or share tax return information with other taxpayers. 
Accordingly, the rules as provided in proposed Sec. Sec.  1.48E-4(d) 
and 1.48E-2(b)(3)(i) that require a taxpayer to directly own at least a 
fractional interest in the entire unit of qualified facility or unit of 
EST and that deny a credit for owners of integral property alone are 
adopted and moved to Sec.  1.48E-1(c) of the final regulations.
    However, while the final regulations maintain the overall structure 
of the proposed ownership rules, after further consideration, the 
Treasury Department and the IRS have determined that certain 
modifications to proposed Sec.  1.48E-2 are required to more closely 
reflect the statutory language. The final regulations adopt those 
modifications.
2. Ownership of EST
    A commenter requested clarification that the section 48E credit can 
be claimed with respect to an EST that is co-located and used in 
conjunction with a qualified facility for which the section 45 or 45Y 
credit is claimed even if the EST could be considered a functionally 
interdependent or an integral part of that qualified facility and 
whether the EST and the facility may be owned by different taxpayers. 
Proposed Sec.  1.48E-2(g)(3) provides 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. Commenters expressed concern that 
this rule prohibits the owner of an EST from claiming a section 48E 
credit if that EST is an integral part of a qualified facility that is 
owned by another taxpayer.
    This commenter's concerns are misplaced. Section 48E(a) describes 
the clean electricity investment credit generally as determined 
separately with respect to any qualified facility and any EST. 
Accordingly, an EST cannot be included in a unit of qualified facility 
under either the integral part or functional interdependence rules for 
purposes of section 48E. Therefore, the Treasury Department and the IRS 
confirm that an EST is eligible for the section 48E credit if it 
satisfies the requirements of section 48E, even if the EST is co-
located with a qualified facility that has claimed the section 45 or 
45Y credits. Assuming all statutory and regulatory requirements are 
satisfied, a qualified facility owned by one taxpayer and an EST owned 
by another taxpayer may each be eligible for a separate section 48E 
credit. From the perspective of credit eligibility, EST is not an 
integral part of a qualified facility.
H. Incremental Production Rule
    Proposed Sec.  1.45Y-4(c)(1) provided, 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) also provided that a new unit or an addition of capacity 
will be treated as a separate qualified facility. Proposed Sec.  1.45Y-
4(c)(1) provided, for purposes of proposed Sec.  1.45Y-4(c), that a new 
unit or an addition of capacity requires the addition or replacement of 
components of property, including any new or replacement integral 
property, added to a facility necessary to increase capacity. Proposed 
Sec.  1.45Y-4(c) provided that, if applicable, 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) provided 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) provided that, solely for purposes of 
proposed 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 certain conditions are met. Proposed Sec.  1.45Y-
4(c)(3) described 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)(4) illustrated the application of these rules to 
determine the increased amount of electricity attributable to a new 
unit or an addition of capacity described in proposed Sec.  1.45Y-4(c).

[[Page 4037]]

    Proposed Sec.  1.48E-4(b)(1) provided, solely for purposes of 
proposed Sec.  1.48E-4(b), 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 48E(b)(3)(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. A new unit or an 
addition of capacity will be treated as a separate qualified facility. 
For purposes of proposed Sec.  1.48E-4(b), a new unit or an addition of 
capacity requires the addition or replacement of qualified property (as 
defined in proposed Sec.  1.48E-2(e)), including any new or replacement 
integral property added to a facility necessary to increase capacity. 
Proposed Sec.  1.48E-4(b) provided that, if applicable, taxpayers must 
use modified or amended facility operating licenses or ISO conditions 
to measure the maximum electrical generating output of a facility to 
determine its nameplate capacity. Additionally, proposed Sec.  1.48E-
4(b)(1) provided that for purposes of section 48E(a)(2)(A)(ii)(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.  1.48E-4(b)(2) provided that, solely for purposes of 
proposed Sec.  1.48E-4(b), a facility that is decommissioned or in the 
process of decommissioning and restarts can be considered to have 
increased capacity if certain conditions are met. Proposed Sec.  1.48E-
4(b)(3) described how to compute the qualified investment for a new 
unit or an addition of capacity. Proposed Sec.  1.48E-4(b)(4) 
illustrated the application of the rules described in proposed Sec.  
1.48E-4(b).
1. General Rules
    A commenter noted that proposed Sec. Sec.  1.45Y-4(c)(1) and 1.48E-
4(b)(3) both reference ``components of property,'' whereas proposed 
Sec.  1.48E-4(b)(1) references ``qualified property,'' and requested 
that the final regulations use a consistent reference to property 
included in the qualified facility. The final regulations at Sec.  
1.48E-4(b)(4) change the term ``components of property'' in proposed 
Sec.  1.48E-4(b)(3) to ``components of qualified property'' to align 
with the requirement of section 48E(b)(1)(A) that the qualified 
investment (as defined in proposed Sec.  1.48E-1(a)(6)) in a qualified 
facility is the basis of any qualified property (as defined in proposed 
Sec.  1.48E-2(e)) placed in service by the taxpayer which is part of a 
qualified facility. However, the term ``components of property'' in 
proposed Sec.  1.45Y-4(c)(1) remains unchanged in these final 
regulations, because the term ``qualified property'' is not used in 
section 45Y.
    Several commenters recommended permitting modifications to a 
facility to qualify as an addition of capacity, and specifically 
requested that the final regulations define additions of capacity as 
``modifications to the facility, including any new or replacement 
integral property added to a facility necessary to increase the 
capacity of the facility by replacing or modifying, in whole or in 
part, the existing capacity of the facility. . .'' (emphasis added). 
Several commenters also requested that the final regulations clarify 
whether such modifications could be to existing components, physical or 
digital, or whether existing components need to be replaced or new 
components added.
    Other commenters asked whether any uprate, upgrade, or efficiency 
improvement to an existing facility that results in an incremental 
increase in the electric-generating output based on the actual 
productive capacity of the facility would qualify as an addition of 
capacity. A commenter noted that sometimes components, including 
software, are modified or adjusted to increase electrical generating 
output. Another commenter stated that the example related to an 
addition of capacity in proposed Sec.  1.45Y-4(c)(4)(ii) does not 
represent a typical fact pattern.
    In response to these comments, the Treasury Department and the IRS 
confirm that the Incremental Production Rule is based on the increased 
amount of electricity produced at a facility as a result of a new unit 
or an addition to capacity. For purposes of the section 45Y credit, a 
new unit or an addition of capacity requires an addition or replacement 
of components of property, including any new or replacement integral 
property, added to a facility necessary to increase capacity. For 
purposes of the section 48E credit, a new unit or addition of capacity 
requires the addition or replacement of qualified property (as defined 
in Sec.  1.48E-2(e)), including any new or replacement integral 
property, added to the facility necessary to increase capacity.
    Several commenters asked whether there is a minimum capital 
expenditure necessary to qualify as a new unit or an addition of 
capacity. Additionally, a commenter suggested that the final 
regulations list the types of new units that would be considered to 
increase the amount of electricity produced. In response to these 
comments, the Treasury Department and the IRS note there is no minimum 
capital expenditure that would satisfy the Incremental Production Rule 
for either a new unit or an addition to capacity. Additionally, to 
provide greater clarity regarding what would qualify as a new unit or 
an addition to capacity, additional examples are included in proposed 
Sec. Sec.  1.45Y-4(c)(4) and 1.48E-4(b)(4), and moved to Sec. Sec.  
1.45Y-4(c)(5) and 1.48E-4(b)(5), respectively, in the final 
regulations. These additional examples illustrate the range and 
diversity of types of investments that can result in an addition of 
capacity.
    Another commenter requested that each stage of a multi-staged 
expansion be eligible for the section 45Y credit even if the larger, 
overall program for improvement and expansion has not yet been 
completed. A commenter requested permitting multiple additions of 
capacity or new units added to the same facility over time to 
separately qualify for the section 45Y credit. The commenter noted 
that, in this case, a taxpayer would measure the electricity production 
attributable to each new addition by reducing earlier additions' 
proportionate share of total energy production. Another commenter 
recommended that taxpayers should be permitted to aggregate all 
components added to a facility and placed in service in the same tax 
year as a single new unit or addition of capacity.
    In response to comments that taxpayers should be able to aggregate 
all components of property added to a facility and placed in service in 
the same tax year as a single new unit or addition of capacity, the 
Treasury Department and the IRS note that proposed Sec. Sec.  1.45Y-
4(c)(1) and 1.48E-4(b)(1) both provided, in part, that a new unit or an 
addition of capacity that meets the requirements of the Incremental 
Production Rule will be treated as a separate qualified facility. In 
response to the commenters' request that a series of additions to 
capacity should be eligible for the Incremental Production Rule, the 
Treasury Department and the IRS interpret section 45Y(b)(1)(C) (and by 
reference, section 48E(b)(3)(B)) to mean that if a single facility 
includes multiple new units or additions to capacity, the taxpayer must 
apply the Incremental Production Rule to each of the new units or 
additions to capacity to determine whether such property meets the 
Incremental Production Rule.

[[Page 4038]]

    A commenter also suggested treating new units as qualified 
facilities that are distinct and separate from the existing qualified 
facility to which they are added and clarifying that all energy 
produced by the new unit would qualify for the section 45Y credit. In 
response to this comment, the Treasury Department and the IRS confirm 
that the Incremental Production Rule is only applicable to additions of 
capacity and new units that would not otherwise qualify as a separate 
qualified facility as defined in section 45Y(b)(1)(A) (or by reference 
section 48E(b)(3)) and therefore clarify this in the final regulations 
at Sec.  1.45Y-4(c)(1) and Sec.  1.48E-4(b)(1).
2. Application to Hydropower Facilities
    Commenters noted that FERC guidance has described ``additions of 
capacity'' to mean any increase in generating capacity other than an 
addition resulting from an efficiency improvement or an addition 
resulting from an operational change. Commenters noted that FERC has 
provided guidance generally indicating that efficiency improvements 
encompass additional generation from existing equipment in the form of 
upgrades to generators or turbines. Commenters also noted that FERC 
guidance provides examples of efficiency improvements that include 
rewinding generators, replacing turbines with more efficient units, and 
computerizing control of turbines and generators to optimize regulation 
of flows for generation.
    A commenter requested that the final regulations define an 
``addition of capacity'' for purposes of a hydropower facility and 
referenced a FERC certification procedure required by section 45(c)(8), 
which provides a production tax credit for certain incremental 
hydropower production. While the commenter acknowledged that section 
45(c)(8) does not define the term ``additions of capacity,'' the 
commenter noted that FERC has provided guidance related to 
certification required under section 45(c)(8) in which FERC describes 
``additions of capacity'' as ``any increase in generating capacity 
other than an addition resulting from an efficiency improvement or an 
addition resulting from an operational change.''
    Commenters also requested that efficiency improvements and upgrades 
to a hydropower facility consisting of refurbished or modified existing 
components, but not the addition or replacement of existing components, 
may qualify as an addition of capacity. Commenters specifically noted 
that upgrades to generators or turbines, rewinding generators, 
replacing turbines with more efficient units, and computerizing control 
of turbines and generators to optimize regulation of flows for 
generation should be treated as efficiency improvements and upgrades 
that should qualify as additions of capacity.
    Similarly, another commenter noted that the requirements for 
establishing incremental hydropower are well-established and well-
understood, and provide precedent for modifications and changes to a 
hydropower facility that result in incremental hydropower production. 
The commenter asserted that the final regulations should take those 
precedents into account in establishing rules for determining an 
increase in capacity for purposes of sections 45Y and 48E.
    The Treasury Department and the IRS acknowledge that section 
45(c)(8) provides that incremental hydropower production attributable 
to ``efficiency improvements'' or ``additions of capacity'' are 
eligible for the section 45 credit. However, section 45(c)(8) does not 
define the terms ``efficiency improvements'' nor ``additions of 
capacity.'' While section 45(c)(8)(B) allows for a determination of 
incremental hydropower production at an existing facility attributable 
to the efficiency improvements or additions of capacity, section 
45Y(b)(1)(C) (and by reference section 48E(b)(3)(B)(i)) provides a 
credit for a new unit or any additions of capacity, but only to the 
extent of the increased amount of electricity production at the 
facility. Notably, section 45Y(b)(1)(C) does not provide for a credit 
for efficiency improvements. As a result, the relevant determination is 
whether a facility's electrical generation capacity increased as a 
result of an addition or replacement of components or property 
(including any new or replacement integral property) to a facility 
necessary to increase capacity. Accordingly, these final regulations do 
not adopt the recommendation that any efficiency improvement could meet 
the requirements of the Incremental Production Rule. However, 
efficiency improvements that are an addition or replacement of 
components of property (including integral property) that result in an 
addition to capacity could meet the requirements of the Incremental 
Production Rule.
    The final regulations add an additional example at Sec. Sec.  
1.45Y-4(c)(5) and 1.48E-4(b)(5) to illustrate the application of the 
Incremental Production Rule to a hydropower facility.
3. Method of Measuring Increased Amount of Electricity Produced at the 
Facility by Reason of New Units or Additions of Capacity
    As noted earlier, the Incremental Production Rule is based on the 
increased amount of electricity produced at a facility as a result of a 
new unit or an addition to capacity. The Incremental Production Rule is 
focused on measuring the amount of the capacity increase. In response 
to commenters, the final regulations permit the measurement of 
increased capacity in several ways, including: (i) modified or amended 
facility operating licenses from the Federal Energy Regulatory 
Commission (FERC) or the Nuclear Regulatory Commission (NRC), or 
related reports prepared by FERC or NRC as part of the licensing 
process (as described in section IV.H.4. of this Summary of Comments 
and Explanation of Revisions); (ii) the ISO conditions to measure the 
nameplate capacity of the facility consistent with the definition of 
nameplate capacity provided in 40 CFR 96.202; or (iii) a measurement 
standard prescribed by the Secretary in guidance published in the 
Internal Revenue Bulletin (see 26 CFR 601.601). The final regulations 
also clarify that taxpayers able to use the measurement standard 
described in Sec.  1.45Y-4(c)(2)(i) or Sec.  1.48E-4(b)(2)(i) may not 
use the method described in Sec.  1.45Y-4(c)(2)(ii) or Sec.  1.48E-
4(b)(2)(ii) (permitting use of the ISO conditions to measure the 
maximum electrical generating output of a facility to determine its 
nameplate capacity).
    A commenter asserted that all energy produced by a new unit should 
be eligible for the section 45Y credit regardless of the degree to 
which that new unit and its electricity replaced existing electricity 
production at that facility. The Treasury Department and the IRS 
disagree with this comment, as the statute limits the application of 
the Incremental Production Rule to the increased amount of electricity 
produced at the facility by reason of the new unit or an addition of 
capacity.
    As proposed, the Incremental Production Rule provided that if 
applicable, taxpayers must use modified or amended facility operating 
licenses or the ISO conditions to measure the maximum electrical 
generating output of a facility to determine its nameplate capacity. 
Several commenters supported the use of the ISO conditions to measure 
the maximum electrical generating output of a facility to determine 
nameplate capacity. Additionally, a commenter noted that the proposed 
regulations properly focus on measuring

[[Page 4039]]

the maximum generating output, rather than measuring increases in 
annual generation that do not impact the maximum output.
    Conversely, several commenters expressed concern with the proposed 
rule requiring the use of nameplate capacity to measure the increased 
amount of electricity produced at a facility because section 
45Y(b)(1)(C) does not mention the term ``nameplate capacity'' and only 
provides that the credit is available to the extent of the increased 
amount of electricity produced at a facility without additional 
elaboration. A commenter also raised the importance of consistency when 
referring to a facility's ``electrical generating output,'' 
``electrical generating capacity,'' ``nameplate capacity,'' and 
``additions of capacity.'' Several commenters contended that using 
nameplate capacity would not be an accurate way to measure additions of 
capacity and emphasized that not every addition of capacity results in 
a new nameplate issued by the manufacturer.
    Additional commenters noted that manufacturer-stamped nameplate 
capacity is, by design, the maximum theoretical output of the facility 
and differs from a facility's actual electric generating capacity. The 
ISO conditions generally require that this measurement be done by the 
manufacturer and would normally occur when the facility is originally 
placed in service. As a result, several commenters noted that 
measurement of nameplate capacity using the ISO conditions would not 
take into account physical depreciation, degradation, and other factors 
that may significantly reduce the maximum generating output and safe 
operating conditions of the facility over time when compared to the 
facility's original nameplate capacity. The Treasury Department and the 
IRS acknowledge that using the ISO conditions to determine nameplate 
capacity may limit nameplate capacity to the nameplate capacity of the 
facility on the original placed in service date, or to a revised 
nameplate capacity of the facility based on major upgrades that would 
result in a revised nameplate capacity rating.
    Commenters noted that the proposed regulations only define 
nameplate capacity by adopting the definition at 40 CFR 96.202 in 
reference to the Five-Megawatt Limitation while noting that the final 
regulations did not adopt the same definition for the Incremental 
Production Rule. In response, the Treasury Department and the IRS have 
modified the Incremental Production Rule at Sec. Sec.  1.45Y-
4(c)(2)(ii) and 1.48E-4(b)(2)(ii) to clarify that the definition of 
nameplate capacity for the Incremental Production Rule is consistent 
with the definition of nameplate capacity provided in 40 CFR 96.202.
    A commenter requested additional flexibility in demonstrating 
incremental generation, including through the use of actual baseline 
generation data reported to government and quasi-government agencies 
such as independent system operators, regional transmission 
organizations, or other balancing authorities where the generator is 
connected. Additionally, several commenters stated that ISO standards 
are not widely used in the industry and that other standards more 
widely used by the industry would be more effective at determining true 
capacity additions. Several commenters that recommended other standards 
for measuring increased capacity noted that geothermal facilities, 
hydropower facilities, and other clean energy facilities would be 
disadvantaged by relying on nameplate capacity to satisfy the 
Incremental Production Rule. Several commenters provided options for 
alternative measurements standards, including the American Society of 
Mechanical Engineers (ASME) Performance Tests, IEC standards, and NERC 
procedures, and other comparable technical standard conditions. 
Additionally, a commenter suggested permitting taxpayers to use an 
accredited measurement method, such as the ASME Performance Test, 
suitable for the particular circumstances associated with the facility 
modification or addition, provided that the accredited method can be 
used to reasonably measure electrical generating capacity, can be 
consistently applied to measure electrical generation capacity before 
and after the modification or addition, and can be clearly documented 
by a third-party engineering report specific to the project.
    Other commenters proposed measuring additional capacity based on 
changes in output compared to the facility's historical baseline 
output. A commenter proposed permitting taxpayers to measure by 
themselves the amount by which all components of property added to the 
facility in a taxable year increases the generating capacity of the 
facility, relative to a baseline in which the components of property 
are not added to the facility. Several commenters also noted that 
measurements should be adjusted as reasonably practicable to ensure a 
like-for-like comparison pre- and post-addition. Conversely, a 
commenter noted that additional capacity measurements should not rely 
on monthly or annual output of a facility prior to and after a project 
or modification because other factors, such as weather, demand, and 
outages will affect a facility's output from one period to another. The 
Treasury Department and the IRS have determined that increased capacity 
should not be based on a measurement methodology that simply compares 
electricity production before the increase in capacity to electricity 
production after the increase in capacity because such measurement 
methodologies involve seasonal or other fluctuations that are too 
easily manipulated to show a greater increase in capacity than the 
actual increase.
    The Treasury Department and the IRS considered the comments 
regarding different methods for measuring increased capacity and found 
that many of the proposed measurement standards were not broadly 
applicable across technologies. Additionally, many were not 
sufficiently objective. The Treasury Department and the IRS recognize, 
though, that different methods may exist that are broadly applicable 
across technologies and sufficiently objective. The Treasury Department 
and the IRS will continue to consult with experts on potential 
additional measurement standards that could apply. The final 
regulations are amended to reflect this continuing consideration and to 
provide flexibility by permitting the Secretary to prescribe additional 
measurement standards in guidance published in the Internal Revenue 
Bulletin.
    The Treasury Department and the IRS recognize the limitations of 
measuring increased capacity with nameplate capacity. As a result, the 
Treasury and the IRS have provided additional measurement options in 
the final regulations. Measurement options in the final rule include: 
modified or amended facility operating licenses from FERC or NRC, or 
related reports prepared by FERC or NRC as part of the licensing 
process (as described in section IV.H.4. of this Summary of Comments 
and Explanation of Revisions); and any measurement standard prescribed 
by the Secretary in guidance published in the Internal Revenue Bulletin 
(see 26 CFR 601.601). The final regulations also clarify that taxpayers 
that are able to use the measurement standard described in Sec.  1.45Y-
4(c)(2)(i) or Sec.  1.48E-4(b)(2)(i) may not use the method described 
in Sec.  1.45Y-4(c)(2)(ii) or Sec.  1.48E-4(b)(2)(ii) (permitting use 
of the ISO conditions to measure the maximum electrical generating 
output of a facility to determine its nameplate capacity). 
Additionally, the final regulations add an additional example at 
Sec. Sec.  1.45Y-4(c)(5) and 1.48E-4(b)(5) to illustrate the 
application of the Incremental Production Rule to a geothermal 
facility.

[[Page 4040]]

4. Documentation Used To Demonstrate Increased Capacity
    As proposed, the Incremental Production Rule allowed taxpayers to 
use modified or amended facility operating licenses to measure capacity 
and changes therein. Several commenters noted that nuclear facilities 
are unable to use modified or amended facility operating licenses to 
measure an addition of capacity, because a NRC operating license lists 
a reactor's maximum power level in megawatts thermal, rather than 
maximum electric generating capacity, and changes can be made to 
improve a plant's thermal efficiency (and thus electric generating 
capacity) without altering the reactor's thermal power or necessitating 
a modified or amended operating license. Nonetheless, the Treasury 
Department and the IRS understand that, under certain circumstances, 
FERC and NRC modified or amended licenses and reports related to those 
modified or amended licenses do report electrical capacity and changes 
therein.
    For example, the NRC reports the electric capacity of nuclear power 
plants before and after uprates involving amendments to NRC licenses. 
Electric generating capacity is not typically included in NRC operating 
licenses, as operating licenses do not condition or limit the electric 
power output. However, electric capacity can be included in related 
NRC-authored safety evaluation reports, which are a required element of 
the license amendment process. These reports typically express power 
output in MW thermal but can also provide information related to 
capacity in MW electric. The final regulations at Sec. Sec.  1.45Y-
4(c)(2)(i) and 1.48E-4(b)(2)(i) allow taxpayers to use the electric 
capacity, and changes therein, presented in safety evaluation reports 
that are part of a modified or amended operating license to demonstrate 
an increased amount of electricity produced at the facility by reason 
of a new unit or addition of capacity, and to calculate the amount of 
that increase. Similarly, the final regulations at Sec. Sec.  1.45Y-
4(c)(2)(i) and 1.48E-4(b)(2)(i) also allow taxpayers to use electrical 
capacity and changes therein as reported in FERC modified or amended 
licenses, and reports related to those modified or amended licenses. 
The final regulations clarify, though, that taxpayers that are able to 
use the measurement standard described in Sec.  1.45Y-4(c)(2)(i) or 
Sec.  1.48E-4(b)(2)(i) may not use the method described in Sec.  1.45Y-
4(c)(2)(ii) or Sec.  1.48E-4(b)(2)(ii) (permitting use of the 
International Standard Organization (ISO) conditions to measure the 
maximum electrical generating output of a facility to determine its 
nameplate capacity).
    Several commenters proposed various additional methods for 
documenting an increase in capacity including the use of a third-party 
engineering report. The Treasury Department and the IRS determined that 
without a specific measurement standard and certification requirements, 
an independent third-party engineering report alone does not provide an 
adequate method to substantiate a facility's increased capacity.
5. Measurement of Eligible Basis for a New Unit or an Addition of 
Capacity Under Section 48E
    Several commenters recommended that the cost of any uprates, 
upgrades, efficiency, or other improvements that result in additional 
generation capacity at a facility be considered a qualified investment 
for purposes of the section 48E credit. Specifically, commenters 
asserted that the qualified investment with respect to a qualified 
facility should include the entire cost of a new unit or any additions 
of capacity, rather than a proportionate share of those costs 
reflective of the extent to which the electricity produced attributable 
to a new unit or addition of capacity increased (as opposed to 
replaced) the existing facility's production. Commenters supported this 
recommendation by noting a similar treatment of basis was used in the 
Section 1603 Grant Program for improvements to hydropower facilities.
    Commenters also noted that the proposed regulations allow for the 
full basis of a qualified investment in a new unit to be eligible for 
the credit, but not for additions of capacity. A commenter emphasized 
that this approach creates challenges for administrability, and 
application of the rule based on measuring fractional additions of 
capacity. As an example, the commenter indicated that some replacement 
parts do not have a nameplate capacity but are essential to the total 
nameplate capacity of the overall facility. Several commenters 
recommended an alternative rule that prorates an investment between 
qualified and non-qualified property when the investment is a 
discretionary replacement of existing capacity but suggested that the 
entire amount of an investment should be treated as eligible for the 
credit if the investment would not have occurred but for increasing 
capacity.
    In response to the comments, the Treasury Department and the IRS 
acknowledge that a qualified investment for an addition of capacity 
would not be paid or incurred but for the increase in electricity 
generation capacity and agree that the rules for computing the 
qualified investment for an addition of capacity should be modified. 
Therefore, the final regulations at Sec.  1.48E-4(b)(4) are amended to 
make the rule for an addition of capacity equivalent to that of a new 
unit by providing that a taxpayer's qualified investment during the 
taxable year that resulted in an increased capacity of a facility by 
reason of a new unit or an addition of capacity is its total qualified 
investment in components of qualified property that result in the new 
unit or addition of capacity.
6. Special Rule for Restarted Facilities
    A few commenters requested further guidance specific to 
decommissioned facilities. These commenters suggested treating the 
capacity of decommissioned facilities before restarting as zero and 
clarifying that facilities meeting the special rule for restarted 
facilities under proposed Sec. Sec.  1.45Y-4(c)(2) and 1.48E-4(b)(2) 
can treat their entire capacity as an addition of capacity. One 
commenter noted that a decommissioned facility ceases operations and is 
not legally permitted to produce electricity due to a lack of operating 
license. Another commenter requested that, instead of requiring a 
period without a valid operating license, the final regulations cover 
the typical situation for decommissioning a hydropower facility in 
which the licensee maintains an operating license that no longer 
authorizes the operation of the facility. Another commenter similarly 
asserted that a nuclear facility must maintain its operating license 
until decommissioning is concluded. The commenter stated that a nuclear 
facility's operating license (issued by the NRC) generally does not 
authorize operation and electricity production after the licensee 
submits a written certification to the NRC that they have determined to 
permanently cease operations and once fuel has been permanently removed 
from the reactor vessel. Accordingly, both commenters suggested 
revising proposed Sec. Sec.  1.45Y-4(c)(2)(ii) and 1.48E-4(b)(2)(ii) to 
treat a facility that is decommissioned or in the process of 
decommissioning and restarts to have increased capacity if the facility 
shuts down for at least one calendar year, during which it was not 
authorized to operate by its respective Federal Agency or did not 
generate more than 0 megawatt-hours, while holding a license from the 
FERC or NRC.
    An additional commenter recommended expanding the special

[[Page 4041]]

rule for restarted facilities to include continuous operation in the 
case of a facility that obtains a renewed operating license and enters 
an initial or subsequent period of extended operation under the renewed 
operating license after December 31, 2024. The commenter suggested 
treating such a scenario as an addition of capacity equal to the full 
capacity of the facility.
    In contrast, a commenter raised concerns regarding the special rule 
for restarted facilities, pointing to abuse by certain taxpayers and 
noting that the rule strays from the intention of the tax credits to 
deploy new resources. The commenter further highlighted a potential 
lack of readiness by implicated government agencies, noting 
specifically that the NRC does not have regulations governing license 
reinstatement. The commenter recommended removing the special rule for 
restarted facilities from the final regulations or, in the alternative, 
engaging in further fact finding before finalizing such a rule. If a 
special rule for restarted facilities is implemented, the commenter 
requested that additional requirements be incorporated to raise the bar 
to entry for decommissioned facilities to prevent abuse of loopholes.
    In response to these comments, the final regulations make four 
changes to proposed Sec. Sec.  1.45Y-4(c)(2) and 1.48E-4(b)(2) and 
moved them to Sec. Sec.  1.45Y-4(c)(3) and 48E-4(b)(3), respectively. 
First, the final regulations modify the language in proposed Sec. Sec.  
1.45Y-4(c)(2)(ii) and 1.48E-4(b)(2)(ii) to state that ``[t]he existing 
facility must have a shutdown period of at least one calendar year 
during which it was not authorized to operate by its respective Federal 
regulatory authority (that is, the FERC or the NRC).'' (Emphasis 
added.) Second, the final regulations modify the language in proposed 
Sec. Sec.  1.45Y-4(c)(2)(iii) and 1.48E-4(b)(2)(iii) to state that the 
restarted facility must be eligible to restart based on an operating 
license issued by either FERC or NRC. Third, the final regulations are 
modified to reflect the Treasury Department and the IRS' agreement with 
the commenter's concerns regarding potential abuse by certain taxpayers 
related to the decommissioning and shutdown steps in the proposed 
regulations. In order to limit this potential abuse, the final 
regulations add an anti-abuse rule to Sec. Sec.  1.45Y-4(c)(3) and 
1.48E-4(b)(3) that provides that a facility may not cease operation for 
the purpose of qualifying for the special rule for restarted 
facilities. Finally, the final regulations reflect that the addition of 
capacity in the case of a restarted facility is the total capacity of 
the facility after it is restarted by modifying the language to state 
that a facility that is decommissioned or in the process of 
decommissioning and restarts can be considered to have increased 
capacity from a base of zero if certain conditions are met. The final 
regulations add an additional example at Sec. Sec.  1.45Y-4(c)(5) and 
1.48E-4(b)(5) to illustrate the application of the Incremental 
Production Rule to a restarted facility.
I. Dual Use Rule
    A commenter requested clarifying the applicability of the ``dual 
use'' concept to sections 45Y and 48E. Specifically, the commenter 
suggested clarifying that the ``75 percent cliff'' for energy property 
with integrated storage does not apply. A previous version of Sec.  
1.48-9 included a Dual Use Rule, referred to as the ``75-percent 
cliff,'' which provided that a solar energy property, wind energy 
property, or geothermal equipment is eligible for the section 48 credit 
to the extent of the energy property's basis or cost allocable to its 
annual use of energy from a qualified source if the use of energy from 
``non-qualifying'' sources does not exceed 25 percent of the total 
energy input of the energy property during an annual measuring period.
    Historically, the Dual Use Rule was used in the section 48 
regulations to address the treatment of energy storage property that 
stored energy from a qualified source and a non-qualified source. This 
was necessary because prior to the IRA amendments to section 48, energy 
storage property was only allowed for the section 48 credit as part of 
an energy property. After the IRA amendments, energy storage property 
became a separate type of energy property, referred to as ``energy 
storage technology,'' and the need for the Dual Use Rule changed. 
Similar to the treatment of EST in section 48, a separate credit is 
provided under section 48E. Accordingly, the Treasury Department and 
IRS clarify that the Dual Use Rule contained in a prior version of 
Sec.  1.48-9 is not applicable to the section 45Y and 48E credits.

V. Rules Relating to the Increased Credit Amount for Satisfying Certain 
Prevailing Wage and Apprenticeship Requirements

A. In General
    The PWA final regulations provide generally applicable rules on the 
PWA requirements. Comments on the general PWA requirements (including 
comments that referenced section 45Y or 48E but addressed the PWA 
requirements more generally) were addressed in the PWA final 
regulations. To the extent consistent with this Summary of Comments and 
Explanation of Revisions, the Explanation of Revisions described in the 
PWA final regulations is incorporated in these final regulations. 
Therefore, general comments addressed in the preamble to the PWA final 
regulations are not readdressed in this Summary of Comments and 
Explanation of Revisions.
    Increased credit amounts are generally available under section 
45Y(a)(2)(B) for qualified facilities and section 48E(a)(2)(A)(ii) for 
qualified facilities and EST if beginning of construction of the 
qualified facility or EST occurs before January 29, 2023 (BOC 
Exception). Under the relevant BOC Exception in sections 45Y and 48E, 
taxpayers may claim the amount of the increased credit without 
satisfying the PWA requirements if construction ``begins prior to the 
date that is 60 days after the Secretary publishes guidance with 
respect to the [PWA requirements].'' On November 30, 2022, the Treasury 
Department and the IRS published Notice 2022-61, 2022-52 I.R.B. 560, 
providing initial guidance with respect to the PWA requirements and 
starting the 60-day period described in those sections. To qualify for 
the BOC Exception, a taxpayer must begin construction before January 
29, 2023.
    Additionally, increased credit amounts are generally available 
under sections 45Y and 48E with respect to qualified facilities with a 
maximum net output (or capacity for EST under section 48E) of less than 
one megawatt (One Megawatt Exception). If a taxpayer satisfies the PWA 
requirements, meets the BOC Exception, or meets the One Megawatt 
Exception, the amount of section 45Y credit or section 48E credit 
determined is equal to the otherwise determined amounts multiplied by 
five.
B. Application of the PWA Requirements to Section 45Y
    Section 45Y(g)(9) provides that rules similar to the rules of 
section 45(b)(7) apply with respect to the prevailing wage requirements 
(Prevailing Wage Requirements). Section 45Y(g)(10) provides that rules 
similar to the rules of section 45(b)(8) apply with respect to the 
apprenticeship requirements (Apprenticeship Requirements). Section 
1.45Y-3(b)(3) adopted by cross-reference the rules in the PWA final 
regulations promulgated under section 45(b)(7) and (8); specifically, 
Sec. Sec.  1.45-7 (Prevailing Wage Requirements), 1.45-8 
(Apprenticeship Requirements), and 1.45-12 (recordkeeping and 
reporting).
    As previously explained, the PWA final regulations addressed 
general

[[Page 4042]]

application of the PWA requirements and provided the rules (except the 
One Megawatt Exception) applicable for section 45Y in Sec.  1.45Y-3. To 
provide consistent descriptions and terminology, non-substantive, 
technical updates have been made to Sec.  1.45Y-3 to reflect these 
final regulations. As revised, Sec.  1.45Y-3 also includes a new 
applicability date. These final regulations make no substantive change 
regarding application of the general PWA requirements, notwithstanding 
the new applicability date, apart from the amendments made to address 
the One Megawatt Exception. Taxpayers that began construction after 
June 25, 2024, and taxpayers that begin construction after the 
publication of the final regulations continue to follow the same 
general rules with respect to the PWA requirements.
    Taxpayers also have the option to apply these final regulations to 
qualified facilities that began construction before the publication of 
the final regulations, provided that taxpayers follow these final 
regulations in their entirety and in a consistent manner. Likewise, 
taxpayers that choose to apply these final regulations must also follow 
the PWA final regulations, consistent with prior Sec.  1.45Y-3. There 
are no changes to the application of the transition rules provided for 
in the PWA final regulations for taxpayers choosing to apply these 
final regulations for construction that began before the publication of 
the final regulations as the general PWA requirements did not change 
between prior Sec.  1.45Y-3 in the PWA final regulations and Sec.  
1.45Y-3 in these final regulations.
    The Treasury Department and the IRS understand that taxpayers may 
need additional time to comply with the amendments made by these final 
regulations to the One Megawatt Exception. Therefore, the amendments 
made to Sec.  1.45Y-3 with respect to the One Megawatt Exception have a 
delayed applicability date that is 60 days after publication of the 
final regulations. Comments received regarding the One Megawatt 
Exception under section 45Y are addressed in these final regulations 
and explained in section V.D. of this Summary of Comments and 
Explanation of Revisions.
C. Application of the PWA Requirements to Section 48E
1. In General
    The PWA requirements in section 48E cross-reference both sections 
45 and 48 for operative rules. Section 48E(d)(3) provides that rules 
similar to the rules of section 48(a)(10) apply with respect to the 
prevailing wage requirements. Section 48(a)(10) provides rules with 
respect to the prevailing wage requirements under section 48, including 
the special recapture provision under section 48(a)(10)(C). Section 
48(a)(10)(B) provides that the correction and penalty procedures under 
section 45(b)(7)(B) for a failure to satisfy the prevailing wage 
requirements generally apply prior to a recapture event under section 
48(a)(10)(C). Section 48E(d)(4) provides that rules similar to the 
rules of section 45(b)(8) apply with respect to the apprenticeship 
requirements. Proposed Sec.  1.48E-3 would adopt by cross-reference 
those rules in the section 48 final regulations promulgated under 
section 48(a)(10) and the PWA final regulations promulgated under 
section 45(b)(7) and (8); specifically, Sec. Sec.  1.48-13(c) 
(Prevailing Wage Requirements), 1.45-8 (Apprenticeship Requirements), 
and 1.45-12 (recordkeeping and reporting). These rules are generally 
adopted by cross-reference in Sec.  1.48E-3 with additional 
clarifications to reflect Sec. Sec.  1.48-13, 1.45-8, and 1.45-12 and 
these final regulations.
    At least one commenter requested that C&G facilities fueled by 
woody biomass feedstocks be eligible to qualify for the domestic 
content bonus credit amount and increased credit amount for satisfying 
PWA requirements. As discussed in section IV.A. of this Summary of 
Comments and Explanation of Revisions, a facility that meets the 
definition of a qualified facility may qualify for the relevant section 
45Y and 48E credits. Accordingly, a qualified facility may also qualify 
for an increased credit amount under sections 45Y and 48E provided that 
the facility satisfies the relevant domestic content bonus or PWA 
requirements.
    A commenter praised the PWA final regulations for using restraint 
in incorporating elements of the Davis-Bacon Act and suggested that the 
Treasury Department and the IRS exercise the same restraint in drafting 
these regulations. The Treasury Department and the IRS generally agree 
with the commenter that the final regulations for section 48E should 
apply a similar approach as in the PWA final regulations in order to 
ensure consistency across different Code sections, provide taxpayer 
certainty, and further tax administration. These final regulations 
reflect such an approach.
2. Transition Rules
    As stated in the preamble to the PWA final regulations and 
reiterated in the preamble to the section 48 final regulations, the 
Treasury Department and the IRS have determined that given the 
complexity of the PWA requirements, the uncertainty regarding the 
potential retroactive effects of the PWA requirements, and the benefits 
to tax administration gained with consistency across the various Code 
sections containing PWA requirements, that a transition rule is 
appropriate. The PWA final regulations provide that any work performed 
before January 29, 2023 (that is, the date that is 60 days after the 
publication of Notice 2022-61) is not subject to the PWA requirements, 
regardless of whether there is an applicable BOC Exception. This 
transition rule also applies for taxpayers that may initially satisfy 
the BOC Exception, but later fail to meet the BOC Exception (for 
example, by failing to meet certain continuity requirements). These 
taxpayers must satisfy the PWA requirements for construction, 
alteration, or repair (as applicable) that occurs on or after January 
29, 2023, but do not need to meet the PWA requirements for work that 
occurred prior to that date. For similar reasons, this transition rule 
also applies to the PWA requirements under section 48E and is 
incorporated by cross-reference to Sec. Sec.  1.48-13 and 1.45-8 in 
these final regulations.
    The section 48 final regulations (and as described in the PWA final 
regulations) also provide a limited transition waiver for the penalty 
payment with respect to the correction and penalty procedures described 
in section 45(b)(7)(B) for a failure to satisfy the Prevailing Wage 
Requirements. The PWA final regulations provide that the penalty 
payment is waived with respect to a laborer or mechanic who performed 
work in the construction, alteration, or repair of a qualified facility 
on or after January 29, 2023, and prior to June 25, 2024, if the 
taxpayer relied upon Notice 2022-61 or the PWA proposed regulations for 
determining when the obligation to pay prevailing wages began, provided 
the taxpayer makes the appropriate correction payments to the impacted 
workers within 180 days of June 25, 2024. These final regulations 
clarify that this limited transition waiver applies to section 48E (by 
incorporation of the cross-reference to section 48(a)(10)) provided the 
taxpayer makes the appropriate correction payments to the impacted 
workers within 180 days of the publication of these final regulations.
    Similarly, these final regulations also allow taxpayers to use 
Notice 2022-61 for determining when construction begins for purposes of 
the applicable percentage of labor hours performed by qualified 
apprentices required under

[[Page 4043]]

section 45(b)(8) in satisfying the labor hours requirement described in 
Sec.  1.45-8. These transition rules are further explained in the 
preamble to the PWA final regulations.
3. Recapture
    The section 48 final regulations also addressed the recapture rules 
under section 48(a)(10)(C). The preamble to the section 48 final 
regulations contains detailed discussion of the recapture rules, and 
similar rules apply for purposes of the special recapture rule in 
section 48E(d)(3) (by reference to section 48(a)(10)). The recapture 
rules in Sec.  1.48-13 are incorporated by cross-reference in Sec.  
1.48E-3. These final regulations do clarify that if there is no 
alteration or repair that occurs during the relevant year during the 
five-year recapture period, the taxpayer is deemed to satisfy the PWA 
requirements with respect to that year.
4. Interconnection Property
    Some commenters suggested clarifying that the PWA requirements do 
not apply to the construction, alteration, or repair of interconnection 
property. Section 48E(a)(2)(A)(ii) provides that the increased credit 
amount (for satisfying the PWA requirements) is determined in the case 
of a qualified facility. The qualified investment with respect to a 
qualified facility described in section 48E(b) 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. Therefore, interconnection property is 
eligible for the increased credit amount. However, consistent with 
section 48(a)(8), Sec.  1.48E-4(a)(2) clarifies that interconnection 
property is not part of a qualified facility and therefore is not 
subject to the PWA requirements.
    In addition to not being part of the qualified facility, as defined 
in section 48E(b)(3)(A), interconnection property generally is also not 
within the control of the taxpayer that owns the qualified facility 
because it generally is not owned by the same taxpayer. Instead, 
qualified interconnection property is generally owned by a utility and 
is part of an addition, modification, or upgrade to a transmission or 
distribution system that is required at or beyond the point at which 
the qualified facility interconnects to such transmission or 
distribution system. It would therefore be difficult or impossible in 
such a case for the taxpayer to control or monitor whether the 
construction of the interconnection property complies with the PWA 
requirements. This may explain why the statute permits the increased 
credit amount for amounts paid or incurred for qualified 
interconnection property, without subjecting the construction of that 
property to the PWA requirements.
    With respect to EST, section 48E(c)(1) describes the qualified 
investment with respect to EST without reference to interconnection 
property. This differing treatment of interconnection property between 
qualified facilities under section 48E(b) and EST under section 48E(c) 
is further supported by section 48E(b)(4), which solely defines 
interconnection property ``[f]or purposes of this paragraph [(b)(4)].'' 
Accordingly, the qualified investment with respect to any EST does not 
include qualified interconnection costs and qualified interconnection 
property is not subject to PWA requirements. Interconnection property 
with respect to EST is further discussed in section III.D.6. of this 
Summary of Comments and Explanation of Revisions.
D. One Megawatt Exception Under Section 45Y
    The preamble to the PWA final regulations explained that the One 
Megawatt Exception for purposes of section 45Y would be addressed in 
these final regulations. Comments pertaining to the technical aspects 
of measuring output for the purposes of the One Megawatt Exception 
under 45Y were limited. Commenters stated that some technologies, such 
as solar, generate electricity in direct current not alternating 
current, so it is unclear how to measure such technologies.
    The Treasury Department and the IRS agree that the One Megawatt 
Exception under section 45Y(a)(2)(B)(i) requires clarification. The 
final regulations under Sec.  1.45Y-3(c)(1) provide that 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 based on the nameplate capacity of the qualified facility. 
The nameplate capacity for purposes of the One Megawatt Exception is 
the maximum electrical generating output in megawatts that a 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. If applicable, taxpayers must use the ISO 
conditions to measure the maximum electrical generating output of a 
qualified facility. For qualified facilities that generate electrical 
output in direct current, the final regulations under Sec.  1.45Y-
3(c)(2) provide an alternative nameplate capacity measurement. For 
qualified facilities that generate electricity in direct current, the 
taxpayer may choose to determine the maximum net output (in alternating 
current) of each qualified facility for purposes of the One Megawatt 
Exception by using the lesser of: (i) the sum of the nameplate 
generating capacities within the unit of qualified facility in direct 
current, which is deemed the nameplate generating capacity of the unit 
of qualified facility in alternating current; or (ii) the nameplate 
capacity of the first component of property that inverts the direct 
current electricity into alternating current.
    When evaluating whether the One Megawatt Exception under section 
45Y applies, the Treasury Department and the IRS have determined that a 
consistent approach should apply for purposes of sections 48E and 45Y. 
A plain reading of the statutory exception for facilities with a 
maximum net output of less than one megawatt demonstrates Congress's 
intent to have only lower output, small facilities excepted from the 
PWA requirements and still be eligible for the increased credit amount. 
For purposes of determining whether a qualified facility must satisfy 
the PWA requirements to obtain an increased credit amount, the output 
of any qualified facility must be evaluated consistent with its 
operations. These final regulations provide, in part, that the unit of 
qualified facility includes all functionally interdependent components 
of property owned by the taxpayer that are operated together and that 
can operate apart from other property to produce electricity. The 
Treasury Department and the IRS intended for the term ``operated 
together'' to be given effect when considering whether the One Megawatt 
Exception applies to the PWA requirements.
    When measuring nameplate capacity for the purposes of the One 
Megawatt Exception under section 45Y, these final regulations provide 
parity with the rules for section 48E and include the same special rule 
that if the qualified facility has integrated operations with one or 
more other qualified facilities, then the aggregate nameplate capacity 
of the qualified facilities is used for purposes of determining whether 
the One Megawatt Exception applies to the qualified facility. Solely 
for the purposes of the One Megawatt Exception, these final regulations 
provide that a qualified facility is treated as having integrated 
operations with any other qualified facility of the

[[Page 4044]]

same technology type if the facilities are: (i) owned by the same or 
related taxpayers; (ii) placed in service in the same taxable year; and 
(iii) transmit electricity generated by the facilities through the same 
point of interconnection or, if the facilities are not grid-connected 
or are delivering electricity directly to an end user behind a utility 
meter, are able to support the same end user. The final regulations 
also provide a definition for related taxpayers. For purposes of the 
One Megawatt Exception, the term related taxpayers means members of a 
group of trades or businesses that are under common control (as defined 
in Sec.  1.52-1(b)). Related taxpayers are treated as one taxpayer in 
determining whether a qualified facility has integrated operations.
    The Treasury Department and the IRS understand that some taxpayers 
who have integrated operations may need additional time to comply with 
the PWA requirements where construction has already begun, or is 
imminent, before publication of these final regulations. To alleviate 
these circumstances, the rule for qualified facilities with integrated 
operations has a delayed applicability date that is 60 days after 
publication of the final regulations.
E. Election To Group Qualified Facilities for Purposes of PWA 
Requirements Under Section 45Y
    Commenters suggested that the taxpayers should be allowed to group 
facilities as they chose when applying the PWA requirements for an 
increased credit amount. For example, a commenter suggested that a 
taxpayer that owns interrelated facilities should be allowed elect to 
combine multiple interrelated facilities into one aggregated unit or, 
alternatively, elect to treat the facilities individually for the PWA 
requirements. Some commenters asserted that it is difficult to certify 
compliance at each qualified facility level, so taxpayers should be 
allowed to certify PWA compliance at an interrelated facilities level.
    To claim an increased credit amount for satisfying the PWA 
requirements, section 45Y requires that each qualified facility satisfy 
the requirements. The statute does not support commenters' request to 
allow PWA certification for qualified facilities based on one qualified 
facility. If a taxpayer does not satisfy the PWA requirements for a 
qualified facility, the taxpayer may cure with correction payments paid 
to impacted workers and a penalty paid to the IRS. The PWA final 
regulations provide taxpayers the rules for the Prevailing Wage 
Requirement, Apprenticeship Requirement, and the recordkeeping and 
reporting applicable to section 45Y.
F. One Megawatt Exception Under Section 48E
    The preamble to the PWA final regulations explained that the One 
Megawatt Exception for purposes of section 48E would be addressed in 
these final regulations. Proposed Sec.  1.48-13 would have provided by 
cross-reference that maximum net output is based on nameplate capacity 
and proposed conversion formulas for certain types of qualified 
facilities and ESTs.
    Some commenters recommended revisions to the conversion formulas. 
For example, one commenter asserted that by defining the threshold for 
the One Megawatt Exception for thermal systems at about a quarter of 
the equivalent output of electrical energy systems, investors in 
thermal energy storage systems will not qualify for the One Megawatt 
Exception. The commenter recommended that the One Megawatt Exception be 
measured as the maximum net output according to a facility's electrical 
equivalent. The commenter explained this means that for thermal energy 
resources, the use of electricity (in kW) that would be avoided or 
offset by each unit of thermal energy (Btu/h for heat, or Ton of 
cooling) provided by the thermal energy resource. The commenter 
recommended that the conversion value for thermal energy cooling 
systems for purposes of measuring the One Megawatt Exception for 
qualified facilities be 1,550 tons for water-cooled systems and 870 
tons for air-cooled systems.
    The Treasury Department and the IRS have concluded that the 
conversion formulas in the proposed regulations provide a direct and 
accurate conversion and that no changes are needed to the conversion 
factors for thermal energy storage property. By providing a broadly 
applicable rule, the conversion formulas should provide accurate 
results for a broad set of applications and technologies. The 
commenters' requests for specific formulas applicable to specific 
technologies conflict with the approach of these final regulations to 
provide general, rather than narrow, rules. Therefore, the final 
regulations do not adopt these comments. The final regulations provide 
conversion formulas for thermal energy storage technology in Sec.  
1.48E-3(c)(3)(iii) and hydrogen storage technology in Sec.  1.48E-
2(g)(6)(iii).
    Commenters also stated that certain technologies generate 
electricity in direct current, not alternating current, so it is 
unclear how such qualified facilities could qualify for the One 
Megawatt Exception. The Treasury Department and the IRS agree that the 
One Megawatt Exception under section 48E requires clarification for 
technologies that generate output in direct current.
    The final regulations provide that 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 based on the 
nameplate capacity of the qualified facility. The nameplate capacity 
for purposes of the One Megawatt Exception is the maximum electrical 
generating output in megawatts that a qualified facility is capable of 
producing on a steady state basis and during continuous operation under 
standard conditions, as specified by the manufacturer and consistent 
with the definition of nameplate capacity provided in 40 CFR 96.202. If 
applicable, taxpayers must use the ISO conditions to measure the 
maximum electrical generating output of a facility. Section 
48E(a)(2)(B)(ii)(I) describes the One Megawatt Exception for EST as 
based on the capacity of the EST. The final regulations adopt this 
general term, and also clarify that the nameplate capacity of the for 
EST is based on the output of the EST.
    For qualified facilities that generate electrical output in direct 
current, the final regulations provide a new alternative nameplate 
capacity measurement. Only for qualified facilities that generate 
electricity in direct current, the taxpayer may choose to determine the 
maximum net output (in alternating current) of each qualified facility 
by using the lesser of: (i) the sum of the nameplate generating 
capacities within the unit of qualified facility in direct current, 
which is deemed the nameplate generating capacity of the unit of 
qualified facility in alternating current; or (ii) the nameplate 
capacity of the first component of property that inverts the direct 
current electricity into alternating current. The final regulations 
also provide these same rules apply for ESTs that have output in direct 
current for the purposes of determining if the EST One Megawatt 
Exception applies.
    Commenters also stated opposition to adopting the concept of an 
``energy project'' or aggregation rule similar to those in the section 
48 proposed regulations for purposes of claiming the increased rate for 
meeting the PWA requirements under section 48E (as well as section 
45Y). Commenters asserted that there is no legal basis for using the 
definition of an energy project or any aggregation rule for the section 
48E

[[Page 4045]]

credit. A commenter instead suggested permitting a taxpayer to elect to 
combine multiple interrelated facilities into one aggregated unit or, 
alternatively, elect to treat the facilities individually for purposes 
of the PWA requirements. Another commenter requested permitting 
taxpayers to certify that individual qualified facilities meet the PWA 
requirements if interrelated facilities meet the PWA requirements. The 
commenter stated that taxpayers typically contract with mechanics and 
laborers for an entire project, rather than for an individual qualified 
facility, and that it would be difficult to certify compliance with the 
PWA requirements at the qualified facility level.
    The Treasury Department and the IRS do not agree with commenters 
that there is no legal basis to incorporate an aggregation rule into 
section 48E. Section 48E(d)(3) provides that ``[r]ules similar to the 
rules of section 48(a)(10) shall apply.'' Section 48(a)(10) applies the 
prevailing wage requirements to ``energy projects,'' which requires the 
aggregation of energy properties under section 48. Additionally, the 
reference in section 48E(d)(3) to the prevailing wage requirements 
provided in section 48(a)(10) \4\ indicates that the express delegation 
of authority in section 48(a)(16) also applies in the context of 
section 48E for implementation of the prevailing wage requirements. 
Although the apprenticeship requirements provided in section 48E(d)(4) 
applies rules similar to section 45(b)(8) rather than section 
48(a)(11), an appropriate reading of the statute is to apply a 
consistent interpretation to both of section 48E's prevailing wage 
requirements and apprenticeship requirements, as inconsistent 
interpretations would frustrate congressional intent by creating 
different standards for the prevailing wage requirements and 
apprenticeship requirements and would be difficult for the IRS to 
administer. For the reasons noted in this Summary of Comments and 
Explanation of Revisions, interpreting the PWA requirements for section 
48E consistently with section 48(a)(10) is the best implementation of 
the overall statutory framework because it results in the PWA 
requirements being applied appropriately and consistently across 
credits.
---------------------------------------------------------------------------

    \4\ Section 48(a)(16) provides the same broad authority for 
administering the PWA provisions in section 48(a).
---------------------------------------------------------------------------

    The concept of interrelated facilities raised by commenters is 
relevant to the One Megawatt Exception. As discussed in section IV.B. 
of this Summary of Comments and Explanation of Revisions, these final 
regulations apply a functional definition to implement the term 
``qualified facility.'' These final regulations provide, in part, that 
the unit of qualified facility includes all functionally interdependent 
components of property owned by the taxpayer that are operated together 
and that can operate apart from other property to produce electricity. 
This functional definition could result in some qualified facilities 
with a maximum net output that is far greater than one megawatt being 
treated as though they were many separate facilities each with a 
maximum net output of less than one megawatt. This would have 
unintended impacts on the PWA requirements. Accordingly, the Treasury 
Department and the IRS intend to give effect to the term ``operated 
together'' when considering whether and how the One Megawatt Exception 
applies to the PWA requirements.
    A plain reading of the statutory exception for facilities with a 
maximum net output of less than one megawatt demonstrates Congress's 
intent to have only lower output, small facilities excepted from the 
PWA requirements and still be eligible for the increased credit amount. 
Any other interpretation undermines the purpose of the statutory 
exception and Congress's intent to have PWA requirements apply to the 
construction of clean energy facilities. For purposes of determining 
whether a qualified facility must satisfy the PWA requirements to 
obtain an increased credit amount, the output of any qualified facility 
must be evaluated consistent with its operations. This supports the 
purpose of the One Megawatt Exception, provides certainty for taxpayers 
seeking increased credit amounts under section 48E, and furthers sounds 
tax administration.
    When measuring nameplate capacity for the purposes of the One 
Megawatt Exception, the final regulations provide a special rule. 
Solely for the purposes of the One Megawatt Exception, if the qualified 
facility has integrated operations with one more other qualified 
facilities, then the aggregate nameplate capacity of the qualified 
facilities is used for the purposes of determining if the One Megawatt 
Exception applies. The final regulations under Sec.  1.48E-3(c)(4)(i) 
provide that solely for the purposes of the One Megawatt Exception, a 
qualified facility is treated as having integrated operations with any 
other qualified facility of the same technology type, if the facilities 
are: (i) owned by the same or related taxpayers; (ii) placed in service 
in the same taxable year; and (iii) transmit electricity generated by 
the facilities through the same point of interconnection or, if the 
facilities are not grid-connected or are delivering electricity 
directly to an end user behind a utility meter, are able to support the 
same end user. The final regulations under Sec.  1.48E-3(c)(4)(ii) 
provide a similar integrated operations rule for EST.
    As discussed in section IV.G. of this Summary of Comments and 
Explanation of Revisions, the final regulations provide for a generally 
applicable related taxpayer rule in Sec.  1.48E-1(c), including for 
purposes of the One Megawatt Exception. The term related taxpayers 
means members of a group of trades or businesses that are under common 
control as defined in Sec.  1.52-1(b). Related taxpayers are treated as 
one taxpayer in determining whether a qualified facility or EST has 
integrated operations.
    As with section 45Y, the Treasury Department and the IRS understand 
that some taxpayers who have integrated operations may need additional 
time to comply with the PWA requirements where construction has already 
begun, or is imminent, before publication of these final regulations. 
To alleviate these circumstances, final regulations for Sec.  1.48-3 
have an applicability date that applies 60 days after publication of 
the final regulations.
    For the reasons provided herein, aggregation of the nameplate 
capacity of qualified facilities with integrated operations is 
applicable only to the One Megawatt Exception under the PWA 
requirements and is not applicable to other circumstances related to 
qualified facilities, such as the Five-Megawatt Limitation for 
qualified interconnection property for Qualified Interconnection 
Property, evaluation of eligibility for the domestic content or energy 
communities bonuses.
G. Election To Group Qualified Facilities or ESTs for Purposes of the 
PWA Requirements Under Section 48E
    As with section 45Y, commenters suggested that the taxpayers should 
be allowed to group facilities as they chose when applying the PWA 
requirements for an increased credit amount under section 48E. A 
commenter suggested that a taxpayer that owns interrelated facilities 
should be allowed to elect to combine multiple interrelated facilities 
into one aggregated unit or, alternatively, elect to treat the 
facilities individually for the PWA requirements. A commenter suggested 
that taxpayers should be allowed to certify compliance with the PWA 
requirements for an individual facility based on compliance of 
interrelated facilities. Commenters'

[[Page 4046]]

suggestions to allow elective grouping to certify compliance with the 
PWA requirements or allow taxpayers to certify for an individual 
qualified facility based on compliance of interrelated facilities are 
not adopted. The statute requires that each qualified facility satisfy 
the requirements and for this reason the commenter's suggestions cannot 
be adopted. If a taxpayer does not satisfy the PWA requirements for a 
qualified facility, the taxpayer may cure with correction payments paid 
to impacted workers and a penalty paid to the IRS. The PWA final 
regulations provide taxpayers the rules for the Prevailing Wage 
Requirement, Apprenticeship Requirement, and the recordkeeping and 
reporting applicable to section 48E.

VI. Domestic Content Bonus

    The proposed regulations provided rules related to the increase in 
credit rate for qualified facilities (or EST in the case of section 
48E) that meet the domestic content bonus requirements.
    Some commenters supported and some commenters opposed adopting the 
concept of an ``energy project'' or aggregation rule similar to those 
in the section 48 proposed regulations for purposes of claiming the 
domestic content bonus credit amount under section 45Y or 48E. 
Commenters contended that there is no legal basis for importing the 
definition of an energy project or any aggregation rule for the section 
48E credit. A commenter instead suggested permitting a taxpayer to 
elect to combine multiple interrelated facilities into one aggregated 
unit or, alternatively, elect to treat the facilities individually for 
purposes of the domestic content bonus credit amount.
    An aggregation rule is incorporated into the section 48 final 
regulations for purposes of claiming the domestic content bonus credit 
amount, because section 48 applies the domestic content bonus credit 
amount to an entire energy project defined as one or more energy 
properties that are part of a single project. However, section 
45Y(g)(11)(A) defines the domestic content bonus credit amount in 
general with respect to a qualified facility, without reference to 
section 48. Although section 48E(a)(3)(B) provides that ``[r]ules 
similar to the rules of section 48(a)(12) shall apply'' for purposes of 
the domestic content bonus credit amount, section 48(a)(12)(B) dictates 
that ``[r]ules similar to the rules of section 45(b)(9)(B) shall 
apply.'' Additionally, even though section 48(a)(12)(A) describes the 
domestic content bonus credit amount rules ``[i]n the case of any 
energy project,'' sections 45Y and 48E do not have the energy project 
concept like section 48 to allow grouping. Under section 45(b)(9)(B), 
the domestic content bonus credit amount applies with respect to a 
qualified facility. Accordingly, for purposes of claiming the domestic 
content bonus credit amount, more than one qualified facility under 
section 45Y and more than one qualified facility or EST under section 
48E may not be treated as a single qualified facility or EST. Each 
qualified facility under section 45Y and each qualified facility or EST 
under section 48E must separately qualify for the increased credit rate 
for meeting domestic content bonus requirements.

VII. Energy Communities

    Similar to some commenters' opposition to aggregation with respect 
to the domestic content bonus credit amounts, some commenters also 
opposed adopting the concept of an ``energy project'' or aggregation 
rule similar to those in the section 48 proposed regulations for 
purposes of the increase in credit for energy communities, under 
section 45Y or 48E. Commenters contended that there is no legal basis 
for importing the definition of an energy project or any aggregation 
rule for the section 48E credit. However, one commenter instead 
suggested permitting a taxpayer to elect to combine multiple 
interrelated facilities into one aggregated unit or, alternatively, 
elect to treat the facilities individually for purposes of the increase 
in credit in energy communities.
    An aggregation rule is incorporated into the section 48 regulations 
for purposes of claiming the increase in credit rate in energy 
communities under section 48, because section 48 applies the increase 
in credit rate to an entire energy project defined as one or more 
energy properties that are part of a single project. However, section 
45Y(g)(7) and section 48E(a)(3)(A)(i) define an energy community by 
cross-reference to section 45(b)(11)(B), instead of section 48. Section 
45 does not have the energy project concept like section 48 to allow 
grouping. Nor do section 45Y or 48E. Accordingly, for purposes of 
claiming the increase in credit in energy communities, more than one 
qualified facility under section 45Y and more than one qualified 
facility or EST under section 48E will not be treated as a single 
qualified facility or EST. Each qualified facility under section 45Y 
and each qualified facility or EST under section 48E must separately 
qualify for the increased credit rate for a qualified facility or EST 
located in an energy community.

VIII. Greenhouse Gas Emissions Rates for Qualified Facilities

    Section 45Y(b)(2) provides rules for determining GHG emissions 
rates. Section 48E(b)(3)(B)(ii) provides that rules similar to the 
rules of section 45Y(b)(2) regarding GHG emissions rates apply for 
purposes of section 48E.\5\ Proposed Sec.  1.45Y-5 provided rules 
pertaining to GHG emissions rates as well as definitions of terms 
relevant to determining GHG emissions rates.
---------------------------------------------------------------------------

    \5\ Some of the proposed regulations related to recapture and 
substantiation are relevant only to section 48E and not section 45Y. 
Those rules are discussed separately later.
---------------------------------------------------------------------------

A. Definitions Related to Greenhouse Gas Emissions Rates
    Proposed Sec.  1.45Y-5(b) provided definitions of terms relevant to 
determining GHG emissions rates.
1. CO2e per kWh
    Section 45Y(e)(1) defines the term ``CO2e per kWh'' to 
mean, with respect to any GHGs, the equivalent carbon dioxide (as 
determined based on global warming potential (GWP)) per kilowatt hour 
of electricity produced. Proposed Sec.  1.45Y-5(b)(1) clarified that 
the determination must be based on the 100-year time horizon global 
warming potential (GWP-100). Proposed Sec.  1.45Y-5(b)(1) also provided 
GWP-100 amounts for certain specific GHGs from the Intergovernmental 
Panel on Climate Change's (IPCC) Fifth Assessment Report (AR5).
    Commenters presented a range of views on the proposed definition of 
``CO2e per kWh.'' Some agreed with the proposed definition, 
including one commenter who noted that the proposed definition aligns 
with Congressional intent in enacting sections 45Y and 48E.
    Some commenters advocated for revisions to the proposed definition 
of ``CO2e per kWh.'' One commenter stated that the urgent 
need for near-term GHG emissions reductions may justify the use of 
different GWP values. Several commenters suggested that the proposed 
definition be revised to use a 20-year GWP for methane to appropriately 
prioritize methane reductions. The commenters asserted that despite its 
prevalence, relying on GWP-100 is arbitrary and lacks scientific basis. 
To support this position, one commenter further asserted that the IPCC 
does not specifically recommend the use of GWP-100, or any other 
specific metric for the conversion of non-CO2 GHG emissions 
into CO2 equivalents. The commenter also noted recent 
adoptions of a 20-year GWP by individual States and asserted that other 
policymakers

[[Page 4047]]

recognize the urgency to incorporate the use of the 20-year GWP to 
accelerate efforts towards reducing methane emissions.
    After consideration of the comments the Treasury Department and the 
IRS decline to modify the proposed definition of the term ``CO2e per 
kWh.'' GWP-100 is a commonly accepted standard that appropriately 
captures the GWP of relevant GHGs and it is the internationally 
accepted standard for reporting GHG emissions. Specifically, the AR5 
GWP-100 is required for all nations reporting national GHG emissions 
inventories to the United Nations Framework Convention on Climate 
Change (UNFCCC). Additionally, the use of a GWP-100 is consistent with 
the use of GWP-100 to calculate GHG emissions rates reported to the EPA 
Inventory of U.S. Greenhouse Gas Emissions and Sinks (GHGI). The GHGI 
is one of the datasets that proposed Sec.  1.45Y-1(c)(4) requires to 
confirm when the applicable year threshold has been passed as required 
by section 45Y(d). The Treasury Department and the IRS view a uniform 
standard for GWP that is consistent across GHGs as necessary for 
evaluating the GWP of different GHGs for purposes of the section 45Y 
and 48E credits. An approach that uses different GWP time horizons for 
different types of GHGs would not provide a consistent basis for 
evaluating GHG emissions rates. Therefore, proposed Sec.  1.45Y-5(b)(1) 
will be adopted without change.
2. Combustion
    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) provided that the term 
``combustion'' means a rapid exothermic chemical reaction, specifically 
the oxidation of a fuel that 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 from hydrogen inside a hydrogen fuel cell. The 
Treasury Department and the IRS received no comments on the proposed 
definition of ``combustion'' and the definition will be adopted as 
proposed. For discussion of the definition of Facility which Produces 
Electricity through Combustion or Gasification (C&G Facility) see 
section VIII.A.4. of this Summary of Comments and Explanation of 
Revisions.
3. Gasification
    Proposed Sec.  1.45Y-5(b)(3) provided 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. Commenters 
expressed support for this definition and it will be adopted without 
change. For discussion of the definition of Facility which Produces 
Electricity through Combustion or Gasification (C&G Facility) see 
section VIII.A.4. of this Summary of Comments and Explanation of 
Revisions.
4. Facility Which Produces Electricity Through Combustion or 
Gasification (C&G Facility)
    Building on the definitions of ``combustion'' and ``gasification'' 
provided in the proposed regulations, proposed Sec.  1.45Y-5(b)(4) 
defined the phrase ``facility which produces electricity through 
combustion or gasification'' (C&G Facility) in section 45Y(b)(2)(B) as 
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. In the preamble to the proposed regulations, the Treasury 
Department and the IRS requested comment on this proposed definition of 
a C&G Facility, including comment on 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.
    Many commenters supported the proposed definition of a C&G 
Facility. Several commenters noted that the proposed definition is a 
reasonable interpretation of section 45Y(b)(2)(B) because it reflects 
the reality that electricity production can drive combustion and 
gasification reactions elsewhere in the production chain even if those 
reactions are not occurring directly at the electricity generation 
facility. Other commenters supported the proposed definition and noted 
that section 45Y(b)(2)(B) provides the appropriate statutory basis for 
looking at transformations beyond the generation facility to determine 
GHG emissions from a C&G Facility. The commenters asserted that this 
interpretation is supported by two concepts within the statutory 
language. First, the inclusion of gasification in section 45Y(b)(2)(B) 
supports the proposed interpretation because ``gasification produces 
fuel not electricity,'' and, therefore, gasification must be given 
independent meaning from the term combustion. Second, the commenters 
asserted that it is appropriate to look at transformations outside the 
generation facility because the statute's use of the word ``through'' 
requires looking at the larger electricity production process to 
determine whether electricity is produced ``through'' combustion or 
gasification. In this context, the commenters noted that ``through'' 
means ``because of,'' ``by means of,'' or ``as a result of.'' 
Therefore, the commenters asserted that the plain meaning of 
``through'' is broad enough to indicate that all the reactions leading 
up to the production of electricity are relevant in determining whether 
electricity is produced through gasification.
    Some commenters questioned or suggested revisions to the proposed 
definition of the term C&G Facility. Many of these commenters raised 
questions and concerns regarding the application of the proposed 
definition of C&G Facility, particularly as applied to fuel cells. 
Several commenters asserted that the proposed definition of a C&G 
Facility misinterprets the statute. Commenters asserted that Congress 
intended the determination of whether a facility should be treated as 
being described under section 45Y(b)(2)(B) to be based on consideration 
of only the activities occurring at the facility such as a fuel cell 
itself, not a far-removed process concerning a third-party fuel or 
feedstock producer's production process, or inputs used in such 
process. These commenters further asserted that the proposed definition 
of C&G Facility is not a credible reading of the statutory reference to 
a ``facility which produces electricity through combustion or 
gasification,'' in section 45Y(b)(2)(B) because that language should be 
interpreted narrowly as requiring consideration of facilities that 
engage in combustion or gasification within the facility itself, such 
as within a solid oxide fuel cell. In other words, the commenters 
suggested that consideration of fuel production processes occurring 
upstream from the electricity-generating facility is not relevant to 
determining whether a facility is a ``facility which produces 
electricity through combustion or gasification,'' as provided in 
section 45Y(b)(2)(B).
    Commenters also asserted that the proposed definition would result 
in most or all fuel cells being categorized as C&G Facilities. The 
commenters asserted that this categorization is

[[Page 4048]]

erroneous and further asserted that fuel cell GHG emissions are not 
directly produced by the fundamental transformation of the input energy 
source into electricity. The commenters stated that fuel cell systems, 
including non-hydrogen fuel cells, use neither combustion nor 
gasification to produce electricity but are electrochemical devices. 
Other commenters asserted that at least a subset of fuel cells should 
be unequivocally treated as Non-C&G Facilities by drawing a comparison 
to nuclear facilities. A commenter stated that nuclear facilities 
(which are categorized as Non-C&G Facilities by proposed Sec.  1.45Y-
5(c)(2)) generally use uranium fuel that is enriched, in part, using 
grid electricity generated through combustion.
    Another commenter specifically noted that fuel cells that directly 
use biogas or renewable natural gas (RNG) do not require combustion or 
gasification to produce electricity because combustion is not necessary 
to produce biogas or RNG. As a result, the commenter asserted that fuel 
cells utilizing biogas or RNG should be categorized as Non-C&G 
Facilities. After consultation with the DOE, the Treasury Department 
and the IRS note that in some cases, biogas or RNG can be produced 
through gasification or combustion. Therefore, categorizing fuel cells 
that directly use biogas or RNG as Non-C&G Facilities would be 
improper.
    Some commenters disagreed with the proposed definition of C&G 
Facility because of its application to hydrogen fuel cells. These 
commenters requested that if the proposed definition is retained, the 
GHG emissions determination for hydrogen used to operate a fuel cell 
facility should follow the carbon intensity standards provided in 
section 45V of the Code. The commenters asserted that this approach 
would appropriately result in a hydrogen fuel cell that uses 
``qualified clean hydrogen'' as defined in section 45V being considered 
a Non-C&G Facility. Another commenter noted that the proposed 
definition of combustion and gasification included the entire supply 
chain for hydrogen fuel cells and recommended an alternative approach 
to determining whether hydrogen fuel cells produce electricity through 
combustion. Under this alternative approach, only transformations 
happening at the fuel production and generation facilities would be 
considered and a full examination of the supply chain would not be 
required.
    The Treasury Department and the IRS acknowledge that the preamble 
to the proposed regulations addressed the application of the definition 
of a C&G Facility to fuel cells by explaining that, 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. Thus, 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 be considered a C&G Facility if the fuel it used to 
produce electricity was produced through combustion or gasification 
under the proposed regulations.
    The Treasury Department and the IRS generally agree with the 
commenters' rationale for retaining the proposed definition of the term 
C&G Facility but view certain modifications to this definition as 
appropriate to address some of the concerns raised by other commenters. 
To appropriately give effect to the term ``gasification'' in section 
45Y(b)(2)(B), consideration of transformations beside the 
transformation directly producing electricity are necessary in 
determining the appropriate classification of a facility as a C&G 
Facility. Congress's use of the word ``through'' in section 
45Y(b)(2)(B) indicates that the steps leading up to the production of 
electricity by a C&G Facility are relevant in determining whether 
electricity is produced through combustion or gasification. However, 
requiring an evaluation of whether a fuel or feedstock used by an 
electricity-generating facility involved combustion or gasification at 
any point of the fuel or feedstock supply chain would be difficult to 
administer, particularly given the complexity of such supply chains. To 
enable the section 45Y and 48E credits to be administered, the Treasury 
Department and the IRS are limiting the analysis of production 
``through combustion or gasification'' to the electricity production 
itself and the production of the input energy source.
    The Treasury Department and the IRS continue to view proposed Sec.  
1.45Y-5(b)(4) as reflecting the best interpretation of the term 
``facility that produces electricity through combustion or 
gasification'' in section 45Y(b)(2)(B). However, after consideration of 
the comments and the administrability challenges the proposed 
definition may pose, the final regulations revise the definition of the 
term ``facility that produces electricity through combustion or 
gasification'' to ``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 of one energy source into another using combustion or 
gasification.''
    Under the revised definition in these final regulations, a hydrogen 
fuel cell would still be considered a C&G Facility if it produced 
electricity using hydrogen that was produced through combustion or 
gasification, for example through steam methane reforming. A fuel cell 
facility such as a solid oxide fuel cell, which uses methane as fuel, 
would also still 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 using electrolysis 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. This modified definition of C&G Facility is consistent 
with section 45Y(b)(2)(B) because it gives appropriate effect to the 
word ``gasification'' and considers whether the facility produces 
electricity through combustion or through the use of a fuel produced 
using combustion or gasification in determining the net GHG emissions 
rate for the qualified facility in the production of electricity. 
Considering only the process that produced the input energy source that 
is used by a facility to generate electricity implements section 
45Y(b)(2)(B)'s directive to assess whether electricity was produced 
``through combustion or gasification'' while addressing significant 
administrability concerns posed by the task of tracing complex fuel and 
feedstock supply chains beyond the production of the input energy 
source to assess whether they involved combustion or gasification.
5. Non-C&G Facility
    Proposed Sec.  1.45Y-5(b)(7) defined a ``Non-C&G Facility'' as a 
facility that produces electricity and is not described in proposed 
Sec.  1.45Y-5(b)(4). Generally, commenters supported the proposed 
definition of a ``Non-C&G Facility.'' Several commenters requested that 
the final regulations remove the terms ``C&G Facility'' and ``Non-C&G 
Facility'' in favor of the term ``qualified facility.''
    Section 45Y(b)(2)(A) specifically provides rules to determine the 
GHG emissions rate for a Non-C&G Facility and section 45Y(b)(2)(B) 
provides similar rules for a C&G Facility. As a result, the Treasury 
Department and the IRS view the proposed definitions of a ``Non-C&G 
facility'' and a ``C&G

[[Page 4049]]

Facility'' as required to implement the distinct requirements provided 
in section 45Y(b)(2)(A) and (B). An electricity-generating facility 
must be a qualified facility to be eligible for the credits provided 
under section 45Y or 48E but categorizing a facility as a C&G Facility 
or a Non-C&G Facility is required for purposes of section 45Y(b)(2)(A) 
and (B). The proposed definition of the term ``Non-C&G Facility'' is 
therefore adopted as proposed.
6. Greenhouse Gas Emissions Rate
    Proposed Sec.  1.45Y-5(b)(5) provided that, consistent with section 
45Y(b)(2)(A), the term ``greenhouse gas emissions rate'' means the 
amount of GHGs emitted into the atmosphere by a facility in the 
production of electricity, expressed as grams of CO2e per 
kWh. Several commenters requested that the definition of ``greenhouse 
gas emissions rate'' be expanded to take account of emitted co-
pollutants such as particulate matter, nitrogen oxides, and sulfur 
dioxides. Some commenters noted that, because of their effect on local 
air quality, environmental justice communities are significantly 
impacted in the near term by the co-pollutants of energy generation in 
addition to the impact of GHGs. The commenters further noted that 
increased and prolonged exposure to co-pollutants results in increased 
local air pollution and the development of a plethora of diseases, from 
skin conditions to cancer. The commenters asserted that co-pollutant 
emissions must be integrated into all GHG emissions rate calculations 
to view emissions holistically and understand and account for both 
climate impacts and human health impacts. The commenters further 
asserted that this approach would ensure that electricity production 
does not contribute to climate change and global GHG emissions and does 
not increase the levels of local air pollution.
    Section 45Y(e)(2) defines the term ``greenhouse gas'' as having 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. Pollutants or gases that are described in 42 U.S.C. 7545(o)(1)(G) 
are already treated as GHGs under sections 45Y and 48E. However, 
pollutants or gases that are not described in 42 U.S.C. 7545(o)(1)(G) 
may not be treated as GHGs under section 45Y or 48E and any requests to 
do so cannot be adopted. Therefore, proposed Sec.  1.45Y-5(b)(5) will 
be adopted without change.
7. Greenhouse Gases Emitted Into the Atmosphere by a Facility in the 
Production of Electricity
    Proposed Sec.  1.45Y-5(b)(6) provided that, for purposes of section 
45Y(b)(2)(A), and 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 (vi) provided 
a list of certain GHG emissions associated with a facility and relevant 
electricity production process excluded from the definition in proposed 
Sec.  1.45Y-5(b)(6) (for example, GHG emissions associated with 
facility siting). For Non-C&G Facilities only, proposed Sec.  1.45Y-
5(c)(1)(i) provided additional types of excluded emissions associated 
with a facility and relevant electricity production process (for 
example, emissions occurring due to activities and operations occurring 
off-site such as the production and transportation of fuels used by the 
facility). For C&G Facilities only, proposed Sec.  1.45Y-5(d)(2) 
provided additional rules on included and excluded GHG emissions 
associated with a facility and relevant electricity production 
processes that apply in order to conduct a GHG emissions lifecycle 
analysis (LCA) as required by section 45Y(b)(2)(B). The Treasury 
Department and the IRS received a wide range of comments in response to 
the definition of ``greenhouse gases emitted into the atmosphere by a 
facility in the production of electricity'' at proposed Sec.  1.45Y-
5(b)(6).
    One commenter suggested that the final regulations clarify which 
emissions (both direct and indirect) must be included (rather than 
excluded) in determining GHG emissions. The Treasury Department and the 
IRS note that the proposed definition would include emissions that 
occur from the processes that transform the input energy source into 
electricity. This definition provides a standard for determining 
included emissions that may be applied to multiple types of facilities 
that may be eligible for the section 45Y and 48E credits. However, the 
Treasury Department and the IRS have made modifications to the proposed 
standard for determining included emissions to further clarify the 
principles outlined in the proposed regulations.
    Several commenters requested additions to the list of excluded 
emissions. A commenter requested an exclusion for emissions from 
standby and auxiliary power for critical infrastructure that is not 
used directly for the production of an input used to produce 
electricity. Proposed Sec.  1.45Y-5(b)(6)(i) and these final 
regulations provide that emissions from electricity production by back-
up or auxiliary 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 would be excluded. The Treasury 
Department and the IRS would generally consider standby and auxiliary 
power systems to fall within this exclusion. This commenter also 
requested an exclusion for emissions offset by indirect financial or 
``book'' accounting methods, including but not limited to, renewable 
energy certificates and environmental attribute certificates that 
demonstrate a carbon intensity no greater than 0 kg CO2e per 
unit of output. Whether indirect or book-and-claim accounting methods 
are permitted is addressed in section VIII.E.4.d. of this Summary of 
Comments and Explanation of Revisions and whether offsets are permitted 
is addressed in section VIII.C.2.d of this Summary of Comments and 
Explanation of Revisions.
    Another commenter requested that emissions associated with various 
processes related to the production of electricity from stationary fuel 
cells be excluded from the scope of assessed emissions. The commenter 
specifically requested that this exclusion cover upstream emissions 
occurring due to the production of fuels, including hydrogen, methane, 
RNG, and other hydrocarbons, for stationary fuel cell systems; and 
emissions related to the production or refinement of fuel for 
stationary fuel cell systems, such as steam reformation, whether or not 
such processes are internal reactions. This commenter also requested an 
exclusion for emissions associated with the distribution of hydrogen to 
consumers. The Treasury Department and the IRS decline to adopt these 
requested revisions to the proposed definition of the term ``greenhouse 
gases emitted into the atmosphere by a facility in the production of 
electricity.'' Because the final regulations provide rules that may 
result in fuel cells being categorized as either a C&G Facility or a 
Non-C&G Facility depending on its operations and the fuel it uses to 
produce electricity, which would entail different rules for assessing 
emissions, it would not be appropriate to provide fuel-cell-specific 
emissions exclusions applicable to all categories of fuel cells. In 
addition, some of the exclusions requested by the

[[Page 4050]]

commenter would inappropriately deviate from the requirement in section 
45Y(b)(2)(B) to take into account lifecycle GHG emissions, as described 
in 42 U.S.C. 7545(o)(1)(H). The final regulations thus do not adopt the 
changes recommended by the commenter.
    Commenters requested other changes to the list of excluded 
emissions. Several commenters supported excluding emissions from backup 
generators, step-up transformers, routine operational and maintenance 
activities, construction, infrastructure, and distribution associated 
activities from the definition. Other commenters voiced concerned about 
the breadth of emissions excluded from the proposed definition for 
certain activities. A commenter asserted that the definition improperly 
excluded emissions from the activities listed in proposed Sec.  1.45Y-
5(b)(6)(i) through (vi). The commenter noted that each of these 
activities are critical steps in electricity generation, production, 
and distribution. As an example, the commenter noted that if 
operational and maintenance activities are disrupted, an energy 
producing facility may need to shut down and pause production. 
Therefore, the commenter asserted that routine maintenance is a vital 
component to electricity generation. Additionally, several commenters 
specifically opposed the exclusion of emissions from infrastructure 
associated with a facility, including, but not limited to, emissions 
from road construction for feedstock production. A commenter noted that 
road construction generates substantial emissions from the clearing of 
vegetation, ground disturbance, and equipment operation. Commenters 
asserted that GHG emissions from these activities must be factored into 
the definition of the GHG emissions rate.
    Several commenters asserted that the breadth of the exclusions 
proposed was too narrow. A commenter specifically disagreed with the 
scope of the exclusion for emissions from electricity production by 
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. The commenter asserted that the proposed 
definition includes emissions from back-up generators used to avoid 
system outages while only excluding emissions that occur during or 
after an outage. The commenter stated that as a result, this exclusion 
could significantly limit the time period during which a qualified 
facility could be eligible for the section 45Y and 48E credits.
    The Treasury Department and the IRS decline to modify the list of 
excluded emissions as requested by these commenters. The excluded 
emissions are appropriate in scope because they address emissions 
associated with activities that are ancillary to the electricity 
generating operations of a facility. Excluding emissions from 
contingency operations, operations that are tangentially related to the 
regular electricity generating operations of a facility, or activities 
that are beyond the scope of the production of electricity (for 
example, emissions from construction of a facility or distribution of 
the electricity) allows for a more accurate evaluation of the emissions 
stemming from a facility's production of electricity and related 
processes. Although the activities covered by these exclusions (such as 
construction, routine maintenance, or distribution) may in fact enable 
a facility to generate electricity, these activities are ancillary to 
the process of generating electricity and the final regulations retain 
the list of excluded emissions as originally proposed.
B. Determining GHG Emissions Rates for Non-C&G Facilities
1. General Rules
    Proposed Sec.  1.45Y-5(c) provided rules for determining a GHG 
emissions rate for Non-C&G Facilities, including for determinations by 
the Secretary when publishing the table described in section 
45Y(b)(2)(C)(i) or by the Secretary when determining a provisional 
emissions rate under section 45Y(b)(2)(C)(ii). Proposed Sec.  1.45Y-
5(c)(1)(i) provided that, with respect to Non-C&G Facilities only, GHG 
emissions that are not directly produced by the fundamental 
transformation of the input energy source into electricity are excluded 
from the emissions accounting. The proposed regulations excluded 
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. Proposed Sec.  1.45Y-5(c)(2) 
provided a list of specific types or categories of facilities that are 
Non-C&G Facilities with a GHG emissions rate that is not greater than 
zero. The Treasury Department and the IRS received a number of comments 
on this proposed provision, including several in support of it.
    While one commenter requested that these Non-C&G Facilities be 
listed in the Secretary's Annual Table as having a GHG emissions rate 
that is not greater than zero, another recommended that the Treasury 
Department and the IRS confirm that inclusion of these types or 
categories of facilities in the Annual Table or PER certification 
described in proposed Sec.  1.45Y-5(f) and (g) are not required for 
such listed facilities. The Treasury Department and the IRS confirm 
that taxpayers may rely on the inclusion of these types or categories 
of facilities in these final regulations as having a GHG emissions rate 
that is not greater than zero unless and until the regulations are 
amended.
    The Treasury Department and the IRS received a variety of comments 
regarding the inclusion of specific technologies in proposed Sec.  
1.45Y-5(c)(2), which are discussed in sections VIII.B.2. through 6. of 
this Summary of Comments and Explanation of Revisions by type of 
technology.
2. Nuclear
    Several commenters expressed their support for the inclusion of 
nuclear fission and nuclear fusion facilities as a type or category of 
facility that is a Non-C&G Facility with a GHG emissions rate of not 
greater than zero in proposed Sec.  1.45Y-5(c)(2)(vi) and (vii). One 
commenter recommended clarification of why the use of electricity, 
which may be produced through combustion and gasification, to enrich 
uranium and produce nuclear fuel would not render nuclear energy a C&G 
Facility. Based on the definition of a facility that produces 
electricity through combustion or gasification provided in Sec.  1.45Y-
5(b)(4), only the fundamental transformations of energy from one energy 
source into another are considered when determining whether a facility 
uses combustion or gasification. In the case of nuclear fission and 
nuclear fusion facilities, the fundamental transformations of energy 
are the conversion of nuclear binding energy in the nuclear fuel into 
heat and electricity. Nuclear fuel often contains uranium, which may 
require enrichment. However, the energy used to enrich the uranium only 
increases the concentration of the isotope needed for nuclear fuel. It 
does not transform the energy in the isotope, and accordingly, it does 
not transform one energy source into another. Therefore, enrichment is 
not considered when determining whether a facility is a C&G Facility. 
Because there is no other process in the production of enriched uranium 
or nuclear energy that would involve combustion or gasification, the 
final regulations retain nuclear fission as a type or category of 
facility that is a Non-C&G Facility.

[[Page 4051]]

    Some commenters who supported this inclusion asked that the final 
regulations amend the reference to ``nuclear fusion'' in proposed Sec.  
1.45Y-5(c)(2)(vii) to reduce confusion with nuclear fission. These 
commenters noted that Congress recently enacted the ADVANCE Act of 
2024, Public Law 118-67, which included a definition of ``fusion energy 
machine'' within the Atomic Energy Act and asked that the final 
regulations amend proposed Sec.  1.45Y-5(c)(2)(vii) to align with that 
terminology. The Treasury Department and the IRS agree that the term 
``nuclear fusion'' in proposed Sec.  1.45Y-5(c)(2)(vii) should be 
amended and adopt one commenter's suggestion that the new term be 
``fusion energy.'' The final regulations under Sec.  1.45Y-5(c)(2)(vii) 
reflect this change.
3. Hydropower
    Proposed Sec.  1.45Y-5(c)(1)(i)(A) and (B) provided that in the 
case of Non-C&G Facilities, emissions from hydropower reservoirs due to 
anoxic conditions and ebullitive, diffuse, and degassing emissions from 
hydropower operations are not GHGs emitted into the atmosphere by a 
facility in the production of electricity. Proposed Sec.  1.45Y-
5(c)(1)(i) explained that these emissions are not directly produced by 
the fundamental transformation of the input energy source into 
electricity.
    Some commenters stated that the Treasury Department and the IRS 
erred in excluding the emissions related to hydropower as described in 
proposed Sec.  1.45Y-5(c)(1)(i)(A) and (B). These commenters stated 
that, because the language in section 45Y(b)(2)(A) provides that a GHG 
emissions rate means the amount of GHGs emitted into the atmosphere by 
a facility in the production of electricity, the exclusion of such 
emissions because they are not ``directly produced by the fundamental 
transformation of the input energy source into electricity'' by the 
facility is flawed. Several commenters noted that hydropower facilities 
do in fact result in GHG emissions that are directly produced by the 
fundamental transformation of the input energy source into electricity 
within the meaning of proposed Sec.  1.45Y-5(c)(1)(i). The commenters 
noted that a reservoir, which is an integral component of a hydropower 
facility, is one of the primary sources of emissions because they emit 
GHGs due to the decomposition of organic matter through diffusion and 
ebullition. Accordingly, the commenters asserted that such emissions 
should not be excluded for hydropower facilities.
    Another commenter stated that degassing emissions that result from 
water passing through a turbine in a hydropower facility are part of 
the ``fundamental transformation of [the input energy source into] 
electricity,'' because the kinetic energy of flowing water passing 
through turbines is harnessed to produce electricity. The GHGs that may 
be released during degassing exist before flowing water passes through 
turbines that are harnessed to create electricity. Such methane is 
therefore not directly produced or created by flowing water passing 
through turbines. In addition, the GHGs associated with degassing may 
have been emitted passively into the atmosphere even in the absence of 
hydropower electricity generation. For these reasons, the Treasury 
Department and the IRS affirm that GHGs released during degassing are 
properly excluded because they are not directly produced by the 
fundamental transformation of the input energy source into electricity.
    The Treasury Department and the IRS have determined that the 
proposed treatment of emissions accounting for hydropower is 
appropriate and the best implementation of section 45Y(b)(2)(A). A 
hydropower facility converts the kinetic energy of flowing water into 
electricity with a turbine that spins a rotor within a generator to 
produce electricity. GHGs may be released from the hydropower reservoir 
due to diffusion at the water surface or due to ebullition, and from 
degassing from water passing through a pump house or turbine. The GHGs 
that may be released during degassing exist before flowing water passes 
through turbines that are harnessed to create electricity. Such GHGs 
are therefore not directly produced or created by flowing water passing 
through turbines. In addition, the GHGs associated with degassing may 
be emitted passively into the atmosphere even in the absence of 
hydropower electricity generation. It is not appropriate to treat such 
emissions as GHGs emitted into the atmosphere by a hydropower facility 
in the production of electricity because these emissions are not 
created by the fundamental transformation of potential energy in 
flowing water into electricity.
    Some commenters stated that because dams and reservoirs are 
required components of hydropower facilities in order for such 
facilities to generate energy, GHG emissions associated with these 
components should not be excluded from emissions accounting. The 
Treasury Department and the IRS have determined that GHG emissions 
associated with dams and reservoirs are properly excluded emissions. 
Emissions associated with the construction and maintenance of such dams 
and reservoirs are properly excluded under proposed Sec.  1.45Y-
5(b)(6)(iv), which states, in relevant part, that emissions that occur 
before commercial operations commence are properly excluded. 
Furthermore, emissions associated with the continued existence of such 
dams or reservoirs are properly excluded because they are not directly 
produced by the fundamental transformation of the input energy source 
into electricity within the meaning of proposed Sec.  1.45Y-5(c)(1)(i).
    Commenters also had varied reactions to the inclusion of hydropower 
as a type or category of Non-C&G Facility with a GHG emissions rate of 
not greater than zero in proposed Sec.  1.45Y-5(c)(2)(ii). Many 
commenters supported the proposed designation of and rationale for 
treating hydropower as a type or category of Non-C&G Facility with a 
GHG emissions rate of not greater than zero. For the reasons summarized 
earlier in this section, the Treasury Department and the IRS agree with 
these commenters that the fundamental energy transformation of kinetic 
energy into electricity does not result in GHGs emitted in the 
production of electricity.
    Some commenters, however, questioned this proposed treatment of 
hydropower by questioning the excluded emissions rules in proposed 
Sec.  1.45Y-5(c)(1)(i)(A) and (B), citing aspects of hydropower 
operations that they asserted give rise to emissions from a hydropower 
facility's production of electricity. For the reasons summarized 
earlier in this part of the Summary of Comments and Explanation of 
Revisions, the Treasury Department and the IRS disagree with these 
commenters. One commenter opposed to this proposed treatment of 
hydropower stated that hydropower causes adverse ecological impacts and 
recommended that facilities be eligible for the credit based not only 
on whether they have a GHG emissions rate that is not greater than zero 
but also on whether they have an ``environmentally low impact'' more 
generally.
    Section 45Y(b)(1) defines a qualified facility, in relevant part, 
as a facility used for the generation of electricity, placed in service 
after December 31, 2024, and for which the GHG emissions rate is not 
greater than zero. The statute does not provide the Treasury Department 
and the IRS the authority to consider environmental impacts beyond GHG 
emissions rates in determining eligibility for the section 45Y and 48E 
credits. Therefore, the final regulations do not adopt the commenter's 
suggestion.

[[Page 4052]]

4. Waste Energy Recovery Property (WERP)
    Proposed Sec.  1.45Y-5(c)(2)(viii) provided that waste energy 
recovery property (WERP) that derives energy from a source described in 
proposed Sec.  1.45Y-5(c)(2)(i) through (vii) is a Non-C&G Facility 
with a GHG emissions rate that is not greater than zero. The preamble 
to the proposed regulations explained that 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. In the preamble to the proposed regulations, the 
Treasury Department and the IRS requested comment on this proposed 
definition and 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).
    Some commenters supported the proposed definition of WERP. One 
commenter stated that this long-standing definition is appropriate for 
the purpose of the section 45Y and 48E credits and would provide 
taxpayers with strong incentives to install WERP to produce electricity 
using heat that would otherwise be wasted. The commenter further noted 
that this definition would also prevent facilities whose primary 
purpose is to generate electricity from ``double dipping'' by taking a 
tax credit on the original electricity generated and again on 
electricity generated from WERP.
    Some commenters requested that facilities using exothermic 
reactions or pressure drop technologies be included in the definition 
of WERP for purposes of the section 45Y and 48E credits. Additionally, 
these commenters asserted that these types of technologies do not rely 
on combustion or gasification and thus could and should be classified 
as Non-C&G Facilities. A commenter further recommended that GHG 
emissions that occur with respect to exothermic reactions or pressure 
drop technologies (for example, turboexpanders on a pipeline) that do 
not rely on combustion or gasification should be treated as Non-C&G 
Facilities and any significant direct or indirect emissions should be 
accounted for. Other commenters suggested that the final regulations 
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).
    The Treasury Department and the IRS have determined that the final 
regulations should not be revised to explicitly include these 
additional types of facilities as WERP, which is included as a Non-C&G 
Facility at Sec.  1.45Y-5(c)(2)(viii). Because some facilities that 
employ exothermic reactions release energy into the environment in the 
form of heat via combustion, it would not be appropriate to classify 
all WERP facilities using exothermic reactions as Non-C&G Facilities.
    Pressure drop technologies are also not appropriately considered 
WERP for purposes of the section 45Y and 48E credits because they 
convert pressure, rather than heat, directly to electricity. As a 
result, this type of technology does not fall within the definition of 
WERP provided in the preamble to the proposed regulations. At this 
time, this type of technology is also not included within the list of 
certain Non-C&G Facilities with a GHG emissions rate that is not 
greater than zero provided at Sec.  1.45Y-5(c)(2). The preamble to the 
proposed regulations defined WERP as 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. This definition of WERP is appropriate for the purposes of 
the section 45Y and 48E credits because it mirrors the statutory 
definition provided in section 48(c)(5)(A). As a result, these final 
regulations add the definition of WERP, as provided in the preamble to 
the proposed regulations, to Sec.  1.45Y-1(a)(12) and to Sec.  1.48E-
1(a)(12).
    The Treasury Department and the IRS also received a number of 
comments recommending that the final regulations provide that all WERP 
be included in the list of Non-C&G Facilities with a GHG emissions rate 
that is not greater than zero at Sec.  1.45Y-5(c)(2). The Treasury 
Department and the IRS have determined that because many of the energy 
sources for WERP rely on combustion or gasification, it would not be 
appropriate to classify all WERP facilities as Non-C&G Facilities 
because some WERP facilities produce electricity using an input energy 
source that was produced through a fundamental transformation of one 
energy source into another using combustion or gasification. WERP 
facilities that produce electricity through combustion or gasification 
would be considered C&G Facilities and can be evaluated for inclusion 
in the Annual Table or for a PER as described later in section VIII.H. 
of this Summary of Comments and Explanation of Revisions.
    One commenter recommended that the definition of WERP be amended to 
allow for the use of waste heat to create thermal energy. However, 
section 45Y(b)(1)(A)(i) requires a facility to be ``used for the 
generation of electricity'' to be considered a qualified facility that 
is eligible for the section 45Y and 48E credits and section 
45Y(a)(1)(A) provides that the credit is granted on the basis of the 
electricity produced by a qualified facility. The facilities described 
by the commenter do not produce electricity, so they would not qualify 
on that basis. The Treasury Department and the IRS do not have 
authority under the statute to expand the scope of eligible facilities 
as requested by the commenter. The final regulations thus adopt the 
provisions of proposed Sec.  1.45Y-5(c)(2)(viii) and the proposed 
definition of WERP without modification. To aid taxpayers in 
determining whether a specific facility meets that definition, the 
final regulations include examples in Sec.  1.45Y-1(a)(12) that 
illustrate buildings or equipment the primary purpose of which is not 
the generation of electricity. These examples remain largely the same 
as those provided in the preamble of the proposed regulations, but, for 
clarity, pipeline compressor stations have not been included in the 
examples in the final regulations. While pipeline compressor stations 
are buildings or equipment the primary purpose of which is not the 
generation of electricity, they do not generate electricity solely from 
heat and thus are not appropriately considered WERP.
5. Geothermal
    Proposed Sec.  1.45Y-5(c)(2)(v) provided that facilities using 
geothermal energy, including flash and binary plants, were Non-C&G 
Facilities with a GHG emissions rate that is not greater than zero. The 
Treasury Department and the IRS requested 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) was appropriate.
    Several commenters supported the inclusion of geothermal facilities 
in proposed Sec.  1.45Y-5(c)(2)(v), with some noting that inclusion of 
these facilities on this list is appropriate because the carbon dioxide 
emitted by the geothermal facility is emitted naturally and passively 
from geothermal

[[Page 4053]]

reservoirs. Commenters noted that some emissions often occur even 
without a geothermal facility in place.
    One commenter stated that the Treasury Department and the IRS 
should consider measuring the incremental emissions associated with the 
production of electricity at flash geothermal facilities as compared to 
the emissions occurring without such production. The Treasury 
Department and the IRS have determined that such measurement will not 
be required in the final regulations. As described in the preamble to 
the proposed regulations, such emissions from flash geothermal 
facilities would not be considered GHGs emitted into the atmosphere by 
a facility in the production of electricity under proposed Sec.  1.45Y-
5(c)(1)(i)(C), because the GHGs 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 also 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. Furthermore, such measurement may not be possible given the 
challenges associated with quantifying emissions from geothermal sites 
with and without electricity production facilities. Therefore, proposed 
Sec.  1.45Y-5(c)(2)(v) is adopted without change.
6. Solar Technologies
    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 requested comment 
on whether the existing definitions of C&G Facility and Non-C&G 
Facility are sufficient to distinguish between these two categories of 
facilities, or whether additional clarification is needed.
    One commenter requested that the Treasury Department and the IRS 
clarify that the use of auxiliary burners at a concentrated solar power 
(CSP) facility does not necessarily mean that a facility will be 
considered a C&G Facility. This commenter stated that CSP 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. As previously indicated 
in the preamble to the proposed regulations and reiterated here, in the 
former instance, such use of auxiliary burners would not mean that a 
facility is properly categorized as a C&G Facility. However, in the 
latter instance, a facility would be producing electricity through 
combustion within the meaning of proposed Sec.  1.45Y-5(b)(4) and thus 
would be a C&G Facility.
C. GHG Emissions Rates for C&G Facilities
1. Determining a Greenhouse Gas Emissions Rate for C&G Facilities
    Consistent with section 45Y(b)(1)(A)(iii), proposed Sec.  1.45Y-
2(a)(3) provided that, for purposes of the section 45Y credit, a 
qualified facility must have a GHG emissions rate of not greater than 
zero. Proposed Sec.  1.45Y-5(d) provided the rules applicable to the 
Secretary for determining a net GHG emissions rate for C&G Facilities, 
including for 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) provided, consistent 
with section 45Y(b)(2)(B), that the GHG emissions rate for a facility 
that produces electricity through combustion or gasification (C&G 
Facility) equals the net rate of GHGs emitted into the atmosphere by 
such facility (taking into account lifecycle GHG emissions, as 
described in 42 U.S.C. 7545(o)(1)(H)) in the production of electricity, 
expressed as grams of CO2e per kWh.
    The Treasury Department and the IRS received comments supporting 
these proposed regulations and some comments recommending alternative 
approaches for evaluating the GHG emissions rate of a C&G Facility. One 
commenter recommended that the final regulations apply a standard of 
``commercially acceptable practices'' or ``commercially reasonable 
practices'' as of the date of passage of the section 45Y and 48E 
credits for inputs and considerations in determining the LCA of GHG 
emissions from a C&G Facility. Other commenters recommended that the 
final regulations not take into account lifecycle GHG emissions in the 
production of electricity for a C&G Facility. Some commenters suggested 
that the final regulations permit the GHG emissions rate of a facility 
to be greater than zero. The changes requested by these commenters 
cannot be adopted because they are not permitted by the statutory 
mandate to take into account lifecycle GHG emissions for C&G Facilities 
as required by section 45Y(b)(2)(B).
    A number of commenters also requested that certain types of C&G 
Facilities be categorically deemed to have a net GHG emissions rate of 
not greater than zero in the final regulations. Other commenters 
requested that certain types of C&G Facilities be categorically deemed 
to have a net GHG emissions rate of greater than zero in the final 
regulations. The Treasury Department and the IRS decline to adopt this 
request at this time. Additional analysis is required to achieve 
sufficient certainty that a type or category of facility has a net GHG 
emissions rate that is greater than or not greater than zero as 
determined by an LCA conducted in accordance with the principles 
required under section 45Y(b)(2)(B) and these final regulations.
    The Treasury Department and the IRS note that many C&G Facilities 
using particular technologies and fuel sources are highly likely to 
have GHG emissions rates that are greater than zero, whereas other C&G 
Facilities with similar but varied technologies or fuels may have GHG 
emissions rates that are not greater than zero. For example, review of 
existing scientific and technical literature indicates that C&G 
Facilities that combust natural gas--such as natural gas-fired boilers 
and combustion turbines--are expected to have GHG emissions rates 
greater than zero, even with the use of carbon capture and 
sequestration (CCS) technology, because the LCA must consider emissions 
in the fuel lifecycle prior to CCS through the point of electricity 
production and the rate of capture and sequestration of carbon dioxide 
produced when combusting the gas is not technically capable of reaching 
100 percent.\6\ However, subject to further analysis and dependent on 
specific facts and circumstances, there may be cases in which a C&G 
Facility that uses a blend of natural gas and other feedstocks that 
have negative lifecycle emissions and use CCS could potentially achieve 
lifecycle GHG emissions not greater than zero.
---------------------------------------------------------------------------

    \6\ See, e.g., National Renewable Energy Laboratory (2021), Life 
Cycle Greenhouse Gas Emissions from Electricity Generation: Update, 
NREL/FS-6A50-80580, https://www.nrel.gov/docs/fy21osti/80580.pdf; 
O'Donoughue, P.R., Heath, G.A., Dolan, S.L. and Vorum, M. (2014), 
Life Cycle Greenhouse Gas Emissions of Electricity Generated from 
Conventionally Produced Natural Gas. Journal of Industrial Ecology, 
18: 125-144. https://doi.org/10.1111/jiec.12084.
---------------------------------------------------------------------------

    A number of commenters submitted analyses or referred to studies 
supporting their request that certain

[[Page 4054]]

types of C&G Facilities that burn biomass be categorically deemed to 
have a net GHG emissions rate of not greater than zero in the final 
regulations. Some of these comments state that biomass, industrial 
wastes, or manufacturing residuals used for generating electricity have 
negative lifecycle GHG emissions. The studies submitted in support of 
this recommendation rely on studies that (i) use assumptions that are 
not adopted in this final rule, (ii) use assumptions that are 
potentially specific to a particular facility and thus are not 
appropriate for use in evaluating the emissions rate for a type or 
category of facility as listed in the Annual Table without further 
study, or (iii) do not consistently apply the requirements for an LCA 
that are required by these final regulations pursuant to the statute. 
For example, some of these studies consider grid electricity 
displacement or fossil fuel displacement, neither of which can be 
considered in an LCA for electricity generation from C&G Facilities as 
it is outside of the LCA boundary. Moreover, some studies do not take 
into account the direct emissions and significant indirect emissions 
outlined in Sec.  1.45Y-5(d)(2)(v)(A) and (B) or other requirements 
finalized in this rule. The Treasury Department and the IRS will 
continue to consider all analysis submitted by commenters in evaluating 
the emissions of the relevant types or categories of facilities. 
However, studies that rely on assumptions or LCA principles that are 
inconsistent with the requirements of this final rule or those within 
the underlying statute will be given less weight. Several commenters 
note that any LCA must include rigorous modeling, carefully consider 
assumptions, follow recognized protocols, as well as apply consistent 
principles. The Treasury Department and the IRS agree that the 
principles identified in these comments reflect appropriate LCA 
practices.
    Furthermore, as stated in the preamble to the proposed regulations, 
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 of not greater than 
zero and intend to publish the first Annual Table after the publication 
of the final regulations. In addition, 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 of greater than zero. Any types or categories of 
facilities that are added or removed from this list in the first 
publication of the Annual Table will be accompanied by the publication 
of an expert analysis of such change as provided in proposed Sec.  
1.45Y-5(f)(2). If any type or category of C&G Facility is added to this 
list in the publication of the Annual Table, the accompanying expert 
analysis of the addition will explain the basis for the lifecycle GHG 
emissions analysis that has been conducted to determine that a given 
type or category of facility has a net GHG emissions rate of not 
greater than zero or greater than zero.
    One commenter noted that the proposed regulations assumed a binary 
distinction between C&G Facilities and Non-C&G Facilities and requested 
that the final regulations clarify how the rules for categorizing 
facilities would apply in the case of fuel-switching facilities such as 
linear generators. The Treasury Department and the IRS have determined 
that the classification of a facility, such as a linear generator, that 
may or may not produce electricity through combustion or gasification 
depends upon the fuel's method of production and whether the facility 
does in fact produce electricity through combustion or gasification, 
and this assessment must be made separately for each taxable year. A 
facility that uses a fuel produced via combustion or gasification in 
the production of electricity any time during a given taxable year is 
properly classified as a C&G Facility for the duration of that taxable 
year. For example, if a linear generator exclusively uses hydrogen 
produced with electrolysis or other fuels not produced via combustion 
or gasification during a taxable year, then that linear generator would 
be a Non-C&G Facility for that taxable year. However, if in the 
production of electricity, a facility uses a fuel produced using 
combustion or gasification (for example, steam methane reforming) 
during a taxable year, even if only to produce a portion of the 
electricity generated that year, that facility is a C&G Facility for 
that year. Such facility's status can change from year to year 
depending on the fuel it uses during a taxable year. The Treasury 
Department and the IRS view this scenario as analogous to the treatment 
of WERP facilities and fuel cells.
    A few commenters recommended that the net rate of GHGs emitted into 
the atmosphere by a C&G Facility should not take into account lifecycle 
GHG emissions because there is no similar requirement when calculating 
the GHG emissions rate of Non-C&G Facilities. Section 45Y(b)(2)(B) 
states that, ``[i]n the case of a facility which produces electricity 
through combustion or gasification, the [GHG] emissions rate for such 
facility shall be equal to the net rate of [GHGs] emitted into the 
atmosphere by such facility (taking into account lifecycle GHG 
emissions, as described in . . . 42 U.S.C. 7545(o)(1)(H))) in the 
production of electricity, expressed as grams of CO2e per 
kWh.'' Because the requirement that lifecycle GHG emissions be taken 
into account for C&G Facilities is statutory and does not apply to Non-
C&G Facilities, the final regulations cannot implement this 
recommendation.
    One commenter recommended that C&G Facilities be subject to an 
attributional LCA rather than a consequential LCA. This commenter 
stated that consequential models are highly dependent on the 
assumptions used, are more complex, and have more uncertainty.
    The Treasury Department and the IRS have determined that a 
consequential analysis is required to accurately assess GHG emissions 
outcomes under section 45Y(b)(2)(B), which requires taking into account 
lifecycle GHG emissions, as described in 42 U.S.C. 7545(o)(1)(H). As 
explained in the preamble to the proposed regulations, in a 2010 
notice-and-comment rulemaking establishing the regulatory framework for 
the updated renewable fuel standard (RFS) program, the EPA interpreted 
42 U.S.C. 7545(o)(1)(H) as requiring the agency to account for the 
real-world emissions consequences of increased production of biofuels. 
The EPA determined that, in the context of the RFS program, the 
inclusion of ``direct emissions and significant indirect emissions such 
as significant emissions from land-use changes'' in 42 U.S.C. 
7545(o)(1)(H) 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 
have determined it is appropriate to adopt this interpretation and 
overall approach in the context of the section 45Y and 48E credits. The 
Treasury Department and the IRS further note that attributional 
analytical approaches may be part of the broader consequential analysis 
in appropriate cases.
2. LCA Requirements
    Proposed Sec.  1.45Y-5(d)(2) provided certain requirements for 
conducting an LCA of GHG emissions for purposes of the section 45Y and 
48E credits. These

[[Page 4055]]

requirements and responsive comments are discussed in section VIII.C. 
of this Summary of Comments and Explanation of Revisions. See also 
section VIII.F. (Carbon Capture and Sequestration) and section 
VIII.E.4. (Use of Natural Gas Alternatives) of this Summary of Comments 
and Explanation of Revisions for a discussion of responsive comments 
addressing the requirements of proposed Sec.  1.45Y-5(d)(2) in relation 
to those topics.
a. Starting Boundary
    Proposed Sec.  1.45Y-5(d)(2)(i) provided, for the purposes of the 
section 45Y and 48E credits, a definition of the starting boundary for 
an LCA involving generation-derived feedstocks (such as biogenic 
feedstocks) and for an LCA involving extraction-derived feedstocks 
(such as fossil fuel feedstocks).
    One commenter expressed support for the starting boundaries 
provided in the proposed regulations. Another commenter opposed the 
proposed starting boundary, asserting that the boundaries for a C&G 
Facility should be the same as those for a Non-C&G Facility. Because 
the statute requires distinct treatment of a C&G Facility and a Non-C&G 
Facility in assessing their GHG emissions rate, the final regulations 
do not adopt this commenter's request.
    One commenter asserted that section 45Y is ``limited by statute to 
the boundaries of the electricity generation facility (which may 
include carbon capture equipment) but excludes upstream and downstream 
emissions.'' The Treasury Department and the IRS have determined that 
the change requested by this commenter would be contrary to the statute 
because it would fail to give effect to the requirement in section 
45Y(b)(2)(B) that the net rate of GHG emissions for a C&G Facility take 
into account lifecycle GHG emissions as described in 42 U.S.C. 
7545(o)(1)(H). Therefore, the final regulations do not adopt this 
commenter's recommendation.
    Another commenter requested that the final regulations clarify the 
activities that constitute the starting boundary. The commenter 
requested that the final regulations provide a specific example 
illustrating that the starting boundary for biomass feedstock includes 
the activities to grow the plant material. The Treasury Department and 
the IRS have determined that such activities are sufficiently included 
within the definition of starting boundary, and no further examples are 
required within the final regulations.
    After consideration of all comments, the Treasury Department and 
the IRS have determined that the final definition of starting boundary 
should be adopted without substantive change.
b. Ending Boundary
    Proposed Sec.  1.45Y-5(d)(2)(ii) provided, for the purposes of the 
section 45Y and 48E credits, that the ending boundary of the LCA for 
electricity that is transmitted to the grid or electricity that is used 
on-site is the meter at the point of electricity production at a C&G 
Facility. The use of such electricity generated by the C&G Facility 
(and what other types of energy sources it displaces), including 
emissions from transmission and distribution, are outside of the LCA 
boundary. For the reasons provided in the preamble to the proposed 
regulations, 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, 
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) but rather occur in the distribution and use of such 
electricity. The preamble to the proposed regulations further explained 
that this result is consistent with section 45Y(b)(2)(B) (and the term 
``ultimate consumer'' in 42 U.S.C. 7545(o)(1)(H) as referenced therein) 
because it would treat the C&G Facility as the ultimate consumer of the 
fuel used to produce electricity.
    Several commenters supported the ending boundary of the LCA 
provided in the proposed regulations. Other commenters requested that 
the ending boundary of the LCA be extended to take into the account 
circumstances in which the emissions from a C&G Facility or the 
emissions related to the production of electricity available on the 
grid are less than they would have been in the absence of the credits 
because of a facility's use of a different fuel or feedstock.
    The Treasury Department and the IRS have determined that extending 
the ending boundary of the LCA as requested by these commenters would 
impermissibly shift the GHG emissions rate inquiry from whether 
electricity production at a C&G Facility has a net GHG emissions rate 
of not greater than zero to whether such facility has fewer emissions 
than either (i) the emissions the C&G Facility would have or did have 
in the absence of the credit or (ii) the marginal unit emissions of the 
grid to which the facility is connected. Conducting the LCA in such a 
manner would conflict with the plain text of the statute, which 
requires that the net rate of GHGs emitted by a C&G Facility, 
considering lifecycle GHG emissions, in the production of electricity 
not be greater than zero.
    Furthermore, the Treasury Department and the IRS have determined 
that the meter at the point of electricity production at a C&G Facility 
is an appropriate ending boundary because eligibility for the section 
45Y and 48E credits depends on the net rate of GHG emissions associated 
with electricity production rather than use. Extending the boundary 
beyond the meter would consider activities that are beyond the scope of 
electricity generation which is beyond the scope of these provisions. 
For these reasons and the reasons further explained in section 
VIII.C.2.f. of these Summary of Comments and Explanation of Revisions, 
the final regulations do not adopt this request, and the definition of 
ending boundary is adopted as proposed. See section VIII.C.2.f. of 
these Summary of Comments and Explanation of Revisions for further 
discussion of the interaction between the LCA ending boundary, avoided 
emissions, and use of a particular fuel or feedstock in the generation 
of electricity in lieu of a fuel or feedstock with a greater rate of 
GHG emissions.
    The Treasury Department and the IRS further note that the ending 
boundary of an LCA, as discussed earlier, is not intended to limit the 
rules applicable to carbon capture and sequestration. See section 
VIII.F. of these Summary of Comments and Explanation of Revisions for 
further discussion of these carbon capture and sequestration rules.
c. Baseline
    Proposed Sec.  1.45Y-5(d)(2)(iii) provided that an LCA must be 
based on a future anticipated baseline, which projects future status 
quo in the absence of the availability of the section 45Y and 48E 
credits (taking into account anticipated changes in technology, 
policies, practices, and environmental and other socioeconomic 
conditions).
    The Treasury Department and the IRS received comments on several 
aspects of the proposed rule regarding an LCA baseline. A number of 
commenters recommended that an LCA baseline take into account the 
relevant laws and regulations already in place, including any 
mitigation of emissions already legally required. The Treasury 
Department and the IRS have determined that this recommendation is 
already incorporated in the proposed rule on LCA baselines, which 
project the future status quo, including relevant laws and regulations, 
in the absence of the availability of the section 45Y and 48E credits. 
As such, a baseline would

[[Page 4056]]

necessarily incorporate mitigation of emissions already required, and 
the effects of other law and regulations. Accordingly, further 
clarification in the final rule is unnecessary.
    Some commenters supported the proposed rule, while providing 
recommendations on how to approach the creation of an LCA future 
anticipated baseline. For instance, one commenter recommended 
considering historical data and anticipated future conditions under a 
business-as-usual trajectory, incorporating key drivers and trends to 
project future emissions; a second commenter recommended a dynamic, 
adaptive baseline that would account for broader system effects such as 
market dynamics; and a third commenter recommended that the baseline 
focus on the geographic location of the facility to accurately reflect 
local conditions and market dynamics. The Treasury Department and the 
IRS appreciate this feedback and will consider these recommendations at 
a later time as development of LCA baselines continues.
    The Treasury Department and the IRS also received comments 
specifically addressing the approach to LCA baselines for biomass 
feedstocks. One commenter encouraged the use of historical forest data 
to inform the creation of a baseline, taking into account longer growth 
cycles of forests, drivers of regional forest management, and economic 
factors. Another commenter recommended that each source of woody 
biomass have its own LCA baseline. Finally, one commenter recommended 
that the LCA baseline take into account the current use of pertinent 
feedstocks and existing facilities.
    The Treasury Department and the IRS appreciate these 
recommendations and have taken them into consideration. However, given 
the diversity of fuels and feedstocks that may be evaluated in creating 
LCA baselines for the purposes of the section 45Y and 48E credits, the 
final regulations provide general requirements for baseline development 
but do not specify requirements for specific fuels or feedstocks. 
Therefore, the commenters' specific recommendations will not be 
included in the final regulations, but they will be considered in 
developing LCAs for purposes of the section 45Y and 48E credits in the 
future. Specific recommendations related to LCA baselines will be 
considered and addressed as their development continues.
    Several commenters recommended that the final regulations provide 
an LCA scenario design that compares a future anticipated baseline with 
biomass use to one without biomass use. The Treasury Department and the 
IRS have determined that this is not the most appropriate scenario 
design with which to assess GHG emissions pursuant to 45Y(b)(2)(B). 
Such a scenario would model a situation in which the entirety of the 
feedstock required for additional electricity production comes from 
additional removals of biomass materials. The commenters' suggestion 
would mean testing impacts from only one potential outcome at one end 
of a range of potential real-world responses. This contrasts with the 
scenario design approach that considers more than one likely scenario, 
which more accurately assesses the various ways that feedstock is 
sourced based on the supply options and markets in a model. This design 
approach is more accurate because, in reality, biomass feedstocks for a 
facility could be sourced from a variety of sources, including being 
diverted from other end uses. An LCA should reflect best estimates of 
how and from where biomass may be sourced taking into account 
historical and future anticipated feedstock, region, and market 
specific conditions. The Treasury Department and the IRS therefore 
decline to include these commenters' recommendation in the final 
regulations.
    The Treasury Department and the IRS, in consideration of the 
comments received, have determined that certain additional principles 
pertaining to LCA baselines will be provided in the final regulations. 
LCA future anticipated baselines, which project future status quo in 
the absence of the availability of the section 45Y and 48E credits 
(taking into account anticipated changes in technology, policies, 
practices, and environmental and other socioeconomic conditions), will 
be updated as necessary to capture material regulatory, economic, 
supply chain, or environmental changes. The baseline must be updated at 
least every ten years, but not more often than every five years. Such 
updates will ensure that any LCA baseline applied for purposes of 
determining the net rate of GHG emissions associated with C&G 
Facilities under this rule robustly reflects the projected future 
status quo in the absence of the section 45Y and 48E credits.
d. Offsets and Offsetting Activities
    Proposed Sec.  1.45Y-5(d)(2)(iv) provided that offsets and 
offsetting activities that are unrelated to the production of 
electricity by the C&G Facility, including the production and 
distribution of any input fuel, may not be taken into account in the 
LCA.
    Several commenters supported this proposed rule. However, one 
commenter requested that the final rules clarify that offsets and 
offsetting activities are not the same as accounting for avoided 
emissions, as avoided emissions are directly related to the electricity 
production value chain. The Treasury Department and the IRS have 
determined that such clarification is not necessary given the 
prohibition on offsets and offsetting activities provided in proposed 
Sec.  1.45Y-5(d)(2)(iv) and the rule provided in proposed Sec.  1.45Y-
5(d)(2)(vii) that the LCA may consider alternative fates of feedstocks 
and fuels and account for avoided emissions. Both the prohibition on 
offsets and offsetting activities and the rule that the LCA may 
consider alternative fates and account for avoided emissions are 
retained in this final rule.
    Furthermore, after reviewing the comments, the Treasury Department 
and the IRS have determined that the proposed regulations were not 
clear in the description of offsets and offsetting activities. In 
particular, the reference to offsets and offsetting activities that are 
unrelated to the production of electricity by the C&G Facility could 
have been read overly broadly to suggest that offsets and offsetting 
activities that are related to the production of electricity would be 
allowed. The reference was intended to make clear that offsets and 
offsetting activities should not be included because they are not 
related to the production of electricity or the lifecycle of the fuel 
used in electricity production rather than to specify a set of offsets 
and offsetting activities that may be permissible. The statute requires 
a C&G Facility's net GHG emissions rate to include the facility's 
lifecycle emissions from the production of electricity. To avoid 
taxpayer confusion, the Treasury Department and the IRS have revised 
the rule in proposed Sec.  1.45Y-5(d)(2)(iv) to remove the phrase 
``that are unrelated to the production of electricity by the C&G 
Facility, including the production and distribution of any input 
fuel.''
e. Principles for Included Emissions
    Proposed Sec.  1.45Y-5(d)(2)(v) provided that the 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

[[Page 4057]]

feedstock production and distribution, and emissions associated with 
distribution, delivery, and use of feedstocks to and by a C&G Facility. 
The preamble to the proposed regulations explained that this provision 
interprets the reference to 42 U.S.C. 7545(o)(1)(H) as requiring under 
section 45Y(b)(2)(B) that an LCA must take into account these emissions 
as they are a part of the full fuel lifecycle through the point of 
electricity production. Proposed Sec.  1.45Y-5(d)(2)(v)(A) provided 
that, for purposes of proposed Sec.  1.45Y-5(d)(2)(v), 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 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 emission from gasification or combustion additives). Proposed Sec.  
1.45Y-5(d)(2)(v)(B) provided that, for purposes of proposed Sec.  
1.45Y-5(d)(2)(v), examples of significant indirect emissions include, 
but are not limited to, emissions from indirect land use and land use 
change and induced emissions associated with the increased use of the 
feedstock for energy production. The preamble to the proposed 
regulations explained that significant indirect emissions may include 
positive or negative emissions, and that, for biogenic resources, 
significant indirect emissions may include emissions from growth and 
regrowth.
    The Treasury Department and the IRS received a range of comments 
about the proposal to include these emissions in the LCA. Most comments 
were supportive of this proposed approach. A few commenters suggested 
revisions to the proposal. One commenter recommended that market 
effects and induced land-use change not be assessed in the emissions 
included in an LCA due to what the commenters view as limited credible 
estimates of such dynamics. Another commenter cited a lack of 
Congressional intent to include market-mediated effects within the 
meaning of ``significant indirect emissions'' as this term does not 
appear in the statute. As explained earlier, the Treasury Department 
and the IRS interpret section 45Y(b)(2)(B) as requiring these emissions 
to be considered in the LCA, which by citing 42 U.S.C. 7545(o)(1)(H) 
directly specifies inclusion of ``significant indirect emissions such 
as land use change''. Estimating the emissions effects associated with 
increased electricity production, including significant indirect 
emissions such as land use change necessarily involves some amount of 
uncertainty, but inclusion of such elements was the clear Congressional 
directive. The final regulations will therefore not include the 
revisions requested by commenters.
    Another commenter suggested that the LCA include emissions from 
``co-pollutants'' such as sulfur dioxide, nitrogen oxides, and fine 
particulate matter, which are not GHG emissions within the meaning of 
sections 45Y and 48E. The Treasury Department and the IRS do not have 
the authority to adopt this proposal, as it is contrary to the text of 
the statute. Section 45Y(b)(2)(B) requires that an LCA be conducted to 
determine the amount of GHGs emitted into the atmosphere by a facility 
in the production of electricity, expressed in grams of CO2e 
per kWh. Section 45Y(e)(1) states that ``CO2e per kWh'' 
means, with respect to any greenhouse gas, the equivalent carbon 
dioxide (as determined based on global warming potential) per kilowatt 
hour of electricity produced. Section 45Y(e)(2) states that 
``greenhouse gas'' has the same meaning given such term under 42 U.S.C. 
7545(o)(1)(G), as in effect on the date of the enactment of this 
section. 42 U.S.C. 7545(o)(1)(G) defines greenhouse gas as ``carbon 
dioxide, hydrofluorocarbons, methane, nitrous oxide, perfluorocarbons, 
sulfur hexafluoride.'' The provision further states that ``[t]he 
Administrator may include any other anthropogenically-emitted gas that 
is determined by the Administrator, after notice and comment, to 
contribute to global warming.'' Because ``co-pollutants'' such as 
sulfur dioxide, nitrogen oxides, and fine particulate matter are not 
GHGs within the meaning of 42 U.S.C. 7545(o)(1)(G), the Treasury 
Department and the IRS do not have the authority to adopt the 
commenter's proposal.
    The Treasury Department and the IRS generally adopt Sec.  1.45Y-
5(d)(2)(v) as proposed. The Treasury Department and the IRS clarify in 
Sec.  1.45Y-5(b)(10) that market-mediated effects are those resulting 
from policy interventions and other factors (for example, technological 
advances) that alter the availability of and demand for marketed goods 
and activities and their related GHG emissions profiles. These effects 
are driven by and result in changes in absolute and relative prices 
which can occur at local, national, and global boundaries. Examples of 
market-mediated effects include direct and significant indirect 
emissions, such as land use changes or land use management changes that 
result from the production of fuels derived from biomass and shifts in 
total market demand and supply for input fuels, feedstocks and related 
commodities, and other materials, as a result of changes associated 
with the policy intervention.
    For further clarity, the final regulations better distinguish in 
Sec.  1.45Y-5(d)(2)(v) between included emissions that are direct 
emissions and those that are significant indirect emissions. The final 
rule also clarifies that all these emissions are within the system 
boundary of the LCA.
f. Principles for Excluded Emissions
    Proposed Sec.  1.45Y-5(d)(2)(vi) provided a list of types of 
emissions that the LCA must not take into account. The Treasury 
Department and the IRS received several comments on these proposed 
excluded emissions from the LCA. Several commenters requested that 
further items be excluded from emissions accounting in the LCA. For 
instance, a few commenters requested the exclusion of emissions 
resulting from standby auxiliary power for electrolyzers or emissions 
from supplementary ``peaker plants''. A few commenters proposed that 
emissions resulting from the conditioning and distribution of hydrogen 
be excluded from the LCA. In each of these instances, the Treasury 
Department and the IRS have determined that such emissions may be 
considered emitted into the atmosphere in the production of electricity 
within the meaning of section 45Y(b)(2)(B), and thus may not be 
appropriately excluded from an LCA. The Treasury Department and the IRS 
therefore decline to adopt these changes in the final regulations. The 
final regulations adopt the principles for excluded emissions as 
proposed.
g. Alternative Fates and Avoided Emissions
    Proposed Sec.  1.45Y-5(d)(2)(vii) provided that an LCA may consider 
alternative fates and may account for

[[Page 4058]]

avoided emissions. The preamble to the proposed regulations defined the 
term ``alternative fate'' to mean a set of informed assumptions (for 
example, production processes, material outcomes, and 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). The final regulations adopt 
this definition of alternative fate in Sec.  1.45Y-5(d)(2)(vii). 
Because the alternative fate for some feedstocks may be disposal, in 
the interest of completeness and clarity, these final regulations 
clarify that the term ``alternative fate'' may include the disposal of 
a feedstock.
    The preamble to the proposed regulations defined the term ``avoided 
emissions'' to mean the estimated emissions associated with the 
feedstock, including the feedstock's production and use or disposal, 
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. The preamble to 
the proposed regulations further explained that, while, in some 
circumstances, emissions may be avoided if compared to the alternative 
fate, in other circumstances 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. The 
final regulations adopt this definition of avoided emissions in Sec.  
1.45Y-5(d)(2)(vii) without change.
    Many commenters generally supported the proposed rule. Several 
commenters opposed allowing the LCA to consider alternative fates or 
avoided emissions because the commenters asserted that it is not 
possible to accurately measure avoided emissions and hence many claims 
of avoided emissions are unreliable.
    Finally, a number of commenters suggested guardrails that might be 
implemented in the final regulations or in the analysis of emissions to 
enhance accuracy. One commenter recommended that the final regulations 
set a minimum carbon intensity score of zero for all fuels and 
feedstocks. The Treasury Department and the IRS have determined that, 
while this recommendation may have merit with respect to certain types 
of fuels or feedstocks, such an approach may not be appropriate for all 
fuels and feedstocks. Thus, this recommendation will not be adopted in 
the final regulations as a generally applicable rule but will be 
considered in targeted cases where the relevant facts and circumstances 
support its application.
    Another commenter suggested that analysis of avoided emissions or 
alternative fates of fuel or feedstock employ a geographical limiting 
element to address local air pollution and health issues. However, 
sections 45Y and 48E do not authorize the Treasury Department and the 
IRS to specifically take into account local air pollution and health 
issues in the assessment of GHG emissions. Therefore, the Treasury 
Department and the IRS decline to adopt this commenter's recommendation 
in the final regulations.
    Several commenters recommended that the LCA take into account only 
reliable and documented alternative fates that are supported by data, 
including land management records and market statistics, showing 
customary practice for the relevant feedstocks or fuels. The Treasury 
Department and the IRS agree that taking care to assess the reliability 
and documentation of any data elements, including those concerning 
alternative fates is good practice for conducting a GHG LCA. However, 
the Treasury Department and the IRS decline at this time to require the 
use of specific forms of documentation and data sources in the final 
regulations given the diversity of fuels and feedstocks and their 
alternative fates that may be evaluated for the purposes of the section 
45Y and 48E credits. Therefore, the commenters' recommendation will not 
be adopted in the final regulations. Specific substantiation and 
documentation data requirements related to alternative fates or avoided 
emissions may be identified for specific fuels or feedstocks in future 
guidance.
    One commenter further recommended that prospective claimants of the 
section 45Y credit be required to support the alternative fate of a 
feedstock or fuel with credible evidence and that verification of such 
fate be required to the maximum extent possible. The Treasury 
Department and the IRS view this request as covered by a taxpayer's 
existing general substantiation obligations under section 6001 of the 
Code so further clarification in the final regulations is not 
necessary. Therefore, the final regulations do not adopt this 
commenter's suggestion.
    A number of commenters recommended that the evaluation of 
alternative fates be comprehensive, with suggestions including that the 
LCA assess multiple alternative fates to improve the robustness of the 
analysis, that such alternative fates account for emissions related to 
the full fuel lifecycle, that alternative fate assumptions be updated 
regularly, and that consideration be given to the influence of market 
conditions and effects.
    The Treasury Department and the IRS agree that ensuring that the 
LCA assessment of alternative fates and avoided emissions is 
comprehensive and up to date is critical to ensure robust estimation of 
the net GHG emissions rates for C&G Facilities. These recommendations 
will be considered in the development of future LCA assessments.
    Commenters also opined on whether the LCA should take into account 
emissions ``displacement'' from electricity grids. This analytical 
framework assumes that, in the absence of the incentive provided by the 
section 45Y and 48E credits, fuels or feedstocks that would otherwise 
have a greater GHG emissions rate will be used to generate electricity, 
and that the assumed reduction in emissions due to the use of fuels or 
feedstocks with a lesser GHG emissions rate at a facility due to this 
rule should be taken into account when evaluating the net GHG emissions 
rate of a facility using those fuels or feedstocks. A number of 
commenters recommended treating this displacement as an avoided 
emission that could lessen the net GHG emissions rate of a facility 
using those fuels or feedstocks, stating that such treatment would spur 
investment in a number of technologies and reduce net GHG emissions.
    Other commenters recommended against treating this displacement as 
an avoided emission that could lessen the net GHG emissions rate of a 
facility using those fuels or feedstocks, asserting that to do so would 
improperly shift the GHG emissions rate inquiry from whether a C&G 
Facility has a net GHG emissions rate of not greater than zero to 
whether the facility has fewer emissions than the marginal unit 
emissions of the grid the facility is on.
    The Treasury Department and the IRS have determined that the 
proposed rule in Sec.  1.45Y-5(d)(2)(ii), which states that energy 
sources displaced by the electricity generated by a C&G Facility are 
outside of the LCA boundary, should be retained in the final 
regulations. This rule appropriately requires that the net GHG 
emissions rate be assessed at the level of the C&G Facility, with an 
ending boundary for assessment for electricity that is transmitted to 
the grid

[[Page 4059]]

or electricity that is used on-site is the meter at the point of 
electricity production of the C&G Facility. This ending boundary is 
consistent with section 45Y's focus on the C&G Facility and the full 
fuel lifecycle of any fuel or feedstock used by the C&G Facility to 
produce electricity as the relevant sources of GHG emissions, rather 
than any change to the emissions profile of the electricity grid.
    The Treasury Department and the IRS agree with commenters that 
taking into account potential post-production grid electricity 
displacement as an avoided emission would impermissibly shift the GHG 
emissions rate inquiry from whether electricity production at a 
qualified facility has a net GHG emissions rate of not greater than 
zero to whether the facility has fewer emissions than the marginal unit 
emissions of the grid to which the facility is connected. Conducting 
the LCA in such a manner would conflict with the plain text of the 
statute, which requires that the net rate of GHGs emitted by a C&G 
Facility, considering lifecycle GHG emissions, in the production of 
electricity not be greater than zero. In contrast to this distinct 
concept of displacement of electricity production from other more 
highly polluting sources on the electricity grid due to electricity 
produced by a C&G Facility, the LCA of electricity production 
calculates the net GHG emissions of the electricity production by that 
facility, including by taking into account alternative fates and 
avoided emissions of the fuels or feedstocks that are themselves used 
to produce electricity at such a facility over the entire lifecycle of 
that particular fuel or feedstock or its supply chain. The statute 
directs the Treasury Department to calculate the GHG emissions 
associated with electricity production by a specific facility. The 
statute does not direct or authorize the Secretary to conduct a 
relative assessment of a facility's GHG emissions before and after 
earning the tax credit or a relative assessment of a facility's 
electricity production volumes and related GHG emissions compared to 
other facilities on the grid. For additional clarity, the Treasury 
Department and the IRS have determined that proposed Sec.  1.45Y-
5(d)(2)(vii) should be modified to add the phrase ``including for the 
fuels and feedstocks consumed in the fuel and feedstock supply chain 
and at the electricity generating facility.''
    The Treasury Department and the IRS also received many comments 
regarding the purported alternative fates or avoided emissions 
associated with the use of a particular fuel or feedstock. Several 
commenters requested that an LCA of municipal solid waste take into 
account emissions that may be avoided by use of such waste to produce 
electricity rather than placement in a landfill. Others shared their 
views or research on common alternative fates of woody biomass, 
including natural decay, prescribed burning, wildfire fuel, and 
transfer to disposal sites.
    The Treasury Department and the IRS appreciate the information 
shared by commenters on these matters and have taken it into 
consideration. Because these assertions make technical claims that must 
be evaluated in the context of an LCA and because they are applicable 
to only certain categories of feedstocks, the Treasury Department and 
the IRS have determined that incorporation of these recommendations in 
the final regulations as a broadly applicable rule would not be 
appropriate.
    Finally, commenters had mixed reactions to the assertion that the 
use of woody biomass in the production of electricity drives forest 
regrowth that might render the use of such feedstock carbon neutral for 
purposes of the section 45Y and 48E credits. Some commenters asserted 
that woody biomass, when used to produce electricity, has a net GHG 
emissions rate of not greater than zero, and that therefore, facilities 
using such feedstock should be included as qualified facilities in the 
final regulations and in the Annual Table.
    Because section 45Y(b)(2)(B) requires taking into account lifecycle 
GHG emissions as described in 42 U.S.C. 7545(o)(1)(H), the Treasury 
Department and the IRS do not have the authority to designate such 
facilities as qualified facilities before ensuring that an LCA specific 
to implementation of sections 45Y and 48E is conducted in accordance 
with statutory requirements. The Treasury Department and the IRS thus 
decline to adopt these commenters' recommendations in the final 
regulations. The Treasury Department and the IRS appreciate commenters' 
feedback and note in particular that certain woody biomass-derived 
feedstocks require significant energy inputs which could make 
qualification of facilities using these specific feedstocks unlikely 
(for example, pelletized biomass due to the electricity used in 
pelletization processes).
D. 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 48E credits. The 
Treasury Department and the IRS requested comment on the following 
topics: (i) the treatment of RNG and fugitive sources of methane; (ii) 
analytical LCA parameters, including spatial scales and time horizons; 
(iii) whether and how to distinguish between co-products, byproducts, 
and waste products and how emissions should be allocated to each in 
LCAs; (iv) how to attribute emissions to the heat produced by 
facilities using combined heat and power systems; (v) how to create and 
maintain LCA baselines; and (vi) certain issues related to LCA 
modeling.
1. Analytical LCA Parameters, Including Spatial Scales and Time 
Horizons
    In the preamble to the proposed regulations, the Treasury 
Department and the IRS requested comment on the analytical LCA 
parameters that are most relevant to particular types of categories of 
C&G Facilities that may be eligible for the section 45Y and 48E 
credits. In particular, the Treasury Department and the IRS requested 
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 section 45Y and 48E credits. As noted in the 
preamble to the proposed regulations, spatial scale involves defining 
the area over which emissions outcomes will be evaluated. Temporal 
scale involves defining the time period over which emissions outcomes 
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. 
The Treasury Department and the IRS received a number of comments on 
these topics.
a. Temporal Scales
    In the preamble to the proposed regulations, the Treasury 
Department and the IRS requested comment regarding what factors should 
be considered in establishing the timeframe for the LCA analysis. 
Commenters suggested a number of specific considerations. Multiple 
commenters advocated for the LCA to account for the full timeframe over 
which lifecycle emissions can occur, with some commenters specifically 
asking for a ``climate-relevant'' timeframe. A commenter argued that a 
full accounting of the effects of activities should include the effects 
of small-scale projects over long time frames with each activity 
assessed individually. Another commenter argued that the full

[[Page 4060]]

timeframe over which emission effects persist into the future should be 
included. Conversely, a commenter noted that any approach that requires 
use of long-run future marginal grid emissions projections could be 
prohibitively challenging or problematically inaccurate. Some 
commenters advocated for inclusion of all relevant emissions fluxes on 
the same timescale. A commenter suggested counting any emissions 
counterbalanced by the regrowth of feedstock on the same time scale as 
the positive emissions from combustion and other direct and indirect 
positive emissions. A commenter also asked to match the time horizon 
with the economic life of a plant that abates existing methane or other 
GHG emissions. Some commenters argued that no specific geographic or 
temporal requirements were required as long as the timeframe covered 
the occurrence of emissions in the counterfactual scenario.
    In the preamble to the proposed regulations, the Treasury 
Department and the IRS requested comment regarding what timeframe would 
provide confidence that significant emissions have been accounted for. 
Commenters suggested a wide variety of specific lengths of time, citing 
a variety of policy reasons. Some commenters suggested time horizons of 
100 years (or more), citing the importance of accounting for potential 
long-term changes in emissions in order for certain feedstocks to 
qualify. Other commenters advocated for much shorter time horizons. One 
commenter requested that CHP property which relies on combustion, such 
as woody biomass energy, should be required to show carbon-neutrality 
over a short period of time such as a year. Multiple commenters 
advocated for a 10-year time horizon. Commenters also cited potential 
ranges somewhere in the middle, such as 20 to 50 years or 20 to 25 
years.
    After thorough review of the comments the Treasury Department and 
the IRS have determined that it is appropriate to base the selection of 
temporal scale on the regulatory context. This is reinforced by the 
2019 recommendations by the Science Advisory Board (SAB) on EPA's Draft 
2014 Framework for Assessing Biogenic CO2 Emissions from 
Stationary Sources. The SAB recommended ``using the `emissions horizon' 
that is determined to be relevant by the specific regulatory 
objective,'' meaning the technical choice should be contingent upon the 
specific policy and regulatory context. The SAB went further to state 
that ``the SAB favors selecting the time horizon for calculating the 
[factor representing the net atmospheric biogenic CO2 
contributions associated with biogenic feedstock production, 
processing, and use at a stationary source] to comport with the 
objective under consideration, which is generally dependent on the 
regulation mandating use of that particular [factor].'' ISO guidance 
also states that an LCA should be conducted within the context of a 
specified goal.
    The broader regulatory context requires the Treasury Department and 
the IRS to balance multiple considerations. The statute creates a 
pathway for C&G Facilities that have a net GHG emissions rate of zero 
or less as determined via LCA to qualify for the credit. Setting a 
relatively short time horizon would not allow for the consideration of 
potential increases or decreases in emissions that can occur as the 
result of electricity production, such as the regrowth of biogenic 
feedstocks or increased emissions from land use or land use management 
changes. However, while biogenic feedstock regrowth can occur over long 
timescales, commenters have raised significant concerns that longer 
time horizons introduce additional uncertainty about the likelihood 
that these theoretical future scenarios and emissions-offsetting 
activities will occur in practice. This uncertainty significantly 
decreases the confidence of the Treasury Department and the IRS that 
LCAs with a longer time horizon will ensure that a facility meets the 
requirements of the statute. Moreover, the broader structure of the IRA 
and specific features of sections 45Y and 48E--including the phase-out 
of the credit occurring after the later of 2032 or the achievement of 
specified GHG emissions reduction target and the requirement that 
qualified facilities have a GHG emissions rate of zero or less--
demonstrate congressional intent for the section 45Y and 48E credits to 
contribute to significant reductions of GHG emissions in the power 
sector in the near- to medium-term. Setting a temporal scale that 
allows C&G Facilities that do not contribute to the reduction of GHG 
emissions (or even increase GHG emissions) in the near- and medium-term 
would also frustrate congressional intent.
    In the preamble to the proposed regulations, the Treasury 
Department and the IRS asked whether the LCA should 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 that would be reflected in the choice of 
temporal scale. Although some commenters advocated for applying 
different time horizons in different contexts (for example, for 
different electricity production pathways), the Treasury Department and 
the IRS have determined that it furthers the interest of fairness and 
administrability in the tax system to apply consistent rules for all 
LCAs under sections 45Y and 48E. Applying different time horizons, 
including different assessment and emissions horizons, in different 
contexts could lead to taxpayer confusion and disparate treatment for 
similarly situated facilities. Moreover, a single time horizon would 
allow LCAs to be conducted as efficiently and accurately as possible. 
The Treasury Department and the IRS further clarify that the final 
rules in Sec.  1.45Y-5(d)(2)(viii) adopt the same assessment horizon 
and emissions horizon.
    In balancing these considerations and commenters' different views, 
the final regulations adopt a time horizon for LCA of 30 years from the 
year in which a qualified facility produces electricity (or, for 
purposes of the section 48E credit, the year in which a qualified 
facility was placed in service). This 30-year time horizon is supported 
by several points, including consistency with the longstanding time 
horizon for EPA's RFS program. This program, authorized under the 
Energy Policy Act of 2005 and expanded under the Energy Independence 
and Security Act of 2007, determined that GHG emissions analysis for 
renewable fuels would quantify the GHG impacts over a 30-year period in 
a March 2010 rule (75 FR 14670) (RFS2). A 30-year analysis time period 
was further maintained in the Final Renewable Fuels Standards Rule for 
2023, 2024, and 2025.\7\ The RFS2 rule made this determination 
balancing a number of considerations, including the expected life of 
biofuel production facilities--and their long-term market impacts on 
emissions--and the inherent uncertainty in estimating GHG emissions 
over a longer period of time. The Treasury Department and the IRS 
assess that solely for the purposes of setting temporal scales in these 
final regulations, the section 45Y and 48E credits and RFS2 are similar 
regulatory contexts based on the information currently available.
---------------------------------------------------------------------------

    \7\ Regulatory Impact Analysis for Renewable Fuel Standard (RFS) 
Program: Standards for 2023-2025 and Other Changes, Section 4.2.2. 
(pp129-130), available at https://nepis.epa.gov/Exe/ZyPDF.cgi?Dockey=P1017OW2.pdf.
---------------------------------------------------------------------------

    A commenter advocated for modifying the Greenhouse Gases,

[[Page 4061]]

Regulated Emissions, and Energy use in Transportation model (GREET 
model) to capture 20-year and 100-year time horizons as the GREET model 
already uses the GWP metric to capture both near-term and long-term 
climate impacts. The Treasury Department and the IRS note that the 
temporal scale of the LCA is the time period over which GHG emissions 
are assessed in the context of sections 45Y and 48E, rather than the 
warming potential of such emissions. Reliance upon specific GWPs to 
determine time horizons or upon the GREET model, which is a particular 
model that does not generally include explicit temporal considerations 
when applying certain assumptions about what activities and related GHG 
emissions to include, is therefore separate from the issue of temporal 
scales. The decision to use GWP-100 is discussed in section VIII.A.1. 
of this Summary of Comments and Explanation of Revisions.
b. Spatial Scales
    Commenters also submitted a wide range of recommendations 
pertaining to spatial scales. A few commenters recommended that spatial 
boundaries be set narrowly around the geographic location of the 
facility, which they stated would more accurately reflect local 
conditions. Another commenter advocated for setting spatial scales such 
that they capture the potential impact of having multiple facilities 
with a GHG emissions rate of greater than zero in the same area. One 
commenter suggested that the LCA spatial scales not be beyond the 
facility producing the feedstock.
    In the preamble to the proposed regulations, the Treasury 
Department and the IRS asked (i) what factors should be considered to 
assess whether a global scale is necessary for certain feedstocks to 
ensure that significant emissions are captured, and (ii) whether all 
feedstock/fuels assessments should be conducted with the same spatial 
scale to determine the extent to which increased use has estimated 
global ramifications. Some commenters had feedstock-specific 
suggestions regarding appropriate spatial scales. Several commenters 
recommended that, in the case of woody biomass, spatial boundaries be 
broad to more accurately represent forest dynamics. A commenter also 
suggested that spatial scales not be limited when taking into account 
wastes, including when such wastes are managed outside of the United 
States.
    After consideration of all comments and of LCA modeling practices 
that take into account the full lifecycle of emissions as described by 
42 U.S.C. 7545(o)(1)(H), the Treasury Department and the IRS have 
determined and provided in Sec.  1.45Y-(d)(2)(ix) that spatial scales 
analysis for LCAs conducted for the section 45Y and 48E credits should 
identify GHG effects from changes in input fuel or feedstock production 
and use, including indirect emissions effects stemming from market-
related changes in supply and demand. When estimating the net GHG 
emissions outcomes associated with a fuel or feedstock that has current 
or anticipated market uses and thus potential market-mediated impacts 
for the entity-level analysis (that is, for a Provisional Emissions 
Rate (PER)) or generally applicable analysis (that is, for the Annual 
Table), the LCA assessment must start with a qualitative market 
analysis to aid with the formation of parameters and other decisions in 
the LCA modeling. This market analysis serves the purpose of analyzing 
whether the prospective fuel or feedstock has been or is anticipated to 
be used directly in or as an input to an activity or commodity in local 
markets, is transported for use in domestic markets elsewhere, or is 
traded for use in international markets, whether use of the material 
does or is anticipated to have significant ramifications on other 
markets, and the magnitude of the use or anticipated use. Findings of 
this assessment should inform the decisions about what spatial scales, 
such as sub-regional, regional, national, or international, are most 
appropriate for assessing the market and related GHG emissions effects 
associated with the feedstock and use case under consideration. The GHG 
emissions analysis should then be conducted using the designated 
model(s) with the applicable spatial scales to estimate the market and 
GHG emissions implications of changing supply flows to provide the 
feedstock for energy purposes and sourcing new or additional feedstock 
material for electricity generation across the applicable market and 
spatial scales for use in the LCA assessment to determine the net GHG 
emissions rate needed as part of the eligibility qualification for the 
section 45Y and 48E credits. If the initial market analysis concludes 
that the prospective feedstock is (i) not currently, has not recently, 
nor is anticipated in the future in the absence of the section 45Y and 
48E credits to be used or sold on the market, (ii) not used as an input 
to an activity or good in local markets, (iii) not transported for use 
in domestic markets elsewhere, (iv) not traded for use in international 
markets, or (v) use of the material does not or is not anticipated to 
have significant ramifications on other markets, then an analysis of 
market-mediated impacts would only need to apply across the spatial 
scales that are applicable to the fuel or feedstock in the LCA 
emissions assessment.
2. Distinguishing Between Co-Products, Byproducts, and Waste Products 
and How Emissions Should Be Allocated to Each in LCAs
    As explained in the preamble to the proposed regulations, the 
categorization and assessment of products as co-products, byproducts, 
or waste products in an LCA may affect the LCA's results. The preamble 
to the proposed regulations provided potential definitions to guide the 
categorization of co-products, by products or waste products and 
further provided that products, co-products, byproducts, and wastes may 
all be produced in the full fuel cycle or used as inputs to the same.
    The preamble to the proposed regulations further explained that the 
categorization of products as co-products, byproducts, and waste 
products may be relevant to an LCA's assessment of the GHG 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 section 45Y and 48E credits have 
the ability to distinguish between such categories.
    In the preamble to the proposed regulations, the Treasury 
Department and the IRS stated an intent to clarify the principles for 
categorizing products as co-products, byproducts, or waste input 
materials and products and assessing the emissions outcomes for such 
products in an LCA for C&G Facilities in the final regulations for the 
section 45Y and 48E credits if such categorization is relevant to the 
LCA model or models used. To inform the development of these 
categorization principles for the final regulations, in the preamble to 
proposed regulations the Treasury Department and the IRS requested 
comment on what principles should be used to distinguish between co-
products, byproducts, and waste products for the purposes of the 
section 45Y and 48E credits. The Treasury Department and the IRS also 
asked whether there are common scientific or industry definitions that 
can be relied upon to distinguish between co-products, byproducts, and 
waste products.
    The Treasury Department and the IRS received a large number of 
comments in response to these questions. A few commenters suggested 
broad principles

[[Page 4062]]

that should be used to distinguish between co-products, byproducts, or 
waste products. One such commenter recommended that the definitions of 
co-products, byproducts, and waste products be less rigid than those 
shared in the preamble to the proposed regulations and that they 
reflect the scientific literature on the lifecycle GHG emissions of 
various materials. Another commenter recommended that the final 
regulations adopt simple common-sense definitions that assign emissions 
of the facility to primary products and co-products. This commenter 
further suggested that all materials left over after the production of 
any primary products be deemed waste unless they have significant 
value, and that the full breadth of potential co-product materials be 
considered. Another commenter recommended that the final regulations 
provide a broad definition of residue materials, citing the need to 
give industry the ability to respond to local market forces. Another 
commenter recommended using mass-based allocation to allocate emissions 
to co-products, byproducts, and waste products, stating that such an 
approach is straightforward to administer and can reduce abuse.
    A number of commenters opposed distinguishing between co-products, 
byproducts, and waste products for the purposes of the section 45Y and 
48E credits. Several stated that such categorization of products would 
result in impermissibly failing to associate all GHG emissions to the 
feedstock or fuel that produced the electricity, or that if such 
categories do not do so, they are therefore irrelevant. Some commenters 
opposed to such categorization noted its complexity, with one commenter 
stating opposition to including these categories in the final rule in 
favor of expert agencies due to the highly technical nature of the 
work. Another commenter, noting the complexity of the designations, 
recommended using caution in any such categorization process to avoid 
rewarding emissions shifting rather than a true reduction in emissions.
    The Treasury Department and the IRS have determined that 
distinguishing between co-products, byproducts, and waste products will 
help facilitate efficient and consistent LCA taking into account 
lifecycle GHG emissions as described in 42 U.S.C. 7545(o)(1)(H). 
Moreover, providing a framework of categorization will facilitate 
communications among stakeholders by providing a common set of terms. 
Such designations were also used in EPA's 2010 notice-and-comment 
rulemaking establishing the regulatory framework for the updated RFS 
program, in which EPA interpreted 42 U.S.C. 7545.
    The Treasury Department and the IRS have determined that, as noted 
in the preamble to the proposed regulations, it is appropriate to 
provide clarifications to the definitions of products, co-products, 
byproducts, and waste and the principles for categorizing and informing 
the assessment of the GHG emissions associated with such materials in 
an LCA for C&G Facilities in the final regulations under Sec.  1.45Y-
5(d)(2)(x) for the section 45Y and 48E credits. These clarifications 
were informed by consideration of the comments received on these 
definitions and principles in the proposed regulations. The Treasury 
Department and the IRS have also determined that these clarifications 
are consistent with the statutory direction in section 45Y to determine 
GHG emissions rates taking into account lifecycle GHG emissions as 
described in 42 U.S.C. 7545(o)(1)(H). The EPA interpreted 42 U.S.C. 
7545(o)(1)(H) as requiring the agency, in the RFS context, to account 
for the real-world emissions consequences of increased production of 
biofuels, including consideration of market interactions that may 
result in indirect emissions. The Treasury Department and the IRS find 
that the clarifications to these definitions and principles therefore 
appropriately incorporate the concepts of marketability and market 
effects in the context of the designation and emissions assessment of 
primary products, co-products, byproducts, and waste products.
    These clarifications include the definitions in Sec.  1.45Y-
(d)(2)(x)(A)(1) through (4):
     A ``primary product'' is an input or an output with 
marketability and is the main driver of the process from which it is 
produced.
     A ``co-product'' is an input or an output with 
marketability that is produced together with another product, both of 
which are economic drivers of the process from which they are produced.
     A ``byproduct'' is an input or an output that is produced 
together with another product, and which has a market recognized 
economic value of zero or greater, but the output is not an economic 
driver of the process from which it is produced.
     A ``waste product'' is an input or an output with negative 
economic value, demonstrated by (1) the absence of a market in which 
the product is purchased and sold and (2) the existence of a market in 
which producers pay for the collection and removal or disposal of the 
input or output material or the existence of a predominant operational 
practice in which producers themselves collect and remove, give away, 
or dispose of the input or output material as part of operational 
processes.
    For the purposes of these definitions, the Treasury Department and 
the IRS note that a ``market'' should be an established set of 
transactions between parties and that whether or not a market exists--
and therefore the categorization of the same product--may vary by 
region. A single or very small number of local transactions of 
insignificant volumes at nominal prices to expedite disposal generally 
would not constitute a market. Moreover, the existence of a market and 
therefore the analysis of market-mediated effects for a particular 
product or material does not prejudge the magnitude of those effects. 
For example, a market may have existed in the past for a particular 
product or material, but market analysis may indicate that this market 
is anticipated to not exist in the future, and vice versa. Relatedly, 
for the purposes of these definitions, marketability is defined as the 
ability to be consistently sold or marketed in the regular course of 
business.
    For example, an input or output generated as part of operational 
processes that would otherwise be subsequently: (i) given away; (ii) 
sold at nominal prices to expedite disposal; or (iii) disposed of 
(without creating a commercial product or generating electricity) by 
burning onsite, burying, piling and burning onsite or leaving to 
decompose, or scattering would generally be considered a waste for the 
purposes of these definitions.
    Consistent with this approach, the final regulations also add in 
Sec.  1.45Y-5(d)(2)(x)(B)(1) through (6) principles for categorizing 
and informing the assessment of the GHG emissions for such materials in 
an LCA for C&G Facilities for the section 45Y and 48E credits if such 
categorization is relevant to the LCA model or models used. The 
principles are as follows:
     All classification of materials and LCAs should take into 
account relevant geospatial variations in supply and demand (that is, 
differences across local, sub-regional, and larger regions), as well as 
variations across specific product types and characteristics, and 
producer types as relevant. For example, a material may meet the 
previously described definition of a waste in certain regions and the 
definition of a by-product or co-product in other regions.
     The LCA should assess whether there are market-mediated 
effects and, if

[[Page 4063]]

so, take these into account as part of the GHG analysis. In some cases, 
market-mediated effects will be small or nonexistent.
     Regardless of how a material is categorized, the LCA 
should consider whether the availability of the section 45Y and 48E 
credits is expected to result in additional production of that material 
or in material changes in the supply chain, and, if so, should take 
into account the direct and indirect emissions impact of the additional 
production or changes in the supply chain.
     Policy and other interventions (for example, technological 
advances) can alter the availability and demand for marketed goods and 
services, which can alter the treatment of materials once disposed of. 
Therefore, reevaluation of material categorization should occur at 
least every ten years, but not more often than every five years.
     All determinations of marketability, market-mediated 
effects, and behavioral changes must be supported by an analytical 
assessment performed by one or more National Laboratories, in 
consultation with other Federal agency experts as appropriate.
     A material should be considered to have a market 
recognized economic value and an established market if one existed 
within the last five years as of the date of the analysis.
    To inform the development of these categorization principles for 
the final regulations, in the preamble to proposed regulations the 
Treasury Department and the IRS requested comment on what principles 
should be used to determine whether a product has sufficient value to 
be considered a co-product or byproduct. Two comments were received in 
response. These commenters stated that if a policy rewards the use of a 
waste product, that product has inherent value, and that that value 
could possibly surpass the value of the ostensible primary product. One 
such commenter noted that this would make these materials co-products. 
Another recommended that the Treasury Department rigorously interrogate 
the designation of waste fuels because of the change in value of such 
items due to the section 45Y and 48E credits as well as any other 
relevant subsidies. This commenter further suggested that when product 
designation is likely shifted as a result of these incentives, so 
should the associated emissions accounting.
    The Treasury Department and the IRS have considered these comments 
and others in evaluating the appropriate definition and treatment of 
co-products. The Treasury Department and the IRS have determined that 
the definition of ``co-product'' will be amended in the final 
regulations under Sec.  1.45Y-5(d)(2)(x)(A)(2) to reflect that a co-
product not only must be an economic driver of the production process 
alongside another product, but also must have marketability. However, 
regardless of how a material is categorized, the LCA will consider 
whether the availability of the section 45Y and 48E credits can result 
in additional production of that material or changes within the 
production and supply chain of that material and take into account any 
direct and indirect GHG emissions outcomes of the additional production 
or any such supply chain changes. Furthermore, because policy and other 
interventions can alter the availability and demand for marketed goods 
and services, even turning waste products into byproducts, co-products, 
or even primary products, the categorization of materials will be 
reevaluated and must be updated at least every ten years, but not more 
often than every five years.
    In the preamble to the proposed regulations, the Treasury 
Department and the IRS also requested comment regarding whether the 
section 45Y and 48E 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 section 45Y and 48E 
credits. The Treasury Department and the IRS also asked how this 
additional economic incentive should be considered to determine if a 
product is a waste product, byproduct, or co-product, and asked whether 
this categorization should be reevaluated and, if so, how often.
    The Treasury Department and the IRS received several comments about 
the economic incentive for the consumption of a product categorized as 
waste prior to the availability of the incentive provided by the 
section 45Y and 48E credits. One commenter recommended that, because of 
this possible incentive, the final regulations not distinguish between 
co-products, byproducts, and wastes for the purposes of emissions 
allocation. For all materials, the LCA must consider whether the 
availability of the section 45Y and 48E credits can result in 
additional production or use of that material, or changes in the 
production of or supply chain to provide that material and take into 
account any direct and indirect emissions outcomes of the additional 
production or use and any supply chain changes.
    Another commenter similarly warned about the risk of incentivizing 
the classification of waste when such categorization is not factually 
justified. This commenter stated that the European Union's Renewable 
Energy Directive (RED) waives sustainability criteria for solid biomass 
fuels that are considered industrial residues, but that to protect 
against the risk of fraudulent classification of such fuels as waste, 
the RED requires that feedstock auditing verify such classification. 
The commenter recommended that the Treasury Department adopt similar 
measures for the section 45Y and 48E credits. The Treasury Department 
and the IRS have determined that a similar requirement would be 
appropriate to ensure accurate tracking and verification of any 
materials determined to constitute waste materials. If a qualified 
facility uses feedstocks that do not have marketability, but which are 
indistinguishable from marketable feedstocks (for instance, after 
processing), the taxpayer will be expected to maintain documentation 
substantiating the origin and original form of the feedstock. See 
section VIII.J. of this Summary of Comments and Explanation of 
Revisions for further discussion of substantiation.
    The Treasury Department and the IRS also received several comments 
regarding the possible reevaluation of a material's categorization as a 
waste. A few commenters were opposed to recategorizing a material from 
a waste to another designation, arguing that such actions could be 
damaging to emissions mitigation efforts or to efforts to find 
productive uses for materials previously disposed of. Another commenter 
recommended that any reevaluation of the classification of waste be 
conducted predictably and only to prospective qualified facilities. The 
commenter further recommended that such reevaluations focus on only 
major changes external to the section 45Y and 48E credits or other 
Federal incentives.
    The Treasury Department and the IRS have determined that 
reevaluation of material categorization should occur at least every ten 
years, but not more often than every five years, consistent with the 
reevaluation period outlined for baselines, because policy 
interventions and other developments in the market can alter the 
availability and demand for marketed goods and services, and can 
sometimes turn waste products into byproducts, co-products, or even 
primary products. This reevaluation is therefore necessary to ensure 
robust estimation of the net GHG emissions rates for C&G Facilities in 
a manner consistent with section 45Y(b)(2)(B). Regardless of the 
results of any such reevaluation, taxpayers may rely on the Annual 
Table in effect as of the date a

[[Page 4064]]

facility began construction or the provisional emissions rate 
determined by the Secretary for the taxpayer's facility to determine 
the facility's greenhouse gas emissions rate 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 or category 
of facility that is described in the Annual Table or the facility's 
emissions value request, as applicable, for the entire taxable year. If 
the facility changes the type or method of production of their fuel or 
feedstock, this constitutes a potential change in their provisional 
emissions rate determined by the Secretary.
    To limit the additional production of waste, in the preamble to the 
proposed regulations, the Treasury Department and the IRS requested 
comment regarding whether the final regulations should 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. The Treasury Department and the IRS also requested 
comment regarding how these factual scenarios could be documented or 
verified, including any changes in volumes of waste and waste capacity 
at existing sources, and additional capture of existing waste or waste 
streams.
    The Treasury Department and the IRS received several comments in 
response to these questions. One commenter recommended that, to limit 
the additional production of waste, materials be classified as waste 
only if the material was created before a qualified facility begins 
claiming the section 45Y and 48E credits. The Treasury Department and 
the IRS have determined that prohibiting classification of a material 
used by a qualified facility as waste after the qualified facility 
begins claiming the section 45Y and 48E credits is unnecessary in light 
of the requirements that the LCA take into account the emissions impact 
of any additional production or use of such material and the 
requirements that the LCA be conducted at the market level. In some 
cases, this may result in different emissions determinations for 
materials that make up waste streams that existed prior to the credits 
versus for those same materials produced after and potentially in 
response to the credits.
    Another commenter responded to this question with a recommendation 
that materials not be classified as wastes unless disposal or 
incineration, as opposed to repurposing, is the only option for such 
material. The commenter offered the ``cascading'' principle in the 
European Union's revised RED that prioritize material use, reuse, and 
recycling of wood over burning for energy as a model for how incentives 
to burn materials should be treated under the section 45Y and 48E 
credits. The Treasury Department and the IRS have determined that, for 
the purposes of the final regulations, a waste product is defined as 
noted earlier. The requirement that a waste material lacks 
marketability for sale but has a market for disposal is consistent with 
this commenter's recommendation that materials be classified as waste 
only if such material lacks a productive use beyond such disposal.
    In the preamble to the proposed regulations, the Treasury 
Department and the IRS also requested comment regarding the potential 
for and approaches to prevent the intentional generation of waste or 
co-products for the purposes of lowering the allocated process 
emissions to electricity. The Treasury Department and the IRS received 
several comments in response to this question. A few commenters, as 
discussed earlier, recommended against designating materials as wastes, 
co-products, or byproducts to avoid intentional generation of waste. 
Another commenter recommended use of a dynamic LCA that incorporates 
every product, flow, and material use when accounting for emissions, 
including assessing the environmental impact of production processes 
such as generation of waste or co-products. This commenter stated that 
this practice would prevent intentional generation of waste because the 
dynamic LCA would accurately reflect the potential benefit of not 
intentionally generating the waste. As discussed earlier, the Treasury 
Department and the IRS have determined that distinguishing between 
these products will facilitate efficient and consistent evaluation of 
GHG emissions rates taking into account lifecycle GHG emissions as 
described in 42 U.S.C. 7545(o)(1)(H). However, regardless of how a 
material is categorized, the LCA must consider whether the availability 
of the section 45Y and 48E credits will result in additional production 
or use of that material or changes in the supply chain of that material 
resulting in GHG emissions effects and take into account any direct and 
indirect emissions impact of the additional production or use and such 
changes.
    Another commenter stated that, in the case of municipal solid waste 
facilities, intentional generation of waste is unlikely because the 
cost of waste disposal will be greater than the value of the credit. 
The Treasury Department and the IRS appreciate this commenter feedback 
and have taken it into consideration. Because this is a technical claim 
that must be evaluated in the context of an LCA and is applicable to 
only certain categories of feedstock, it would not be appropriate to 
incorporate these recommendations in the text of the final regulations 
as a generally applicable rule.
    In the preamble to the proposed regulations, the Treasury 
Department and the IRS also requested comment on whether the 
classification of feedstocks as products, co-products, byproducts, or 
waste change depending on the technology. Specifically, the Treasury 
Department and the IRS asked whether products, co-products, byproducts, 
and waste should be described and accounted for differently if derived 
from biogenic sources.
    The Treasury Department and the IRS received a wide range of 
comments in response to this question. A number of commenters requested 
that either all or a subset of woody biomass feedstocks be designated 
as waste or residue, with many pointing to woody biomass-specific 
industry definitions of terms like waste, residue, co-product, and 
byproduct. Some commenters requested that woody biomass feedstocks be 
designated as waste or residue if the feedstock is not intentionally 
grown and harvested for wood energy applications or if the feedstock is 
grown in a particular region where woody biomass has an alternative 
fate that is typically high in GHG emissions. One commenter requested 
that woody biomass feedstock that is left over from the manufacturing 
and repair of wood pallets be classified as a residue.
    One commenter suggested that products, co-products, byproducts, and 
waste be accounted for differently if derived from biogenic sources by 
using ASTM D6866 Method B to determine and report their biogenic 
content. This commenter noted this standard's use in Canada's Clean 
Fuels Regulation.
    Other commenters recommended against classifying woody biomass 
feedstocks as waste or residue. Some stated that the definition of 
these terms as used in the forest industry is broadly defined and does 
not sufficiently consider alternative uses of the feedstock. Some 
further expressed concern that the appropriate designation of woody 
biomass as a residue or a waste is not verifiable after its initial 
processing by foresters.
    One commenter asked that the final regulations clarify whether the 
LCA will recognize treatment of residue materials as distinct from 
waste. The commenter further recommended that forestry and logging 
residues should be defined as

[[Page 4065]]

``materials generated by some other process, where the alternative fate 
is decomposition or burning without energy recovery.'' The commenter 
suggested that such materials should not be designated as residues if 
their most likely alternative fate is decay because it is less carbon 
intensive than burning the materials for electricity.
    One commenter recommended that trees harvested for the forest 
biomass industry that come from land harvested entirely (or almost 
entirely) to satisfy wood pellet or bioenergy demand not be designated 
as byproducts. The commenter stated that because the trees would not 
have been harvested but for demand from the forest biomass industry, 
they are therefore the primary economic driver of the harvest and thus 
not a byproduct. The commenter further recommended that the final 
regulations clarify what it means for a material to be the primary 
economic driver of a process.
    The Treasury Department and the IRS also received a comment about 
the designation of materials used by a WERP facility. A commenter 
recommended that the final regulations treat such waste heat as a waste 
product.
    The Treasury Department and the IRS appreciate these commenters' 
feedback and have taken it into consideration. Because technical and 
fact-specific suggestions regarding designation or emissions accounting 
for a particular feedstock must be evaluated in the context of an LCA, 
the suitability of these recommendations requires further consideration 
of their application to specific cases and these recommendations are 
not included in these final regulations at this time.
    The Treasury Department and the IRS have also determined that 
distinguishing between residues and wastes in the final regulations is 
unnecessary. The principles for categorizing and evaluating the GHG 
emissions of materials that are provided in these final regulations 
require an assessment of their associated uses or removal or disposal 
processes, as applicable, and associated GHG emissions. This 
requirement mitigates the need to address a distinction between 
residues and wastes as a residue may be categorized within one of the 
categories defined earlier.
    The Treasury Department and the IRS have further determined that 
further clarification of the term ``the primary economic driver of the 
process'' within the previously described definitions is not necessary 
in the final regulations because this concept provides sufficient 
clarity in conducting an LCA.
3. LCA Modeling Topics
a. Certain Issues Related to LCA Baselines and Modeling
    The preamble to the proposed regulations posed twelve questions 
related to factors that must be considered to assess the net GHG 
emissions associated with the production of electricity by a C&G 
Facility in the context of the section 45Y and 48E credits. This list 
included questions on six subtopics, including about: (1) the creation 
and maintenance of LCA baselines; (2) existing models and data sources 
that could be used for modeling; (3) how to account for incentives 
created by the section 45Y and 48E credits; (4) how to establish 
feedstock categories; (5) how to assess shocks; and (6) how to account 
for variation and uncertainty in models. Responses to comments received 
about the creation and maintenance of LCA baselines can be found in 
section VIII.C.2.c. of this Summary of Comments and Explanation of 
Revisions. Responses to comments received about how to account for 
incentives created by the section 45Y and 48E credits can be found in 
section VIII.D.2. of this Summary of Comments and Explanation of 
Revisions. This section contains responses to the comments received on 
the other four sub-topics listed earlier.
i. Feedstock Categorization
    The preamble to the proposed regulations requested comment on 
feedstock classification and posed a series of questions. The Treasury 
Department and the IRS received a number of comments in response to 
these questions. One comment expressed support generally for the idea 
of differentiating between subcategories of feedstock in the LCA, and 
another comment recommended subcategorizing feedstocks to the greatest 
extent possible.
    The Treasury Department received a number of comments on the topic 
of whether to subcategorize biomass feedstocks to differentiate between 
feedstock that is waste and feedstock that is not. Several commenters 
expressed support for this idea, while several others expressed 
opposition to it. See section VIII.D.2. of this Summary of Comments and 
Explanation of Revisions for further discussion of categorizing some 
feedstock as waste.
    The Treasury Department and the IRS received comments that provided 
a range of suggestions regarding how best to categorize woody biomass 
feedstocks. A few opposed subcategorization of woody biomass 
feedstocks. One commenter recommended that forest biomass feedstocks be 
considered one type or category of facility to avoid unduly burdensome 
complex analysis. Another who opposed subcategorizing feedstock 
altogether urged that, in the event that forest biomass feedstocks are 
subcategorized, the Treasury Department require reliable, verifiable 
bases for each sub-categorization as a means of reducing uncertainty. 
Several commenters endorsed the idea of creating subcategories of woody 
biomass feedstock and provided various recommendations about how to do 
so. One commenter recommended that trees be categorized based upon 
species and upon management practices such as clear cutting or thinning 
to most accurately capture ``carbon debt payback times.'' Another 
recommended that woody biomass forest feedstock be categorized based on 
use, with at least five categories, including saw timber, low-grade 
roundwood or pulpwood, forestry or harvesting residues, sawmill and 
other woody industry residues, and post-consumer waste wood. A 
different commenter suggested creating feedstock categories that are 
further divided by the feedstock's potential alternative fates.
    Several commenters provided information or recommendations on how 
blends of fuels or feedstocks should be treated in the LCA or the 
annual publication of emissions rates. One commenter suggested that 
precaution is warranted to ensure that facilities using a blend of 
fuels are not deemed to have a net GHG emissions rate of not greater 
than zero if they do in fact have a positive net GHG emissions rate. 
Another commenter recommended that the LCA accommodate site specific 
feedstock use, which may include mixed feedstocks or blending with RNG. 
Finally, one commenter stated that there are several options for 
providing an emissions rate to facilities that use a mix of feedstocks. 
This commenter further stated that the Secretary could provide a 
formula by which taxpayers can use the published emissions rates in the 
Annual Table to calculate their facility's rate; that all facilities 
using a blend of fuels could be required to obtain an emissions rate 
via the provisional emissions rate (PER) process; or that facilities 
using multiple fuels could be deemed to be multiple separate facilities 
for the purposes of the credit and a rate calculated for each facility.
    The Treasury Department and the IRS, appreciate these 
recommendations and have taken them into consideration. However, given 
the diversity of fuel and feedstock blends that may be evaluated for 
the purposes of the section 45Y and

[[Page 4066]]

48E credits, incorporating specific requirements suggested by these 
commenters in the text of the final regulations would be inappropriate 
as a generally applicable rule. Therefore, the commenters' 
recommendations will not be included in the text of the final 
regulations.
ii. Shocks
    In the preamble to the proposed regulations, the Treasury 
Department and the IRS posed several questions about the treatment of 
shocks in modeling. One such question solicited comment regarding 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. One 
commenter recommended that the scale of demand be assessed in the 
context of what types of feedstocks are most likely to be used, which 
the commenter recommends projecting based on current practice.
    In the preamble to the proposed regulations, the Treasury 
Department and the IRS further requested comment on whether shocks 
should reflect a small incremental increase in the use of the feedstock 
to reflect the marginal impact or a large increase to reflect the 
average effect of all potential users. One commenter recommended that 
both approaches be used to provide a comprehensive understanding of the 
potential impacts of the change.
    Another commenter suggested that incremental increases may not 
accurately reflect the consequences of a policy because large demand 
shocks can have qualitatively different effects than incremental 
shocks. This commenter further stated that a shock that reflects all 
users can be a poor tool in cases in which local markets are important. 
This commenter recommended estimating regional factors before averaging 
to find the effect on all users and suggested that model testing be 
similarly applied to evaluate differences between marginal increases in 
feedstock demand and absolute demand provided in the region.
    In the preamble to the proposed regulations, the Treasury 
Department and the IRS also requested comment on what the general 
increment of the shock could be and whether it should be specified as 
an absolute or relative increase. One commenter suggested that when 
demand is not pre-determined, scenario modeling could be used to 
evaluate potential effects. The commenter recommended complementing 
this analysis with a series of marginal model runs to evaluate how an 
increase in demand impacts model results.
    Finally, in the preamble to the proposed regulations, the Treasury 
Department and the IRS requested comment on 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). A 
commenter recommended that similar feedstocks that offer comparable 
results in model testing be implemented in aggregate. Another commenter 
suggested that in a regulatory framework, it is likely most appropriate 
to model at the asset level, such as by modeling a shock applied to the 
surrounding landscape based on anticipated demand for feedstock of a 
new bioenergy investment.
    The Treasury Department and the IRS appreciate these 
recommendations and have taken them into consideration. However, given 
the complexity of modeling shocks in the LCA and the diversity of fuels 
and feedstocks that may be evaluated for the purposes of the section 
45Y and 48E credits, incorporating the specific requirements suggested 
by these commenters in the final regulations would be inappropriate as 
a generally applicable rule. Therefore, the commenters' recommendations 
will not be included in the final regulations.
iii. Variation and Uncertainty in Models
    In the preamble to the proposed regulations, the Treasury 
Department and the IRS posed a number of questions about the treatment 
of variation and uncertainty in evaluating model estimates. Commenters 
provided a range of recommendations in response to these questions. 
Some suggested that modeling multiple outcomes is an important factor 
in reducing the uncertainty of modeled GHG emissions changes. One 
commenter further recommended that Treasury be transparent about the 
assumptions made when modeling, ensure that biomass feedstock 
utilization assumptions are backed by robust traceability and a supply 
chain of custody to ensure that the biomass modeled in the LCA is the 
biomass transported across the supply chain, and use conservative 
estimates. Another commenter recommended a similarly precautionary 
approach in situations in which a given assumption could ``fully flip'' 
an outcome from being calculated as a net climate benefit to being 
calculated as a net climate harm.
    One commenter noted their support for the use of consequential 
modeling, stating that their recommendation is ``in part'' because land 
sector modeling is frequently subject to large uncertainties that are 
better addressed by effective policy design than by embedding 
quantified impacts within the regulatory framework. The commenter 
stated that this is especially true when applying complex econometric 
modeling to scenarios relying on large temporal and spatial boundaries.
    Another commenter similarly noted that longer assessment horizons 
increase uncertainties and asserted that using an assessment horizon 
that constrains the compounding effects of uncertainties is an 
essential component to limit uncertainty. This commenter further 
recommended against the use of economic models, stating that they 
generate unacceptable levels of uncertainty.
    The Treasury Department and the IRS appreciate these 
recommendations and have taken them into consideration. However, given 
the complexity of considering variation and uncertainty in evaluating 
model estimates and the diversity of fuels and feedstocks that may be 
evaluated for the purposes of the section 45Y and 48E credits, 
incorporating the specific requirements suggested by these commenters 
in these final regulations would be inappropriate as a generally 
applicable rule. Therefore, although the considerations that commenters 
raise--such as the importance of verification and the uncertainty 
inherent to modeling--have been incorporated in concept in other 
aspects of the LCA and substantiation requirements, the commenters' 
specific recommendations will not be included in these final 
regulations.
b. Recommended Models and Modeling Sources
i. Recommended LCA Models
    In the preamble to the proposed regulations, the Treasury 
Department and the IRS requested comment regarding 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) and asked 
for additional information regarding suggested models. Commenters 
provided a wide range of views. Several commenters requested a 
consistent and technology-neutral approach be adopted for LCA 
assessment of all renewable energy

[[Page 4067]]

technology and from all feedstocks. Another commenter emphasized that 
whatever model is employed, it is critical that it reflects current 
peer reviewed literature and is well supported by available data and 
science.
    Most commenters strongly advocated for the use of a version of the 
GREET model to complete an LCA consistent with requirements of the 
section 45Y and 48E credits. Several commenters noted that the GREET 
model is thorough, widely accepted, and the ideal model to be used for 
tax incentives in the IRA. These commenters further asserted that 
allowing the GREET model as the assessment tool for the section 45Y and 
48E credits (in addition to the section 40B and 45V credits) would 
further bring all the emission calculations required under the IRA tax 
credit provisions under a single verification regime, which could be 
controlled by U.S. Federal agencies responsible for implementing the 
IRA 2022 tax incentives. A commenter emphasized that methodological 
consistency between IRA tax credits is important to avoid unintended 
market effects, particularly if credited products under sections 45Y 
and 48E, 40B, and 45V have overlapping accounting boundaries (for 
example, RNG lifecycle emissions are relevant under all four). Notably, 
most commenters overwhelmingly supported the use of the GREET model for 
the emissions assessment required by sections 45Y and 48E without 
specifying a specific version of the GREET model.
    While supporting the use of the GREET model, a commenter noted that 
the GREET model is still an approximation of reality and must be 
regularly updated to reflect real-world trends and the latest research. 
Several commenters recommended that the Treasury Department and the IRS 
leverage both the existing GREET model and EPA modeling to inform 
feedstock-specific GHG emissions rates and associated avoided 
emissions.
    Other commenters specifically requested that the former ANL-GREET 
model, (now referred to as the R&D GREET model) be used. Specially, 
these commenters asserted that the Treasury Department and the IRS 
adopt the 2023 R&D GREET model (or a successor) for emissions 
assessments for the section 45Y and 48E credits. These commenters note 
that this would assist the Treasury Department and the IRS in timely 
providing a model and allow for efficiencies going forward as the R&D 
GREET model is already regularly updated. These commenters also assert 
that using the R&D GREET model (or a successor) will make the LCA 
process clearer, more certain, and more effective, consistent with 
congressional intent to encourage the deployment of zero-emission 
technologies. Other commenters suggested the use of the R&D GREET model 
because it takes methane leakage and counterfactual assumptions into 
account. A commenter noted that using the R&D GREET model will reduce 
the prospect of relying on the PERs process because the R&D GREET model 
allows for site-specific RNG carbon intensity scores. Another commenter 
noted that the R&D GREET model is another publicly available model 
which has incorporated a process model for estimating emissions from 
landfills. However, the commenter noted that the current version of the 
GREET R&D model needs several updates and modifications to properly 
reflect the latest peer-reviewed information.
    Several commenters opposed the use of the GREET model. A commenter 
noted that the GREET model lags deployment and so favors longer 
established technologies like wind and solar to the detriment of 
technologies such as biomass gasification with CCS. This commenter 
noted that relying on the GREET model would certainly disadvantage and 
perhaps disqualify new technologies that are the most carbon-negative, 
while simultaneously favoring projects which would use a fuel such as 
municipal solid waste, which is not climate friendly, yet is considered 
by the model to be carbon-negative. This commenter also asserted that 
such a perverse incentive is not a desired outcome and yet is possible 
with the application of a static model to a dynamic industry deploying 
novel and first-of-kind technologies. Other commenters opposed the use 
of the GREET model by asserting that the GREET model underestimates 
avoided methane emissions from diverting waste from a landfill. The 
Treasury Department and the IRS do not believe that the R&D GREET model 
is the appropriate model for determining GHG emissions rates for the 
section 45Y and 48E credits because it does not conform to the 
principles and requirements for LCA analysis provided in this final 
regulation.
    Several commenters suggested the use of alternate models for a 
specific type of feedstock. For municipal solid waste (referred to as 
MSW), several commenters recommended the use of the MSW-DST and the 
EPA's WARM models, which are publicly available waste management-
focused lifecycle models. The MSW-DST is an LCA model tailored directly 
for the waste sector that has been used by the DOE's National Renewable 
Energy Laboratory (NREL) for previous analyses. The WARM model is 
provided by the EPA and specifically built to allow high-level 
comparisons of potential greenhouse gas emissions reductions, energy 
savings, and economic impacts when considering different materials 
management practices.
    A commenter expressed concern that both the MSW-DST and the WARM 
models require further refinements to ensure they are accurately 
quantifying the GHG emissions outcomes associated with diverting post-
recycled waste from landfills to waste-to energy (WTE) facilities. The 
commenter noted that these models are not equipped to model emissions 
for other energy generation technologies and acknowledges that the use 
of these models for wastes, while potentially using the GREET model to 
evaluate other technologies, could pose challenges.
    For biomass, several commenters recommended the use of the 
California Biomass Residue Emissions Characterization (C-BREC) model. 
These commenters note that the C-BREC model provides a robust LCA for 
forest residues used for electricity generation, which enables detailed 
and transparent accounting for GHG and air pollutant emissions and 
evaluates emissions across different project profiles, including the 
reference fate of unutilized biomass. The commenter noted that although 
the C-BREC model results show that the emissions associated with 
wildfire risk are significant for biomass residues left in the forest, 
the wildfire probability factors used in the model are outdated and the 
real risk is much higher. Therefore, the commenter asserts that C-BREC 
likely underestimates the actual risk of wildfires in California, 
leading to potential underestimation of emissions from biomass residues 
left in forests.
    Several commenters suggested models related to forest-related 
feedstocks. A commenter suggested the use of the published C-ROADS and 
En-ROADS models to calculate forest ecosystem and harvested carbon 
estimates. The commenter noted that these dynamic models represent the 
carbon cycle, budgets and stocks of GHGs, radiative forcing, and the 
heat balance of the Earth. The commenter also noted that both models 
are freely available and fully documented.
    Another commenter supported the use of timber projection models 
like ATLAS (Aggregate Timberland Assessment System), which is managed 
and updated by the U.S. Forest Service, providing projections at 
regional and

[[Page 4068]]

national scales. This commenter noted that ATLAS models different 
timber yield scenarios, and their respective implications for carbon 
stocks.
    Additionally, a commenter supported the use of the Landscape Carbon 
Factor Tool, developed by the American Forest Foundation, to calculate 
net carbon stock changes in forest regions of variable sizes using the 
USFS Forest Inventory Assessment (FIA) data. The commenter noted that 
this tool can provide important data on the current state of carbon 
stocks in a sourcing area that can be used to inform a full 
consequential LCA, which will also predict future changes in carbon 
stocks. The commenter pointed out that this tool could be used as an 
initial screen to determine whether biomass will meet the ``not greater 
than zero'' emissions rate criterion provided that net forest stocks in 
the region of consideration are maintained or increased.
    While no commenters suggested using the Forestry and Agricultural 
Sector Optimization Model with Greenhouse Gases (FASOM-GHG) Model to 
assess GHG emissions for purposes of the section 45Y and 48E credits, 
several commenters specifically asserted that the Treasury Department 
and the IRS should not adopt it for this purpose. These commenters 
noted that the FASOM-GHG model is not a credible source of estimates of 
wood harvest emissions due to a lack of global analysis, poor 
performance for this purpose, lack of reasonable cost data and 
contradiction with known estimates, and structural bias.
    The Treasury Department and the IRS appreciate the thoughtful 
responses provided by commenters. After taking into account the wide 
variety of different mechanisms for generating electricity through 
combustion or gasification that would require an LCA, the Treasury 
Department and the IRS have determined that there is not a clear or 
obvious single model or models that would be appropriate for all 
situations. After consideration of these comments, the Treasury 
Department and the IRS will coordinate with Federal agency scientific 
and technical experts on the selection and development of a model or 
models to assess net GHG emissions for purposes of the section 45Y and 
48E credits.
ii. Recommended Data Sources and Peer-Reviewed Studies
    In the preamble to the proposed regulations, the Treasury 
Department and the IRS requested comments regarding 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. The Treasury Department and the IRS 
also noted that 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.
    The commenters recommended a wide range of data sets to provide 
information on different feedstock production systems. A commenter 
noted that feedstock production systems vary by industry and should be 
assessed on an industry-by-industry basis. However, the same commenter 
also noted that the same principles can be used to make decisions on 
feedstock production system irrespective of the industry.
    For biomass, a commenter recommended the use of forest inventories 
that characterize the stocks of carbon in different forests. This 
commenter noted the USDA Forest Service's Forest Inventory and Analysis 
(FIA) Program as an open-source, nationally consistent inventory of 
forest resources that is regularly updated. Further, the commenter 
noted that the FIA database provides comprehensive information on 
forest stand characteristics, growth rates, and carbon stocks across 
different regions of the United States. It employs direct measurements 
from a network of permanent sample plots, offering high-quality, 
empirical data at both regional and national scales.
    For MSW, several commenters noted that the EPA should be referenced 
as a primary source of information on the physical properties of MSW 
and specifically pointed to the EPA's emission factor database, AP-42: 
A Compilation of Emissions Factors from Stationary Sources (AP-42), 
based on data from 40 landfills, U.S. EPA Landfill Gas Emission Model 
(LandGEM) default L0 for inventory purposes. Additionally, a commenter 
noted that the importance of data reported from the combustion of MSW 
at existing WTE facilities to the EPA's GHGRP. These commenters 
asserted that given the extensive monitoring employed at WTE 
facilities, they can serve as a critical source of lifecycle data, 
including for biogenic carbon fraction and total carbon content both 
for WTE emissions and to serve as a possible resource for data on 
process inputs used for the baseline scenario of landfilling.
    The Treasury Department and the IRS appreciate the data sources 
provided by commenters. Given the extensive range of feedstocks and 
types of facilities, and the fact that no data source seems to address 
all use cases, the Treasury Department and the IRS are continuing to 
evaluate and consider the utility of the data sources identified by 
commenters. The Treasury Department and the IRS will coordinate with 
Federal agency scientific and technical experts on the use of data sets 
in the development of a model or models to assess GHG emissions for 
purposes of the section 45Y and 48E credits.
E. Treatment of Specific Types of Facilities and Feedstocks
1. Combined Heat and Power (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 GHGs 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. The 
inclusion of thermal energy production-related emissions in an LCA for 
a CHP property 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. In the preamble to the proposed regulations, the 
Treasury Department and the IRS indicated an intention to clarify the 
principles for assessing the emissions related to the generation of 
useful thermal energy by a CHP property in an LCA in the final 
regulations for the section 45Y and 48E credits and posed a number of 
questions.
    Several commenters requested that CHP property be categorized as 
non-C&G Facilities. A commenter requested that CHP property that 
derives its energy from facilities on the ``categorically non-C&G'' 
list should also be included on that list. However, the statute does 
not alter the definition of a ``qualified facility'' for CHP property, 
and the Treasury Department and the IRS therefore do not have the 
authority to treat CHP property that produce electricity through 
combustion or gasification any differently from other facilities (that 
is, the same rules for classifying facilities and determining emissions 
rates apply). However, the Treasury Department and the IRS note that 
certain types of CHP facilities may meet the definition of a Non-C&G 
Facility if they do not produce electricity and heat through 
combustion.

[[Page 4069]]

    Under the statute, to determine the amount of GHGs emitted by a C&G 
CHP property, the LCA must include the net GHG emissions emitted by 
that facility in the production of useful thermal energy. For purposes 
of an LCA for a CHP property, the Treasury Department and the IRS asked 
what principles should govern how GHG emissions from the production of 
useful thermal energy are calculated. In response, several commenters 
advocated for the use of an output-based standard for emissions 
calculation for a CHP property. An output-based standard is based on 
emissions per unit of energy generated rather than amount of fuel used, 
which is addressed in an input-based standard. Commenters asserted that 
an output-based standard is appropriate to govern an LCA for a CHP 
property because it produces two useful outputs (electrical and thermal 
energy) that are each fully credited under this analysis.
    Additionally, several commenters recommended that the final 
regulations adopt LCA principles similar to those incorporated by the 
2023 R&D GREET model (or a successor), which includes inputs for 
``equivalent electric efficiency using fuel allocated to power 
generation'' and ``overall plant conversion efficiency.'' These 
commenters supported this recommendation by noting that this LCA 
approach would incorporate principles similar to the LCA principles 
used for the section 40B and 45V credits. A commenter noted that an LCA 
for natural gas-fired CHP property should account for lower emission 
gas supplies, or use assumptions for project-specific leakage rates, to 
encourage suppliers to reduce methane leakages. The Treasury Department 
and the IRS appreciate this feedback and will consider these 
recommendations as LCA development for CHP property continues.
    In the preamble to the proposed regulations, the Treasury 
Department and the IRS requested comment regarding what principles 
should be used to determine the baseline for useful thermal energy 
production by a CHP property. In response, several commenters noted 
that fossil fuel displacement should be the baseline for an LCA for a 
CHP property. The commenters asserted that to quantify the GHG 
emissions savings of a CHP property, the emissions from the CHP 
property should be subtracted from the fuel use that would normally 
occur without the CHP property in place--normally generating heat from 
an onsite natural gas boiler and using power from offsite generation 
powering the grid. The commenters suggested establishing a baseline 
emissions profile and then quantifying expected GHG emission reductions 
and providing methods for accounting for the displacement of marginal 
grid resources to account for energy efficiency improvements. To 
support this recommendation, the commenters generally cited common LCA 
practice, ISO guidance, and the plain language of the CAA for 
calculating GHG emissions.
    A commenter recommended that an LCA assess GHG emissions from the 
production of useful thermal energy in a CHP property by using a 
baseline emissions rate composed of (i) an electric-only plant using 
the same prime mover design (make/model of the steam turbine, 
combustion turbine or reciprocating engine plant) producing the same 
net quantity of electricity generation as produced in the CHP property; 
and (ii) a natural gas boiler producing the same net quantity of useful 
thermal energy produced in the CHP property. The GHG emissions from the 
production of useful thermal energy in the CHP property would then be 
calculated by subtracting the emissions of the CHP property (based on 
LCA emissions per unit of fuel consumed) and the net generation of 
electrical and thermal energy (net of energy produced and used within 
the facility before energy is exported from the facility) from the 
baseline emissions.
    Similarly, a commenter noted that following the GHG Protocol for 
Project Accounting, the typical baseline for C&G projects would include 
the current fate of the residue, the current emissions associated with 
the grid where the project would be located, and the current energy 
source for thermal energy when looking at a CHP property. The commenter 
recommended that an LCA is conducted for the baseline, and an LCA is 
conducted for the proposed project. The difference between these two is 
the ``net'' GHG emissions rate for the project.
    Additionally, several commenters supported the adoption of 
displacement principles by noting that biologic carbon (such as wood) 
would enter the atmosphere regardless of whether it is combusted or 
through the ecological process of decomposition once a tree dies. 
Conversely, these commenters noted that fossil fuels are sources of 
geologic carbon that would otherwise not enter the atmosphere if not 
for their combustion. Therefore, the commenters asserted that wood 
utilized for cogeneration releases no additional net carbon to this 
cycle and can even reduce emissions when used as a substitute for 
fossil fuels.
    While supporting the adoption of displacement principles in an LCA, 
several commenters also advocated for the final regulations to give 
credit for avoided GHG emissions from the alternative fate of the 
biomass which include being piled and burned with uncontrolled criteria 
pollutants and GHG emissions; masticated and left on-site, increasing 
fuels for future fires; or transported long distances to available 
disposal sites, incurring high costs and associated emissions. These 
commenters also noted that an LCA must credit emissions offsets by 
biomass generated energy when compared to the emissions from 
alternative replacement power. These commenters noted that if these two 
considerations are allowed, utilization of woody biomass will easily be 
shown to be carbon neutral or likely negative, with net GHG emissions 
at an acceptable level. The issues raised by these comments are 
addressed in section VIII.C. of this Summary of Comments and 
Explanation of Revisions.
    Section 45Y(g)(2)(A) provides a special rule for CHP property, 
which explicitly includes any production in the form of useful thermal 
energy in the calculation of the credit as well as the amount of GHG 
emissions from the facility in the production of such useful thermal 
energy. After consideration of the comments, the Treasury Department 
and the IRS have determined that the best reading of section 
45Y(g)(2)(A) is that thermal energy produced by a CHP property is 
accounted for with the electricity produced by the facility in 
assessing the GHG emissions from the facility. As a result, the 
baseline for GHG emissions from thermal energy produced by a CHP 
property are zero, which is consistent with LCA accounting for 
electricity and provides a consistent baseline between electrical and 
thermal energy. Even though it is a departure from some of the LCA 
methods typically used within the CHP industry, this treatment is an 
option within LCA accounting methodology that is consistent with the 
principles and requirements for an LCA used to determine a GHG 
emissions rate for purposes of sections 45Y and 48E.
    Additionally, the preamble to the proposed regulations noted that 
there may be scenarios in which a facility generates electricity that 
is used (i) by the electricity generation facility in the production of 
electricity; or (ii) 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 property that

[[Page 4070]]

produces electricity; and this electricity is consumed by the 
wastewater treatment facility. The Treasury Department and the IRS 
requested comment on what principles should be used to determine how 
GHG emissions from the consumption of electricity in the production of 
electricity or in the production of the fuel consumed by the facility 
are calculated. In response, a commenter noted they were not aware of 
any circumstances in which any CHP property host would consume 
electricity from the CHP property for the sole or primary purpose of 
generating electricity. The commenter also noted that generally 
facilities hosting CHP property use the electricity and thermal energy 
onsite to meet the needs of host facility or export that energy via the 
grid or district energy system respectively. The commenter asserted 
that to the extent such facilities support the production of useful 
biogas from the wastewater stream that can be used for future fuel for 
the CHP property, the Treasury Department and the IRS should not craft 
rules that would discourage productive use of byproducts as fuel.
    The Treasury Department and the IRS confirm that the rules provided 
in these final regulations are not intended to encourage or discourage 
certain fuels or feedstocks for electricity production but to outline 
LCA principles such that LCAs of C&G Facilities, including CHP 
property, result in impartial and robust assessments of net GHG 
emissions across feedstocks, fuels, and facility types to determine 
eligibility.
    The preamble to the proposed regulations similarly noted that 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 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. The Treasury Department and the 
IRS requested comment regarding what principles should be used be used 
to determine GHG emissions from the self-consumption of thermal energy 
by the CHP property. In response, a commenter proposed that facilities 
should not be assessed based on the purposes for which the useful 
energy is used, including both electricity and the heat in the case of 
a CHP property. Proposed Sec.  1.45Y-5(d)(2)(ii) provided that the 
ending boundary ``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'' therefore the use of the electricity 
does not impact the LCA assessment as it is outside of the LCA system 
boundary. See section VIII.C. of this Summary of Comments and 
Explanation of Revisions for additional discussion of comments 
pertaining to the LCA ending boundary.
    The anticipated future baseline scenario as described in Sec.  
1.45Y-5(d)(2)(iii) will not be impacted by whether the electricity is 
sold to the grid or used onsite. Therefore, whether the electricity 
generated from any type of facility, including a CHP property, is 
supplementing or replacing an existing power source onsite or grid 
electricity for the host facility (for example, a wastewater treatment 
plant) will not impact the LCA of the generating facility.
2. Biomass
    The Treasury Department and the IRS received a number of comments 
pertaining to the use of biomass as a feedstock in the production of 
electricity. While these comments and their responses are addressed 
throughout this Summary of Comments and Explanation of Revisions, the 
following paragraphs address comments regarding the substantiation of 
eligibility for the section 45Y and 48E credits for taxpayers whose C&G 
Facility uses biomass as a feedstock.
    In the preamble to the proposed regulations, the Treasury 
Department and the IRS requested comment on the types of documentation 
that taxpayers should be required to maintain to substantiate 
eligibility for the section 45Y and 48E credits. Specifically, comment 
was requested on the types of documentation or substantiation a 
taxpayer should maintain to establish that an input in the supply chain 
of a fuel or feedstock used for electricity production has the energy 
attributes or other relevant characteristics that were taken into 
account in determining a GHG emissions rate; what existing systems, 
industry standards, or practices may be used to substantiate that a 
facility's operations and supply chain for such inputs resulted in a 
GHG emissions rate that is not greater than zero; how to develop such 
tracking and verification systems if they do not currently exist and 
how long development of such systems may take; and 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 section 
45Y and 48E credits.
    The Treasury Department and the IRS received a number of comments 
about whether taxpayers should be required to maintain documentation or 
provide third-party verification of fuels or feedstocks in order for 
their qualified biomass facility to be eligible for the section 45Y and 
48E credits. While some noted the importance of oversight and 
independent means of verification to properly substantiate that inputs 
to fuel or feedstock have the energy attributes or other relevant 
characteristics that were taken into account in determining a GHG rate, 
others disagreed. Some commenters requested that taxpayers whose 
qualified facilities have less than one megawatt of capacity not be 
required to maintain or provide any documentation to be eligible for 
the section 45Y and 48E credits. These commenters further recommended 
that taxpayers be required only to self-attest to the volume of 
biogenic feedstock received under a given category for that year, total 
generation, and percentage of fuel usage, similar to the procedure that 
currently exists for biomass facilities participating in the California 
Bioenergy Market Adjusting Tariff (BioMAT).
    Other commenters suggested verification bodies or tools for use in 
confirming the GHG emissions rate of qualified biomass facilities. One 
commenter suggested a tool in development that they have commissioned 
to calculate net carbon stock changes in forest regions. Other 
commenters suggested existing third-party certifications, such as those 
provided by the Sustainable Forestry Initiative (SFI), the Forest 
Stewardship Council (FSC), the Sustainable Biomass Program (SBP), and 
the International Sustainability and Carbon Certification System 
(ISCC). However, some commenters critiqued the design of these 
certifications, asserting that they provide inadequate monitoring and 
enforcement.
    The Treasury Department and the IRS appreciate the information 
shared by commenters on these matters and have taken it into 
consideration. Woody biomass can pose unique issues warranting 
verification because wood sourced from different types and parts of 
trees may have very different LCA profiles but appear uniform after 
processing and upon delivery to an electricity production facility. The 
Treasury Department and the IRS intend to provide additional 
information in future guidance about how taxpayers should substantiate 
compliance with the statute's requirements. See section VIII.J. of this 
Summary of Comments and Explanation of Revisions for more information 
about substantiation. To ensure that C&G Facilities that utilize 
biomass feedstocks meet the statutory requirement of a net GHG 
emissions rate not greater than zero, the Treasury Department and the 
IRS anticipate that

[[Page 4071]]

it may be appropriate to require or encourage taxpayers to maintain 
third-party certification that verifies that these facilities meet the 
criteria that the LCA has found are necessary for a facility to meet 
this statutory requirement.
3. Waste-to-Energy (WTE) Facilities
    The Treasury Department and the IRS received many comments 
pertaining to the use of WTE facilities in the production of 
electricity. While these comments and their responses are addressed 
throughout this preamble, including in section VIII.C. (LCA 
Requirements), the following paragraphs address comments regarding the 
eligibility for the section 45Y and 48E credits for taxpayers that use 
WTE facilities (such as landfills and waste incinerators) in the 
production of electricity.
    Commenters have sharply divergent views regarding the eligibility 
of WTE facilities for the section 45Y and 48E credits. Many commenters 
requested that the production of electricity from WTE facilities be 
specifically excluded from qualifying for the credits. To support this 
view, several commenters noted that WTE facilities are significant 
emitters of GHG emissions, and as it was clearly not the intent of 
Congress to allow GHG producing industries to be eligible for the 
credits, WTE facilities should not be eligible. These commenters also 
asserted that WTE facilities should not be eligible for the credits 
because WTE facilities are disproportionately located in low-income and 
marginalized communities and can endanger a community's health.
    Conversely, several commenters strongly advocated for the 
eligibility of WTE facilities for the section 45Y and 48E credits. 
These commenters noted that WTE facilities would have traditionally fit 
into the category of landfill or trash facilities once eligible for the 
section 45 credit and therefore, should be eligible for the section 45Y 
and 48E credits. Several commenters requested that WTE facilities be 
included as Non-C&G Facilities on the Annual Table that will be 
published by the Treasury Department and the IRS.
    The Treasury Department and the IRS appreciate the input shared by 
commenters and have taken it into consideration. Because WTE facilities 
produce electricity through combustion, they are C&G Facilities, and 
whether a WTE facility is eligible for the section 45Y or 48E credits 
must be assessed through an LCA. Accordingly, categorically excluding 
or including WTE facilities as eligible for the section 45Y and 48E 
credits is not appropriate unless and until their eligibility has been 
assessed and confirmed through an LCA that satisfies all the 
requirements of section 45Y(b)(2)(B) and these final regulations. The 
final regulations will therefore not reflect these commenters' 
suggestions.
4. Use of Natural Gas Alternatives
    The Treasury Department and the IRS announced in the preamble to 
the proposed regulations an intent to provide final regulations 
addressing electricity production that uses biogas, RNG, and fugitive 
sources of methane (collectively, natural gas alternatives), for 
purposes of the section 45Y and 48E credits. The assessment of GHG 
emissions with respect to such natural gas alternatives presents a 
complex set of technical questions. Thus, the preamble to the proposed 
regulations described various rules related to the use of natural gas 
alternatives in the production of electricity that the Treasury 
Department and the IRS were considering for inclusion in these final 
regulations. The preamble to the proposed regulations also included 
detailed comment requests about various aspects of the use of natural 
gas alternatives to inform the development of these final rules.
    The Treasury Department and the IRS received many comments 
regarding the treatment of natural gas alternatives. While specific 
recommendations are addressed later in this section, commenters broadly 
emphasized the importance and complexity of establishing appropriate 
alternative fates for these feedstocks. For example, some commenters 
noted that it is critical for the Treasury Department and the IRS to 
provide clear rules to enable RNG to be used in the production of clean 
electricity. Other commenters warned that failure to specify 
appropriate guardrails in this area could lead to incorrect emissions 
assessments and substantial claims under sections 45Y and 48E for C&G 
Facilities that in fact have net rates of GHG emissions that are 
greater than zero, which would undermine the purpose of sections 45Y 
and 48E.
    The Treasury Department and the IRS agree with commenters that the 
determination of alternative fates for natural gas alternatives is both 
complex and important for accurately determining eligibility under 
sections 45Y and 48E. GHG emissions rates for C&G Facilities generally 
must be determined consistent with section 45Y(b)(2)(B) and the rules 
provided in Sec.  1.45Y-5(d) and (f). Within this statutory and 
regulatory framework, the Treasury Department and the IRS have 
determined that specifically addressing the assessment of alternative 
fates for natural gas alternatives will help ensure accurate lifecycle 
GHG emissions determinations and prevent improper credit claims, 
advance sound tax administration, and increase certainty for taxpayers. 
Therefore, Sec.  1.45Y-5(e)(3) applies the rules in Sec.  1.45Y-5(d) 
and (f) to establish alternative fates for natural gas alternatives 
from certain sources that are used by a C&G Facility in the production 
of electricity. In assessing the alternative fates for certain sources 
of natural gas alternatives that may be used by a C&G Facility in the 
production of electricity, as provided in Sec.  1.45Y-5(e)(3), the 
Treasury Department and the IRS consulted extensively with interagency 
technical experts, including technical experts from the National 
Laboratories, to ensure that the requirements of the section 45Y and 
48E credits, as well as the rules in Sec.  1.45Y-5(d) and (f), were 
applied consistent with sound scientific principles.
    The use of natural gas alternatives and the assessment of lifecycle 
GHG emissions (as defined in section 42 U.S.C. 7545(o)(1)(H)) 
associated with such use is relevant beyond the section 45Y and 48E 
credits. For example, for purposes of the section 45V credit, Sec.  
1.45V-4(f)(3) establishes alternative fates for certain natural gas 
alternatives used in the production of hydrogen. The Treasury 
Department and the IRS have concluded that it will provide taxpayer 
certainty and advance sound tax administration to require that 
alternative fates for natural gas alternatives be addressed 
consistently across sections 45V, 45Y, and 48E, to the extent possible 
consistent with the requirements of each statute and incorporating 
consideration of comments.
    After careful consideration of the numerous comments submitted in 
response to the proposed regulations' specific requests for comment, 
the final regulations provide rules in Sec.  1.45Y-5(e) related to the 
use of natural gas alternatives in the production of electricity and 
the assessment of GHG emissions with respect to natural gas 
alternatives. Rather than provide rules that would specify a single, 
generic alternative fate for all natural gas alternatives (for example, 
capture and flaring), the Treasury Department and the IRS have 
considered the technical characteristics of different sources of 
natural gas alternatives and sought to apply the approach most 
appropriate for each type of source to provide an administrable and 
robust alternative fate for each sector.

[[Page 4072]]

a. Definitions
i. Biogas
    The preamble to the proposed regulations did not define the term 
``biogas,'' but, in the interest of completeness and clarity, Sec.  
1.45Y-5(e)(2)(i) clarifies that the term ``biogas'' means gas 
containing methane that results from the decomposition of organic 
matter under anaerobic conditions.
ii. Coal Mine Methane
    The preamble to the proposed regulations did not offer a definition 
of the term ``coal mine methane,'' but, in the interest of completeness 
and clarity, Sec.  1.45Y-5(e)(2)(ii) provides that the term ``coal mine 
methane'' means methane that is stored within coal seams and is 
liberated as a result of current or past mining activities. 
``Liberated'' coal mine methane (CMM) can be released intentionally by 
the mine for safety purposes, such as through mine degasification 
boreholes or underground mine ventilation systems, or it may leak out 
of the mine through vents, fissures, or boreholes. For the purpose of 
these regulations, the term ``coal mine methane'' does not include 
methane removed from virgin coal seams (for example, coal bed methane).
iii. Fugitive Methane
    The preamble to the proposed regulations would have defined the 
term ``fugitive methane'' to mean the release of methane through, for 
example, equipment leaks, or venting during the extraction, processing, 
transformation, and delivery of fossil fuels to the point of final use, 
such as CMM. Commenters noted that this definition was broad but did 
not recommend alternatives. The proposed definition is adopted in these 
final regulations without substantive change in Sec.  1.45Y-
5(e)(2)(iii). One commenter asserted that under no circumstances should 
methane from oil and gas operations be treated as fugitive methane 
because methane from oil and gas operations should be attributed the 
emissions profile of oil and natural gas production. The Treasury 
Department and IRS understand this concern and note that the baseline 
and alternative fates relevant to certain sources of fugitive methane 
are further discussed at sections VIII.E.4.c.i.C. and E. of this 
Summary of Comments and Explanation of Revisions.
iv. Renewable Natural Gas
    The preamble to the proposed regulations would have defined the 
term ``renewable natural gas'' to mean ``biogas that has been upgraded 
to be equivalent in nature to fossil natural gas.'' Some commenters 
suggested that the term ``renewable'' is misleading in this context 
because the production and use of such gas results in significant 
adverse impacts on public health and welfare. Although the Treasury 
Department and the IRS recognize these concerns, Sec.  1.45Y-
5(e)(2)(iv) does not adopt the suggested change in terminology because 
the term ``renewable natural gas'' is sufficiently clear, is a commonly 
used term in other regulatory programs and in commerce, and is unlikely 
to result in confusion. The term ``renewable natural gas'' and its 
proposed definition is therefore adopted without substantive change.
b. Considerations Regarding GHG Emissions Assessments of the Production 
of Electricity Using Methane From Natural Gas Alternatives
    The preamble to the proposed regulations explained that the rules 
provided in the final regulations regarding natural gas alternatives 
would apply to all natural gas alternatives used for purposes of 
sections 45Y and 48E. The preamble to the proposed regulations 
described and requested comment on several provisions the Treasury 
Department and the IRS were considering adopting in the final 
regulations to address the risk of significant indirect emissions and 
induced emissions from the use of natural gas alternatives in the 
production of electricity. This risk of significant indirect emissions 
and induced emissions can arise when natural gas alternatives are 
diverted from another productive use. In these situations, such 
productive uses may be backfilled with a different source that is not a 
natural gas alternative, such as fossil natural gas, which could result 
in associated emissions. For example, a facility that previously used 
its biogas for heat may opt to import fossil natural gas to satisfy its 
on-site energy needs. There is also a risk of significant indirect 
emissions, induced emissions, or inappropriate claims of the section 
45Y and 48E credits with respect to facilities that do not meet the 
statutory emissions requirements, if the incentives provided by 
sections 45Y and 48E result in the creation of new or expanded sources 
of methane or other GHGs that otherwise would not have existed, or the 
creation of additional methane that would not have been created or 
would have remained sequestered. Section 1.45Y-5(e)(3)(i) implements 
section 45Y(b)(2)(B), which, by reference to 42 U.S.C. 7545(o)(1)(H) 
requires consideration of direct and significant indirect emissions in 
the determination of the net rate of lifecycle GHG emissions into the 
atmosphere by a C&G Facility in the production of electricity.
i. GHG Emissions Associated With the Use of Natural Gas Alternatives
    The accurate assessment of GHG emissions is vital to determining 
eligibility under sections 45Y and 48E. GHG emissions assessments that 
underestimate the emissions associated with the production of 
electricity would mean that the section 45Y and 48E credits could be 
claimed for a facility even if its GHG emissions rates in fact exceed 
the zero-emissions eligibility threshold established by Congress. 
Because the Treasury Department and the IRS lack authority under 
sections 45Y and 48E to allow a facility that produces electricity with 
a GHG emissions rate (or, in the case of section 48E, an anticipated 
rate) that is greater than zero to be a qualified facility under 
section 45Y(b) and section 48E(b), guardrails are needed in the final 
regulations to address the risk of such credit claims.
    The preamble to the proposed regulations requested comments on the 
LCA considerations for methane derived from natural gas alternatives. 
To account for direct and significant indirect emissions, these 
considerations include, among other things, appropriate alternative 
fate scenarios and the assessment of current feedstock management 
practices. After consideration of the comments received, the final 
regulations address aspects of the GHG emissions analysis for natural 
gas alternatives used in the production of electricity. The following 
sections of this Summary of Comments and Explanation of Revisions 
address first productive use and general alternative fate assumptions 
ranging from venting to responsible avoidance of methane.
    The Treasury Department and the IRS agree with commenters who 
assert that accurately measuring GHG emissions rates for facilities 
that rely on methane from natural gas alternatives to produce 
electricity requires taking into account a wide range of factors to 
establish the alternative fate against which the use of methane to 
produce electricity should be assessed. Consistent with the reference 
to 42 U.S.C. 7545(o)(1)(H), the Treasury Department and the IRS 
interpret section 45Y(b)(2)(B) as requiring any LCA of a C&G Facility 
to address direct and significant indirect emissions. For a facility 
using methane as a fuel or feedstock for the production of electricity, 
that means accounting for direct and significant indirect emissions 
associated with the methane including

[[Page 4073]]

emissions resulting from the diversion of methane from an alternative 
productive use or from the expansion of existing sources or creation of 
new sources of natural gas alternatives. Consideration of such 
emissions is required under the principles for included emissions 
specified in Sec.  1.45Y-5(d)(2)(v).
ii. First Productive Use
    The preamble to the proposed regulations provided that the Treasury 
Department and the IRS intended to require that in order for natural 
gas alternatives to receive an emissions value consistent with that gas 
(and not fossil natural gas), the natural gas alternative used in the 
production of electricity must originate from the first productive use 
of the relevant methane. The preamble to the proposed regulations 
further noted that for any specific source, productive use would 
generally be defined as any valuable application of the relevant 
methane (for example, providing heat or cooling, generating 
electricity, or upgrading to RNG) and productive use would specifically 
exclude venting to the atmosphere or capture and flaring. The preamble 
to the proposed regulations further proposed to define ``first 
productive use'' as the time when a producer of the relevant methane 
first begins using or selling it for productive use in the same taxable 
year as (or after) the relevant electricity-generating facility was 
placed in service. Under this proposal, RNG produced from any source of 
methane, where the methane had been productively used in a taxable year 
prior to the taxable year in which the relevant electricity-generating 
facility was placed in service, would not have received an emission 
value consistent with biogas-based RNG, but would instead have received 
a value consistent with fossil natural gas. This proposal was intended 
to address emissions associated with the diversion of natural gas 
alternatives from other productive uses and the risk of emissions 
associated with the creation of new or expansion of existing sources of 
natural gas alternatives.
    The preamble to the proposed regulations noted that, for existing 
biogas or fugitive methane sources that typically productively use or 
sell a portion of the biogas and flare or vent the remainder, the 
flared or vented portion may be eligible for first productive use, 
provided the flaring or venting volume can be adequately demonstrated 
and verified. The Treasury Department and the IRS requested comment on 
these and other potential conditions on the use of natural gas 
alternatives in the production of electricity.
    After full consideration of the comments and as further explained 
elsewhere in this section, these final regulations do not impose a 
first productive use requirement. Although a first productive use 
requirement could effectively address important considerations in the 
determination of a GHG emissions rate, the Treasury Department and the 
IRS acknowledge that the requirement may be difficult for taxpayers to 
substantiate and to independently verify. Establishing compliance with 
a first productive use requirement could involve taxpayers needing to 
obtain detailed, often unavailable, historical documentation of the 
operations of the methane source, including historical production 
levels, material changes in waste source composition and volume, use of 
capture equipment and capture rates, sales or uses of captured methane, 
and waste management practices.
    Moreover, challenges in the administration of a first productive 
use requirement raise questions about the practical ability of a first 
productive use requirement to address the risk of direct or significant 
indirect emissions effectively. Instead of a first productive use 
requirement, for determining GHG emissions rates associated with the 
use of natural gas alternatives, the more appropriate approach is to 
take the likelihood of alternative productive use into account in 
assessing the alternative fate of such gas.
    The Treasury Department and the IRS received many comments 
addressing the first productive use requirement. Many commenters 
questioned the legal and technical basis of a first productive use 
requirement. Several commenters asserted that a first productive use 
requirement is not authorized by statute, overly restricts otherwise 
eligible biogas and RNG feedstocks that could support clean electricity 
production and ignores the fact that there are numerous reasons an 
existing biogas facility may switch productive uses, including, but not 
limited to, the expiration of existing contracts, like power purchase 
agreements. Other commenters asserted that there is no evidence that 
using RNG to generate electricity will result in the induced emissions 
that appear to underlie the first productive use requirement.
    Several commenters argued that industry data suggests that domestic 
production of biogas and RNG can support both new electricity 
production and current end uses like compressed natural gas (CNG) 
transportation vehicles; thus, within the timeframe within which the 
section 45Y and 48E credits will be available there is ample capacity 
to serve demand in many sectors, without causing induced emissions. 
Similarly, several commenters stated that much of the RNG produced in 
the United States is used in the transportation sector for compliance 
with the RFS and/or state clean fuel programs like the California Low 
Carbon Fuel Standard (LCFS). Further, these commenters suggested that 
since these programs drive deployment of a specific amount of compliant 
fuels, if an existing RNG supplier leaves these transportation markets 
to supply RNG as a feedstock to an electricity-generating facility, the 
prior end use of such RNG will be backfilled with other compliant fuels 
(for example, those that meet the RFS's GHG requirements).
    In response to these comments, the Treasury Department and the IRS 
acknowledge that these existing transportation fuel programs, chiefly 
the RFS and California's LCFS, have been the primary drivers for 
deployment of RNG domestically. The Treasury Department and the IRS 
agree that the existence of these programs mitigates the risk that RNG 
currently produced for such programs will be redirected to electricity 
production. Despite this, there still remains a risk that RNG (or 
biogas) could be redirected to electricity production from other 
current uses. Additionally, because RNG currently comprises the vast 
majority of cellulosic biofuel credits generated under the RFS program, 
it is not necessarily the case that RNG previously used in this program 
would be backfilled with other compliant fuels should insufficient RNG 
be available for use as U.S. transportation fuel. As discussed 
previously, however, these final regulations do not impose a first 
productive use requirement at this time, but instead take an alternate 
approach to addressing these concerns.
    Several commenters suggested the Treasury Department adopt a mid-
program 5-year ``check-in'' to evaluate whether electricity produced 
using RNG is leading to unintended increases in emissions. Facilities 
that have achieved commercial operation during this period could 
qualify as ``additional'' for purposes of tax credit eligibility. 
Several commenters suggested that a robust assessment of any induced 
emissions associated with redirecting RNG from its prior use would 
demonstrate that such consideration would not result in an increase in 
the emissions rate and, therefore, such emissions need not be 
considered due to the speculative nature of the initial premise. One 
commenter

[[Page 4074]]

noted that a potential alternative is to add an indirect emission 
charge equal to the emissions associated with the extraction, 
processing, and delivery of fossil natural gas to backfill the prior 
demand for such gas.
    In response to these comments, the Treasury Department and the IRS 
acknowledge that the first productive use requirement, which is not 
required as part of these final regulations due to the difficulties in 
proving and verifying first productive use, would address two aspects 
of lifecycle GHG emissions assessments, both of which must be 
considered under section 45Y(b)(2)(B). First, a first productive use 
requirement would mitigate the risk of emissions associated with the 
diversion of natural gas alternatives from a productive use other than 
the production of electricity. Although methane from natural gas 
alternatives could be used for different productive uses, the potential 
emissions associated with changes in use are nonetheless relevant in 
the determination of a GHG emissions rate. Second, a first productive 
use requirement aids in the determination of the appropriate 
alternative fate of natural gas alternatives used in the production of 
electricity. Comments questioning a first productive use requirement 
because of a lack of evidence of induced emissions arising from shifts 
in behavior due to the availability of the section 45Y and 48E credits 
are not dispositive. Section 45Y(b)(2)(B) does not require empirical 
evidence of direct and significant indirect emissions associated with a 
newly available incentive like the section 45Y and 48E credits before 
the likelihood of such emissions may be considered, and such a 
restriction would systematically underestimate such emissions. As 
further explained elsewhere in this section, it is necessary for a GHG 
emissions assessment that is consistent with the statutory definition 
of lifecycle GHG emissions in 45Y(b)(2)(B) to reflect the emissions 
effects that can be reasonably expected to occur based on current or 
future market trends and drivers, inclusive of incentives and 
regulation.
    Many commenters raised concerns about the effect a first productive 
use requirement would have on deployment of RNG production technologies 
and suggested it could also have other undesirable effects on the 
market for certain methane sources. Several comments suggested the 
first productive use rule limits RNG pathways by creating a de facto 
strict additionality requirement that is unnecessary. Several 
commenters stated that the first productive use requirement is overly 
burdensome and will unnecessarily curtail methane abatement at scale.
    Several commenters argued that the proposed ``first productive 
use'' requirement would cause a significant value discrepancy for new 
projects, creating a market distortion, greater risk of stranded gas 
for existing projects, added complexity, and higher prices for end-
consumers. Several commenters argued that adding a first productive use 
rule creates potential unintended consequences of RNG plants sitting 
idle if the deployment of a facility does not coincide with the RNG 
plant completion dates.
    Assuming the implementation of the first productive use 
requirement, many comments requested modifications, changes to, or 
transitional relief to the first productive use requirement outlined in 
the preamble to the proposed regulations. One commenter recommended the 
first productive use requirement be satisfied by any use that is more 
productive than the prior use. This commenter suggested that the first 
productive use rule may be overly restrictive and that it could be 
beneficial to relax the first productive use requirement, so long as 
the new use of the RNG delivers overall lower net emissions than its 
original fate. One commenter suggested there should be no restrictions 
on RNG; however, if a first productive use rule is implemented, then it 
should apply a look-back period of 36 months. Several commenters stated 
the first productive use requirement should be eliminated or modified 
as it relates to production using CMM. Several comments recommended 
that each individual borehole for CMM be seen as additional and as a 
first productive use of supply due to each of them being a unique 
investment decision requiring incremental capital expenditure to 
mitigate leaking methane. Several commenters asserted that if the first 
productive use requirement is adopted, it must be applied to each 
methane source--that is, at the digester or lagoon-level for RNG and 
borehole-level for CMM so as to reflect how investment decisions are 
made. Several commenters noted that once a low-carbon gas source is 
accepted as meeting a first productive use requirement (if adopted), it 
should not be exclusively tied to a particular electricity-generating 
facility.
    For the reasons previously discussed, these final regulations do 
not impose a first productive use requirement, and so modifications, 
changes, and transitional relief are not necessary. The Treasury 
Department and the IRS will continue to consider the recommendations 
raised by these comments in evaluating whether imposing a first 
productive use requirement, with potential modifications, may be 
appropriate in future guidance under sections 45Y and 48E.
    Many commenters supported imposing a first productive use 
requirement and some recommended additional guardrails. One commenter 
asserted that the proposed first productive use rule would help direct 
biomethane that is otherwise vented (or, in some cases, flared) to 
electricity generation, rather than creating an additional demand for 
methane by taking from other sources that may meet that demand through 
dirtier sources of energy. According to the commenter, a first 
productive use requirement is important to avoid significant indirect 
emissions associated with electricity generation from biomethane. The 
commenter noted that avoiding significant indirect emissions is 
especially important for agricultural methane emissions, which have 
risen over the last few decades despite overall declines in national 
methane emissions. Several commenters supported the proposed 
regulations and argued that enforcing the first productive use rule and 
narrowly tailoring the definition of first productive use are critical 
to prevent the significant amount of RNG production today shifting to 
electricity generation. The commenters posited that diversion of 
currently produced and used RNG to electricity generation would be 
backfilled with fossil natural gas and contended that this is 
especially true for existing RNG heat applications and CNG-powered 
vehicles. One commenter stated that the proposed rule requiring the 
first productive use be matched to the same taxable year as (or after) 
the electricity-generating facility is placed in service would help to 
limit any diversion of biogas or RNG from other pre-existing uses, 
which might otherwise increase overall emissions. Several comments 
supported prohibiting crediting biomethane or fugitive methane that has 
previously been put to productive use and stated that a first 
productive use requirement would ensure emissions reductions claimed 
under the section 45Y and 48E credits are indeed additional to the 
climate system overall. The Treasury Department and the IRS agree with 
many of the observations made in these comments. While these final 
regulations do not adopt a first productive use requirement for the 
reasons stated earlier in this Summary of Comments and Explanation of 
Revisions, the Treasury Department and the IRS have considered these 
observations regarding

[[Page 4075]]

alternative productive use of natural gas alternatives when 
establishing the alternative fates.
c. Alternative Fates
    Section 1.45Y-5(d)(2)(vii) clarifies that an LCA of a C&G Facility 
may consider alternative fates and account for avoided emissions, 
including for the fuels and feedstocks consumed in the fuel and 
feedstock supply chain and at the electricity generating facility.
    These final regulations establish general requirements for 
lifecycle GHG emissions determinations for facilities that use methane 
derived from natural gas alternatives to produce electricity, requiring 
such determinations to consider the alternative fates of that methane, 
including avoided emissions and alternative productive uses of that 
methane; the risk that the availability of tax credits creates 
incentives to produce additional methane or otherwise induces 
additional emissions; and observable trends and anticipated changes in 
waste management and disposal practices over time as they are 
applicable to methane generation and uses. The emissions risks that 
would have been addressed by a first productive use requirement are 
addressed in the development of the appropriate alternative fates for 
certain sources of natural gas alternatives, thereby reflecting an 
accurate assessment of GHG emissions pursuant to section 45Y(b)(2)(B). 
The factors considered in establishing the appropriate alternative fate 
are interrelated and must account for other aspects of these final 
regulations. For example, because these final regulations do not impose 
a first productive use requirement, there may be a greater likelihood 
that the appropriate alternative fate for certain sources of natural 
gas alternatives should be productive use.
    As previously discussed, analytical decisions regarding the 
alternative fate of natural gas alternatives are critical in the 
assessment of their carbon intensity. Commenters suggested a range of 
broadly applicable alternative fate assumptions for methane from 
natural gas alternatives. Recommendations included venting, flaring, 
productive use, and responsible avoidance of waste-stream-generated 
methane. Rather than adopting a single alternative fate for all natural 
gas alternatives, these final regulations instead address specific 
considerations for each major source of natural gas alternatives. This 
section of this Summary of Comments and Explanation of Revisions 
addresses comments recommending broadly applicable alternative fates, 
while comments addressing alternative fates for specific sources of 
methane are discussed in section VIII.E.4.c.i. of this Summary of 
Comments and Explanation of Revisions.
    Several commenters stated that it is only appropriate to compare 
alternative fates against a suite of alternative best practices. The 
commenters noted that only comparing utilization emissions against a 
limited scope of alternatives may exclude practices that offer the 
greatest potential climate and environmental justice benefits. For 
example, one commenter asserted that any methane that can be captured 
should be assigned a baseline counterfactual of capture and flare, 
which would acknowledge the cost of methane pollution and other 
economic and regulatory factors already driving abatement. Several 
commenters suggested that the assessment of an alternative fate should 
consider practices that offer the best climate and environmental 
justice benefits. The Treasury Department and the IRS understand these 
comments but emphasize that an alternative fate must reflect the 
appropriate assumptions that are relevant to estimating emissions 
impacts that would have occurred in the absence of the implementation 
of policy.
    One commenter stated that specificity should be critical in 
designating alternative fates because, for example, while RNG, biogas, 
or fugitive methane may be chemically the same, they may have very 
different emissions. Several commenters stated that any alternative 
fate must assume that relevant laws would have been followed if the tax 
credits did not exist. For example, according to one commenter, 
emissions should not be based on a venting alternative fate, if venting 
would have been illegal.
    Commenters supported and opposed a venting alternative fate (that 
is, assuming the methane in question would have been released directly 
to the atmosphere rather than flared or productively used) for a range 
of reasons that are discussed further in the discussion of specific 
sources of natural gas alternatives that follow. In response to these 
commenters, the Treasury Department and the IRS note that venting is 
not an appropriate alternative fate to apply across all sources of 
natural gas alternatives, because it does not account for the 
prevalence of flaring and productive use, nor does it address the risk 
of induced emissions due to the incentives provided by the section 45Y 
and 48E credits. The Treasury Department and the IRS also anticipate 
that a venting baseline would become increasingly inappropriate over 
time, due to ongoing and anticipated changes in regulations and 
operational practices. The section 45Y and 48E credits are available 
for facilities that begin construction before these credits are phased 
out under sections 45Y(d) and 48E(e). These final regulations also 
permit taxpayers to rely on the Annual Table that was in effect when a 
facility began construction or a PER determined with respect to a 
facility for the duration of the facility's 10-year credit period, 
provided the facility continues to operate as a type of facility that 
is described in the Annual Table or in the facility's emissions value 
request. Therefore, consistent with the requirement in Sec.  1.45Y-
5(d)(2)(iii) to apply a future anticipated baseline, Sec.  1.45Y-
5(e)(3) provides that the GHG emissions rate of a C&G Facility that 
uses methane derived from biogas, RNG, or CMM (or any hydrogen derived 
from methane from these sources) as a fuel or feedstock to produce 
electricity must take into account anticipated changes in waste 
disposal practices or use of that methane over the relevant timeframe.
    The Treasury Department and the IRS expect venting prohibitions to 
expand in future years, as local, state, and Federal policy 
restrictions on venting are becoming increasingly common. While the 
policy landscape for specific methane sources is discussed later in 
this section, a range of current and prospective state policies 
limiting venting of different RNG sources or encouraging more 
responsible methane management practices indicates the trajectory of 
state action in this area. For example, California, Colorado, Maryland, 
Michigan, Oregon, and Washington have all recently taken or imminently 
plan to take action to restrict venting and require more responsible 
methane management practices, in some cases beyond the Federal 
standards currently in place.
    As discussed in more detail regarding specific sources of natural 
gas alternatives, there are significant voluntary Federal incentives to 
encourage responsible methane management practices. There is also 
evidence of ongoing growth in methane capture through proliferation of 
landfill gas capture and anaerobic digesters. For example, as shown in 
updated project database files from EPA's Landfill Methane Outreach 
Program (LMOP), as of September 2024 there are 1,245 landfills with 
operational gas collection and control systems, as compared to

[[Page 4076]]

1,187 in 2014.\8\ Additionally, LMOP data shows growth in the number of 
landfill gas energy projects upgrading landfill gas to RNG. As of 
September 2024, there are 110 operational RNG projects (as compared to 
63 projects in 2019) and 102 planned or under construction.\9\ In 
addition, as subsequently discussed, there has been rapid growth in the 
construction of animal waste digesters, largely as a result of policy 
incentives, with data from AgSTAR showing an additional 172 operational 
anaerobic digesters accepting livestock manure in 2024 relative to 2019 
(267 digesters).\10\ AgSTAR data also demonstrates rapid growth in RNG 
projects (including pipeline injection and CNG for vehicle fuel or 
other uses), with 191 RNG projects in 2024 compared to 32 in 2019, and 
only 8 in 2017.\11\ As of 2023, CNG has surpassed CHP property as the 
most common end use of biogas from manure-based anaerobic digestion 
systems in AgSTAR.\12\ In light of all these trends, a methane venting 
baseline across all natural gas alternatives is inaccurate today, and, 
over time, the assumptions and inputs will likely become increasingly 
erroneous as regulations, markets, and resource management practices 
evolve during the period over which the section 45Y and 48E credits are 
available. This supports the use of reasonably conservative alternative 
fates in the face of uncertainty to provide greater assurance that 
facilities will comply with the statutory emissions requirements.
---------------------------------------------------------------------------

    \8\ LMOP Landfill and Project Database, U.S. Environmental 
Protection Agency, available at https://www.epa.gov/lmop/lmop-landfill-and-project-database (last updated Sept. 20, 2024).
    \9\ Id.
    \10\ AgSTAR Data and Trends, Biogas Data and Trends, U.S. 
Environmental Protection Agency, available at https://www.epa.gov/agstar/agstar-data-and-trends#biogasfacts (last updated Nov. 27, 
2024).
    \11\ Id.
    \12\ Id.
---------------------------------------------------------------------------

    The Treasury Department and the IRS also agree that conservative 
approaches to assessing alternative fates of natural gas alternatives 
may be an appropriate response to challenges in documenting and 
verifying alternative fates applicable to specific sources of natural 
gas alternatives in order to better ensure compliance with the 
statutory emissions requirements of sections 45Y and 48E. However, such 
conservative approaches should consider the distinct characteristics of 
each source or type of source, to the extent reasonably practicable. 
Thus, although a capturing and flaring alternative fate may be 
generally appropriate for some categories of sources of natural gas 
alternatives, it is not appropriate for all sources of natural gas 
alternatives.
    Some commenters suggested that the alternative fate assumption for 
all methane derived from waste streams should be alternative productive 
use. As explained subsequently, the Treasury Department and the IRS 
have concluded that the significant and, in some cases, growing rates 
of productive use of methane from certain waste streams is an important 
consideration in establishing alternative fate assumptions for 
measuring GHG emissions rates. Because not all methane from waste 
streams is used productively, however, applying an alternative fate of 
productive use as a general rule for natural gas alternatives would 
understate the potential emissions benefits of using such gas in the 
production of electricity in some contexts. The final regulations, 
therefore do not adopt these comments.
    Some commenters suggested that the alternative fate assumption for 
all waste stream-generated methane should be responsible avoidance of 
such methane production by applying practices that minimize its 
production. These commenters highlighted the risk that incentives 
created by the section 45Y and 48E credits would lead to the production 
of more methane than would have otherwise occurred. The Treasury 
Department and the IRS agree that this is an important consideration 
that must be addressed pursuant to Sec.  1.45Y-5(d)(2)(v)(A) and (B).
    For new methane that would not have been produced in the absence of 
the section 45Y and 48E credits, use of such methane for electricity 
production must not be reflected as avoided methane emissions in an LCA 
for a C&G Facility. For example, for certain waste streams, the volumes 
of waste-stream-generated methane produced by a certain practice can be 
affected by operator actions, such as a change in manure management 
practices from land disposal to lagoon disposal, or heating an 
anaerobic digester to increase the amount of methane produced. 
Moreover, in some cases, the cost of generating additional methane may 
be small compared to the value of the section 45Y and 48E credits.
    The availability of the section 45Y and 48E credits may lead to 
generation of methane in the form of natural gas alternatives for the 
purpose of supplying feedstocks or fuel that would be used to produce 
electricity by a facility seeking to claim a credit under sections 45Y 
and 48E. In those instances, the appropriate alternative fate is that 
the methane generated from waste streams, or increments of it, would 
not have been created in the first place or that it would have remained 
sequestered. In such scenarios, it would be inappropriate to credit 
electricity production with avoided emissions because the analysis must 
address methane leakage and combustion emissions that otherwise would 
not have occurred, and crediting these scenarios with avoided emissions 
would likely result in allowing a section 45Y or 48E credit with 
respect to a facility that is ineligible for the credit based on the 
statutory emissions requirements. This is a particularly important 
consideration for certain types of methane-producing practices and 
materials, and for determining the appropriateness of alternative fates 
that can result in highly negative GHG emissions rate estimates if 
emissions from additional methane generation are not accounted for, 
which would create potentially large incentives for additional waste 
production, potentially resulting in highly inaccurate lifecycle GHG 
emissions assessments.
    In light of the substantial venting and flaring of methane that 
currently occurs, an alternative fate of avoidance would in many 
instances understate the emissions benefits of capturing such gas and 
using it to produce electricity. To meet statutory requirements, 
however, incentives for methane creation must be considered in the 
determination of a GHG emissions rate.
    It is not practicable for the Treasury Department and the IRS to 
ascertain which specific waste-stream-generated methane would not exist 
absent the incentives provided by the section 45Y and 48E credits, nor 
is it practicable to precisely estimate the market-mediated emissions 
of such an incentive effect. To ensure that these emissions are 
accounted for, as is required under the statute, the Treasury 
Department and the IRS have concluded that the most administrable and 
appropriate way to take into account the economic incentives for 
additional waste production is in the establishment of the alternative 
fates that generally apply to particular feedstocks. Specifically, in 
settings where a significant but non-identifiable share of methane from 
some sources could be produced in response to incentives provided by 
the section 45Y and 48E credits or other programs, alternative fate 
assumptions that result in highly negative emissions estimates are 
likely to be inaccurate and understate the real-world GHG emissions. 
The final regulations require that determinations of alternative fates 
for methane derived from biogas, RNG, or fugitive methane consider the 
risk that the availability of tax credits creates

[[Page 4077]]

incentives to produce additional methane.
i. Alternative Fate Considerations for Methane From Certain Sources
    Informed by the considerations discussed previously, Sec.  1.45Y-
5(e)(3)(ii) through (vi) specifically address the alternative fate 
considerations for methane from landfill gas, wastewater, CMM, animal 
waste sources, and fugitive methane other than CMM. The following 
sections of this Summary of Comments and Explanation of Revisions 
address these specific sources of natural gas alternatives in further 
detail. These final regulations have developed alternative fates on a 
sector-by-sector basis because determining and validating alternative 
fates on an entity-by-entity basis would not be practicable. As 
discussed previously, identifying an appropriate alternative fate for 
specific sources of natural gas alternatives would depend not only on 
the specific facts and circumstances (for example, whether methane from 
the source was already being productively used), but would also require 
an entity-by-entity assessment of the applicability of alternative fate 
scenarios with many complex factors potentially relevant to that 
assessment (for example, financial incentives absent the section 45Y 
and 48E credits, regulatory considerations, or trends in waste 
management or disposal practices). It would be highly burdensome for 
taxpayers to demonstrate, and impractical to confirm as a matter of tax 
administration, that a specific methane source had certain historic 
practices and whether in the future that source would have had a 
certain disposition other than the one that actually occurred. 
Quantities of methane from an individual source could even have 
different alternative fates. For example, assuming a situation where, 
absent tax incentives, a source capturing and using methane would have 
produced less methane and vented it, the alternative fate for that 
amount of methane (venting) would differ dramatically from the 
alternative fate of the additional methane produced due to the tax 
incentive (no methane produced or emitted). Given these significant 
administrative challenges, alternative fates are assessed and applied 
on a sector-by-sector basis in these final regulations.
A. Alternative Fate Considerations for Methane From Landfill Gas
    A number of commenters highlighted competing considerations in 
determining the appropriate alternative fate for methane from landfill 
gas. Several commenters stated that venting is the correct alternative 
fate for landfill gas. Several commenters stated that a venting 
alternative fate is not appropriate where relevant laws and regulations 
require a landfill to capture biogas. Several commenters stated that 
capture and flare is the correct alternative fate for methane and that, 
in the case of landfills, the uncaptured portion of methane gas should 
be part of the lifecycle analysis. One commenter specified the 
appropriate alternative fate is flaring at a 95-98 percent destruction 
efficiency. Another commenter noted the GREET model does not currently 
include fugitive methane emissions at a landfill in the LCA, even 
though fugitive methane emissions can negate the climate and 
environmental benefits of biomethane projects. One commenter stated 
that landfills do not deliberately generate additional biogas in order 
to qualify for a tax credit.
    The Treasury Department and the IRS note that regulations 
increasingly require flaring of landfill gas, and anticipated changes 
in regulatory requirements and operational practice are an important 
consideration in determining appropriate alternative fates. The EPA 
currently regulates emissions (in the form of landfill gas using non-
methane organic compound (NMOC) emissions as a surrogate) from 
landfills under section 111 of the CAA; EPA regulations under the Solid 
Waste Disposal Act (commonly known as the Resource Conservation and 
Recovery Act, or RCRA) mandate certain landfill management practices 
that also affect methane emissions from landfills. As noted later, 
several states have adopted additional more stringent requirements for 
landfill methane emissions. Also, the EPA has announced that it intends 
to update and strengthen its existing landfill regulations under 
section 111 of the CAA in 2025 (the current rules for landfill gas 
emissions were finalized in 2016).\13\ Pursuant to the EPA's regulatory 
plan, the EPA plans to revisit the rule to understand how new 
technologies and approaches could be incorporated into updated New 
Source Performance Standards (NSPS) and Emissions Guidelines to reduce 
emissions from municipal solid waste landfills and to protect the 
environment and the health of people that live nearby.\14\
---------------------------------------------------------------------------

    \13\ Non-regulatory Public Docket: Municipal Solid Waste 
Landfills, U.S. Environmental Protection Agency, available at 
https://www.epa.gov/stationary-sources-air-pollution/non-regulatory-public-docket-municipal-solid-waste-landfills (last updated Dec. 9, 
2024); Press Release, The White House, Fact Sheet: Biden-Harris 
Administration Announces New Actions to Detect and Reduce Climate 
Super Pollutants (Jul. 23, 2024), available at https://www.whitehouse.gov/briefing-room/statements-releases/2024/07/23/fact-sheet-biden-harris-administration-announces-new-actions-to-detect-and-reduce-climate-super-pollutants; Keaton Peters, Is the 
EPA About to get Serious About Methane Pollution from Landfills?, 
Canary Media (Jul. 10, 2024), available at https://www.canarymedia.com/articles/methane/is-the-epa-about-to-get-serious-about-methane-pollution-from-landfills.
    \14\ Reconsideration of Standards of Performance and Emissions 
Guidelines for Municipal Solid Waste Landfills (RIN 2060-AU24) 
available at https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=202404&RIN=2060-AU24.
---------------------------------------------------------------------------

    In particular, certain landfills are subject to NSPS (40 CFR part 
60, subpart XXX) and Emissions Guidelines (40 CFR part 60, subpart Cf) 
under section 111 of the CAA (collectively, NSPS/EG Rules). The listed 
regulated pollutant under these regulations is ``landfill gas.'' The 
EPA has also promulgated National Emissions Standards for Hazardous Air 
Pollutants (NESHAP) (40 CFR part 63, subpart AAAA) in 2020 that 
regulate the emissions of Hazardous Air Pollutants (HAP) from 
landfills. The NESHAP regulates HAP emissions by requiring landfills 
that exceed the size and NMOC emission thresholds to install and 
operate a landfill gas collection and control system (GCCS). As in the 
NSPS/EG, the GCCS is required to include a control device capable of 
reducing NMOC emissions by 98 percent. This system will also reduce 
emissions of methane since methane makes up approximately 50 percent of 
the landfill gas.
    The EPA's current CAA section 111 NSPS provides emissions control 
requirements for new (since 2014) municipal solid waste landfills. 40 
CFR part 60, subparts WWW and XXX. The section 111 emissions guidelines 
(EG) cover existing (pre-2014) municipal solid waste landfills through 
requirements that are adopted by states through state plans, or by the 
EPA in the event a state does not submit an approvable plan. 40 CFR 
part 60, subpart Cf. Both new and existing landfills that exceed 
specified size and emissions thresholds must install landfill gas GCCS 
and use, sell, or flare (combust) the gas. The EPA estimated that 846 
landfills would be required to collect and control landfill gas under 
these regulations by 2025.\15\ In addition, landfills covered by these 
regulations and that have GCCS installed must conduct quarterly surface 
monitoring for leaks. In the states with more stringent state 
requirements, the requirements

[[Page 4078]]

commonly apply to smaller landfills, landfills with lower emissions 
levels, and/or apply more stringent emissions control measures compared 
to the Federal requirements. A number of other landfills that are not 
subject to emissions control regulations nevertheless have installed 
landfill GCCS and are either flaring, combusting the gas for energy 
generation, or upgrading it and injecting it in the pipeline system for 
sale.\16\ The LMOP tracks voluntary GCCS installation based on 
available data reported by program partners. As of 2024, at least 450 
landfills operate a GCCS without being required by regulation. Many of 
the landfills that are not currently regulated or voluntarily 
collecting gas may be required to collect and control landfill gas 
emissions during the timeframe in which the section 45Y and 48E credits 
are available, as additional regulation is expected at both the Federal 
and state level.\17\
---------------------------------------------------------------------------

    \15\ U.S. Environmental Protection Agency, Final Updates to 
Performance Standards for New, Modified and Reconstructed Landfills, 
and Updated to Emission Guidelines for Existing Landfills: Fact 
Sheet (Sept. 2016), available at https://www.epa.gov/sites/default/files/2016-09/documents/landfills-final-nsps-eg-factsheet.pdf.
    \16\ Landfill Methane Outreach Program (LMOP), U.S. 
Environmental Protection Agency, available at https://www.epa.gov/lmop (last updated Dec. 5, 2024).
    \17\ In addition to upcoming EPA regulations, additional states 
are also contemplating regulations. See, for example, Landfill 
Methane Reductions in Colorado, Colorado Department of Public Health 
and Environment, available at https://cdphe.colorado.gov/landfill-methane-reductions-in-colorado; New York Department of Environmental 
Conservation et al., Methane Reduction Plan (May 2017), available at 
https://extapps.dec.ny.gov/docs/administration_pdf/mrpfinal.pdf.
---------------------------------------------------------------------------

    Given that landfill gas collection and use or flaring is 
widespread, as it is required by regulation for an increasing number of 
landfills and often supported by GHG credit programs when it is not 
otherwise required, an assumption that absent the section 45Y and 48E 
credits the typical practice would be uncontrolled venting is not 
supportable. The Treasury Department and the IRS have determined that 
since collection and flaring is required by law for the largest sources 
of landfill gas, and is increasingly being required for smaller sources 
as well, collection and flaring is the most appropriate alternative 
fate assumption for the sector as a whole given its prevalence. 
Although a flaring alternative fate will result in an underestimate of 
lifecycle GHG emissions for landfills with current productive use, the 
fact that there are some landfills where capture and flaring or 
productive use is not yet occurring, in combination with the prevalence 
of flaring, makes a flaring alternative fate the most robust approach 
for the sector as a whole. Section 1.45Y-5(e)(3)(ii) of the final 
regulations provides that, for purposes of determining the GHG 
emissions rate of a C&G Facility (as defined in Sec.  1.45Y-5(b)(4)) 
that produces electricity through combustion or gasification using 
methane derived from landfill sources as a fuel or feedstock, the 
alternative fate of such gas must be flaring.
B. Alternative Fate Considerations for Methane From Wastewater
    Several commenters stated that the R&D GREET 2023 model provides a 
reasonable baseline assumption that should be applied for all 
wastewater sludge projects. These commenters noted that a digester 
would be present on site and the biogas would be flared or consumed on 
site, and this should inform the baseline in establishing the 
alternative fate of the methane. Another commenter stated that it would 
be incorrect to presume both that most wastewater treatment plants have 
operational biogas/anaerobic digester systems and that operational 
biogas systems are flaring their gas. The commenter further asserted 
that, based on the American Biogas Council's database of wastewater 
facilities maintained under a memorandum of understanding with the 
Water Environment Federation, the vast majority of operational digester 
systems at wastewater plants are using such biogas to produce renewable 
electricity, RNG, or heat, which, according to the commenter, offsets 
fossil fuel use and its related emissions.
    National-level data on anaerobic digestion at wastewater treatment 
plants and the use of biogas produced is limited. There are more than 
16,000 wastewater treatment plants in the U.S. While most wastewater 
treatment plants in the U.S. serve small populations and do not process 
sufficiently large wastewater flows to justify the installation of 
anaerobic digesters, which are capital-intensive, anaerobic digesters 
are very prevalent among the smaller number of large wastewater 
treatment facilities that process the large majority of wastewater: the 
largest 8 percent of facilities (1,132 facilities that each handle 
greater than 5 million gallons per day) process 77 percent of total 
national wastewater flow, according to Argonne National Laboratory.\18\ 
Among the 1,100 generally large wastewater treatment plants that have 
anaerobic digesters, 860 have the equipment to use their biogas on 
site, according to the U.S. Department of Energy Alternative Fuels Data 
Center.\19\ Additionally, nearly all biogas-producing wastewater 
treatment plants surveyed in 2018 reported flaring at least some of 
their biogas, based on the Nationwide Survey of WRRF Biosolids Programs 
released in 2022.\20\ Venting practices are not reported in any 
national datasets, although vents are required to prevent over-
pressurization events in biogas storage systems and local regulators 
may require facilities to track and report venting events. Some 
facilities combust biogas to heat their digesters and some also take 
advantage of the additional heat availability for on-site biosolids 
drying.
---------------------------------------------------------------------------

    \18\ Ha, Miae, et al. ``Opportunities for Recovering Resources 
from Municipal Wastewater.'', Jul. 2022. https://doi.org/10.2172/1876441.
    \19\ See https://afdc.energy.gov/fuels/natural-gas-renewable.
    \20\ National Biosolids Data Project, Nationwide Survey of WRRF 
Biosolids Programs https://www.biosolidsdata.org/downloads/nationwide-wrrf-survey-cleaned-data-spreadsheet.
---------------------------------------------------------------------------

    Given that use or flaring of methane from wastewater is generally 
applied to the majority of wastewater generated domestically, an 
assumption that absent the section 45Y and 48E credits the typical 
practice would be uncontrolled venting is not supportable. Section 
1.45Y-5(e)(3)(iii) of the final regulations therefore provides that, 
for purposes of determining the GHG emissions rate of a C&G Facility 
(as defined in Sec.  1.45Y-5(b)(4)) that produces electricity through 
combustion or gasification using methane derived from wastewater 
sources as a fuel or feedstock, the alternative fate of such gas must 
be flaring of gas not used to heat the anaerobic digester.
    For the large majority of biogas from wastewater treatment plants, 
this is either consistent with current practice or modestly 
overestimates avoided emissions in cases where the portion of biogas 
not needed to satisfy on-site heat requirements would otherwise have 
been productively used. Although a flaring alternative fate for this 
additional biogas will result in an over-estimate of avoided GHG 
emissions for wastewater treatment plans with current productive use 
beyond satisfying on-site heat demands, this potential overestimation 
of GHG emissions avoidance is counterbalanced by the existence of 
wastewater treatment plants where capture and flaring or productive use 
is not yet occurring, thus making the specified alternative fate the 
most appropriate approach for the sector as a whole.
C. Alternative Fate Considerations for Coal Mine Methane
    The Treasury Department and the IRS recognize that fossil sources 
of fugitive methane can be utilized for the production of electricity. 
Many commenters specifically noted the feasibility of producing 
electricity from

[[Page 4079]]

CMM and identified venting as a common alternative fate. One commenter 
noted concerns associated with allowing for the use of fugitive methane 
from sources such as coal mines until robust lifecycle analysis, 
verifiability, incrementality, and other principles related to the 
emissions impacts of this gas are demonstrated. Another commenter 
recommended that the emissions associated with coal mine methane be 
determined consistent with the GREET model maintained by Argonne 
National Laboratory.
    Drainage gas is the subset of CMM that is most likely to be used 
for electricity generation, due to its high methane content. Drainage 
systems are a mechanism of recovering methane from underground mines to 
maintain safe operating conditions.\21\ These systems are typically 
installed when ventilation systems are insufficient to maintain 
underground methane concentrations within permissible limits. Unlike 
drainage gas, ventilation gas is typically dilute in methane content 
and therefore is not widely used for electricity production.
---------------------------------------------------------------------------

    \21\ Active underground mines that liberate more than 36,500,000 
actual cubic feet of methane per year report annually to GHGRP on 
whether their drainage gas is vented or destroyed.
---------------------------------------------------------------------------

    Based on consultation with interagency experts, the Treasury 
Department and the IRS understand that the EPA's GHGRP is the only 
national public database with historical information provided annually 
by large active underground mines regarding their treatment of drainage 
gas. Review of data submitted by coal mines to GHGRP under 40 CFR part 
98, subpart FF, indicates that, while the majority of ventilation gas 
liberated by coal mines over the past decade has been vented, the 
majority of drainage gas has been productively used or flared. Mine 
practices have fluctuated, with some mines transitioning from 
predominantly venting drainage gas to predominantly using or destroying 
such gas. Factors that can affect the extent to which a mine vents, 
flares, and/or productively uses such gas in a given year include the 
amount of methane required by onsite equipment (for example, engines); 
proximity to offsite infrastructure (for example, pipelines); and the 
lucrativeness of programs incentivizing the capture of CMM. Incentives 
for CMM destruction and utilization that are currently available 
include state offset programs, state renewable portfolio standards, and 
voluntary offsets, some of which specifically do not allow for pipeline 
injection.
    There is considerable uncertainty associated with establishing the 
appropriate alternative fate scenarios for CMM for the period over 
which a facility may be able to claim the section 45Y and 48E credits. 
Coal mines that are currently injecting CMM into pipelines may 
transition to flaring if natural gas prices fall, or may exercise 
flaring at future boreholes if those boreholes are distant from 
existing pipeline infrastructure. Mines that are currently 
predominantly venting may transition to productive use if pipeline 
infrastructure is built in their vicinity. A flaring baseline is 
therefore the most appropriate approach for CMM sourced from drainage 
systems given the uncertainty with respect to these emissions in 
particular in the United States, and reduces the risk of 
inappropriately attributing extremely negative lifecycle emissions 
rates to the capture of CMM which would have already been captured and 
productively used.
    Accordingly, Sec.  1.45Y-5(e)(3)(iv) of these final regulations 
provides that for purposes of determining the GHG emissions rate of a 
C&G Facility (as defined in Sec.  1.45Y-5(b)(4)) that produces 
electricity through combustion or gasification using coal mine methane 
that is drainage gas as a fuel or feedstock, the alternative fate of 
such gas must be flaring. This alternative fate accounts for the 
uncertainties associated with future practices, as previously 
described, while recognizing that most drainage gas is destroyed today.
D. Alternative Fate Considerations for Animal Waste
    Commenters suggested a variety of alternative fate assumptions for 
purposes of estimating GHG emissions for biogas derived from animal 
waste sources, including venting, alternative productive use, and 
responsible waste management, with some commenters recommending a 
single alternative fate for biogas produced from these sources and 
others recommending differentiated alternative fates. There is no 
national database that tracks farm-level methane emissions, capture, 
and usage in the agricultural sector. Additionally, there are no 
nationally applicable reporting requirements for animal waste 
management practices at livestock and poultry farms, which differ 
substantially on a farm-to-farm basis, and state-level animal waste 
management reporting requirements vary. Therefore, lack of data and 
heterogeneity of animal waste management practices are limiting factors 
in establishing a single specific alternative fate for methane 
generated from animal waste.
    Many commenters highlighted competing considerations in determining 
the appropriate alternative fate for methane derived from animal waste. 
Several commenters recommended that the R&D GREET 2023 model be used to 
calculate the avoided emissions from anerobic digestion and the 
associated biogas using site-specific baseline manure management 
practices. The commenters suggested that the correct alternative fates 
could be entered into the model manure management categories and 
practices to accurately quantify baseline emissions prevented by a 
biogas project. Several commenters suggested that for biogas produced 
from livestock manure, the alternative fate should be that methane 
would continue venting from manure handling facilities until such time 
as that venting is no longer permissible by law or regulation. The 
consequence of the commenters' suggestion is that any biogas utilized 
would be associated with avoided GHG emissions. The commenters noted 
that this alternative fate is similar to what the commenters assert is 
appropriate for the landfill gas industry, where once regulations are 
in place requiring landfill gas to be captured and destroyed, then 
flaring becomes the appropriate alternative fate. One commenter noted 
that although the primary precedent for crediting avoided methane 
emissions is the California LCFS's treatment of biomethane from manure 
lagoons, this precedent is not appropriate for purposes of the section 
45Y and 48E credits. The commenter stated that the avoided GHG 
emissions calculation was specifically incorporated within the LCFS as 
a means of subsidizing investments in anaerobic digesters to address 
pollution from California's dairies rather than as a reflection of the 
best available science.
    Determining the appropriate alternative fate and emissions 
intensity for biogas produced from animal waste sources presents 
several challenges. First, the emissions intensity of biogas produced 
from animal waste can vary widely based on the specific waste practices 
used by individual producers. These practices are not comprehensively 
tracked and, in many cases, would be extremely difficult to effectively 
verify. Different waste disposal practices produce very different 
quantities of methane per unit of manure, as methane generation is much 
higher in wet anaerobic conditions. As one example, the EPA's GHG 
Inventory data indicates that uncovered anaerobic lagoons produce 
roughly one hundred times the amount

[[Page 4080]]

of methane as daily spread. Even among farms credited with methane 
venting counterfactuals under the California LCFS, the resulting GHG 
emissions intensities for biogas vary widely depending on specific 
practices. Factors impacting the emissions intensity calculations for 
that program include, but are not limited to, the type of animals 
producing waste for the digester, type(s) of feed provided for the 
animals, the digester technology, and ambient conditions at the 
digester. As discussed further later in this section, none of these 
practices are comprehensively tracked or reported at a national level. 
Commenters also noted the further uncertainty and variation introduced 
by a range of leakage rates from operations capturing and upgrading 
manure-derived methane, including the high likelihood that there are 
``super emitter'' sources (consistent with the patterns seen in other 
fugitive methane streams). This could introduce additional uncertainty 
and risk of over crediting in measuring a GHG emissions rate.
    Second, there is substantial and growing alternative productive use 
of methane from animal waste. There are 400 operational animal waste 
anaerobic digesters in the U.S. and 73 additional digesters under 
construction as of 2024, according to the AgSTAR Digester Database. 
Based on data from the AgSTAR Digester Database regarding the number of 
livestock (by head) feeding anaerobic digesters as of 2024, it is 
estimated that the waste from roughly 8 percent of dairy cattle and 2 
percent of swine (by head) is currently sent to anaerobic digesters and 
these numbers increase to 10 percent and 3 percent, respectively, if 
digesters currently under construction are included.\22\ The percentage 
of waste being sent to anaerobic digesters has been rising rapidly 
since 2019, with 400 operational projects and 73 under construction, 
and with the majority of new projects upgrading their biogas to RNG, 
due, in part, to incentives provided by the RFS, LCFS, and a California 
grant program. The digesters listed as newly operational and under 
construction as of 2023-2024 in the AgSTAR database represent a 28 
percent increase in the dairy cattle waste and 50 percent increase in 
swine waste (by head) sent to anaerobic digesters relative to 2022 
levels. While there has been some variation in the profitability of 
installing anaerobic digesters as credit values have fluctuated,\23\ 
the financial incentives provided by the RFS and LCFS programs appear 
to be sufficient to incentivize some installations of anaerobic 
digesters at existing lagoons, which reduces emissions without any 
additional incentive from the section 45Y and 48E credits. There are 
also other possible sources of revenue from anaerobic digester systems 
including tipping fees from local food production, or the sale of 
secondary products such as digestate-based fertilizer or phosphorus 
pellets.
---------------------------------------------------------------------------

    \22\ Values were calculated using data from the AgSTAR Digester 
Database. Livestock Anaerobic Digester Database, U.S. Environmental 
Protection Agency, available at https://www.epa.gov/agstar/livestock-anaerobic-digester-database (last updated Oct. 1, 2024). 
The sum of dairy cattle reported as feeding operational digesters in 
the AgSTAR database as of June 2024 was calculated to be 1.55 
million. The sum of swine reported as feeding operational digesters 
was calculated to be 1.68 million. The total values including under-
construction digesters are 1.87 million dairy cattle and 2.08 
million swine. Percentages are calculated by dividing these values 
by the most up-to-date data on dairy cattle and swine head: total 
dairy cattle head in 2022 (18.6 million) and swine head (73.4 
million) as reported in the EPA GHG Inventory. See also U.S. 
Environmental Protection Agency, ``Inventory of U.S. Greenhouse Gas 
Emissions and Sinks,'' available at https://www.epa.gov/ghgemissions/inventory-us-greenhouse-gas-emissions-and-sinks (last 
updated November 22, 2024); U.S. Department of Energy, ``A Generic 
Counterfactual Greenhouse Gas Emission Factor for Life-Cycle 
Assessment of Manure-Derived Biogas and Renewable Natural Gas'' 
(2025), available at www.energy.gov/45vresources.
    \23\ How Much Should Dairy Farms Get Paid for Trapping 
Methane?--Energy Institute Blog, available at https://energyathaas.wordpress.com/2024/10/14/how-much-should-dairy-farms-get-paid-for-trapping-methane/.
---------------------------------------------------------------------------

    Complementing these incentives are a range of other voluntary 
programs that encourage capture and productive use of methane emissions 
from animal waste. For example, USDA is leveraging its authority under 
a variety of existing programs to encourage farmers and ranchers to 
install or upgrade equipment and adopt new practices that improve 
manure management and can substantially reduce methane emissions. One 
such program, AgSTAR, is a collaborative program sponsored by the EPA 
and USDA that promotes the use of biogas recovery systems, such as 
anaerobic digester systems, to reduce methane emissions from animal 
waste. Likewise, USDA Natural Resources Conservation Service programs--
including the Environmental Quality Incentives Program (EQIP) and the 
Conservation Stewardship Program (CSP)--provide incentives for 
upgrading existing anaerobic lagoons, anaerobic digesters, and solid 
separators and covers to collect methane for use or destruction; 
install solid separators that reduce methane-producing slurries; and 
providing conservation assistance for transitions to alternative manure 
management systems, such as deep pits, composting, transitions to 
pasture, or other practices that have a lower GHG emissions profile. 
The Rural Energy for America Program (REAP) has offered more than $160 
million in grants and loans to incentivize anaerobic digesters and 
biogas projects to control methane and biogas from dairy and other 
farms.
    Given rapid recent and continuing growth and multiple existing 
incentive programs, it is reasonable to assume continued growth in the 
share of large dairies and concentrated animal feeding operations with 
anaerobic digesters, even absent an additional incentive under the 
section 45Y and 48E credits. Redirecting biogas that comes from these 
sources to electricity production will mean less displacement of 
natural gas elsewhere in the economy, and could therefore result in 
significant indirect emissions that must be taken into account under 
section 45Y(b)(2)(B).
    Third, the magnitude of the incentive provided by the section 45Y 
and 48E credits itself creates a significant risk of additional waste 
production in response to the credit, with emissions that must be 
accounted for in the LCA. While some commenters noted that the EPA did 
not find that its RFS program's incentivization of anaerobic digesters 
had driven a proliferation of concentrated animal feeding operations or 
other large-scale animal agriculture, other commenters disagreed, 
stating that the availability of these credits may incentivize the 
operation of new or larger farming units and the deliberate production 
of methane. Commenters noted that, even with use of anaerobic 
digesters, GHG emissions may still result from leakage, use of 
digestate, and the need to use venting to accommodate fluctuating gas 
levels. Additional waste production could thus result in additional 
emissions; moreover, even if emissions from additional production are 
captured, crediting the additional waste with avoided emissions would 
result in inaccurate credit determinations.
    For biogas produced from animal waste, there are several potential 
routes that may increase methane production:
     Shifting management practices for existing quantities of 
manure from land application to lagoon, thereby significantly 
increasing methane generation;
     On the margin, making new or expanded concentrated animal 
feeding operations (CAFOs) more profitable (whether by increasing the 
overall numbers of animals raised, or by consolidating smaller existing 
operations) and thereby inducing additional manure and methane 
generation; and

[[Page 4081]]

     Using management practices at biodigesters to produce more 
methane than would have been produced otherwise (for example, 
increasing the temperature at an anaerobic digester).
    To the extent producers adopt these practices in response to 
incentives created by the section 45Y and 48E credits, failure to take 
this into account could lead to allowing facilities that do not meet 
statutory GHG emissions requirements to be treated as qualified 
facilities under section 45Y and 48E. This would be a particular 
concern with a venting alternative fate because it would result in a 
significantly negative estimated GHG emissions rate, creating strong 
incentives to produce additional methane for use by facilities to claim 
the section 45Y and 48E credits inappropriately.
    In light of these challenges, the Treasury Department and the IRS 
have determined that the most appropriate approach to determining the 
carbon intensity of biogas and ensuing RNG derived from animal waste is 
to use an alternative fate for the sector as a whole that is derived 
from the national average of all animal waste management practices. The 
rule provided in Sec.  1.45Y-5(e)(3)(v) requires a best estimate of the 
nationwide average methane emissions from manure based on currently 
available data. As detailed in a technical analysis from the DOE,\24\ 
this results in a carbon intensity score of -51 gCO2e/MJ, 
where the MJ basis refers to the lower heating value of the methane 
contained in the biogas. This emissions attribute for the methane 
contained in biogas from animal waste can be subsequently used to 
calculate the carbon intensity of electricity and RNG by accounting for 
the GHG emissions associated with onsite electricity generation from 
biogas or for upgrading, transportation, and compressing into RNG.
---------------------------------------------------------------------------

    \24\ U.S. Department of Energy, ``A Generic Counterfactual 
Greenhouse Gas Emission Factor for Life-Cycle Assessment of Manure-
Derived Biogas and Renewable Natural Gas'' (2025), available at 
www.energy.gov/45vresources.
---------------------------------------------------------------------------

    As further explained in the DOE's analysis of animal waste sources, 
this carbon intensity of RNG derived from methane contained in biogas 
from animal waste has been calculated using a weighted average of U.S. 
manure management practices across manure from all types of livestock 
and poultry. Averaging over the full set of animal-waste management 
practices nationwide is an administrable way to take into account the 
range of existing waste management practices and represent emissions 
reductions that result from additional methane capture and use.\25\ It 
is a reasonable and administrable representation of the carbon 
intensity of biogas from manure-based sources in light of the 
significant limitations of available data and verification mechanisms, 
the uncertainties associated with estimation of the GHG emissions, the 
benefits of different manure management systems, and the risks of 
perverse incentives At the same time, it provides taxpayers certainty 
and clarity regarding the carbon intensity of methane from certain 
animal waste sources.
---------------------------------------------------------------------------

    \25\ Id.
---------------------------------------------------------------------------

    The Treasury Department and the IRS considered alternative 
approaches suggested by commenters, in particular whether to provide 
differentiated alternative fates, for example based on a producer's 
prior waste management practices and methane production levels or the 
mix of animal types used to generate biogas. Differentiated alternative 
fates, however, is not feasible because it would not be administrable 
or practicable to set up a reporting and verification system to 
determine the prior practices and quantities of manure and biogas at 
each individual participating livestock and poultry operation that 
generates biogas. Such an approach would be infeasible given the large 
number of such operations and the lack of nationally applicable 
reporting requirements regarding numbers of animals or manure 
management practices by livestock and poultry operation (and wide 
variation in state reporting requirements). Additionally, 104 of the 
473 digesters operational or under construction in the AgSTAR database 
report co-digesting their primary manure type with one or more other 
wastes, including other types of manure, food waste, agricultural 
residues, and dairy/food processor waste. These tracking and 
verification challenges are of particular concern because differences 
in waste disposal practices or specific waste sources can result in 
large differences in avoided emissions, meaning that highly specific 
prior waste management practices would need to be consistently reported 
and verified to support accurate differentiated alternative fates. In 
addition, as discussed previously, differentiated alternative fates 
that allow for highly negative emissions values raise concerns about 
incentives for additional waste production that could result in 
inappropriate claims of the section 45Y and 48E credits. The Treasury 
Department and the IRS will continue to monitor reporting and tracking 
systems and study the feasibility of introducing differentiated 
pathways in the future.
    The Treasury Department and the IRS also considered whether the 
emissions values for RNG produced from animal waste should be adjusted 
to reflect the risk of additional waste production in response to the 
incentives provided by the section 45Y and 48E credits. The Treasury 
Department and IRS expect the modestly negative emissions values 
established in these rules will provide, at most, only modest 
incentives to generate new methane or other GHGs from animal waste. 
However, the Treasury Department and the IRS will continue to study 
this issue to determine whether adjustments are needed in the future.
E. Alternative Fate Considerations for Fugitive Methane From Fossil 
Fuel Activities Other Than Coal Mining
    The Treasury Department and the IRS have considered the alternative 
fate of fugitive methane from fossil fuel activities other than coal 
mining, which are overwhelmingly comprised of oil and gas operations, 
and determined that the generally applicable alternative fate for 
fugitive methane from these activities is productive use.
    While some commenters viewed the alternative fate of fugitive 
emissions to be venting, others noted the extensive existing regulatory 
requirements and additional incentives for avoiding fugitive emissions 
from oil and gas operations and argued that productive use is the 
appropriate alternative fate for this source of methane. Some 
commenters stated that any program that would incentivize the capture 
of fugitive methane from oil and gas sources would be ineffective and 
inefficient because of the combination of: (i) variable emissions, (ii) 
the technical challenge of measuring emissions, and (iii) the 
counterproductive incentives the baseline setting process would create. 
Another commenter stated that, to avoid double counting methane 
emissions abatement, the final regulations must explicitly state that 
fugitive sources of methane arising from oil and gas activities are to 
be treated equivalently to fossil methane.
    The Treasury Department and the IRS note that EPA regulations under 
section 111 of the CAA seek to limit volatile organic compound (VOC) 
and methane emissions from oil and gas operations through a variety of 
requirements including performance standards as well as operational 
practices and leak detection and repair programs. See 40 CFR part 60, 
subparts OOOO, OOOOa, OOOOb, and OOOOc. For example,

[[Page 4082]]

EPA's latest rules for new sources of VOC and methane emissions require 
use of zero emitting process controllers in most scenarios. EPA's 
previous rules allowed low bleed and intermittent bleed controllers, 
which emit pollutants to the atmosphere by discharging natural gas. 
EPA's new rules keep that gas in the system instead of allowing it to 
be released. EPA's new rules also phase out routine flaring of 
associated gas from most new oil wells, establish strong performance 
standards for emissions from storage tanks, include requirements for 
the efficiency of flares, and strengthen requirements for regular leak 
monitoring and the deadline for repairs at well sites. EPA's leak 
detection and repair program at well sites requires frequent monitoring 
of oil and gas equipment with approved technology and methods to look 
for leaks. If a leak is found, then it must be repaired quickly so that 
the equipment stops leaking fugitive emissions to the atmosphere. This 
program will reduce the amount of emissions coming from leaking 
components. EPA's rules also require owners and operators of new wells 
to use best management practices to minimize or eliminate venting of 
emissions from gas well liquids unloading.
    As discussed in section VIII.4.c.i.A. of this Summary of Comments 
and Explanation of Revisions, while some of the compliance deadlines 
under each of the updated regulations under section 111 and updated 
reporting requirements in 40 CFR part 98, subpart W, have not yet 
passed, operators must plan for timely compliance with those 
requirements and must currently comply with other requirements such as 
the new source requirements under section 111. Thus, operators have 
significant incentives to make certain compliance investments now and 
are required to do so well within the period of the tax credit. In 
addition, the Bureau of Land Management and most oil and gas producing 
states also regulate the ``waste'' of gas through venting and flaring, 
and some, such as New Mexico and Colorado, have regulations equally or 
more stringent than EPA requirements in many respects.\26\ As a 
consequence, the majority of the actions that an oil or gas operator 
could take to avoid fugitive emissions are already required by law or 
will be during the period in which the section 45Y and 48E credits will 
be available.
---------------------------------------------------------------------------

    \26\ See, for example, Waste Prevention, Production Subject to 
Royalties, and Resource Conservation, 89 FR 25378 (Apr. 10, 2024).
---------------------------------------------------------------------------

    Given the extensive regulatory environment already in place 
requiring oil and gas operators to minimize GHG emissions from oil and 
gas operations, and the strong incentive and existing infrastructure to 
sell gas that is not lost through venting or flaring, the generally 
applicable alternative fate for fugitive emissions from fossil fuel 
activities other than coal mining is productive use. Accordingly, Sec.  
1.45Y-5(e)(3)(vi) provides that for purposes of determining the GHG 
emissions rate of a C&G Facility (as defined in Sec.  1.45Y-5(b)(4)) 
that produces electricity through combustion or gasification using 
fugitive methane other than coal mine methane as a fuel or feedstock, 
such as fugitive methane from oil and gas operations, the alternative 
fate of such gas must be productive use, which would result in 
emissions equivalent to the carbon intensity of using fossil natural 
gas. For example, the production of methane from virgin coal seams, 
which is commonly referred to as ``coal bed methane'' (CBM), may be for 
the purpose of natural gas production or may result from pre-mining 
activities. Since it is typically of a comparable methane content as 
other natural gas sources, it is commonly sold for use. Nationwide, 
emissions that result from CBM extraction are currently reported to 
EPA's Greenhouse Gas Reporting Program under 40 CFR part 98, subpart W, 
which informs background estimates of upstream methane emissions for 
the natural gas supply chain. Accordingly, GHG emissions analyses 
conducted for purposes of sections 45Y and 48E would represent CBM with 
a carbon intensity that is equivalent to that of other sources of 
fossil natural gas.
d. Book-and-Claim
    Book-and-claim accounting has been used in some contexts to track 
the attributes associated with the production of a unit of energy in a 
manner that prevents double counting. In such a system, producers of 
energy are required to acquire and retire corresponding attribute 
certificates through a book-and-claim system that can verify, generally 
in an electronic tracking system, that all applicable requirements are 
met. The preamble to the proposed regulations requested comment on 
whether book-and-claim accounting may be suitable for use in 
substantiating and verifying claims to the energy attributes of fuels 
and feedstocks used by a facility to generate electricity. Examples of 
the relevant fuels and feedstocks for which book-and-claim accounting 
may be considered include natural gas alternatives or other feedstocks 
such as hydrogen. The preamble to the proposed regulations further 
noted that the Treasury Department and the IRS are considering 
providing rules that may permit the use of book-and-claim accounting 
for the section 45Y and 48E credits 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. The 
preamble to the proposed regulations further noted that tracking and 
verification mechanisms for natural gas alternatives specific to the 
needs of the section 45Y and 48E credits are not yet available, and 
existing systems have limited capabilities for tracking and verifying 
pathways for natural gas alternatives, especially in the part of the 
production process before the methane has been reformed to RNG.
    A wide range of comments arguing in favor of and against allowing 
the use of book-and-claim systems for natural gas alternatives were 
received in response to the proposed regulations. Several commenters 
discussed how book-and-claim systems were commonplace within the RNG 
industry. In addition, several commenters expressed concern about the 
ability of the RNG industry to take advantage of the section 45Y and 
48E credits if a book-and-claim approach was not adopted. Several 
commenters stated that, because sources of natural gas alternatives are 
unevenly distributed throughout the United States and may not be 
located near prospective electricity-generating facilities, book-and-
claim allows entities that do not have access to such sources to be 
eligible for the section 45Y and 48E credits. One commenter suggested 
that a mass balance model or an ``identity preservation'' model could 
be adopted if a book-and-claim system was disallowed.
    Several commenters suggested that existing systems, such as the 
Midwest Renewable Energy Tracking Systems (M-RETS), the EPA's RFS, or 
the California LCFS, might have sufficient capabilities to enable book-
and-claim accounting for purposes of the section 45Y and 48E credits. 
Other commenters argued that these systems do not have sufficient 
tracking capabilities and that the Treasury Department and the IRS 
should disallow book-and-claim given these limitations. Several 
commenters recommended that if a book-and-claim system were allowed, 
then such system should take measures to avoid double-counting of the 
same environmental attributes. Several commenters suggested that any 
tracking system should be able to allocate emissions based on different 
levels of gas blending from different feedstocks and enable the 
differentiation of carbon capture rates to

[[Page 4083]]

those different feedstock production pathways. Several commenters noted 
that any tracking system would not address the issue on which proposed 
regulations invited comment, such as ensuring that biomethane is not 
produced for the purpose of meeting demand for the biomethane market. 
In response to these comments, the Treasury Department and the IRS note 
that existing tracking and verification systems have limited 
capabilities for tracking and verifying RNG pathways and that there is 
no sufficiently accurate, nationally available, auditable and reliable 
third-party tracking system (or registry) in place today.
    Several commenters suggested there was clear Congressional intent 
to allow book-and-claim. However, other commenters suggested that 
allowing the section 45Y and 48E credits solely on the basis of RNG 
certificates would be contrary to requirements of the statute. These 
commenters argued that the requirement to assess the emissions rates of 
the facility precludes the use of book-and-claim in the specific 
context of the section 45Y and 48E credits. These commenters asserted 
that the use of a book-and-claim system was not statutorily authorized 
because such use would not comply with the requirement of section 
45Y(b)(2)(A) and (B) and section 48E(b)(3)(ii) to assess the emissions 
emitted by a facility in the production of electricity. Commenters also 
argued that the result of allowing book-and-claim would be to allow 
facilities to claim the credits with no meaningful change in 
operations, contrary to the intended purpose of the section 45Y and 48E 
credits.
    In response to these comments, the Treasury Department and the IRS 
have examined whether book-and-claim accounting is permissible under 
the statutes. As further explained later in this section, the final 
regulations do not permit the use of book-and-claim accounting for 
purposes of the section 45Y and 48E credits because the use of book-
and-claim accounting would conflict with the statutory directive to 
assess the GHG emissions specific to a facility.
    Congress set the statutory boundaries for determining greenhouse 
gas emissions rates for the section 45Y and 48E credits in section 
45Y(b)(2). Section 45Y(b)(2)(A) defines ``greenhouse gas emissions 
rate'' as ``the amount of greenhouse gases emitted into the atmosphere 
by a facility in the production of electricity, expressed as grams of 
CO2e per kWh.'' This general rule for determining emissions rates 
requires an analysis of the emissions associated with a facility's 
production of electricity. Section 45Y(b)(2)(B) clarifies that for 
facilities that produce electricity through combustion or gasification, 
the GHG emissions rate for such facilities 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 42 U.S.C. 7545(o)(1)(H) in the production of electricity, expressed 
as grams of CO2e per kWh.'' Section 45Y(b)(2)(C) provides the rules for 
specifying a GHG emissions rate for a particular facility. Section 
45Y(b)(2)(C)(i) requires the Secretary to annually publish a table 
(Annual Table) that sets forth the GHG emissions rates ``for types or 
categories of facilities.'' Taxpayers must use this Annual Table to 
determine the GHG emissions rate of any facility for which the Annual 
Table provides a rate. Section 45Y(b)(2)(C)(ii) provides that if the 
Annual Table does not provide a rate for a facility, the taxpayer that 
owns such facility may petition the Secretary for a provisional 
emissions rate. Finally, section 45Y(b)(2)(D) requires the amount of 
GHGs emitted into the atmosphere ``by a facility in the production of 
electricity'' to not include any qualified carbon dioxide that is 
captured by the taxpayer and sequestered pursuant to certain 
requirements. Taken together, these statutory rules provide the 
framework to assess the GHG emissions of a facility based on the 
facility's operations.
    Sections 45Y(b)(2)(C) and (f) provide the Secretary authority to 
specify and clarify how GHG emissions rates are determined within this 
framework. Section 45Y(b)(2)(C) directs the Secretary to publish an 
Annual Table or consider petitions for provisional emissions rates. 
Section 45Y(f) directs the Secretary to ``issue guidance regarding 
implementation of [section 45Y], including calculation of greenhouse 
gas emission rates for qualified facilities and determination of clean 
electricity production credits under this [section 45Y].'' To establish 
the GHG emissions rates as directed by the statute, the Secretary must 
first establish a process to calculate these rates. Because of this 
broad statutory mandate, the emissions rate determination process must 
account for the varied production methods that are currently viable or 
those that may be devised in the future, the idiosyncrasies of each 
facility's electricity-generating process, and scientific advancements 
and uncertainty associated with lifecycle analysis.
    Upon consideration of the comments submitted regarding book-and-
claim, the Treasury Department and the IRS have determined that the 
statute requires a facility's eligibility for the section 45Y and 48E 
credits to be determined by the electricity-generating operations 
undertaken by the facility itself to produce electricity and that book-
and-claim, by its nature, cannot establish what fuel or feedstock is 
physically used within a facility to produce electricity or the actual 
fundamental transformations of energy that are used to produce a 
facility's input energy source. Sections 45Y(b)(1)(A) and 
48E(b)(3)(A)(iii) provide that ``qualified facility'' means a facility 
that is owned by the taxpayer and is used for the generation of 
electricity, placed in service after December 31, 2024, and for which 
the GHG emissions rate or, for purposes of section 48E, the anticipated 
GHG emissions rate, is not greater than zero.
    For both the determination of whether a facility produces 
electricity through combustion or gasification and the determination of 
the emissions associated with a facility's production of electricity, 
Congress directed the Secretary to assess the activities of a given 
facility in the course of electricity production, rather than, for 
example, the process used to produce the electricity. The use of book-
and-claim could misrepresent the activities taking place in the 
facility or the actual fundamental transformations of energy that are 
used to produce a facility's input energy source, resulting in 
inaccurate determinations both with respect to whether the facility is 
producing electricity through combustion and gasification and with 
respect to the emissions associated with the facility's production of 
electricity.
    Book-and-claim accounting may appropriately be used in contexts 
other than the section 45Y and 48E credits to substantiate claims to 
the energy attributes of certain fuels and feedstocks. However, such 
claims do not necessarily correspond to the actual physical use of the 
relevant fuels and feedstocks. For example, where fuel is delivered 
through a common pipeline, the acquisition and retirement of 
certificates representing the attributes a particular fuel or feedstock 
may not (and are in fact unlikely to) reflect the physical delivery of 
fuel or feedstock with those attributes and its use by a facility in 
the production of electricity. In addition, the statutory authorization 
for credits other than the section 45Y and 48E credits may provide 
broader authority to support the use of a book-and-claim system, but 
the Treasury Department and the IRS agree with the commenters that such 
authority is not

[[Page 4084]]

available with respect to the section 45Y and 48E credits.
    Whether a facility produces electricity through combustion or 
gasification is an inherently factual question that requires an 
assessment of (i) a facility's operations that produce electricity and 
(ii) the operations that produced the fuel, if any, used by that 
facility in the production of electricity. The emissions assessment for 
a facility that produces electricity through the combustion of a 
particular set of fuels must be based on the fuels in fact used by the 
facility, as well as any emissions from the full lifecycle of those 
fuels through the point of electricity production. The acquisition and 
retirement of certificates representing the attributes of certain types 
of fuel on behalf of this facility would have no bearing on which fuels 
it in fact used to produce electricity or the operations or feedstocks 
used to produce such fuel. As a result, permitting a facility to use 
book-and-claim accounting for this purpose could result in treating a 
facility that produced electricity through combustion or gasification 
as if it did not do so. For example, a hydrogen fuel cell that produces 
electricity using hydrogen produced entirely by steam methane reforming 
would be considered under the final regulations to have produced 
electricity through combustion or gasification. If the fuel or 
feedstock used by such facility were allowed to be determined using 
book-and-claim accounting, that facility could acquire and retire the 
attributes of hydrogen produced through electrolysis to be classified 
as a facility that did not produce electricity through combustion or 
gasification even though its operations did not support such a 
determination. This result would be inappropriate because section 
45Y(b)(2)(B) requires consideration of the actual operations at a 
facility to produce electricity and the actual fundamental 
transformations of energy that are used to produce the facility's input 
energy source. The final regulations, therefore, cannot permit book-
and-claim accounting in determining whether a facility produces 
electricity through combustion or gasification.
    For the reasons explained previously, book-and-claim accounting 
also cannot establish the characteristics of the fuels used in a 
specific facility to produce electricity. Both sections 45Y(b)(2)(A) 
and (B) require an assessment of the greenhouse gases emitted into the 
atmosphere by the facility. The statute thus requires this inquiry to 
be based on the facility's actual operations and the emissions 
associated with it, both of which could be misrepresented by book-and-
claim accounting. The final regulations, therefore, also cannot permit 
book-and-claim accounting in determining the amount of greenhouse gases 
emitted into the atmosphere by a facility in the production of 
electricity.
    Thus, after consideration of the comments, Sec. Sec.  1.45Y-5(e)(4) 
and 1.48E-5(e) of these final regulations do not permit the use of a 
book-and-claim accounting system to determine or claim the energy 
attributes of biogas, RNG, coal mine methane, any other methane used in 
the production of electricity, or any other input or feedstock. A 
facility that produces electricity through the combustion of RNG, for 
example, may substantiate its use of RNG by having a direct connection 
to an RNG source or records establishing exclusive, physical delivery 
of the RNG from that source to the facility for use in generating 
electricity. Because book-and-claim accounting of RNG energy attributes 
is not permitted for purposes of section 48E, such substantiation must 
address the actual anticipated operations of the qualified facility.
F. Carbon Capture and Sequestration
    Section 45Y(b)(2)(D) provides that for purposes of section 45Y(b), 
the amount of GHGs emitted into the atmosphere by a facility in the 
production of electricity does not include any qualified carbon dioxide 
that is captured by the taxpayer and (i) pursuant to any regulations 
established under section 45Q(f)(2), disposed of by the taxpayer in 
secure geological storage, or (ii) utilized by the taxpayer in a manner 
described in paragraph (5) of such section. The Treasury Department and 
the IRS interpret this statutory language to mean that, for the 
calculation of the GHG emissions rate, the GHG emissions of a qualified 
facility in the production of electricity must be reduced by the amount 
of qualified carbon dioxide that is captured by the taxpayer at the 
qualified facility, and disposed of in secure geological storage; used 
in an enhanced oil and gas recovery (EOR) project and then disposed of 
in secure geological storage; or utilized (as defined in section 
45Q(f)(5)).
    Proposed Sec.  1.45Y-5(e) provided that for purposes of paragraphs 
(c) and (d) of the section, a GHG emissions rate for a Non-C&G Facility 
or C&G Facility must exclude any qualified carbon dioxide (as defined 
in section 45Y(c)(3)) that is produced in such facility's production of 
electricity, 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. Several commenters requested that the final regulations 
more closely track the statutory language with respect to treatment of 
qualified carbon dioxide within the meaning of section 45Q by changing 
the language in proposed Sec.  1.45Y-5(e) from ``must exclude'' to 
``shall not include.'' The Treasury Department and the IRS acknowledge 
that the proposed regulatory text created ambiguity and have revised 
the final rule accordingly.
    Additionally, in the preamble to the proposed regulations, the 
Treasury Department and the IRS requested comments regarding 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 sequestration, or (b) utilized by the taxpayer in a 
manner described in section 45Q(f)(5). Commenters almost universally 
recommended adopting the requirements for substantiation and 
verification of CCS provided by regulations and Internal Revenue 
Bulletin guidance under section 45Q, referred to collectively as ``the 
section 45Q rules.'' The commenters cited support for adopting the 
requirements for substantiation and verification provided by the 
section 45Q rules because they provide taxpayer certainty, particularly 
as industry has already adopted these procedures. Other commenters 
supported adopting the rules because these commenters view the rules as 
appropriately stringent.
    Several commenters provided specific recommendations regarding the 
adoption of requirements for substantiation and verification provided 
by the section 45Q rules. The commenters requested that the final 
regulations adopt the requirements for secure geological storage 
provided under Sec.  1.45Q-3, which include allowing the taxpayer to 
contract with a third party for secure geological storage activities 
consistent with the requirements under Sec.  1.45Q-1(h)(2) and 
providing documentation to verify secure geological storage in 
accordance with 40 CFR part 98, subparts RR and VV (GHGRP), and the 
CSA/ANSI ISO 27916:2016 pathway. Several commenters also requested that 
the final regulations adopt the utilization requirements provided under 
Sec.  1.45Q-4, including providing a written LCA report in conformity 
with ISO 14040:2006 and 14044:2006, third-party

[[Page 4085]]

independent review, and technical review by the DOE. Commenters also 
recommended imposing reporting requirements consistent with those 
imposed on taxpayers that claim the section 45Q credit on IRS Form 
8933. Other commenters asserted that verification and substantiation 
requirements must include detailed records of the CCS process, third-
party verification, and compliance with GHGRP reporting standards.
    Several commenters recommended the adoption of a less stringent 
version of the requirements for substantiation and verification 
provided by the section 45Q rules. A commenter recommended that 
taxpayers not be required to obtain pre-approval of LCA reports, which 
is required for utilization under the section 45Q regulations and 
Notice 2024-60, 2024-34 I.R.B. 515. Instead, the commenter suggested 
that the final regulations provide an option for taxpayers that claim 
the section 45Y or 48E credits for capturing and utilizing carbon 
dioxide to use different LCA parameters than currently apply under the 
section 45Q rules. Another commenter requested that in addition to 
procedures provided by the section 45Q rules, that the final regulation 
provide that taxpayers may use other workable methods and protocols for 
verifying secure geological storage. After consideration of the 
comments, the Treasury Department and the IRS have determined that 
based on the explicit statutory direction in section 45Y(b)(2)(D) to 
rely upon the regulations established under section 45Q(f)(2) for 
secure geological storage and the reference to the requirements for 
utilization provided in section 45Q(f)(5), the final regulations adopt 
the requirements for substantiation and verification provided by 
regulations and Internal Revenue Bulletin guidance under section 45Q.
    The Treasury Department and the IRS also asked whether it would be 
appropriate to limit the carbon dioxide that may be considered as 
qualified carbon dioxide (as defined under section 45Y(e)(3)), and thus 
excluded under section 45Y(b)(2)(D), to carbon dioxide that has been 
reported to the EPA's GHGRP, and if so, which GHGRP subpart or subparts 
should be used. Several commenters supported limiting the qualified 
carbon dioxide excluded from the GHG emissions of a qualified facility 
based on the amount of qualified carbon dioxide reported by the 
taxpayer to the GHGRP. A commenter also recommended that 40 CFR part 
98, subpart RR (GHGRP), be used to verify secure geological storage.
    Another commenter asserted that the GHGRP procedures are not 
stringent enough to be the basis for excluding qualified carbon dioxide 
from the GHG emissions rate of a qualified facility for purposes of the 
section 45Y or 48E credits. This commenter noted that the current 
methodology for the GHGRP does not accurately track emissions to 
conduct LCAs and determine emissions from C&G Facilities. The commenter 
also noted that measurements of carbon dioxide that is captured, 
sequestered, or injected into an EOR project are based on volumetric 
and mass flow-related mathematical and engineering calculations once a 
quarter, whereas calculations within the GHGRP assume that operations 
and measurement are consistent, excluding any considerations of site-
specific equipment, operations, or malfunctions. The commenter asserted 
that this assumption may lead to inaccurate reporting to the GHGRP.
    After consideration of the comments, the final regulations at Sec.  
1.45Y-5(e)(2) provide that the requirements for substantiation and 
verification of carbon capture and sequestration provided by 
regulations and Internal Revenue Bulletin guidance under section 45Q 
must be satisfied for qualified carbon dioxide to be taken into account 
to compute the GHG emissions rate of a qualified facility. Further, all 
taxpayers must comply with applicable GHGRP requirements under 40 CFR 
part 98, subpart PP (for carbon capture), subpart RR (for geological 
storage), and subpart RR or VV (for geological storage through enhanced 
oil recovery). In addition to the section 45Q rules, taxpayers using 
the ISO 27916 standard for EOR must report information to GHGRP under 
40 CFR part 98, subpart VV. Additionally, a taxpayer claiming the 
section 45Y credit while conducting carbon capture and sequestration 
must also include their applicable GHGRP ID number(s) on any applicable 
IRS Form when claiming the section 45Y credit, with the exception of 
taxpayers claiming the section 45Y credit by performing carbon capture 
and utilization. The GHGRP does not provide a reporting mechanism for 
utilization.
    In the preamble to the proposed regulations, the Treasury 
Department and the IRS provided an example in which 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 section 45Y or 48E 
credit. The Treasury Department and the IRS asked what enforcement 
mechanisms or regulatory regimes should be used to identify when such 
emissions leakages have occurred. The Treasury Department and the IRS 
also requested comment regarding how such emissions leakages should be 
taken into account in determining compliance with the GHG emissions 
rate requirements under sections 45Y and 48E.
    Several commenters endorsed using recapture concepts from the 
section 45Q rules to address instances in which qualified carbon 
dioxide taken into account for the section 45Y or 48E credits later 
leaks. Other commenters recommended that for cases in which captured 
and sequestered carbon dioxide subsequently escapes into the 
atmosphere, enforcement mechanisms should include regular monitoring 
and reporting requirements outlined in 40 CFR part 98, subpart RR, or 
CSA/ANSI ISO 27916:2019, as referenced in Sec.  1.45Q-5(c). A commenter 
noted that stricter standards of measurement and reporting, and 
accounting for leakages are required to accurately determine if a 
facility's carbon capture and sequestration adequately accounts for 
leaked emissions. Another commenter suggested that for purposes of the 
section 45Y and 48E credits, treatment of emissions leakages must be 
adjusted from the section 45Q rules to require recalculation of the 
emissions rate of the qualified facility if the recalculated GHG 
emissions rate exceeds the required threshold.
    After consideration of the comments the Treasury Department and the 
IRS have determined that the provisions of the section 45Q rules will 
apply to qualified carbon dioxide taken into account by a taxpayer for 
purposes of the section 45Y or 48E credits. These provisions include 
rules and standards for quantifying, certifying, and verifying when 
metric tons of qualified carbon dioxide have leaked into the 
atmosphere.
    Further, the Treasury Department and the IRS also asked whether the 
existing recapture provisions under section 45Q are sufficient to 
address emissions leakages. Several commenters recommended that the 
final regulations incorporate the recapture requirements provided under 
Sec.  1.45Q-5 to address captured and sequestered carbon oxide that 
later escapes into the atmosphere when a taxpayer has taken that carbon 
dioxide into account for purpose of the section 45Y or 48E credits. The 
section 45Q rules provide for a 3-year recapture period using a LIFO 
method and provide that for each year during the recapture period the 
amount of qualified carbon dioxide that is injected into secure 
geological storage is netted against the amount of qualified carbon

[[Page 4086]]

dioxide that may leak from such secure geological storage.
    A commenter noted that the mechanics of attributing leakage events 
across years must be adapted for the section 45Y and 48E credits, with 
the effect of disqualifying a facility for the credit in years for 
which the recalculated GHG emissions rate exceeds the threshold. While 
most commenters endorsed adopting the concepts of the section 45Q 
recapture rule to the section 45Y and 48E credits, a commenter 
requested that the recapture rules not apply to taxpayers that use 
carbon capture and utilization to claim the section 45Y or 48E credits. 
The Treasury Department and the IRS have determined that the provisions 
of the section 45Q rules will apply to qualified carbon dioxide taken 
into account by a taxpayer for purposes of the section 45Y or 48E 
credits. These provisions include rules and standards for quantifying, 
certifying, and verifying when metric tons of qualified carbon dioxide 
have leaked into the atmosphere.
    In the preamble to the proposed regulations, the Treasury 
Department and the IRS also requested comment regarding whether carbon 
capture and sequestration that occurs in the production of fuel that is 
used by a facility to produce electricity should be taken into account 
under proposed Sec.  1.45Y-5(e) and section 45Y(e)(3) and, if so, how 
should such use of carbon capture and sequestration be assessed in an 
LCA. Several commenters asserted that fuel production is within the 
boundaries of an LCA for a C&G Facility and the determination of the 
GHG emissions rates for the qualified facility, and therefore, 
emissions captured and sequestered in the production of fuel for the 
qualified facility should be taken into account. Additionally, several 
commenters recommended that for carbon capture and sequestration 
occurring in the production of fuel used by a qualified facility to 
produce electricity, the LCA should account for emissions from the 
entire carbon capture and sequestration process, including capture, 
purification, compression, transportation, and injection because these 
processes all require energy input and will potentially result in 
further fugitive emissions and leaks. These commenters noted that a 
contrary approach would ignore a large portion of GHG emissions in the 
LCA. As a result, the commenters assert that the GHG emissions from 
these stages should be included in determining the net GHG emissions 
rate of a C&G Facility.
    Other commenters asserted that if carbon capture and sequestration 
occurs in the production of a fuel used as a feedstock for a qualified 
facility, such emissions should be excluded from the GHG emissions of 
the qualified facility. A commenter noted that where fuel is produced 
from a process that involves carbon capture and sequestration (such as 
natural gas steam methane reforming, or gasification of biomass), the 
entity producing that fuel would claim any carbon removal credits. 
Therefore, the commenter asserted that the carbon dioxide captured and 
sequestered from the production of the fuel should not be accounted for 
by the qualified facility that uses such the fuel to produce 
electricity.
    After consideration of the comments, the Treasury Department and 
the IRS have determined that for purposes of determining a net GHG 
emissions rate of a qualified facility, the section 45Q rules will 
apply only to qualified carbon dioxide subject to CCS at such qualified 
facility during the production of electricity. While the section 45Q 
rules are applicable to a taxpayer that uses CCS at a qualified 
facility during the production of electricity, there currently is no 
known administrable method to apply those provisions to third parties 
that produce fuel used by a qualified facility. Accordingly, the final 
regulations do not adopt the commenters' recommendation that CCS that 
occurs in the production of fuel that is used by a qualified facility 
to produce electricity should be taken into account for purpose of 
determining the net GHG emissions rate of such qualified facility.
G. Annual Publication of Emissions Rates
    Proposed Sec.  1.45Y-5(f)(1) provided 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) further provided 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) also provided 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 Federal 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 (B) (which refers to the definition of lifecycle GHG emissions in 
42 U.S.C. 7545(o)(1)(H)) 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. To provide clarity and certainty to taxpayers regarding 
eligibility, the Treasury Department and the IRS may also include in 
the Annual Table the types or categories of facilities that have a GHG 
emissions rate that is greater than zero and therefore do not meet the 
definition of a qualified facility. 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 or any changes to emissions determinations for any types 
or categories of facilities in the Annual Table must be accompanied by 
the publication of an expert analysis of such

[[Page 4087]]

change as provided in proposed Sec.  1.45Y-5(f)(2). If there are no 
changes to the Annual Table in a given taxable year, the Treasury 
Department and the IRS intend to notify taxpayers accordingly.
    Commenters provided multiple perspectives on the substance and form 
of the Annual Table. Commenters noted that the Treasury Department and 
the IRS are required to publish an Annual Table that includes ``the GHG 
emissions rates for types or categories of facilities.'' Some 
commenters stated that the Annual Table should include the emissions 
rates of components used in different C&G technologies, that would be 
consistent for all facilities under specific conditions. Other 
commenters stated that the Treasury Department and the IRS should 
either not list the facility type in the Annual Table or should be 
conservative about the criteria listed for facilities with zero or 
negative emissions.
    As noted earlier in this section of this Summary of Comments and 
Explanation of Revisions, section 45Y(b)(2)(C)(i) requires the 
Secretary to annually publish a table that sets forth the GHG emissions 
rates for types or categories of facilities. In order to promote 
taxpayer certainty and fulfill the requirements of the statute, the 
Annual Table should include sufficient information about what types or 
categories of facilities meet the GHG emissions rate requirements in 
sections 45Y and 48E. The Treasury Department and the IRS therefore do 
not adopt commenters' suggestions that the Annual Table should not 
include specific facility types.
    From a technical perspective, many taxpayer situations cannot be 
covered in the Annual Table in a way that would be consistent with the 
statutory requirements for determining GHG emissions rates, as specific 
factual circumstances will impact the outcomes of this analysis. In 
order to avoid false precision, the Treasury Department and the IRS 
have determined that the Annual Table should capture whether a 
particular type or category of facility has a GHG emissions rate of 
less than or equal to zero or a rate that is greater than zero. These 
determinations will be made consistent with the requirements of 
sections 45Y and 48E and these final regulations.
    Some commenters requested that the publication of the Annual Table 
be expedited to release the first Annual Table at the same time as the 
final regulations. Commenters also suggested that, for types or 
categories of facilities that are listed as having a GHG emissions rate 
that is less than or equal to zero in the final regulations, 
publication of the Annual Table or a PER certification is unnecessary 
for those facilities to meet the emissions rate requirement.
    Given the time and effort necessary to conduct emissions analysis 
that meets the requirements of the statute and these final regulations, 
the Treasury Department and the IRS cannot commit to a specific 
timeline for publication of the first Annual Table at this time. 
However, as noted earlier in this section of this Summary of Comments 
and Explanation of Revisions, taxpayers may treat the types or 
categories of facilities that are listed in these final regulations as 
having an emissions rate that is less than equal to zero or an 
emissions rate of greater than zero in accordance with the rules 
provided in the final regulations.
    Commenters also raised concerns regarding consistency between the 
approach to the Annual Table and the PER process. Some commenters 
stated that the Treasury Department should take a conservative approach 
to the evaluation of any petitions for C&G Facility types not listed in 
the Annual Table. The Treasury Department and the IRS have adopted an 
approach that harmonizes the technical requirements for the Annual 
Table and the PER process. For example, for purposes of determining the 
net GHG emissions rate for a C&G Facility under sections 45Y and 48E, 
any LCA must meet the requirements of the statutes, including taking 
into account lifecycle GHG emissions as described in 42 U.S.C. 
7545(o)(1)(H) and these final regulations.
    Commenters supported the proposed regulations' approach to updating 
the Annual Table, including the requirement to produce analysis led by 
one or more of the National Laboratories, in consultation with other 
Federal agency experts, and the requirement to publish that analysis. 
The Treasury Department and the IRS agree that such an approach is 
essential to ensuring public accountability and adherence to sound 
scientific principles and adopt the approach as proposed in the final 
regulations.
H. Provisional Emissions Rates
1. In General
    For purposes of section 45Y, proposed Sec.  1.45Y-5(g) provided the 
rules applicable to provisional emissions rates. Proposed Sec.  1.45Y-
5(g)(1) provided 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).
    For purposes of section 48E, proposed Sec.  1.48E-5(g) provided the 
rules applicable to provisional emissions rates. Proposed Sec.  1.48E-
5(g)(1) provided 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.  1.48E-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). The proposed rule is adopted without change.
2. Rate Not Established
    Proposed Sec.  1.45Y-5(g)(2) provided 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. If a taxpayer's request for an emissions value pursuant 
to proposed Sec.  1.45Y-5(g)(5) is pending at 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.  1.48E-5(g)(2) provided that an emissions rate has 
not been established by the Secretary for a facility for purposes of 
sections 45Y(b)(2)(C)(ii) and 48E(b)(3)(B)(ii) if such facility is not 
described in the Annual Table. If a taxpayer's request for an emissions 
value pursuant to proposed Sec.  1.48E-5(g)(5) is pending at the time 
such facility is or becomes described in the Annual Table, the 
taxpayer's request for an emissions value will be automatically denied.
3. Process for Filing a PER Petition
    Proposed Sec.  1.45Y-5(g)(3) provided the process for filing a PER 
petition. Proposed Sec.  1.45Y-5(g)(3) provided 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. A PER petition must contain an 
emissions value and, if provided by DOE, 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 emissions value obtained from DOE will be based on an analytical

[[Page 4088]]

assessment of the emissions rate associated with the facility, 
performed by one or more National Laboratories, in consultation with 
Federal agency and other 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. See Sec.  601.601 of this chapter. 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.  1.48E-5(g)(3) provided the process for filing a PER 
petition. Proposed Sec.  1.48E-5(g)(3) provided 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 48E credit with respect to the facility to 
which the PER petition applies. A PER petition must contain an 
emissions value and, if provided by DOE, the associated DOE letter. An 
emissions value may be obtained from DOE or by using the LCA model 
designated in proposed Sec.  1.48E-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 Federal agency experts as appropriate, consistent with proposed 
Sec.  1.48E-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.  1.48E-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.  1.48E-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. See Sec.  601.601 of this chapter. 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.  1.48E-5(g)(6).
    A commenter supported the process provided in the proposed 
regulations for filing a PER petition and for permitting taxpayers to 
determine an emissions value during the PER process based on the most 
recent approved LCA model. However, the commenter cautioned that a 
self-certification option would be effective only to the extent that 
LCA models are approved for clean-electricity technologies for which an 
emissions rate is not available in the Annual Table. This commenter 
recommended that the Treasury Department and the IRS approve LCA models 
expeditiously and ensure that the LCA models take avoided emissions 
into account based on technologies like fuel cells. Another commenter 
suggested clarifying whether facilities with standardized 
configurations and equipment could rely upon a single PER, rather than 
having to independently apply for a PER. The commenter emphasized that 
a single PER could just as easily be applied to separate facilities, 
provided that material characteristics are sufficiently similar.
    The Treasury Department and the IRS developed the PER process in 
consultation with the DOE and other agencies. The procedures developed 
for the PER process will designate an LCA model or models that are 
consistent with the requirements of sections 45Y and 48E and these 
regulations for use under Sec.  1.45Y-5(g)(6). The Treasury Department 
and the IRS decline to permit taxpayers to rely upon a single PER for 
separate facilities, because, as a commenter recognized, whether a 
single PER could be applicable to separate facilities would depend on 
the facts and circumstances. Accordingly, to ensure that the taxpayer 
has a PER determination applicable to each qualified facility, the 
taxpayer must submit a request for a PER determination for each 
separate facility.
    With respect to the Annual Table and the PER process, a commenter 
requested that the Treasury Department develop or design an incentive 
for those investors willing to invest in technological innovations that 
could improve on average results likely set forth in the Annual Table. 
The Treasury Department and the IRS decline to address this request 
because the addition of extra-statutory incentives is outside the scope 
of these final regulations.
4. PER Determination
    Proposed Sec.  1.45Y-5(g)(4) provided 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. 
Such PER petition must be submitted to the IRS in the first taxable 
year in which the taxpayer claims the section 45Y credit with respect 
to the facility to which the PER petition applies. 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 accurately reflect the facility's 
operations in each year the taxpayer seeks to rely on that emissions 
value. 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 remain accurate. The IRS's 
deemed acceptance of an emissions value is the Secretary's 
determination of the PER. 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.  1.48E-5(g)(4) provided 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. A 
taxpayer would be able to rely upon an emissions value provided by DOE 
for purposes of calculating and claiming a

[[Page 4089]]

section 48E 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.  1.48E-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. The taxpayer must still comply 
with all applicable requirements for the section 48E credit and any 
information, representations, or other data supporting an emissions 
value are subject to later examination by the IRS.
    A commenter suggested permitting joint evaluations of similar PER 
requests, as well as leveraging information submitted under prior 
evaluations, to promote a more streamlined process. The commenter 
requested that the Treasury Department and the IRS prioritize certainty 
and expediency and clarify the timing by which taxpayers can expect to 
receive an official assessment from the National Laboratories and other 
involved experts. An additional commenter stated that a delay in PER 
determinations would be hugely detrimental and disadvantage early 
entrants and innovative technologies. This commenter suggested that the 
Treasury Department, the IRS, and the DOE assess their collective 
capacities and resource needs to conduct analytical assessments for PER 
applications efficiently and expeditiously. The commenter also 
recommended that the Treasury Department direct the DOE to assess 
applications and determine a facility's emissions rate within six 
months of a taxpayer's submission of a PER application.
    The Treasury Department and the IRS recognize the importance of 
certainty and expediency in evaluating PER requests and have consulted 
with DOE to develop the PER application process. These agencies expect 
to review PER applications within an appropriate timeframe. Therefore, 
the changes suggested by the comments are not adopted. The Treasury 
Department and the IRS will continue to consult with the DOE as 
appropriate to assist in the administration of these final regulations.
5. Emissions Value Request Process
    Proposed Sec.  1.45Y-5(g)(5) provided the rules applicable to the 
emissions value request process. Proposed Sec.  1.45Y-5(g)(5) provided 
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. 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. 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) also provided 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.  1.48E-5(g)(5) provided the rules applicable to the 
emissions value request process. Proposed Sec.  1.48E-5(g)(5) provided 
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.  1.48E-5. An 
applicant may request an emissions value from DOE only after a 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. 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.  1.48E-5(g)(2)) or a facility that 
can determine an emissions value using a designated LCA model under 
proposed Sec.  1.48E-5(g)(6) (consistent with proposed Sec.  1.48E-
5(g)(3)), or applications that are incomplete.
    Proposed Sec.  1.48E-5(g)(5) also provided 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.
    A commenter requested that the Treasury Department conservatively 
evaluate any petitions to assign an emissions rate for C&G facility 
types not listed in the Annual Table and to strive to be fully 
confident that operation of the facility would not lead to net 
lifecycle emissions.
    The Treasury Department and the IRS have adopted an approach that 
harmonizes the technical requirements for the Annual Table and the PER 
process. For example, for purposes of determining the GHG emissions 
rate for a C&G Facility under sections 45Y and 48E, any LCA must meet 
the requirements of the statutes, including taking into account 
lifecycle GHG emissions as described in 42 U.S.C. 7545(o)(1)(H) and 
these final regulations.
    Another commenter contended that completion of a FEED study is an 
inappropriate indicator of project maturity to request a PER. The 
commenter asserted that such a requirement could substantially delay 
projects and that a more logical approach would be for the DOE to 
determine a PER using a pre-FEED or feasibility study as a 
demonstration of project maturity. An additional commenter claimed that 
the cost and related timing of a FEED study may be prohibitive for 
distributed or small-scale facilities. The commenter asserted that in 
order to access project financing, project developers must know early 
in the development process that a facility will be eligible for the 
section 45Y or 48E credit. However, the commenter stated that, a FEED 
study cannot typically be completed until well after a project 
developer will need to have provided prospective financiers with

[[Page 4090]]

certainty about credit eligibility. The commenter noted that this 
disconnect could effectively prevent the development of clean energy 
production facilities that utilize pathways not already identified in 
the Annual Table.
    As an alternative to requiring a FEED study, a commenter suggested 
accepting an LCA performed by a third-party, DOE-certified provider, 
conducted using the most current, approved GREET model, provided that 
the following criteria are satisfied: (i) the system is UL or CE 
certified, (ii) the total landed bill of materials (BOM) cost of the 
system is less than $20 million, and (iii) the system has less than 10 
MW energy equivalent (thermal, total gas flow, or total electricity) in 
it. Similarly, a commenter asserted that FEED studies can cost up to 
$50 million and delay project development by 6-8 months and recommended 
considering projects at FEL-2 \27\ of the project for PER applications.
---------------------------------------------------------------------------

    \27\ FEL-2, also known as the conceptual design or feasibility 
design phase of a project, may typically result in deliverables 
which include project schedule, preliminary design report, site 
layout, and similar. See Stage Gate Project Management, Mark 
Ludwigson, PDH Academy, https://pdhacademy.com/wp-content/uploads/2024/01/524-Stage_Gate_Project_Management.pdf.
---------------------------------------------------------------------------

    Proposed Sec.  1.45Y-5(g)(5) provided flexibility to taxpayers by 
permitting a taxpayer to request an emissions value from DOE after an 
indication of project maturity, as determined by DOE, such as a FEED 
study or the completion of a project specification and cost estimation 
sufficient to inform a final investment decision for the facility. As 
proposed, DOE has some discretion to determine appropriate project 
maturity indicators, if not a FEED study. However, a pre-FEED or 
feasibility study are not adequate indicators of project maturity as 
there exists too high of a likelihood that the final design of the 
qualified facility will differ from the pre-FEED or feasibility study 
and therefore would undermine the implementation of the statutory 
definition of a qualified facility. Accordingly, the proposed rule is 
adopted without change.
    An applicant can request an emissions value from DOE only after a 
front-end 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. The DOE will publish more information about the 
process to receive an emissions value in forthcoming guidance.
6. LCA Model for Determining an Emissions Value for C&G Facilities
    Proposed Sec.  1.45Y-5(g)(6) provided 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. 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 is required to publish an accompanying expert 
analysis of the model prepared by one or more of the National 
Laboratories, in consultation with other Federal agency experts as 
appropriate. Such analysis must address the model's compliance with 
section 45Y(b)(2)(B) 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 also ensures that the Secretary 
has a robust record to inform any designations or revocations of an LCA 
model or models.
    The rules provided in proposed Sec.  1.45Y-5(g)(6) regarding the 
designation of an LCA model or models for determining an emissions 
value for C&G Facilities apply for purposes of section 48E and proposed 
Sec.  1.48E-5(g)(6).
7. Effect of PER
    Proposed Sec.  1.45Y-5(g)(7) provided 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. The Secretary's determination of a PER 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. A PER determination does not signify that the IRS has 
determined that the requirements of section 45Y have been satisfied for 
any taxable year.
    Proposed Sec.  1.48E-5(g)(7) provided that a taxpayer may use a PER 
determined by the Secretary to determine the section 48E credit for the 
facility to which the PER applies, provided all other requirements of 
section 48E are met. The Secretary's determination of a PER 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 48E credit is 
claimed. A PER determination does not signify that the IRS has 
determined that the requirements of section 48E have been satisfied for 
any taxable year.
8. Reliance on Annual Table or Provisional Emissions Rate
    Proposed Sec.  1.45Y-5(h) provided 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.
    A commenter requested a safe harbor for taxpayers with ongoing 
transactions in the event of any changes to categories of facilities 
and corresponding GHG emissions rates listed on the Annual Table, with 
a clearly advertised cutoff date for the applicability of the prior 
iteration.
    The proposed regulations provided a rule allowing for reliance on 
the Annual Table in effect as of the date a facility began construction 
in order to give sufficient taxpayer certainty for projects in 
development. Specifying that reliance on the Annual Table in effect 
based on the beginning of construction date provides a clear point in 
time that is already well understood for tax purposes. The commenter's 
recommendation requires a fact intensive analysis of an event or series 
of events that lack a definitive date certain for when a transaction 
becomes ``ongoing.'' Such a rule is not administrable for taxpayers and 
the IRS. Therefore, the proposed rule is adopted without change.
I. Determining Anticipated Greenhouse Gas Emissions Rate
    Consistent with section 48E(b)(3)(A)(iii), proposed Sec.  1.48E-
5(h)

[[Page 4091]]

provided rules to determine an anticipated GHG emissions rate. As 
explained in the preamble to the proposed regulations, the Treasury 
Department and the IRS interpret the reference in section 
48E(b)(3)(A)(iii) to an ``anticipated greenhouse gas emissions rate'' 
that is not greater than zero to require a reasonable expectation that 
a qualified facility will operate with a rate or net rate of greenhouse 
gas emissions that is not greater than zero over a specified period of 
time. Certain Non-C&G Facilities, such as the facilities described in 
Sec.  1.45Y-5(c)(2), may have an anticipated greenhouse gas emissions 
rate that is not greater than zero based on the technology and 
practices they rely upon to generate electricity. For facilities that 
require the use of certain fuel sources, which may vary, or carbon 
capture and sequestration, to generate electricity with a greenhouse 
gas emissions rate that is not greater than zero, objective indicia 
that such facilities will use such fuel sources or operate such carbon 
capture equipment, as applicable, in a manner that results in a 
greenhouse gas emissions rate that is not greater than zero for at 
least 10 years beginning from the date the facility is placed in 
service are required to establish a reasonable expectation that the 
combination of fuel, type of facility, and practice will result in a 
greenhouse gas emissions rate that is not greater than zero.
    The proposed regulations provided a non-exhaustive list of examples 
of objective indicia that may establish a reasonable expectation that a 
qualified facility will operate with an anticipated GHG emissions rate 
that is not greater than zero, including include co-location of the 
facility with a fuel source for which the combination of fuel, type of 
facility, and practice is reasonably expected to result in a GHG 
emissions rate that is not greater than zero; a 10-year contract to 
purchase fuels for which the combination of fuel, type of facility, and 
practice is reasonably expected to result in a GHG emissions rate that 
is not greater than zero; or a facility type that only accommodates one 
type of fuel or a small range of fuels for which the combination of 
fuel, type of facility, and practice is reasonably expected to result 
in a GHG emissions rate that is not greater than zero; or a 10-year 
contract for the capture, disposal, or utilization of qualified carbon 
dioxide from the facility for which the combination of fuel, type of 
facility, and practice is reasonably expected to result in a GHG 
emissions rate that is not greater than zero. These examples are 
adopted in the final regulations in Sec.  1.48E-5(h)(2) with minor 
changes to clarify that such contracts must be binding written 
contracts and to more closely align the language used in the example 
pertaining to carbon capture and sequestration at proposed Sec.  1.48E-
5(h)(2)(iv) with that used for purposes of section 45Q and referenced 
in section 45Y(b)(2)(D).
    The Treasury Department and the IRS requested comment on what 
evidence or substantiation taxpayers should be required to maintain to 
be able to establish an anticipated GHG emissions rate for a qualified 
facility. Two commenters recommended requiring that objective indicia 
take the form of physical features that make it more likely that the 
qualified facility will operate with a GHG emissions rate that is not 
greater than zero. In these commenters' view, if the objective indicia 
do not relate to physical features of the qualified facility, the 
qualified facility could be too easily repurposed in a way that results 
in a positive GHG emissions rate. Commenters provided examples of 
physical features such as evidence of carbon capture and sequestration 
equipment incorporated into the qualified facility or a direct pipeline 
connection from the qualified facility to a waste fuel or feedstock, as 
appropriate.
    The Treasury Department and the IRS have determined that objective 
indicia need not always take the form of physical features. While in 
some cases physical features may provide objective indicia that a 
qualified facility will operate with a GHG emissions rate that is not 
greater than zero, such features are not relevant and therefore not 
required in all cases. Some qualified facilities may not have a 
physical feature that differentiates a facility with a GHG emissions 
rate that is not greater than zero from a comparable facility with a 
GHG emissions rate that is greater than zero. In such cases, the 
taxpayer must find another method of documenting its anticipated GHG 
emissions rate that is not greater than zero that provides a comparable 
level of substantiation as a physical feature. This could take the form 
of a long-term contract for fuel that would enable the facility to 
attain a GHG emissions rate that is not greater than zero, provided the 
contract imposes a binding obligation on the purchaser to compensate 
the seller for a sufficient volume of fuel to operate the entire 
facility for a substantial portion of the facility's lifetime, such as 
ten years. The Treasury Department and the IRS have determined that in 
some cases non-physical features that involve commitment to a third 
party, such as the aforementioned contract, can provide substantiation 
that a facility is reasonably expected to operate with a GHG emissions 
rate that is not greater than zero that is equivalent to the 
substantiation provided by a physical feature and relevant for a facts 
and circumstances analysis. Accordingly, the final regulations do not 
adopt the suggestion that objective indicia must take the form of 
physical features.
    The Treasury Department and the IRS also recognize that in some 
cases, a facility may seek to establish that it will operate with a GHG 
emissions rate that is not greater than zero on the basis that it will 
continuously operate carbon capture and sequestration equipment during 
electricity production. The physical presence of the carbon capture 
equipment would not generally be sufficient objective indicia to 
substantiate that the facility will operate using that equipment. The 
final regulations therefore provide at Sec.  1.48E-5(h)(2)(iv) that one 
form of objective indicia substantiating operation of such equipment 
may include a 10-year binding written contract for the permanent 
geological storage (including after injection into an EOR project) or 
utilization of qualified carbon dioxide from the facility for which the 
combination of fuel, type of facility, and practice is reasonably 
expected to result in a GHG emissions rate that is not greater than 
zero. The final regulations further provide an additional example of 
such objective indicia substantiating the operation of this equipment 
at Sec.  1.48E-5(h)(2)(v). Such objective indicia may include a legally 
binding Federal or State air permit which requires, as a condition of 
the permit, that the facility operates in a manner for which the 
combination of fuel, type of facility, and practice is reasonably 
expected to result in a greenhouse gas emissions rate that is not 
greater than zero and that any captured carbon dioxide is permanently 
geologically stored and subjects the holder to civil or criminal 
penalties in the event the relevant permit requirements are breached. 
In the case of a facility which requires the operation of carbon 
capture and sequestration equipment to achieve a qualifying GHG 
emissions rate of not greater than zero, the Treasury Department and 
the IRS have currently identified that such a permit requirement would 
provide sufficient assurance that the objective indicia requirement is 
met with respect to the operation of the carbon capture and 
sequestration and expect that taxpayers seeking to substantiate in 
other ways

[[Page 4092]]

would need to substantiate with substantially similar objective 
indicia.
    The preamble to the proposed regulations also requested comment on 
the appropriate period of time for which taxpayers should be required 
to be able to demonstrate that there is a reasonable expectation that a 
qualified facility will operate with a GHG emissions rate that is not 
greater than zero. Commenters provided a range of views on this topic. 
Several commenters suggested that taxpayers be required to demonstrate 
objective indicia that a qualified facility will operate with a GHG 
emissions rate that is not greater than zero for the lifetime of the 
qualified facility. Several other commenters recommended that this 
period be shorter, asserting that longer timelines, such as those 
beyond ten years, could prove burdensome, in part due to greater 
uncertainty over such time periods.
    Because the Treasury Department and the IRS have determined that 
the examples of objective indicia that account for a GHG emissions rate 
over ten years are sufficient to show that the operation of a qualified 
facility could reasonably be expected to result in a GHG emissions rate 
that is not greater than zero, these final regulations will not adopt 
the suggestion that the lifetime of the facility is the appropriate 
period of time for which a taxpayer is required to be able to 
demonstrate such expectation. The Treasury Department and the IRS have 
determined that demonstrating a reasonable expectation that a qualified 
facility will operate with a GHG emissions rate that is not greater 
than zero for the lifetime of a qualified facility would, for some 
long-lived facilities, be extremely challenging, if not impossible. 
However, these final regulations require taxpayers claiming the section 
48E credit to attest under penalty of perjury in a manner prescribed by 
the IRS in forms or instructions that the anticipated GHG emissions 
rate as determined under the statute and these final regulations is not 
greater than zero. A facility subject to legally binding State or 
Federal permit conditions requiring that the facility operate in a 
manner that would be incompatible with a greenhouse gas emissions rate 
of not greater than zero is not a facility for which the anticipated 
greenhouse gas emissions rate is not greater than zero.
J. Substantiation
    Upon consideration of the comments and consultation with other 
Federal agency experts, the Treasury Department and the IRS have also 
determined that the proposed regulations would benefit from additional 
clarity regarding substantiation requirements. In particular, the 
Treasury Department and the IRS acknowledge commenters' concerns about 
verifying and substantiating the key characteristics that ensure a 
qualified facility has a GHG emissions rate not greater than zero. 
Accordingly, the final regulations make clear that substantiation 
requirements prescribed by the Secretary must include substantiation of 
the key parameters that would contribute to or impact the GHG emissions 
rates based on analytical assessments conducted by the National 
Laboratories, in consultation with other Federal agency experts as 
appropriate. The Treasury Department and the IRS will describe specific 
substantiation requirements for such facilities, including requirements 
for preparation or verification by an unrelated third party as 
appropriate, in future guidance. The Treasury Department and the IRS 
will require taxpayers to substantiate that the full electricity 
production process--including specific fuels or feedstocks used--is 
consistent with the taxpayer's claims and meets the specific criteria 
that the analytical assessment has found are necessary for it to meet 
the statutory requirement of a GHG emissions rate not greater than 
zero. Given feedback provided by commenters on biomass discussed in 
section VIII.E. of this Summary of Comments and Explanation of 
Revisions, the final regulations also specify that for C&G Facilities 
utilizing biomass feedstocks, taxpayers must substantiate that the 
source of such fuels or feedstocks used are consistent with the 
taxpayer's claims. Moreover, in response to comments and as discussed 
in section VIII.D. of this Summary of Comments and Explanation of 
Revisions, if a qualified facility uses feedstocks that do not have 
marketability, but which are indistinguishable from marketable 
feedstocks (for instance, after processing), the taxpayer will be 
required to maintain documentation substantiating the origin and 
original form of the feedstock. To ensure that C&G Facilities that 
utilize biomass feedstocks meet the statutory requirement of a net GHG 
emissions rate not greater than zero, the Treasury Department and the 
IRS anticipate that it may be appropriate to require or encourage 
taxpayers to maintain third-party certification that verifies that 
these facilities meet the criteria that the LCA has found are necessary 
for a facility to meet this statutory requirement.

Severability

    If any provision in this rulemaking is held to be invalid or 
unenforceable facially, or as applied to any person or circumstance, it 
shall be severable from the remainder of this rulemaking, and shall not 
affect the remainder thereof, or the application of the provision to 
other persons not similarly situated or to other dissimilar 
circumstances.

Applicability Dates

    These regulations apply to qualified facilities (and for Sec. Sec.  
1.48E-1 through 1.48E-4, ESTs) placed in service after December 31, 
2024, and during taxable years ending on or after January 15, 2025.

Special Analyses

I. Regulatory Planning and Review--Economic Analysis

    Pursuant to the Memorandum of Agreement, Review of Treasury 
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory 
actions issued by the IRS are not subject to the requirements of 
section 6 of Executive Order 12866, as amended. Therefore, a regulatory 
impact assessment is not required.

II. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA) 
generally requires that a Federal agency obtain the approval of the 
Office of Management and Budget (OMB) before collecting information 
from the public, whether such collection of information is mandatory, 
voluntary, or required to obtain or retain a benefit. An agency may not 
conduct or sponsor and a person is not required to respond to a 
collection of information unless it displays a valid OMB control 
number.
    The collections of information in these final regulations contain 
recordkeeping and reporting requirements that are required to 
substantiate eligibility to claim a section 45Y or section 48E credit. 
These collections of information would generally be used by the IRS for 
tax compliance purposes and by taxpayers to facilitate proper reporting 
and compliance. The general recordkeeping requirements mentioned within 
these final regulations are considered general tax records under Sec.  
1.6001-1(e).
    The recordkeeping requirements in these final regulations with 
respect to section 45Y include the requirement in Sec.  1.45Y-5(h)(1) 
that taxpayers claiming the section 45Y credit must maintain in its 
books and records documentation regarding the design and operation of a 
facility that establishes that such facility

[[Page 4093]]

had a GHG emissions rate that is not greater than zero for the taxable 
year. Included in Sec.  1.45Y-5(h)(2) are examples of documentation 
that sufficiently substantiates that a facility has a GHG emissions 
rate that is not greater than zero for the taxable year, which includes 
documentation, or a report prepared by an unrelated party that verifies 
that a facility had such an emissions rate. A facility described in 
Sec.  1.45Y-5(c)(2) can maintain sufficient documentation to 
demonstrate a GHG emissions rate that is not greater than zero for the 
taxable year by showing that it is a type of facility described in 
Sec.  1.45Y-5(c)(2). Section 1.45Y-5(h)(2) provides that for other 
types of facilities not described in Sec.  1.45Y-5(c)(2), the taxpayer 
must demonstrate that the qualified facility meets the specific 
criteria that the analytical assessment prepared by the National 
Laboratories, in consultation with other Federal agency experts as 
appropriate, has found are necessary for a facility to meet the 
statutory requirement of a greenhouse gas emissions rate not greater 
than zero. Section 1.45Y-5(j)(2) provides that for C&G Facilities that 
utilize biomass feedstocks, the taxpayer must substantiate that the 
source of such fuels or feedstocks used are consistent with the 
taxpayer's claims. Section 1.45Y-5(j)(2) further provides that for the 
qualified facilities not described in Sec.  1.45Y-5(c)(2), the 
Secretary may determine that other types of facilities can sufficiently 
substantiate a GHG emissions rate, as determined under this section, 
that is not greater than zero with certain documentation and will 
describe such facilities and documentation in IRS forms, instructions, 
or publications, or guidance published in the Internal Revenue 
Bulletin. For facilities that utilize unmarketable feedstocks that are 
indistinguishable from marketable feedstocks (for instance, after 
processing), the taxpayer will be required to maintain documentation 
substantiating the origin and original form of the feedstock. For PRA 
purposes, these general tax records are already approved by OMB under 
1545-0074 for individuals, 1545-0123 for business entities, 1545-0092 
for trust and estate filers, and 1545-0047 for tax-exempt 
organizations.
    The recordkeeping requirements in these final regulations with 
respect to section 48E would include the requirement in Sec.  1.48E-
5(k)(1) that a taxpayer must maintain in its books and records 
documentation regarding the design and operation of a facility that 
establishes that such facility had an anticipated GHG emissions rate 
that is not greater than 10 grams of CO2e per kWh during 
each year of the recapture period that applies for purposes of section 
48E(g). Included in Sec.  1.48E-5(k)(2) are examples of documentation 
that sufficiently substantiates that a facility has a GHG emissions 
rate that is not greater 10 grams of CO2e per kWh during 
each year of the recapture period, which includes documentation, or a 
report prepared by an unrelated party that verifies that a facility had 
such an emissions rate. A facility described in Sec.  1.45Y-5(c)(2) can 
maintain sufficient documentation to demonstrate a GHG emissions rate 
that is not greater than 10 grams of CO2e per kWh by showing 
that it is a type of facility described in Sec.  1.45Y-5(c)(2). The 
Secretary may determine that other types of facilities can sufficiently 
substantiate a GHG emissions rate that is not greater than 10 grams of 
CO2e per kWh with certain documentation and will describe 
such facilities and documentation in IRS forms, instructions, or 
publications, or in guidance published in the Internal Revenue 
Bulletin. For such other types of facilities that utilize biomass 
feedstocks, the taxpayer must substantiate that the source of such 
fuels or feedstocks used are consistent with the taxpayer's claims. For 
all facilities that utilize unmarketable feedstocks that are 
indistinguishable from marketable feedstocks (for instance, after 
processing), the taxpayer will be required to maintain documentation 
substantiating the origin and original form of the feedstock. For PRA 
purposes, these general tax records are already approved by OMB under 
1545-0074 for individuals, 1545-0123 for business entities, 1545-0092 
for trust and estate filers, and 1545-0047 for tax-exempt 
organizations.
    The reporting requirements in these final regulations are in 
Sec. Sec.  1.45Y-5 and 1.48E-5, which provide the process for 
applicants to file a petition with the Secretary for a PER 
determination. To file a PER petition with the Secretary, a taxpayer 
must submit the PER petition attached to the taxpayer's Federal income 
tax return or Federal return, as appropriate, for the taxable year in 
which the taxpayer claims the section 45Y credit or the section 48E 
credit with respect to the facility to which the PER petition relates. 
A PER petition must contain an emissions value. If the applicant 
obtained an emissions value from DOE, the PER petition made to the IRS 
must include and emissions value letter from DOE. This emission value 
letter process will be approved by OMB. A taxpayer must retain in its 
books and records a copy of the taxpayer's request to DOE for an 
emissions value, including the supporting documentation provided to DOE 
with the request. Alternatively, if applicable, a PER petition may 
contain an emissions value determined for a facility using the most 
recent version of an LCA model, as of the time the PER petition is 
filed, that has been designated by the Secretary for such use. If an 
emissions value is determined using a 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, 
instructions, or publications, or guidance published in the Internal 
Revenue Bulletin. The burden for these requirements will be included 
within the forms and instructions applicable to sections 45Y and 48E.
    For section 45Y, the burden for these requirements will be 
associated the form and instructions applicable to claiming this credit 
and will be approved by OMB, in accordance with 5 CFR 1320.10, under 
the following OMB control numbers: 1545-0074 for individuals/sole 
proprietors, 1545-0123 for business entities, 1545-0047 for tax-exempt 
organizations, and 1545-0092 for trust and estate filers.
    For section 48E, the burden for these requirements will be 
associated with Form 3468, Investment Credit, and will be approved by 
OMB, in accordance with 5 CFR 1320.10, under the following OMB control 
numbers: 1545-0074 for individuals/sole proprietors, 1545-0123 for 
business entities, 1545-0047 for tax-exempt organizations, and 1545-
0092 for trust and estate filers.

III. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes 
certain requirements with respect to Federal rules that are subject to 
the notice and comment requirements of section 553(b) of the 
Administrative Procedure Act (5 U.S.C. 551 et seq.) and that are likely 
to have a significant economic impact on a substantial number of small 
entities.
    Unless an agency determines that a proposal is not likely to have a 
significant economic impact on a substantial number of small entities, 
section 604 of the RFA requires the agency to present a final 
regulatory flexibility analysis (FRFA) of the final regulations.
    The Treasury Department and the IRS have not determined whether the 
final rule will likely have a significant economic impact on a 
substantial number of small entities. This

[[Page 4094]]

determination requires further study. However, because there is a 
possibility of significant economic impact on a substantial number of 
small entities, an IRFA is provided in these final regulations affected 
and the economic impact on small entities.
    In addition, pursuant to section 7805(f), the proposed regulations 
preceding these final regulations were submitted to the Chief Counsel 
for the Office of Advocacy of the Small Business Administration for 
comment on its impact on small business, and no comments were received 
from the Chief Counsel for the Office of Advocacy of the Small Business 
Administration. However, the Small Business Administration's Office of 
Advocacy provided comments in response to the PWA proposed regulations, 
including proposed Sec.  1.48E-3, which is finalized as modified by 
this Treasury decision. See section III.B. of the Special Analysis of 
the PWA final regulations for a discussion of those comments.
A. Need for and Objectives of the Rule
    The final regulations provide greater clarity to taxpayers for 
purposes of claiming the section 45Y credit and section 48E credit. The 
final regulations provide necessary definitions rules regarding the 
determination of credit amounts and the procedure for requesting a 
provisional emissions rate. The final regulations provide greater 
clarity to taxpayers for purposes of claiming the section 45Y credit 
and the section 48E credit and encourage taxpayers to produce clean 
energy or invest in clean energy facilities and ESTs. Thus, the 
Treasury Department and the IRS intend and expect that the final 
regulations will deliver benefits across the economy that will 
beneficially impact various industries.
B. Affected Small Entities
    The RFA directs agencies to provide a description of, and if 
feasible, an estimate of, the number of small entities that may be 
affected by the final regulations. The Small Business Administration's 
Office of Advocacy estimates in its 2023 Frequently Asked Questions 
that 99.9 percent of American businesses meet its definition of a small 
business. The applicability of these final regulations does not depend 
on the size of the business, as defined by the Small Business 
Administration.
    As described more fully in the preamble to this final regulation 
and in this IRFA, the section 45Y credit and the section 48E credit 
incentivize the production of clean energy and the investment in clean 
energy facilities and energy storage facilities. Because the potential 
credit claimants can vary widely, it is difficult to estimate at this 
time the impact of these final regulations, if any, on small 
businesses.
    The Treasury Department and the IRS expect to receive more 
information on the impact on small businesses once taxpayers start to 
claim the section 45Y credit or the section 48E credit using the 
guidance and procedures provided in these final regulations.
C. Impact of the Rules
    The final regulations will allow taxpayers to plan investments and 
transactions based on the ability to claim the section 45Y production 
credit and/or the section 48E investment credit. The increased use of 
these credits will incentivize increased production and use of clean 
energy as well as the development of new methods and technologies for 
generating clean energy. The use of the credits will also incentivize 
additional investment in the facilities that produce and develop clean 
energy.
    Because recordkeeping and reporting requirements relating to the 
section 45Y and 48E credits will not materially differ from the 
requirements relating to existing energy production and investment tax 
credits, the recordkeeping and reporting requirements should not 
materially increase for taxpayers that already claim existing credits. 
To claim the section 45Y credit or the section 48E credit, taxpayers 
will need to continue to execute the relevant form (or successor form, 
or pursuant to instructions and other guidance) and file such form with 
the taxpayer's timely filed return (including extensions) for the 
taxable year in which the property is placed in service.
    Although the Treasury Department and the IRS do not have sufficient 
data to precisely determine the likely extent of the increased costs of 
compliance, the estimated burden of complying with the recordkeeping 
and reporting requirements are described in the Paperwork Reduction Act 
section of this preamble.
D. Alternatives Considered
    The Treasury Department and the IRS considered alternatives to the 
final regulations. For example, the Treasury Department and the IRS 
considered whether to impose different rules for determining if a 
section 48E qualified facility had a recapture event, and how and when 
a taxpayer was required to notify the Secretary that the emissions rate 
at a qualified facility was greater than 10 grams of CO2e 
per kWh. The final regulations were designed to minimize burdens on 
taxpayers while ensuring that the IRS has sufficient information to 
determine if a section 48E qualified facility's emissions rate exceeded 
the recapture threshold. The final regulations require that a taxpayer 
that claimed the section 48E credit to annually report to the IRS its 
GHG emissions rate in the form and manner prescribed in IRS forms or 
instructions or in guidance as published in the Internal Revenue 
Bulletin.
    An additional example is that the Treasury Department and the IRS 
considered alternatives to how a taxpayer should compute any increase 
in capacity at a qualified facility that, for purposes of sections 45Y 
and 48E, was a qualified facility due to an increase in capacity. The 
final regulations were designed to provide a rule that was 
administrable for the IRS and taxpayers. The final regulations offer 
taxpayers the following options for measuring capacity increases: use 
of capacity measures from modified or amended facility operating 
licenses from FERC or NRC, or related reports prepared by FERC or NRC 
as part of the licensing process; measurement of nameplate capacity of 
the facility consistent with the definition of nameplate capacity 
provided in 40 CFR 96.202; or a measurement standard prescribed by the 
Secretary in guidance published in the Internal Revenue Bulletin.
E. Duplicative, Overlapping, or Conflicting Federal Rules
    The final rules would not duplicate, overlap, or conflict with any 
relevant Federal rules. As discussed earlier, the regulations provide 
guidance relating to the section 45Y tax credit and the section 48E tax 
credit. The Treasury Department and the IRS invited input from 
interested members of the public about identifying and avoiding 
overlapping, duplicative, or conflicting requirements.

IV. Congressional Review Act

    Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), 
the Office of Information and Regulatory Affairs has determined that 
this rule meets the criteria set forth in 5 U.S.C. 804(2).

V. Immediate Effective Date

    These final regulations have an effective date of January 15, 2025. 
To the extent that a good cause statement is necessary under any 
provision of law, the Treasury Department and the IRS find that there 
would be good cause to make this rule immediately effective upon 
publication in the Federal Register.

[[Page 4095]]

    The IRA added the section 45Y and 48E credits to the Code, and 
provided that the section 45Y credit applies to facilities placed in 
service after December 31, 2024, and that the section 48E credit 
applies to property placed in service after December 31, 2024.
    Following the enactment of the IRA and the addition of sections 45Y 
and 48E to the Code, the Treasury Department and the IRS published 
proposed regulations to provide certainty to taxpayers. In particular, 
as demonstrated by the wide variety of public comments in response to 
the proposed regulations, taxpayers and other stakeholders continue to 
express uncertainty regarding the proper application of the statutory 
rules under sections 45Y and 48E, and the need for timely final 
regulations, because the credits apply to facilities and property 
placed in service after December 31, 2024. Taxpayers have requested the 
certainty that these final regulations provide prior to making 
investment decisions that will affect such facilities and property. In 
addition, this uncertainty extends to the application of a number of 
important provisions in sections 45Y and 48E that require 
determinations to be made by the Secretary, in consultation with other 
Federal agency experts, that are intended to provide certainty for 
taxpayers embarking on highly capital intensive projects intended to 
qualify for the section 45Y and 48E credits. Certainty with respect to 
these provisions is essential given the January 1, 2025 statutory 
effective date, and so that taxpayers can accurately predict the 
economic return from making particular investments and make informed 
business decisions. In addition, while taxpayers have requested clarity 
regarding the specific requirements of these rules, the public already 
has been provided notice of the general contents of these rules and 
their proposed applicability to qualified facilities and energy storage 
technologies placed in service after December 31, 2024, and during 
taxable years ending on or after the date of publication of these final 
regulations. As provided in the IRA, sections 45Y and 48E replace 
existing production and investment tax credits for facilities placed in 
service after December 31, 2024. The statute and proposed rules, 
therefore, provide notice that the rules will apply to qualified 
facilities and energy storage technologies placed in service beginning 
in 2025, and provide notice of the qualification requirements being 
promulgated in this final rule. Moreover, section 45Y(f) directs the 
Secretary to issue guidance regarding the implementation of section 45Y 
not later than January 1, 2025. Section 48E(i) similarly directs the 
Secretary to issue guidance regarding implementation of section 48E not 
later than January 1, 2025.
    Consistent with Executive Order 14008 (January 27, 2021) and 
commenters' request for finalized rules, the Treasury Department and 
the IRS have determined that an effective date of the final regulations 
as soon in time after the 45Y and 48E credits go into effect on January 
1, 2025 as possible is appropriate to provide certainty to taxpayers 
seeking to place facilities and property in service after December 31, 
2024, in order to claim the section 45Y and 48E credits. The final 
regulations provide needed rules on what the law requires for taxpayers 
to claim these credits. Accordingly, to the extent that a finding of 
good cause is necessary, the Treasury Department and the IRS have found 
good cause for the rules in this Treasury decision to take effect on 
January 15, 2025.

VI. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits and take 
certain other actions before issuing a final rule that includes any 
Federal mandate that may result in expenditures in any one year by a 
State, local, or Indian Tribal government, in the aggregate, or by the 
private sector, of $100 million (updated annually for inflation). This 
final rule does not include any Federal mandate that may result in 
expenditures by State, local, or Indian Tribal governments, or by the 
private sector in excess of that threshold.

VII. Executive Order 13132: Federalism

    Executive Order 13132 (Federalism) prohibits an agency from 
publishing any rule that has federalism implications if the rule either 
imposes substantial, direct compliance costs on State and local 
governments, and is not required by statute, or preempts State law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. This final rule does not have 
federalism implications and does not impose substantial direct 
compliance costs on State and local governments or preempt State law 
within the meaning of the Executive order.

VIII. Executive Order 13175: Consultation and Coordination With Indian 
Tribal Governments

    Executive Order 13175 (Consultation and Coordination With Indian 
Tribal Governments) prohibits an agency from publishing any rule that 
has Tribal implications if the rule either imposes substantial, direct 
compliance costs on Indian Tribal governments, and is not required by 
statute, or preempts Tribal law, unless the agency meets the 
consultation and funding requirements of section 5 of the Executive 
order. This final rule does not have substantial direct effects on one 
or more federally recognized Indian tribes and does not impose 
substantial direct compliance costs on Indian Tribal governments within 
the meaning of the Executive order.

Statement of Availability of IRS Documents

    Guidance cited in this preamble is published in the Internal 
Revenue Bulletin and is available from the Superintendent of Documents, 
U.S. Government Publishing Office, Washington, DC 20402, or by visiting 
the IRS website at https://www.irs.gov.

Drafting Information

    The principal authors of these final regulations are Maksim Berger, 
John M. Deininger, Martha M. Garcia, Boris Kukso, Nathaniel Kupferman, 
and Alexander Scott (Passthroughs and Special Industries). Other 
personnel from the Treasury Department, the DOE, the EPA, the USDA, and 
the IRS participated in the development of the final regulations.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, the Treasury Department and the IRS amend 26 CFR part 
1 as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by:
0
a. Adding entries in numerical order for Sec. Sec.  1.45Y-1 and 1.45Y-
2;
0
b. Revising the entry for Sec.  1.45Y-3; and
0
c. Adding entries in numerical order for Sec. Sec.  1.45Y-4 and 1.45Y-5 
and 1.48E-1 through 1.48E-5.
    The revision and additions read in part as follows:

    Authority:  26 U.S.C. 7805 * * *
* * * * *

[[Page 4096]]

    Section 1.45Y-1 also issued under 26 U.S.C. 45Y(f).
    Section 1.45Y-2 also issued under 26 U.S.C. 45Y(f).
    Section 1.45Y-3 also issued under 26 U.S.C. 45Y(f).
    Section 1.45Y-4 also issued under 26 U.S.C. 45Y(f).
    Section 1.45Y-5 also issued under 26 U.S.C. 45Y(b) and (f).
* * * * *
    Section 1.48E-1 also issued under 26 U.S.C. 48E(i).
    Section 1.48E-2 also issued under 26 U.S.C. 48E(i).
    Section 1.48E-3 also issued under 26 U.S.C. 48E(i).
    Section 1.48E-4 also issued under 26 U.S.C. 48E(i).
    Section 1.48E-5 also issued under 26 U.S.C. 48E(i).
* * * * *

0
Par. 2. Add an undesignated center heading immediately following Sec.  
1.37-3 to read as follows:

General Business Credits

* * * * *

0
Par. 3. Sections 1.45Y-0 through 1.45Y-2 are added to read as follows:
Sec.
* * * * *
1.45Y-0 Table of contents.
1.45Y-1 Clean electricity production credit.
1.45Y-2 Qualified facility for purposes of section 45Y.
* * * * *


Sec.  1.45Y-0  Table of contents.

    This section lists the captions contained in Sec. Sec.  1.45Y-1 
through 1.45Y-5.

Sec.  1.45Y-1 Clean electricity production credit.

    (a) Overview.
    (1) In general.
    (2) CHP property.
    (i) In general.
    (ii) Components excluded.
    (3) Code.
    (4) kWh.
    (5) Metering device.
    (i) In general.
    (ii) Standards for maintaining and operating a metering device.
    (iii) Network equipment.
    (iv) Examples.
    (6) Qualified facility.
    (7) Related person.
    (i) In general.
    (ii) Member of a consolidated group.
    (8) Secretary.
    (9) Section 45Y credit.
    (10) Section 45Y regulations.
    (11) Unrelated person.
    (12) Waste energy recovery property (WERP).
    (b) Credit amount.
    (1) In general.
    (2) Applicable amount.
    (i) In general.
    (ii) Base amount.
    (iii) Alternative amount.
    (3) Inflation adjustment.
    (i) In general.
    (ii) Annual computation.
    (iii) Inflation adjustment factor.
    (iv) GDP implicit price deflator.
    (4) Energy communities increase in credit.
    (5) Domestic content bonus credit amount.
    (c) Credit phase-out.
    (1) In general.
    (2) Phase-out percentage.
    (3) Applicable year.
    (4) Phase-out data.
    (5) Determination of phase-out.
    (d) Requirements for CHP property.
    (1) In general.
    (2) Energy efficiency percentage.
    (3) Special rule for calculating electricity produced by CHP 
property.
    (i) In general.
    (ii) Conversion from Btu to kWh.
    (e) Applicability date.

Sec.  1.45Y-2 Qualified facility for purposes of section 45Y.

    (a) Qualified facility.
    (b) Property included in qualified facility.
    (1) In general.
    (2) Unit of qualified facility.
    (i) In general.
    (ii) Functionally interdependent.
    (3) Integral part.
    (i) In general.
    (ii) Power conditioning and transfer equipment.
    (iii) Roads.
    (iv) Fences.
    (v) Buildings.
    (vi) Shared integral property.
    (vii) Examples.
    (c) Coordination with other credits.
    (1) In general.
    (2) Allowed.
    (3) Examples.
    (d) Applicability date.

Sec.  1.45Y-3 Rules relating to the increased credit amount for 
prevailing wage and apprenticeship.
    (a) In general.
    (b) Qualified facility requirements.
    (c) Nameplate capacity for purposes of the One Megawatt 
Exception.
    (1) In general.
    (2) Nameplate capacity for qualified facilities that generate in 
direct current for purposes of the One Megawatt Exception.
    (3) Integrated operations.
    (4) Related taxpayers.
    (i) Definition.
    (ii) Related taxpayer rule.
    (d) Applicability date.

Sec.  1.45Y-4 Rules of general application.

    (a) Only production in the United States taken into account for 
purposes of section 45Y.
    (b) Production attributable to the taxpayer.
    (1) In general.
    (2) Example of gross sales.
    (3) Section 761(a) election.
    (c) Expansion of facility; Incremental production (Incremental 
Production Rule).
    (1) In general.
    (2) Measurement standard.
    (3) Special rule for restarted facilities.
    (4) Computation of increased amount of electricity produced.
    (5) Examples.
    (d) Retrofit of an existing facility (80/20 Rule).
    (1) In general.
    (2) Cost of new components of property.
    (3) Examples.
    (e) Applicability date.

Sec.  1.45Y-5 Greenhouse gas emissions rates for qualified 
facilities under section 45Y.

    (a) In general.
    (b) Definitions.
    (1) CO2e per kWh.
    (2) Combustion.
    (3) Gasification.
    (4) Facility that produces electricity through combustion or 
gasification (C&G Facility).
    (5) Greenhouse gas emissions rate.
    (6) Greenhouse gases emitted into the atmosphere by a facility 
in the production of electricity.
    (7) Non-C&G Facility.
    (8) Fuel.
    (9) Feedstock.
    (10) Market-mediated effects.
    (c) Non-C&G Facilities.
    (1) Determining a greenhouse gas emissions rate for Non-C&G 
Facilities.
    (i) Excluded emissions.
    (ii) Emissions assessment process.
    (iii) Example of greenhouse gas emissions rate determination for 
a Non-C&G Facility.
    (2) Non-C&G Facilities with a greenhouse gas emissions rate that 
is not greater than zero.
    (d) C&G Facilities.
    (1) Determining a greenhouse gas emissions rate for C&G 
Facilities.
    (2) LCA requirements.
    (i) Starting boundary.
    (ii) Ending boundary.
    (iii) Baseline.
    (iv) Offsets and offsetting activities.
    (v) Principles for included emissions.
    (vi) Principles for excluded emissions.
    (vii) Alternative fates and avoided emissions.
    (viii) Temporal scales.
    (ix) Spatial scales.
    (x) Categorization of products.
    (e) Use of methane from certain sources to produce electricity.
    (1) In general.
    (2) Definitions.
    (i) Biogas.
    (ii) Coal mine methane.
    (iii) Fugitive methane.
    (iv) Renewable natural gas.
    (3) Considerations regarding the lifecycle greenhouse gas 
emissions associated with the production of electricity using 
methane from certain sources.
    (i) In general.
    (ii) Methane from landfill sources.
    (iii) Methane from wastewater sources.
    (iv) Coal mine methane.
    (v) Methane from animal waste.
    (vi) Fugitive methane other than coal mine methane.
    (4) Book and claim.
    (f) Carbon capture and sequestration.
    (1) In general.
    (2) Substantiation.
    (g) Annual publication of emissions rates.
    (1) In general.
    (2) Publication of analysis required for changes to the Annual 
Table.

[[Page 4097]]

    (h) Provisional emissions rates.
    (1) In general.
    (2) Rate not established.
    (3) Process for filing a PER petition.
    (4) PER determination.
    (5) Emissions value request process.
    (6) LCA model for determining an emissions value for C&G 
Facilities.
    (7) Effect of PER.
    (i) Reliance on Annual Table or Provisional Emissions Rate.
    (j) Substantiation.
    (1) In general.
    (2) Sufficient substantiation.
    (k) Applicability date.


Sec.  1.45Y-1  Clean electricity production credit.

    (a) Overview--(1) In general. For purposes of section 38 of the 
Internal Revenue Code (Code), the section 45Y credit (defined in 
paragraph (a)(9) of this section) is determined under section 45Y of 
the Code and the section 45Y regulations (defined in paragraph (a)(10) 
of this section). This paragraph (a) provides definitions of terms 
that, unless otherwise specified, apply for purposes of section 45Y, 
the section 45Y regulations, and any provision of the Code or this 
chapter that expressly refers to any provision of section 45Y or the 
section 45Y regulations. Paragraph (b) of this section provides rules 
for determining the amount of the section 45Y credit for any taxable 
year. Paragraph (c) of this section provides rules regarding the phase-
out of the section 45Y credit. Paragraph (d) of this section provides 
rules regarding combined heat and power system (CHP) property. See 
Sec.  1.45Y-2 for rules relating to qualified facilities for purposes 
of the section 45Y credit. See Sec.  1.45Y-4 for rules of general 
application for the section 45Y credit. See Sec.  1.45Y-5 for rules to 
determine greenhouse gas emissions rates for qualified facilities.
    (2) CHP property--(i) In general. For purposes of section 
45Y(g)(2)(B) and paragraph (d) of this section, the term CHP property 
means property comprising a system that uses the same energy source for 
the simultaneous or sequential generation of electrical power, 
mechanical shaft power, or both, in combination with the generation of 
steam or other forms of useful thermal energy (including for heating 
and cooling applications).
    (ii) Components excluded. CHP property does not include property 
used to transport the energy source to the generating facility or to 
distribute energy produced by the facility.
    (3) Code. The term Code means the Internal Revenue Code.
    (4) kWh. The term kWh means kilowatt hours.
    (5) Metering device--(i) In general. For purposes of section 
45Y(a)(1)(A)(ii)(II), the term metering device means 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.
    (ii) Standards for maintaining and operating a metering device. For 
purposes of section 45Y(a)(1)(A)(ii)(II) and this section, a metering 
device must--
    (A) Be maintained in proper working order in accordance with the 
instructions of its manufacturer;
    (B) Be certified as meeting generally accepted industry performance 
standards, such as the American National Standards Institute C12.1-2022 
standard, or subsequent revisions;
    (C) Be revenue grade with a +/-0.5 percent accuracy; and
    (D) Be properly calibrated.
    (iii) Network equipment. For purposes of operating 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 equipment in the taxpayer's facilities.
    (iv) Examples. This paragraph (a)(5)(iv) provides examples 
illustrating the application of paragraph (a)(5) of this section.
    (A) Example 1. Qualified facility equipped with a metering device 
owned and operated by an unrelated person. X owns a qualified facility 
equipped with a metering device that is owned and operated by Y, an 
unrelated person. The metering device meets the requirements of 
paragraphs (a)(5)(i) through (iii) of this section. X sells electricity 
produced at the qualified facility to Z, a related person during the 
taxable year. Because the qualified facility is equipped with a 
metering device that is owned and operated by an unrelated person and 
meets the requirements of paragraphs (a)(5)(i) through (iii), X may 
claim a section 45Y credit based on the electricity produced by X and 
sold to Z during the taxable year.
    (B) Example 2. Electricity produced by the taxpayer at a qualified 
facility sold, consumed, or stored by the taxpayer during the taxable 
year. X owns a qualified facility equipped with a metering device that 
is owned and operated by an unrelated person, Y. The metering device 
meets the requirements of paragraphs (a)(5)(i) through (iii) of this 
section. Because the qualified facility is equipped with a metering 
device that is owned and operated by an unrelated person and the 
metering device meets the requirements of paragraphs (a)(5)(i) through 
(iii), X may sell electricity produced at the qualified facility during 
the taxable year to a related or unrelated person. X may also consume 
the electricity produced at the qualified facility during the taxable 
year onsite. Additionally, X may store the electricity produced at the 
qualified facility during the taxable year in energy storage technology 
owned by X. In any of these three situations, X may claim a section 45Y 
credit for the taxable year for the kWh of electricity produced at the 
qualified facility measured by the metering device and sold, consumed, 
or stored by X during the taxable year.
    (6) Qualified facility. The term qualified facility for purposes of 
the section 45Y credit has the meaning provided in Sec.  1.45Y-2(a).
    (7) Related person--(i) In general. The term related person means a 
person that is related to another person if such persons would be 
treated as a single employer under the regulations in this chapter 
under section 52(b) of the Code.
    (ii) Member of a consolidated group. In the case of a corporation 
that is a member of a consolidated group (as defined in Sec.  1.1502-
1(h)), such member 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.
    (8) Secretary. The term Secretary means the Secretary of the 
Treasury or their delegate.
    (9) Section 45Y credit. The term section 45Y credit means the clean 
electricity production credit determined under section 45Y of the Code 
and the section 45Y regulations.
    (10) Section 45Y regulations. The term section 45Y regulations 
means this section and Sec. Sec.  1.45Y-2 through 1.45Y-5.
    (11) Unrelated person. 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 paragraph (a)(7) of this section. 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. For example, assume Taxpayer X produces electricity at a 
qualified facility and sells it to Consumer Y. Consumer Y is an 
individual consumer and is not subject to aggregation under the 
regulations at 26 CFR 1.52-1 prescribed under section 52(b). Therefore, 
Consumer Y is not treated as a single employer with Taxpayer X under 
section 52(b), and a sale to Consumer Y is treated as a sale to an 
unrelated person. The result is the same

[[Page 4098]]

if Consumer Y is an individual consumer who is a member of a 
cooperative or Indian tribe that owns or controls, directly or 
indirectly, Taxpayer X. The result is also the same if Consumer Y is an 
individual consumer who is a resident of a State or municipality that 
owns or controls, directly or indirectly, Taxpayer X.
    (12) Waste energy recovery property (WERP). 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, and associated equipment.
    (b) Credit amount--(1) In general. The section 45Y credit for any 
taxable year is an amount equal to the product of the kWh of 
electricity that is produced at a qualified facility and sold by the 
taxpayer to an unrelated person during the taxable year, multiplied by 
the applicable amount with respect to such qualified facility. In the 
case of a qualified facility equipped with a metering device (as 
defined in paragraph (a)(5) of this section) 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 
produced, as measured by the metering device, at such qualified 
facility and sold, consumed, or stored by the taxpayer during the 
taxable year, multiplied by the applicable amount with respect to such 
qualified facility. Only one section 45Y credit can be claimed for each 
kWh of electricity produced by the taxpayer at a qualified facility. 
The credit amount may also be increased as provided in section 
45Y(g)(11) and paragraph (b)(5) of this section in the case of a 
qualified facility that satisfies the domestic content requirements of 
section 45Y(g)(11)(B).
    (2) Applicable amount--(i) In general. The term applicable amount 
means the base amount described in paragraph (b)(2)(ii) of this section 
or the alternative amount described in paragraph (b)(2)(iii) of this 
section. The applicable amount is subject to the inflation adjustment 
as provided in section 45Y(c)(1) and paragraph (b)(3) of this section. 
The applicable amount may also be increased as provided in section 
45Y(g)(7) and paragraph (b)(4) of this section in the case of a 
qualified facility that is located in an energy community.
    (ii) Base amount. Under section 45Y(a)(2)(A), in the case of any 
qualified facility that does not satisfy the requirements provided in 
section 45Y(a)(2)(B), the applicable amount is the base amount, which 
is 0.3 cents.
    (iii) Alternative amount. Under section 45Y(a)(2)(B), in the case 
of any qualified facility that satisfies the prevailing wage and 
apprenticeship requirements provided in section 45Y(a)(2)(B), the 
applicable amount is the alternative amount, which is 1.5 cents.
    (3) Inflation adjustment--(i) In general. Pursuant to section 
45Y(c)(1), in the case of a calendar year beginning after 2024, the 
base amount and the alternative amount 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. If the base amount as adjusted under this paragraph 
(b)(3)(i) is not a multiple of 0.05 cent, such amount will be rounded 
to the nearest multiple of 0.05 cent. If the alternative amount as 
adjusted under this paragraph (b)(3)(i) is not a multiple of 0.1 cent, 
such amount will be rounded to the nearest multiple of 0.1 cent.
    (ii) Annual computation. Pursuant to section 45Y(c)(2), the 
inflation adjustment factor for each calendar year will be published in 
the Federal Register not later than April 1 of that calendar year. The 
base amount and the alternative amount, as adjusted under paragraph 
(b)(3)(i) of this section, will also be published in the Federal 
Register not later than April 1 of each calendar year.
    (iii) Inflation adjustment factor. Under section 45Y(c)(3), the 
term inflation adjustment factor means, with respect to a calendar 
year, a fraction--
    (A) The numerator of which is the GDP implicit price deflator for 
the preceding calendar year; and
    (B) The denominator of which is the GDP implicit price deflator for 
the calendar year 1992.
    (iv) GDP implicit price deflator. Under section 45Y(c)(3), the term 
GDP implicit price deflator means the most recent revision of the 
implicit price deflator for the gross domestic product as computed and 
published by the Department of Commerce before March 15 of the calendar 
year.
    (4) Energy communities increase in credit. 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 
section 45Y credit with respect to any electricity produced by the 
taxpayer at such facility during the taxable year, the applicable 
amount will be increased by an amount equal to 10 percent of the 
applicable amount that would otherwise be in effect before application 
of this paragraph (b)(4). The 10 percent increase under this paragraph 
(b)(4) applies after the inflation adjustment under paragraph (b)(3) of 
this section.
    (5) Domestic content bonus credit amount. In the case of any 
qualified facility that satisfies the requirements of section 
45Y(g)(11)(B)(i) (domestic content requirement), for purposes of 
determining the amount of the section 45Y credit with respect to any 
electricity produced by the taxpayer at such facility during the 
taxable year, the amount of the credit otherwise determined under this 
paragraph (b), without application of paragraph (b)(4) of this section 
(related to energy communities), is increased by 10 percent.
    (c) Credit phase-out--(1) In general. The amount of the section 45Y 
credit for any qualified facility, the construction of which begins 
during a calendar year provided in section 45Y(d)(2) and described in 
paragraph (c)(2) of this section, is equal to the product of--
    (i) The amount of the credit determined under section 45Y(a) and 
described in paragraph (b) of this section, without regard to section 
45Y(d) and this paragraph (c); multiplied by
    (ii) The phase-out percentage provided under section 45Y(d)(2) and 
described in paragraph (c)(2) of this section.
    (2) Phase-out percentage. The phase-out percentage described in 
this paragraph (c)(2) is equal to--
    (i) For a facility the construction of which begins during the 
first calendar year following the applicable year, 100 percent;
    (ii) For a facility the construction of which begins during the 
second calendar year following the applicable year, 75 percent;
    (iii) For a facility the construction of which begins during the 
third calendar year following the applicable year, 50 percent; and
    (iv) For a facility the construction of which begins during any 
calendar year subsequent to the calendar year described in paragraph 
(c)(2)(iii) of this section, 0 percent.
    (3) Applicable year. For purposes of this paragraph (c), the term 
applicable year means the later of--
    (i) 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

[[Page 4099]]

electricity in the United States for calendar year 2022; or
    (ii) 2032.
    (4) Phase-out data. For purposes of paragraph (c)(3)(i) of this 
section, the annual greenhouse gas emissions from the production of 
electricity in the United States for any calendar year must be assessed 
separately using both of the data sources described in paragraphs 
(c)(4)(i) and (ii) of this section:
    (i) The U.S. Energy Information Administration's Electric Power 
Annual, summing the annual carbon dioxide emissions data from 
conventional power plants and combined heat and power plants and the 
Monthly Energy Review annual carbon dioxide emissions from the 
combustion of biomass to produce electricity in the Electric Power 
Sector; and
    (ii) 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.
    (5) Determination of phase-out. For purposes of paragraph (c)(3)(i) 
of this section, the Secretary will determine 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 only if the annual greenhouse gas 
emissions from the production of electricity in the United States, as 
determined separately under both of the data sources described in 
paragraph (c)(4) of this section, are each 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. If a data 
source described in paragraph (c)(4) of this section becomes 
unavailable (for example, it is no longer published or does not provide 
the specified data), the Secretary must designate a similar data source 
to replace the unavailable data source.
    (d) Requirements for CHP property--(1) In general. To be eligible 
for the section 45Y credit, a CHP property must produce at least 20 
percent of its total useful energy in the form of useful 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). The energy efficiency percentage of CHP property must exceed 
60 percent. These percentages are determined on a British thermal unit 
(Btu) basis.
    (2) Energy efficiency percentage. The energy efficiency percentage 
of a CHP property 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. In the case of a qualified facility 
using nuclear energy, which does not involve combustion, the 
denominator is the reactor's maximum power level in megawatts thermal 
listed on the Nuclear Regulatory Commission (NRC) operating license, 
converted to Btus using 3,412,140 Btus per hour per megawatt. For other 
qualified facilities not using combustion, additional methodologies may 
be prescribed by the Secretary in guidance published in the Internal 
Revenue Bulletin (see Sec.  601.601 of this chapter).
    (3) Special rule for calculating electricity produced by CHP 
property--(i) In general. For purposes of section 45Y(a) and paragraph 
(b) of this section, 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 is included for purposes of 
determining the greenhouse gas emissions rate for such facility.
    (ii) Conversion from Btu to kWh--(A) In general. For purposes of 
section 45Y(g)(2)(A)(i) and this paragraph (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.
    (B) Heat rate. For purposes of this paragraph (d)(3), the term heat 
rate means 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. In the case of a qualified facility using 
nuclear energy, which does not involve combustion, the facility's 
reactor's total annual thermal output (in Btus, using a conversion rate 
of 3,412,140 Btus per megawatt hour thermal) shall be used in place of 
the total annual fuel consumption of the CHP property. For other 
qualified facilities not using combustion, additional methodologies may 
be prescribed by the Secretary in guidance published in the Internal 
Revenue Bulletin (see Sec.  601.601 of this chapter).
    (e) Applicability date. This section applies to qualified 
facilities placed in service after December 31, 2024, and during a 
taxable year ending on or after January 15, 2025.


Sec.  1.45Y-2  Qualified facility for purposes of section 45Y.

    (a) Qualified facility. For purposes of the section 45Y credit 
(defined in Sec.  1.45Y-1(a)(9)), the term qualified facility means a 
facility owned by the taxpayer that meets the requirements of 
paragraphs (a)(1) through (3) of this section:
    (1) The facility is used for the generation of electricity, meaning 
that it is a net generator of electricity taking into account any 
electricity consumed by the facility;
    (2) The facility is placed in service after December 31, 2024; and
    (3) The facility has a greenhouse gas emissions rate of not greater 
than zero (as determined under rules provided in Sec.  1.45Y-5).
    (b) Property included in qualified facility--(1) In general. A 
qualified facility includes a unit of qualified facility (as defined in 
paragraph (b)(2) of this section) that meets the requirements of 
paragraph (b)(2). A qualified facility also includes property owned by 
the taxpayer that is an integral part (as defined in paragraph (b)(3) 
of this section) of the qualified facility. Any component of property 
that meets the requirements of this paragraph (b) is part of a 
qualified facility regardless of where such component of property is 
located. A qualified facility generally does not include equipment that 
is an addition or modification to an existing qualified facility. 
However, see Sec.  1.45Y-4(c) for rules regarding the Incremental 
Production Rule and Sec.  1.45Y-4(d) for rules regarding a retrofitted 
qualified facility (80/20 Rule).
    (2) Unit of qualified facility--(i) In general. For purposes of the 
section 45Y credit, the unit of qualified facility includes all 
functionally interdependent components of property (as defined in 
paragraph (b)(2)(ii) of this section) owned by the taxpayer that are 
operated together and that can operate apart from

[[Page 4100]]

other property to produce electricity, or, in the case of CHP property, 
useful thermal energy and electricity. No provision of this section, 
Sec.  1.45Y-1, or Sec. Sec.  1.45Y-3 through 1.45Y-5 uses the term unit 
in respect of a qualified facility with any meaning other than that 
provided in this paragraph (b)(2)(i).
    (ii) Functionally interdependent. Components of property 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 produce electricity.
    (3) Integral part--(i) In general. For purposes of thesection 
45Ycredit, a component of property owned by a taxpayer is an integral 
part of a qualified facility if it is used directly in the intended 
function of the qualified facility and is essential to the completeness 
of such function. Property that is an integral part of a qualified 
facility is part of the qualified facility.
    (ii) Power conditioning and transfer equipment. Power conditioning 
equipment and transfer equipment are integral parts of a qualified 
facility. Power conditioning equipment includes, but is not limited to, 
transformers, inverters, and converters, which modify the 
characteristics of electricity or thermal energy into a form suitable 
for use, transmission, or distribution. Parts related to the 
functioning or protection of power conditioning equipment are also 
treated as power conditioning equipment and include, but are not 
limited to, switches, circuit breakers, arrestors, and hardware used to 
monitor, operate, and protect power conditioning equipment. Transfer 
equipment includes components of property that allow for the 
aggregation of electricity generated by a qualified facility and 
components of property that alter voltage to permit electricity to be 
transferred to a transmission or distribution line. Transfer equipment 
does not include transmission or distribution lines. Examples of 
transfer equipment include, but are not limited to, wires, cables, and 
combiner boxes that conduct electricity. Parts related to the 
functioning or protection of transfer equipment are also treated as 
transfer equipment and may include items such as current transformers 
used for metering, electrical interrupters (such as circuit breakers, 
fuses, and other switches), and hardware used to monitor, operate, and 
protect transfer equipment.
    (iii) Roads. Roads that are integral to the intended function of 
the qualified facility such as onsite roads that are used to operate 
and maintain the qualified facility are integral parts of a qualified 
facility. 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.
    (iv)Fences. Fencing is not an integral part of a qualified facility 
because it is not integral to the intended function of the qualified 
facility.
    (v) Buildings. Generally, buildings are not integral parts of a 
qualified facility because they are not integral to the intended 
function of the qualified facility. However, the structures described 
in paragraphs (b)(3)(v)(A) and (B) of this section are not treated as 
buildings for this purpose and are an integral part of a qualified 
facility:
    (A) A structure that is essentially an item of machinery or 
equipment; and
    (B) A structure that houses components of property that are 
integral to the intended function of a qualified facility if the use of 
the structure is so closely related to the use of the components of 
property housed therein that the structure clearly can be expected to 
be replaced if the components of property it initially houses are 
replaced.
    (vi) Shared integral property. 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. In addition, 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 by section 48E(b)(3) (48E 
Qualified Facility) that is an integral part of both qualified 
facilities will not affect the eligibility of the 45Y Qualified 
Facility for the section 45Y credit or the 48E Qualified Facility for 
the section 48E credit (defined in Sec.  1.48E-1(a)(10)).
    (vii) Examples. This paragraph (b)(3)(vii) provides examples 
illustrating the rules of paragraphs (b)(3)(i) through (vi) of this 
section.
    (A) Example 1. Co-located qualified facilities owned by the same 
taxpayer that share integral property. X constructs and owns a solar 
facility (Solar Facility) and nearby also constructs and owns a wind 
facility (Wind Facility) that are each a qualified facility. The Solar 
Facility and Wind Facility each connect to a shared transformer that 
steps up the electricity produced by each qualified facility to 
electrical grid voltage before it is transmitted to the electrical grid 
through an intertie. The fact that the Solar Facility and Wind Facility 
share property that is integral to both does not impact the ability of 
X to claim a section 45Y credit for both qualified facilities.
    (B) Example 2. Co-located qualified facilities owned by different 
taxpayers that share integral property. X constructs and owns a solar 
facility (Solar Facility), and nearby Y constructs and owns a wind 
facility (Wind Facility) that are each a qualified facility. X's Solar 
Facility and Y's Wind Facility each connect to a shared transformer 
that steps up the electricity produced by both qualified facilities to 
electrical grid voltage before it is transmitted to the electrical grid 
through an intertie. The fact that the Solar Facility and Wind Facility 
share property that is integral to both does not impact the ability of 
X or Y to claim a section 45Y credit for the electricity produced by 
their respective qualified facilities.
    (C) Example 3. Co-located qualified facility and Energy Storage 
Technology (EST) owned by the same taxpayer that share integral 
property. X constructs and owns a wind facility that is a qualified 
facility (Wind Facility) that is co-located with an EST (as defined in 
Sec.  1.48E-2(g)) that X also constructed and owns. The Wind Facility 
and EST share transfer equipment that is integral to both. The fact 
that the Wind Facility and EST share property that is integral to both 
does not impact the ability of X to claim a section 45Y credit for the 
electricity produced by the Wind Facility or to claim a section 48E 
credit for the EST.
    (D) Example 4. Co-located wind qualified facility and Energy 
Storage Technology owned by different taxpayers that share integral 
property. X constructs and owns a solar facility that is a qualified 
facility (Solar Facility) that is co-located with an EST (as defined in 
Sec.  1.48E-2(g)) constructed and owned by Y. The Wind Facility and EST 
share transfer equipment that is integral to both. The fact that the 
Wind Facility and EST share property that is integral to both does not 
impact the ability of X to claim a section 45Y credit for the 
electricity produced by the Wind Facility or the ability of Y to claim 
a section 48E credit for the EST.
    (E) Example 5. Qualified facility with integral property owned by a 
different taxpayer. X constructs and owns a hydropower production 
facility that is a qualified facility (Hydropower Facility). The 
Hydropower Facility connects to a dam owned by Y, a government entity, 
that is an integral part of the Hydropower Facility. The fact that X 
does not own the dam does not impact the ability of X to claim a 
section 45Y

[[Page 4101]]

credit for the production of electricity by the Hydropower Facility.
    (c) Coordination with other credits--(1) In general. The term 
qualified facility (as defined in section 45Y(b) and paragraph (a) of 
this section) does 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. A taxpayer that directly owns a qualified facility (as defined in 
section 45Y(b)) that is eligible for both a section 45Y credit and a 
credit determined under one of section 45, 45J, 45Q, 45U, 48, 48A, or 
48E is eligible for the section 45Y credit only if such other Federal 
income tax credit was not allowed with respect to the qualified 
facility. Nothing in this paragraph (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.
    (2) Allowed. For purposes of paragraph (c)(1) of this section, the 
term allowed only includes credits that a taxpayer has claimed on a 
Federal income tax return or Federal return, as appropriate, and that 
the Internal Revenue Service (IRS) has not challenged in terms of the 
taxpayer's eligibility.
    (3) Examples. This paragraph (c)(3) provides examples illustrating 
the rules of paragraph (c) of this section.
    (i) Example 1. Taxpayer claims a section 45Y credit on a solar farm 
and section 48E credit on co-located EST. X owns a solar farm that is a 
qualifying facility (Solar Qualified Facility), and X owns a co-located 
EST (as defined in Sec.  1.48E-2(g)) (Energy Storage). The Energy 
Storage is not part of the Solar Qualified Facility, and, therefore, X 
may claim the section 45Y credit based on the kWh of electricity 
produced by the Solar Qualified Facility, and X may also claim the 
section 48E credit based on its qualified investment in the Energy 
Storage.
    (ii) Example 2. Different taxpayers claim a section 45Y credit for 
a solar farm and a section 48E credit for co-located Energy Storage 
Technology. X owns a solar farm that is a qualifying facility (Solar 
Qualified Facility), and Y owns a co-located EST (as defined in Sec.  
1.48E-2(g)) (Energy Storage). The Energy Storage is not part of the 
Solar Qualified Facility, and therefore, X may claim the section 45Y 
credit based on the kWh of electricity produced by the Solar Qualified 
Facility, and Y may claim the section 48E credit based on its qualified 
investment in the Energy Storage.
    (iii) Example 3. Taxpayer claiming another credit is not allowed a 
section 45Y credit. X owns a wind facility that satisfies the 
requirements of a qualified facility as well as the requirements of a 
qualified facility as defined in Sec.  1.48E-2(a). X claims a section 
48E credit with respect to the wind facility. While a credit may be 
available with regard to the wind facility under section 45Y, because X 
has already claimed a section 48E credit with respect to the wind 
facility, a section 45Y credit is not allowed.
    (iv) Example 4. Interaction of section 45Y and section 45Q credits 
for single qualified facility. X owns a qualified facility (Facility A) 
that includes carbon capture equipment, which is needed for the 
facility to meet the zero greenhouse gas requirement, so it is 
functionally interdependent to the production of electricity by 
Facility A. X used the carbon capture equipment to capture and utilize 
(as described in section 45Q(f)(5)) qualified carbon dioxide and 
claimed a section 45Q credit in a prior taxable year. As a result, X 
cannot claim a credit for its Facility A because a qualified facility 
does not include a facility for which a credit determined under section 
45Q is allowed.
    (v) Example 5. Interaction of section 45Y and section 45Q credits 
for co-located qualified facilities. Assume the same facts as in 
paragraph (c)(3)(iv) of this section (Example 4), except that X owns a 
co-located qualified facility (Facility B) that also includes carbon 
capture equipment, which is needed for the facility to meet the zero 
greenhouse gas requirement, so it is functionally interdependent to the 
production of electricity by Facility B. X used the carbon capture 
equipment to capture and utilize (as described in section 45Q(f)(5)) 
qualified carbon dioxide, but has not claimed a section 45Q credit with 
respect to Facility B. While X claimed a section 45Q credit in a prior 
taxable year for Facility A (see paragraph (c)(3)(iv) of this section 
(Example 4)), Facility B is not part of Facility A, and, therefore, X 
may claim the section 45Y credit for Facility B.
    (d) Applicability date. This section applies to qualified 
facilities placed in service after December 31, 2024, and during a 
taxable year ending on or after January 15, 2025.

0
Par. 4. Section 1.45Y-3 is revised to read as follows:


Sec.  1.45Y-3  Rules relating to the increased credit amount for 
prevailing wage and apprenticeship.

    (a) In general. If any qualified facility satisfies the 
requirements in paragraph (b) of this section, the applicable amount 
used for calculating the amount of the credit for producing clean 
electricity determined under section 45Y(a) of the Internal Revenue 
Code is the alternative applicable amount described in section 
45Y(a)(2)(B), subject to adjustment provided by section 45Y(c).
    (b) Qualified facility requirements. A qualified facility satisfies 
the requirements of this paragraph (b), if it is described in paragraph 
(b)(1), (2), or (3) of this section:
    (1) A qualified facility with a maximum net output of less than one 
megawatt (as measured in alternating current) determined based on the 
nameplate capacity as provided in paragraph (c) of this section (One 
Megawatt Exception);
    (2) A qualified facility the construction of which began prior to 
January 29, 2023; or
    (3) A qualified facility that meets the prevailing wage 
requirements of section 45(b)(7) and Sec.  1.45-7, the apprenticeship 
requirements of section 45(b)(8) and Sec.  1.45-8, and the 
recordkeeping and reporting requirements of Sec.  1.45-12 with respect 
to the construction, alteration, or repair of a qualified facility 
within the meaning of section 45Y.
    (c) Nameplate capacity for purposes of the One Megawatt Exception--
(1) In general. For purposes of paragraph (b)(1) of this section, the 
determination of whether a qualified facility has a maximum net output 
of less than 1 megawatt (MW) of electrical energy (as measured in 
alternating current) is determined based on the nameplate capacity of 
the qualified facility. If a qualified facility has integrated 
operations with one or more other qualified facilities, then the 
aggregate nameplate capacity of the qualified facilities is used for 
the purposes of determining if the qualified facility meets the 
requirements of paragraph (b)(1) of this section. The nameplate 
capacity for purposes of the One Megawatt Exception is the maximum 
electrical generating output in megawatts that a 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. If applicable, the International Standard Organization 
conditions should be used

[[Page 4102]]

to measure the maximum electrical generating output.
    (2) Nameplate capacity for qualified facilities that generate in 
direct current for purposes of the One Megawatt Exception. For 
qualified facilities that generate electricity in direct current, the 
taxpayer determines the maximum net output (in alternating current) of 
each qualified facility by using the lesser of:
    (i) The sum of the nameplate generating capacities within the unit 
of qualified facility in direct current, which is deemed the nameplate 
generating capacity of the unit of qualified facility in alternating 
current; or
    (ii) The nameplate capacity of the first component of property that 
inverts the direct current electricity into alternating current.
    (3) Integrated operations. Solely for the purposes of the One 
Megawatt Exception, a qualified facility is treated as having 
integrated operations with any other qualified facility of the same 
technology type if the facilities are owned by the same or related 
taxpayers, placed in service in the same taxable year; and transmit 
electricity generated by the facilities through the same point of 
interconnection or, if the facilities are not grid-connected or are 
delivering electricity directly to an end user behind a utility meter, 
are able to support the same end user.
    (4) Related taxpayers--(i) Definition. For purposes of this 
section, the term related taxpayers means members of a group of trades 
or businesses that are under common control (as defined in Sec.  1.52-
1(b)).
    (ii) Related taxpayer rule. For purposes of this section, related 
taxpayers are treated as one taxpayer in determining whether a 
qualified facility has integrated operations.
    (d) Applicability date--(1) In general. Except as provided in 
paragraph (d)(2) of this section, this section applies to qualified 
facilities placed in service in taxable years ending after January 15, 
2025, and the construction of which begins after January 15, 2025. 
Taxpayers may apply this section to qualified facilities placed in 
service in taxable years ending on or before January 15, 2025, and 
qualified facilities placed in service in taxable years ending after 
January 15, 2025, the construction of which begins before January 15, 
2025, provided that taxpayers follow this section in its entirety and 
in a consistent manner.
    (2) Paragraph (b)(1) of this section. Paragraph (b)(1) of this 
section applies to qualified facilities placed in service in taxable 
years ending after January 15, 2025, and the construction of which 
begins after March 17, 2025. Taxpayers may apply this section to 
qualified facilities placed in service in taxable years ending on or 
before January 15, 2025, the construction of which begins before 
January 15, 2025, provided that taxpayers follow this section in its 
entirety and in a consistent manner.

0
Par. 5. Sections 1.45Y-4 and 1.45Y-5 are added to read as follows:
* * * * *
Sec.
1.45Y-4 Rules of general application.
1.45Y-5 Greenhouse gas emissions rates for qualified facilities 
under section 45Y.
* * * * *


Sec.  1.45Y-4   Rules of general application.

    (a) Only production in the United States is taken into account for 
purposes of section 45Y. Consumption, sales, or storage are taken into 
account for purposes of the section 45Y credit (defined in Sec.  1.45Y-
2(a)) only with respect to electricity the production of which is 
within the United States (within the meaning of section 638(1) of the 
Internal Revenue Code (Code)), or a United States territory, which for 
purposes of section 45Y and the section 45Y regulations (defined in 
Sec.  1.45Y-2(a)) has the meaning of the term a possession of the 
United States (within the meaning of section 638(2)).
    (b) Production attributable to the taxpayer--(1) In general. In the 
case of a qualified facility in which more than one person has an 
ownership share (and the arrangement is not treated as a partnership 
for Federal tax purposes) production from the qualified facility is 
allocated among such persons in proportion to their respective 
ownership shares in the gross sales from such qualified facility. The 
respective owners each determine their respective section 45Y credit 
under section 45Y(a) and based on their respective ownership shares in 
the gross sales from such qualified facility during the taxable year.
    (2) Example of gross sales. A, B and C, all calendar year 
taxpayers, each own an interest in a solar facility which is a 
qualified facility (as defined in Sec.  1.45Y-2(a)) (Solar Facility). A 
owns 45 percent, B owns 35 percent, and C owns 20 percent, and each are 
allocated gross sales from the Solar Facility in proportion to their 
ownership interest. The Solar Facility produced 1000 kWh of electricity 
during the taxable year. A, B, and C will each determine their 
respective section 45Y credit under section 45Y(a) and Sec.  1.45Y-1(b) 
based on their allocable share of the gross sales from the 1000 kWh of 
electricity produced at the Solar Facility during the taxable year.
    (3) Section 761(a) election. 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.
    (c) Expansion of facility; Incremental production (Incremental 
Production Rule)--(1) In general. Solely for purposes of this paragraph 
(c), 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 section 45Y(b)(1)(A)(ii)) that 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. This rule is only applicable to an addition of 
capacity or new unit that would not otherwise qualify as a separate 
qualified facility as defined in section 45Y(b)(1)(A). A new unit or an 
addition of capacity that meets the requirements of this paragraph (c) 
will be treated as a separate qualified facility. For purposes of this 
paragraph (c), a new unit or an addition of capacity requires the 
addition or replacement of components of property, including any new or 
replacement integral property, added to a facility necessary to 
increase capacity. For purposes of assessing the One Megawatt Exception 
provided in section 45Y(a)(2)(B)(i), the maximum net output for a new 
unit or an addition of capacity is the sum of the capacity of the added 
qualified facility and the capacity of the facility to which the 
qualified facility was added, as determined under Sec.  1.45Y-3(c) and 
paragraph (c)(2) of this section.
    (2) Measurement standard. For purposes of this paragraph (c), 
taxpayers must use one of the measurement standards described in 
paragraph (c)(2)(i), (ii), or (iii) of this section to measure the 
capacity and change in capacity of a facility, except a taxpayer cannot 
use the measurement standard described in paragraph (c)(2)(ii) of this 
section if they are able to use the measurement standard described in 
paragraph (c)(2)(i) of this section:
    (i) Modified or amended facility operating licenses from the 
Federal Energy Regulatory Commission (FERC) or the Nuclear Regulatory 
Commission (NRC), or related reports prepared by FERC or NRC as part of 
the licensing process;
    (ii) Nameplate capacity certified consistent with generally 
accepted

[[Page 4103]]

industry standards, such as the International Standard Organization 
(ISO) conditions to measure the nameplate capacity of the facility 
consistent with the definition of nameplate capacity provided in 40 CFR 
96.202; or
    (iii) A measurement standard prescribed by the Secretary in 
guidance published in the Internal Revenue Bulletin (see Sec.  601.601 
of this chapter).
    (3) Special rule for restarted facilities. Solely for purposes of 
this paragraph (c), a facility that is decommissioned or in the process 
of decommissioning and restarts can be considered to have increased 
capacity from a base of zero if the conditions described in each of 
paragraphs (c)(3)(i) through (iv) of this section are met:
    (i) The existing facility must have ceased operations;
    (ii) The existing facility must have a shutdown period of at least 
one calendar year during which it was not authorized to operate by its 
respective Federal regulatory authority (that is, FERC or NRC);
    (iii) The restarted facility must be eligible to restart based on 
an operating license issued by either FERC or NRC; and
    (iv) The existing facility may not have ceased operations for the 
purpose of qualifying for the special rule for restarted facilities in 
this paragraph (c)(3).
    (4) Computation of increased amount of electricity produced. To 
determine the increased amount of electricity produced by a facility in 
a taxable year by reason of a new unit or an addition of capacity, a 
taxpayer must multiply the amount of electricity that the facility 
produces during that taxable year after the new unit or addition of 
capacity is placed in service by a fraction, the numerator of which is 
the added capacity that results from the new unit or addition of 
capacity, and the denominator of which is the total capacity of the 
facility with the new unit or addition of capacity added, provided the 
added capacity and resulting total capacity are measured using a 
measurement standard identified in paragraph (c)(2) of this section.
    (5) Examples. This paragraph (c)(5) provides examples illustrating 
the rules of paragraph (c) of this section.
    (i) Example 1. New Unit. X owns a hydropower facility (Facility H) 
that was originally placed in service in 2020, with a FERC license 
authorizing an installed capacity of 60 megawatts. During taxable years 
2020 through 2024, X claimed a section 45 credit for the electricity 
produced by Facility H. On July 1, 2025, as allowed by a FERC license 
amendment, X places in service components of property comprising a new 
unit that results in Facility H having an increased authorized 
installed capacity of 90 megawatts in 2025. For purposes of paragraph 
(c) of this section, this new unit will be treated as a separate 
facility (Facility J). X may claim a section 45Y credit during the 10-
year credit period starting on July 1, 2025, based on the increased 
amount of electricity generated as a result of the new unit, which is 
determined by multiplying the electricity that Facility H produces with 
Facility J by one-third (equal to the 30-megawatt increase in capacity 
that results from the addition of Facility J divided by the 90 megawatt 
capacity of Facility H with Facility J). Even though X claimed a 
section 45 credit for the existing capacity of Facility H in taxable 
years 2020 through 2024, X can claim a section 45Y credit for the 
production of electricity associated with Facility J. X may also 
continue to claim the section 45 credit through taxable year 2030 for 
electricity generated by Facility H (excluding the incremental 
electricity generation related to Facility J).
    (ii) Example 2. Addition of Capacity. Y owns a nuclear facility 
(Facility N) that was originally placed in service on January 1, 2000. 
Y claimed a section 45U credit in taxable years 2024 and 2025 for the 
electricity generated by Facility N. On January 15, 2026, Y completed 
and placed in service an investment associated with a power uprate 
approved by an NRC license amendment that involved the removal and 
replacement of components of property and placing in service additional 
components of property. NRC reports associated with the license 
amendment describe the uprate as increasing the nuclear facility's 
electrical capacity by 100 MW to 900 MW. For purposes of this paragraph 
(c), Facility N's addition of capacity is treated as a new separate 
qualified facility placed in service on January 15, 2026 (Facility P). 
Y may claim a section 45Y credit during the 10-year credit period 
starting on January 15, 2026, based on the increased amount of 
electricity produced at Facility N that is attributable to the addition 
of capacity (Facility P), which is determined by multiplying the 
electricity that Facility N produces with Facility P by \1/9\ (equal to 
the 100-megawatt increase in capacity divided by Facility N's new total 
capacity of 900 megawatts with Facility P, as described in NRC reports 
associated with the license amendment). Even though Y claimed a section 
45U credit in taxable years 2024 and 2025 for the existing capacity of 
Facility N, Y can claim a section 45Y credit for the production of 
electricity associated with Facility P. Y may also continue to claim 
the section 45U credit for electricity generated by Facility N 
(excluding the incremental electricity generation related to Facility 
P).
    (iii) Example 3. Geothermal Turbine and Generator Additions of 
Capacity. X owns a geothermal power plant (Facility G) with a 24 MW 
nameplate capacity, which is placed in service in 2007. Over the 
subsequent years, the plant's generating capability declines because of 
physical degradation of the turbine and generator. On March 1, 2027, X 
places in service components of property at Facility G that increase 
its capacity. The turbine rotor is removed, and the eroded blades are 
replaced with new blades. The generator is refurbished by removing old 
subcomponents of the generator and replacing those with new 
subcomponents, as well as replacing the old copper windings with new 
windings in concert with new insulation. After the upgrade, the plant 
increases its nameplate capacity to 26 MW, an increase of 2 MW over the 
previous nameplate capacity. For purposes of this paragraph (c), the 
addition of capacity to Facility G is treated as a new separate 
qualified facility placed in service on March 1, 2027 (Facility N). X 
may claim a section 45Y credit during the 10-year credit period 
starting on March 1, 2027, based on the amount of electricity produced 
by Facility N, which is determined by multiplying the aggregate amount 
of electricity that Facility G produces with Facility N by 1/13 (that 
is, the fraction equal to the 2-megawatt increase in nameplate capacity 
attributable to Facility N divided by the new total aggregate 26 
megawatt nameplate capacity of Facility G with Facility N).
    (iv) Example 4. Hydropower Addition of Capacity. X owns a 
hydropower plant (Facility H) that was placed in service in 1960. 
Facility H has become less efficient since it was placed in service 
with attendant reductions in its generating capacity. As approved by a 
FERC license amendment, X increases Facility H's capacity by installing 
new headcovers, new turbines with integrated dissolved oxygen 
injection, and a new high pressure digital governor system. The new 
turbines are more efficient and are capable of more power output than 
the original design. Improvements to the generators involve removing 
the old asphalt coated copper windings and purchasing and then 
installing new epoxy coated double wound windings. X adds digital

[[Page 4104]]

controls to effectively utilize new digital governors while 
simultaneously investing in cybersecurity protection. As set forth in 
the FERC order amending its license, these investments, which are 
placed in service on April 15, 2026, increase Facility H's authorized 
installed capacity from 180 MW to 190 MW, an increase of 10 MW. For 
purposes of this paragraph (c), Facility H's addition of capacity is 
treated as a new separate qualified facility placed in service on April 
16, 2026 (Facility A). X may claim a section 45Y credit during the 10-
year credit period starting on April 16, 2026, based on the amount of 
electricity produced by Facility A, which is determined by multiplying 
the aggregate amount of electricity that Facility H produces with 
Facility A by 1/19 (equal to the 10-megawatt increase in capacity 
attributable to Facility A divided by the new total aggregate 190 MW 
capacity of Facility H with Facility A).
    (v) Example 5. Nonoperational Nuclear Facility that Satisfies 
Restart Rule. T owns a nuclear facility (Facility N) that was 
originally placed in service in 1982. In 2020, Facility N ceased 
operations, began decommissioning, and the NRC no longer authorized the 
operation of Facility N. T did not cease operations at Facility N for 
the purpose of qualifying for the special rule for restarted facilities 
under section 45Y. In 2028, the NRC authorized Facility N to restart 
and, on October 1, 2028, Facility N placed in service components of 
property and restarted and resumed operations, with an electrical 
capacity of 800 MW, as indicated in NRC documents related to the 
authorization to restart. For purposes of this paragraph (c), the 
restart of Facility N is considered to have increased capacity from a 
base of zero, and Facility N is treated as having an addition of 
capacity equal to 800 MW. For purposes of this paragraph (c), Facility 
N's 800 MW addition of capacity is treated as a new qualified facility 
placed in service on October 1, 2028 (Facility P). T may claim a 
section 45Y credit during the 10-year period starting on October 1, 
2028, based on the increased amount of electricity produced at Facility 
N that is attributable to that addition of capacity (Facility P).
    (d) Retrofit of an existing facility (80/20 Rule)--(1) In general. 
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). 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. A 
qualified facility that meets the 80/20 Rule may claim the section 45Y 
credit without regard to any addition of capacity to the qualified 
facility.
    (2) Cost of new components of property. For purposes of the 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 of the unit of qualified facility.
    (3) Examples. The following examples illustrate the rules of this 
paragraph (d).
    (i) Example 1. Retrofitted facility that meets the 80/20 Rule. A 
owns an existing wind facility. On February 1, 2026, A replaces used 
components of the unit of qualified facility of a wind facility with 
new components at a cost of $2 million. The fair market value of the 
remaining original components of the unit of qualified facility is 
$400,000, which is not more than 20 percent of the retrofitted unit of 
qualified facility's total fair market value of $2.4 million (the cost 
of the new components ($2 million) + the fair market value of the 
remaining original components of the unit of qualified facility 
($400,000)). Thus, the retrofitted wind facility will be considered 
newly placed in service for purposes of section 45Y, and the section 
45Y credit is allowable for electricity produced by A at the wind 
qualified facility and sold, consumed, or stored, during the 10-year 
period beginning on February 1, 2026, assuming all the other 
requirements of section 45Y are met.
    (ii) Example 2. Retrofit of an existing facility that meets the 80/
20 Rule. Facility Z, a facility that was originally placed in service 
on January 1, 2026, was not a qualified facility (as described in Sec.  
1.45Y-2(a)) when it was placed in service because it did not meet the 
greenhouse gas emissions rate requirements (as determined under rules 
provided in Sec.  1.45Y-5). On January 1, 2027, Facility Z was 
retrofitted and now meets the requirements to be a qualified facility 
under Sec.  1.45Y-2(a). After the retrofit, the cost of the new 
property included in the unit of qualified facility of Facility Z is 
greater than 80 percent of the unit of qualified facility of Facility 
Z's total fair market value. Because Facility Z meets the 80/20 Rule, 
Facility Z is deemed to be originally placed in service on January 1, 
2027. Therefore, a section 45Y credit is allowable for electricity 
produced by Facility Z and sold, consumed, or stored during the 10-year 
period beginning on January 1, 2027, assuming all the other 
requirements of section 45Y are met.
    (iii) Example 3. Retrofitted nuclear facility that satisfied the 
80/20 Rule. T owns a nuclear facility (Facility N) that was originally 
placed in service on March 1, 1982. T replaces used components of 
property of unit of qualified facility of Facility N with new 
components at a cost of $200 million, placing in service the components 
of property on July 15, 2026. The fair market value of the remaining 
original components of the unit of qualified facility of Facility N, 
prior to the retrofit, is $30 million, which is less than 20 percent of 
the unit of qualified facility of Facility N's total fair market value 
of $230 million (the cost of the new components ($200 million) + the 
fair market value of the remaining original components of the unit of 
qualified facility ($30 million)) ($30 million/$230 million = 13%). 
Thus, Facility N will be considered newly placed in service on July 15, 
2026, for purposes of section 45Y, and T will be able to claim a 
section 45Y credit based on the electricity generated at Facility N, 
assuming all the other requirements of section 45Y are met.
    (iv) Example 4. Capital improvements to an existing qualified 
facility that do not satisfy the 80/20 Rule. X owns an existing 
facility, Facility C, that was originally placed in service on January 
1, 2023. X makes capital improvements to Facility C that are placed in 
service on June 1, 2026. The cost of the capital improvements to the 
unit of qualified facility of Facility C is $500,000 and the fair 
market value of the unit of qualified facility of Facility C after the 
improvements is $2 million. The value of the old components of property 
of the unit of qualified facility is $1,500,000 out of $2.0 million, or 
75 percent ($500,000/$2,000,000) of the total fair market value of the 
unit of qualified facility after the improvements. Because the fair 
market value of the new property included in the unit of qualified 
facility is less than 80 percent of the total fair market value of the 
unit of qualified facility, Facility C does not meet the 80/20 Rule. 
Facility C will not be considered a qualified facility (as defined in 
Sec.  1.45Y-2(a)) eligible for the section 45Y credit. If the capital

[[Page 4105]]

improvements to Facility C increase its nameplate capacity, the 
determination that it does not meet the 80/20 Rule does not prevent X 
from claiming a section 45Y credit if the requirements under paragraph 
(c)(1) of this section are met.
    (v) Example 5. Upgrades to a hydropower qualified facility that 
satisfies the 80/20 Rule: Y owns a hydropower qualified facility 
(hydropower facility) and no taxpayer, including Y, has ever claimed a 
section 45 credit for the hydropower facility. The hydropower facility 
consists of a unit of qualified facility including water intake, water 
isolation mechanisms, turbine, pump, motor, and generator. The 
associated impoundment (dam) and power conditioning equipment are 
integral parts of the unit of qualified facility. Y makes upgrades to 
the unit of qualified facility by replacing the turbine, pump, motor, 
and generator with new components at a cost of $1.5 million. Y does not 
make any upgrades to the property that is an integral part of the unit 
of qualified facility. The remaining original components of the unit of 
qualified facility have a fair market value of $100,000, which is not 
more than 20 percent of the retrofitted hydropower facility's total 
value of $1.6 million (that is, the cost of the new components ($1.5 
million) + the value of the remaining original components ($100,000)). 
Thus, the retrofitted hydropower facility will be considered newly 
placed in service for purposes of section 45Y, and Y will be able to 
claim a section 45Y credit based on the cost of the new components 
($1.5 million).
    (e) Applicability date. This section applies to qualified 
facilities placed in service after December 31, 2024, and during a 
taxable year ending on or after January 15, 2025.


Sec.  1.45Y-5  Greenhouse gas emissions rates for qualified facilities 
under section 45Y.

    (a) In general. This section provides rules and definitions for 
determining emissions rates for purposes of section 45Y of the Internal 
Revenue Code (Code). Paragraph (b)(4) of this section provides a 
definition for a facility that produces electricity through combustion 
or gasification and paragraph (b)(7) of this section defines a facility 
that does not produce electricity through combustion or gasification. 
Paragraphs (c) through (e) provide rules for determining the greenhouse 
gas emissions rates for facilities for purposes of section 45Y. 
Paragraph (f) of this section provides rules for the annual publication 
of emissions rates. Paragraph (g) of this section provides rules 
related to provisional emissions rates. Paragraph (h) of this section 
provides rules regarding reliance on the annual publication of 
emissions rates and provisional emissions rates. Finally, paragraph (i) 
of this section provides rules regarding substantiation requirements.
    (b) Definitions. The definitions in this paragraph (b) apply for 
purposes of this section.
    (1) CO2e per kWh. The term CO2e per kWh means 
with respect to any greenhouse gas, the equivalent carbon dioxide (as 
determined based on global warming potential) per kWh of electricity 
produced. The 100-year time horizon global warming potentials (GWP-100) 
from the Intergovernmental Panel on Climate Change's Fifth Assessment 
Report (AR5) must be used to convert emissions to equivalent carbon 
dioxide emissions. For purposes of this paragraph (b)(1), the GWP-100 
from AR5 (as shown in table 1 to this paragraph (b)(1)) excludes 
climate-carbon feedbacks. Table 1 to this paragraph (b)(1) provides 
GWP-100 amounts for certain greenhouse gases applicable to this 
section.

   Table 1 to Paragraph (b)(1)--100 Year Global Warming Potentials for
                            Greenhouse Gases
------------------------------------------------------------------------
             Greenhouse gas                            GWP
------------------------------------------------------------------------
CO2....................................  1.
CH4....................................  28.
N2O....................................  265.
SF6....................................  23,500.
Hydrofluorocarbons.....................  Varies by gas.
Perfluorocarbons.......................  Varies by gas.
------------------------------------------------------------------------

    (2) Combustion. The term combustion means a rapid exothermic 
chemical reaction, specifically the oxidation of a fuel, which 
liberates energy including heat and light.
    (3) Gasification. 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.
    (4) Facility that produces electricity through combustion or 
gasification (C&G Facility). Consistent with section 45Y(b)(2)(B), the 
term 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 of one energy source into another using 
combustion or gasification.
    (5) Greenhouse gas emissions rate. 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 CO2e per 
kWh.
    (6) Greenhouse gases emitted into the atmosphere by a facility in 
the production of electricity. For purposes of section 45Y(b)(2)(A), 
for both C&G 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 processes 
that transform the input energy source into electricity but excludes 
emissions described in paragraphs (b)(6)(i) through (vi) of this 
section.
    (i) Emissions from electricity production by back-up or auxiliary 
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.
    (ii) 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.
    (iii) Emissions from a step-up transformer that conditions the 
electricity into a form suitable for productive use or sale.
    (iv) 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.
    (v) Emissions from infrastructure associated with the facility, 
including, but not limited to, emissions from road construction for 
feedstock production.
    (vi) Emissions from the distribution of electricity to consumers.
    (7) Non-C&G Facility. The term Non-C&G Facility means a facility 
that produces electricity and is not described in paragraph (b)(4) of 
this section.
    (8) Fuel. The term fuel means material directly used to produce 
electricity or energy inputs that are used to produce electricity.
    (9) Feedstock. The term feedstock means any raw material used in a 
process for electricity generation or to produce an intermediate 
product or

[[Page 4106]]

finished fuel used for electricity generation.
    (10) Market-mediated effects. The term market-mediated effects 
means effects resulting from policy interventions and other factors 
(for example, technological advances) that alter the availability of 
and demand for marketed goods and activities and their related 
greenhouse gas (GHG) emissions profiles. These effects are driven by 
and result in changes in absolute and relative prices which can occur 
at local, national, and global boundaries. Examples of market-mediated 
effects include direct and significant indirect emissions, such as land 
use changes or land use management changes that result from the 
production of fuels derived from biomass and shifts in total market 
demand and supply for input fuels, feedstocks and related commodities, 
and other materials, as a result of changes associated with the policy 
intervention.
    (c) Non-C&G Facilities--(1) Determining a greenhouse gas emissions 
rate for Non-C&G Facilities. Greenhouse gas emissions rates for Non-C&G 
Facilities must be determined under paragraphs (c) and (e) of this 
section.
    (i) Excluded emissions. 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:
    (A) Emissions from hydropower reservoirs due to anoxic conditions;
    (B) Ebullitive, diffuse, and degassing emissions from hydropower 
operations;
    (C) Emissions of non-condensable gases from underground reservoirs 
during geothermal operations; and
    (D) 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.
    (ii) Emissions assessment process. Subject to paragraphs (b)(6) and 
(c)(1) of this section, a greenhouse gas emissions rate for a Non-C&G 
Facility must be determined through a technical and engineering 
assessment of the fundamental energy transformation into electricity. 
This 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.
    (iii) Example of greenhouse gas emissions rate determination for a 
Non-C&G Facility--(A) Facts. A facility uses solar photovoltaic 
technologies to convert light directly into electricity through use of 
the photovoltaic effect. This is a physical phenomenon in which certain 
semiconducting materials upon exposure to light, absorb the light and 
transform the energy contained in the light directly into an electric 
current. There are many materials that may be used to generate 
electricity through this method, including crystalline silicon, 
amorphous silicon, cadmium telluride, copper indium gallium diselenide, 
perovskites, quantum dots, and carbon-based materials known as organic 
photovoltaics. The smallest unit of photovoltaic materials is a cell. 
Multiple cells are typically assembled into a panel or module and 
electrically connected. Multiple modules or panels are generally 
connected to comprise a solar system or installation. Solar 
photovoltaic technologies produce direct current electricity that can 
be used as is or, more typically, can be fed into inverters to 
transform it into alternating current. Solar panels can be ground 
mounted at a fixed angle or can be mounted with tracking systems that 
move the panels to track the location of the sun over the course of the 
day and season in order to maximize electricity production. Solar 
panels may also be mounted on buildings (for example, on roofs), or 
solar photovoltaic materials can be integrated into other building 
components such as roofing tiles.
    (B) Analysis. For solar photovoltaic technologies, the fundamental 
transformation of input energy (solar electromagnetic radiation) into 
electricity using the photovoltaic effect involves no mechanical energy 
or chemical reactions. Academic studies on the lifecycle greenhouse gas 
emissions from solar photovoltaic power indicate that there is a small 
but non-zero amount of emissions associated with the operational phase 
of these technologies. However, these emissions exclusively occur due 
to ongoing maintenance (for example, the washing of solar panels), 
preventative maintenance (for example, the periodic replacement of 
electrical equipment such as inverters), and a minimal amount of 
project management (for example, inverter standby mode at night). These 
emissions do not occur directly due to the production of electricity. 
Therefore, consistent with paragraph (c)(1)(ii) of this section, the 
greenhouse gas emissions rate for facilities that produce electricity 
by solar photovoltaic properties is not greater than zero.
    (2) Non-C&G Facilities with a greenhouse gas emissions rate that is 
not greater than zero. The types or categories of facilities described 
in paragraphs (c)(2)(i) through (viii) of this section are Non-C&G 
Facilities with a greenhouse gas emissions rate that is not greater 
than zero and may be treated as listed in the Annual Table (see 
paragraph (g) of this section) with an emissions rate that is not 
greater than zero:
    (i) Wind (including small wind properties);
    (ii) Hydropower (including 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);
    (iii) Marine and hydrokinetic;
    (iv) Solar (including photovoltaic and concentrated solar power);
    (v) Geothermal (including flash and binary plants);
    (vi) Nuclear fission;
    (vii) Fusion energy; and
    (viii) Waste energy recovery property that derives energy from a 
source described in paragraphs (c)(2)(i) through (vii) of this section.
    (d) C&G Facilities--(1) Determining a greenhouse gas emissions rate 
for C&G Facilities. The greenhouse gas emissions rate for a C&G 
Facility--
    (i) Must be determined by a lifecycle analysis (LCA) that complies 
with the requirements of paragraphs (d) and (e) of this section; and
    (ii) Equals the net rate of greenhouse gases emitted into the 
atmosphere by such facility (taking into account lifecycle greenhouse 
gas emissions, as described in 42 U.S.C. 7545(o)(1)(H)) in the 
production of electricity, expressed as grams of CO2e per 
kWh.
    (2) LCA requirements. For purposes of this paragraph (d), an LCA 
must comply with the requirements of paragraphs (d)(2)(i) through (x) 
of this section:
    (i) Starting boundary. The starting boundary of the LCA for an LCA 
involving generation-derived feedstocks (such as biogenic feedstocks) 
is feedstock generation. The starting boundary of the LCA for an LCA 
involving extraction-derived feedstocks (such as fossil fuel 
feedstocks) is feedstock extraction. The starting boundaries include 
the processes and inputs 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, but is not limited to, the 
emissions effects, including associated direct and indirect greenhouse 
gas emissions, of relevant land management activities or changes 
related to or associated with the

[[Page 4107]]

extraction or production of raw feedstock materials or fuel.
    (ii) Ending boundary. The ending boundary of the 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 use of such electricity generated by the C&G Facility (and what 
other types of energy sources it displaces), including emissions from 
transmission and distribution, are outside of the LCA boundary.
    (iii) Baseline. The LCA must be based on a future anticipated 
baseline, which projects future status quo in the absence of the 
availability of the section 45Y and 48E credits (taking into account 
anticipated changes in technology, policies, practices, and 
environmental and other socioeconomic conditions). The future 
anticipated baseline must be updated as necessary to capture material 
regulatory, economic, supply chain, or environmental changes. The 
baseline must be updated at least every ten years, but not more often 
than every five years.
    (iv) Offsets and offsetting activities. Offsets and offsetting 
activities may not be taken into account in the LCA.
    (v) Principles for included emissions. The LCA must take into 
account direct emissions and significant indirect emissions. Sources of 
direct emissions include those associated with feedstock production or 
extraction, including 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. 
Sources of significant indirect emissions include emissions in the 
United States and other countries associated with market-mediated 
changes in related commodity markets, such as emission from indirect 
land use change and emissions consequences of commodity production. 
These included emissions are within the system boundary of the LCA.
    (A) Direct emissions. For purposes of this paragraph (d)(2)(v), 
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 
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 emission from gasification or combustion 
additives).
    (B) Significant indirect emissions. For purposes of this paragraph 
(d)(2)(v), examples of significant indirect emissions include, but are 
not limited to, emissions from indirect land use and land use change, 
and induced emissions associated with the increased use of the 
feedstock for energy production.
    (vi) Principles for excluded emissions. The LCA must not take into 
account the types of emissions described in paragraphs (d)(2)(vi)(A) 
through (D) of this section:
    (A) Emissions from facility construction, siting or decommissioning 
(including on-site emissions occurring from construction or 
manufacturing of the facility itself);
    (B) Emissions from facility maintenance (including emissions from 
the on and offsite construction or maintenance of the facility; 
emissions from vehicles used to access and perform maintenance on 
electricity generating facilities; emissions from back-up generators 
that do not provide additional firm power and are used in maintaining 
critical systems in case of a power system outage or for supporting 
restart of a generator after an outage; and emissions occurring from 
heating and cooling control rooms or dispatch centers);
    (C) Emissions from infrastructure associated with the facility 
(including emissions from road construction for feedstock production 
and emissions from onsite backup or emergency generators used in an 
emergency or unplanned outage); and
    (D) Emissions from the distribution of electricity to consumers.
    (vii) Alternative fates and avoided emissions. The LCA may consider 
alternative fates and account for avoided emissions, including for the 
fuels and feedstocks consumed in the fuel and feedstock supply chain 
and at the electricity generating facility. The term alternative fate 
means a set of informed assumptions (for example, production processes, 
material outcomes, and market-mediated effects) used to estimate the 
emissions from the use or disposal of each feedstock were it not for 
the feedstock's new use due to the implementation of policy (that is, 
to produce electricity). The term avoided emissions means the estimated 
emissions associated with the feedstock, including the feedstock's 
production and use or disposal, 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.
    (viii) Temporal scales. The LCA should evaluate the emissions over 
a time horizon of 30 years from the year in which a qualified facility 
first qualifies for the credit (or, for purposes of the section 48E 
credit, the year in which a qualified facility was placed in service).
    (ix) Spatial scales. To determine the initial spatial scope of the 
LCA, the initial qualitative assessment should analyze whether the 
feedstock has been or is anticipated: to be used or sold on the market 
in the absence of the section 45Y and 48E credits; to be used directly 
in or as an input to an activity or good in local markets; to be 
transported for use in domestic markets elsewhere; to be traded for use 
in international markets; and to be used in a manner that has 
significant ramifications on other markets. If this assessment 
concludes that the feedstock does not meet one or more of the criteria 
in this paragraph (d)(2)(ix), then the market-mediated effects analysis 
would not be necessary beyond the relevant spatial scale(s) (for 
example, if the feedstock is not traded or not anticipated to be traded 
for use in international markets and increased use in the United States 
is not anticipated to have significant market ramifications abroad, 
international market-mediated effects analysis would not be necessary). 
Based on the results of the assessment, the LCA should evaluate the 
emissions on a sub-regional, regional, national, or international scale 
as appropriate. The evaluation of emissions should include the market 
and emissions implications of sourcing new or additional material for 
electricity generation across the applicable market and spatial scales.
    (x) Categorization of products. As appropriate, the LCA should 
distinguish between primary products, co-products, byproducts, and 
waste products.
    (A) Products should be categorized based on the definitions in 
paragraphs (d)(2)(x)(A)(1) through (4) of this section.
    (1) A primary product is an input or an output with marketability 
and is the main driver of the process from which it is produced.

[[Page 4108]]

    (2) A co-product is an input or an output with marketability that 
is produced together with another product, both of which are economic 
drivers of the process from which they are produced.
    (3) A byproduct is an input or an output that is produced together 
with another product, and which has a market recognized economic value 
of zero or greater, but the output is not an economic driver of the 
process from which it is produced.
    (4) A waste product is an input or an output with negative economic 
value, demonstrated by--
    (i) The absence of a market in which the product is purchased and 
sold; and
    (ii) The existence of a market in which producers pay for the 
collection and removal or disposal of the input or output material or 
the existence of a predominant operational practice in which producers 
themselves collect and remove, give away, or dispose of the input or 
output material as part of operational processes.
    (B) The LCA should adopt the principles in paragraphs 
(d)(2)(x)(B)(1) through (6) of this section for categorizing and 
assessing the emissions outcomes for different types of products if 
such categorization is relevant to the LCA model or models used.
    (1) All classification of materials and LCAs should take into 
account relevant geospatial variations in supply and demand (that is, 
differences across local, sub-regional, and larger regions), as well as 
variations across specific product types and characteristics, and 
producer types as relevant.
    (2) The LCA should assess whether there are market-mediated effects 
and, if so, take these into account as part of the GHG analysis.
    (3) Regardless of how a material is categorized, the LCA should 
consider whether the availability of the section 45Y and 48E credits is 
expected to result in additional production of that material or in 
material changes in the supply chain, and, if so, should take into 
account the direct and indirect emissions impact of the additional 
production or changes in the supply chain.
    (4) Policy and other interventions (for example, technological 
advances) can alter the availability and demand for marketed goods and 
services, which can alter the treatment of materials once disposed of. 
Therefore, reevaluation of material categorization should occur at 
least every ten years, but not more often than every five years.
    (5) All determinations of marketability, market-mediated effects, 
and behavioral changes must be supported by an analytical assessment 
performed by one or more National Laboratories, in consultation with 
other Federal agency experts as appropriate.
    (6) A material should be considered to have a market recognized 
economic value and an established market if one existed within the last 
five years as of the date of the analysis.
    (e) Use of methane from certain sources to produce electricity--(1) 
In general. The requirements provided by this paragraph (e) apply to 
C&G Facilities (as defined in paragraph (b)(4) of this section) that 
produce electricity through combustion or gasification using methane 
derived from biogas, renewable natural gas (RNG) derived from biogas, 
or fugitive sources of methane (or any hydrogen derived from methane 
from these sources) as a fuel or feedstock.
    (2) Definitions. The following definitions apply for purposes of 
paragraph (e) of this section:
    (i) Biogas. The term biogas means gas containing methane that 
results from the decomposition of organic matter under anaerobic 
conditions.
    (ii) Coal mine methane. The term coal mine methane means methane 
that is stored within coal seams and is liberated as a result of 
current or past mining activities. Liberated coal mine methane can be 
released intentionally by the mine for safety purposes, such as through 
mine degasification boreholes or underground mine ventilation systems, 
or it may leak out of the mine through vents, fissures, or boreholes. 
The term coal mine methane does not include methane removed from virgin 
coal seams (for example, coal bed methane).
    (iii) Fugitive methane. The term fugitive methane means methane 
released from equipment leaks or venting during the extraction, 
processing, transformation, or delivery of fossil fuels and other 
gaseous fuels to the point of final use.
    (iv) Renewable natural gas. The term renewable natural gas (RNG) 
means biogas that has been upgraded to remove water, CO2, 
and other impurities such that it is interchangeable with fossil 
natural gas.
    (3) Considerations regarding the lifecycle greenhouse gas emissions 
associated with the production of electricity using methane from 
certain sources--(i) In general. For purposes of determining the GHG 
emissions rate of a C&G Facility (as provided in paragraph (d)(1) of 
this section) that produces electricity through combustion or 
gasification using methane derived from biogas, RNG derived from 
biogas, or fugitive sources of methane (or any hydrogen derived from 
methane from these sources) as a fuel or feedstock, measurements of 
lifecycle GHG emissions must consider all the direct and significant 
indirect emissions associated with a C&G Facility's production of 
electricity. For purposes of determining the alternative fates and 
avoided emissions under paragraph (d)(2)(vii) of this section, such 
determinations must consider the alternative fates of that methane, 
including avoided emissions and alternative productive uses of that 
methane; the risk that the availability of tax credits creates 
incentives resulting in the production of additional methane or 
otherwise induces additional emissions; and observable trends and 
anticipated changes in waste management and disposal practices over 
time as they are applicable to methane generation and uses.
    (ii) Methane from landfill sources. For purposes of determining the 
GHG emissions rate of a C&G Facility (as provided in paragraph (d)(1) 
of this section) that produces electricity through combustion or 
gasification using methane derived from landfill sources as a fuel or 
feedstock, the alternative fate of such gas must be flaring.
    (iii) Methane from wastewater sources. For purposes of determining 
the GHG emissions rate of a C&G Facility (as provided in paragraph 
(d)(1) of this section) that produces electricity through combustion or 
gasification using methane derived from wastewater sources as a fuel or 
feedstock, the alternative fate of such gas must be flaring of gas not 
used to heat the anaerobic digester.
    (iv) Coal mine methane. For purposes of determining the GHG 
emissions rate of a C&G Facility (as provided in paragraph (d)(1) of 
this section) that produces electricity through combustion or 
gasification using coal mine methane that is drainage gas as a fuel or 
feedstock, the alternative fate of such gas must be flaring.
    (v) Methane from animal waste. For purposes of determining the GHG 
emissions rate of a C&G Facility (as provided in paragraph (d)(1) of 
this section) that produces electricity through combustion or 
gasification using methane derived from animal waste as a fuel or 
feedstock, the emissions associated with producing and transporting 
such biogas must use an alternative fate derived from the national 
average of all animal waste management practices, which results in a 
carbon intensity score of -51 gCO2e/megajoule (MJ), where 
the MJ basis refers to the lower heating value of the

[[Page 4109]]

methane contained in the biogas prior to upgrading.
    (vi) Fugitive methane other than coal mine methane. For purposes of 
determining the GHG emissions rate of a C&G Facility (as provided in 
paragraph (d)(1) of this section) that produces electricity through 
combustion or gasification using fugitive methane other than coal mine 
methane as a fuel or feedstock, such as fugitive methane from oil and 
gas operations, the alternative fate of such gas must be productive 
use, resulting in emissions equivalent to the carbon intensity of using 
fossil natural gas.
    (4) Book-and-claim. For purposes of determining a GHG emissions 
rate of a facility under section 45Y or 48E, a book-and-claim 
accounting system may not be used to establish or claim the energy 
attributes of biogas, RNG, coal mine methane, or any other methane 
described in this paragraph (e), or any other input or feedstock.
    (f) Carbon capture and sequestration--(1) In general. For purposes 
of determining a greenhouse gas emissions rate for a Non-C&G Facility 
or C&G Facility, the greenhouse gas emissions rate must not include any 
qualified carbon dioxide (as defined in section 45Y(c)(3)) that is 
produced in such facility's production of electricity, that is captured 
by the taxpayer, and pursuant section 45Q(f)(2) and 26 CFR 1.45Q-3, 
disposed of by the taxpayer in secure geological storage, or utilized 
by the taxpayer in a manner described in section 45Q(f)(5) and 26 CFR 
1. 45Q-4.
    (2) Substantiation. The requirements for substantiation and 
verification of carbon capture and sequestration provided by 
regulations and guidance published in the Internal Revenue Bulletin 
(see Sec.  601.601 of this chapter) under section 45Q (section 45Q 
requirements) must be satisfied for qualified carbon dioxide to be 
taken into account under paragraph (e)(1) of this section. A taxpayer 
that uses carbon capture and sequestration at a qualified facility for 
which a section 45Y credit is claimed must comply with applicable 
requirements of the U.S. Environmental Protection Agency's Greenhouse 
Gas Reporting Program (GHGRP) under 40 CFR part 98, subpart PP (for 
carbon capture), subpart RR (for geological storage), and subpart RR or 
VV (for storage through enhanced oil recovery). In addition to the 
section 45Q requirements, taxpayers using the ISO 27916 standard for 
enhanced oil recovery must report information to GHGRP under 40 CFR 
part 98, subpart VV. Furthermore, the taxpayer must also include their 
applicable GHGRP ID number(s) on the IRS Form used to claim the section 
45Y or section 48E credit, with the exception of taxpayers claiming the 
credits by performing carbon capture and utilization. The GHGRP does 
not provide a reporting mechanism for utilization.
    (g) Annual publication of emissions rates--(1) In general. As 
required by section 45Y(b)(2)(C)(i), the Secretary will annually 
publish a table that sets forth the greenhouse gas emissions rates for 
types or categories of facilities (Annual Table), which a taxpayer must 
use for purposes of section 45Y. Except as provided in paragraph (h) of 
this section, 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 credit 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.
    (2) Publication of analysis required for changes to the Annual 
Table. 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, as well as any changes to emissions determinations for any types 
or categories of facilities in the Annual Table, since its last 
publication. Types or categories of facilities will 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 paragraph (c)(1)(ii) of this section, and, 
for C&G Facilities, an LCA that complies with paragraphs (d) and (f) of 
this section. Such expert analysis must be prepared by one or more of 
the National Laboratories, in consultation with other Federal agency 
experts 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 (B) of the Internal Revenue Code 
and this section.
    (h) Provisional emissions rates--(1) In general. 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 paragraph (g) of this 
section, 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). A PER must be 
determined and obtained under the rules of this section.
    (2) Rate not established. 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. 
If a taxpayer's request for an emissions value pursuant to paragraph 
(h)(5) of this section is pending at the time such facility is or 
becomes described in the Annual Table, the taxpayer's request for an 
emissions value will be automatically denied.
    (3) Process for filing a PER petition. 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. The PER petition must contain an emissions value, 
and, if applicable, the associated letter from the Department of Energy 
(DOE). An emissions value may be obtained from DOE or by using the 
designated LCA model in accordance with paragraph (h)(6) of this 
section. 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 Federal agency experts as appropriate, 
consistent with this section. A taxpayer must retain in its books and 
records a copy of the application and correspondence to and from DOE 
including a copy of the taxpayer's request to DOE for an emissions 
value and any information provided by the taxpayer to DOE pursuant to 
the emissions value request process provided in paragraph (h)(5) of 
this section. Alternatively, an emissions value can be determined by 
the taxpayer for a facility using the most recent version of an LCA 
model, as of the time the PER petition is filed, that has been 
designated by the Secretary for such use under paragraph (h)(6) of this 
section. If an emissions value is determined using the most recent 
version of the model or models, the taxpayer is required to provide to 
the IRS information to support its determination in the form and manner 
prescribed in IRS forms or instructions or in publications or guidance 
published in the Internal Revenue Bulletin. See Sec.  601.601 of this 
chapter. 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 paragraph (h)(6) of this section.
    (4) PER determination. Upon the IRS's acceptance of the taxpayer's 
Federal income tax return or Federal return, as

[[Page 4110]]

appropriate, containing a PER petition, the emissions value of the 
facility specified on such petition will be deemed accepted. A taxpayer 
may rely upon an emissions value provided by DOE for purposes of 
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 specific LCA model or models that, as of the 
time the PER petition is filed, have been designated by the Secretary 
for such use under paragraph (h)(6) of this section, 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. However, 
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.
    (5) Emissions value request process. An applicant that submits a 
request for an emissions value must follow the procedures specified by 
DOE to request and obtain such emissions value. Emissions values will 
be determined consistent with the rules provided in this section. 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 completion of a project 
specification and cost estimation sufficient to inform a final 
investment decision for the facility. DOE may decline to review 
applications that are not responsive, including those applications that 
relate to a facility described in the Annual Table (consistent with 
paragraph (h)(2) of this section) or a facility for which an emissions 
value can be determined by an LCA model designated under paragraph 
(h)(6) of this section (consistent with paragraph (h)(3) of this 
section), or applications that are incomplete. DOE will publish 
guidance and procedures that applicants must follow to request and 
obtain an emissions value from DOE. DOE's guidance and procedures will 
include a process for, under limited circumstances, requesting a 
revision to DOE's initial assessment of an emissions value based on 
revised technical information or facility design and operation.
    (6) LCA model for determining an emissions value for C&G 
Facilities. The Secretary may designate one or more LCA models for 
determining an emissions value for C&G Facilities that are not 
described in the Annual Table. The Secretary may only designate a model 
under this paragraph (h)(6) if the model complies with section 
45Y(b)(2)(B) and paragraphs (d) and (f) of this section. 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 is required to publish an accompanying expert 
analysis of the model that is prepared by one or more of the National 
Laboratories, in consultation with other Federal agency experts as 
appropriate, and such analysis must address the model's compliance with 
section 45Y(b)(2)(B) of the Internal Revenue Code and paragraphs (d) 
and (f) of this section.
    (7) Effect of PER. A taxpayer may use a PER determined by the 
Secretary to determine eligibility for the section 45Y credit for the 
facility to which the PER applies, provided all other requirements of 
section 45Y are met. 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. Further, a PER determination does not signify that the IRS has 
determined that the requirements of section 45Y have been satisfied for 
any taxable year.
    (i) Reliance on Annual Table or provisional emissions rate. 
Taxpayers may rely on the Annual Table in effect as of the date a 
facility began construction or the provisional emissions rate 
determined by the Secretary for the taxpayer's facility under paragraph 
(h)(4) of this section to determine the facility's greenhouse gas 
emissions rate 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.
    (j) Substantiation--(1) In general. 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 greenhouse gas emissions rate, as 
determined under this section, that is not greater than zero for the 
taxable year.
    (2) Sufficient substantiation. Documentation sufficient to 
substantiate that a facility had a greenhouse gas emissions rate, as 
determined under this section, that is not greater than zero for the 
taxable year includes documentation or a report prepared by an 
unrelated party that verifies that a facility had such an emissions 
rate. For a facility described in paragraph (c)(2) of this section, the 
taxpayer can maintain sufficient documentation to demonstrate a 
greenhouse gas emissions rate that is not greater than zero for the 
taxable year by showing that it is the type of facility described in 
paragraph (c)(2). For qualified facilities not described in paragraph 
(c)(2), the taxpayer must demonstrate that the qualified facility meets 
the specific criteria that the analytical assessment prepared by the 
National Laboratories, in consultation with other Federal agency 
experts as appropriate, has found are necessary for a facility to meet 
the statutory requirement of a greenhouse gas emissions rate not 
greater than zero. For C&G Facilities that utilize biomass feedstocks, 
the taxpayer must substantiate that the source of such fuels or 
feedstocks used are consistent with the taxpayer's claims. The 
Secretary may determine that qualified facilities not described in 
paragraph (c)(2) can sufficiently substantiate a greenhouse gas 
emissions rate, as determined under this section, that is not greater 
than zero with certain documentation and will describe such facilities 
and documentation in IRS forms or instructions or in publications or 
guidance published in the Internal Revenue Bulletin. See Sec.  601.601 
of this chapter. For facilities that utilize unmarketable feedstocks 
that are indistinguishable from marketable feedstocks (for instance, 
after processing), the taxpayer will be required to maintain 
documentation substantiating the origin and original form of the 
feedstock.
    (k) Applicability date. This section applies to qualified 
facilities placed in service after December 31, 2024, and during a 
taxable year ending on or after January 15, 2025.

0
Par. 6. Sections 1.48E-0 through 1.48E-5 are added to read as follows:
Sec.
* * * * *
1.48E-0 Table of contents.
1.48E-1 Clean electricity investment credit.
1.48E-2 Qualified investments in qualified facilities and EST for 
purposes of section 48E.

[[Page 4111]]

1.48E-3 Rules relating to the increased credit for prevailing wage 
and apprenticeship.
1.48E-4 Rules of general application.
1.48E-5 Greenhouse gas emissions rates for qualified facilities 
under section 48E.
* * * * *


Sec.  1.48E-0  Table of contents.

    This section lists the captions contained in Sec. Sec.  1.48E-1 
through 1.48E-5.

Sec.  1.48E-1 Clean electricity investment credit.
    (a) Overview.
    (1) In general.
    (2) Claim.
    (3) Code.
    (4) EST.
    (5) kWh.
    (6) Qualified facility.
    (7) Qualified investment with respect to a qualified facility.
    (8) Qualified investment with respect to EST.
    (9) Secretary.
    (10) Section 48E credit.
    (11) Section 48E regulations.
    (12) Waste energy recovery property (WERP).
    (b) Credit amount.
    (1) In general.
    (2) Applicable percentage.
    (3) Base rate.
    (4) Alternative rate.
    (5) Energy communities increase in credit rate.
    (i) In general.
    (ii) Applicable credit rate increase.
    (6) Domestic content increase in credit rate.
    (i) In general.
    (ii) Applicable credit rate increase.
    (c) Credit phase-out.
    (1) In general.
    (2) Phase-out percentage.
    (3) Applicable year.
    (d) Related taxpayers.
    (1) Definition.
    (2) Related taxpayer rule.
    (e) Applicability date.
Sec.  1.48E-2 Qualified investments in qualified facilities and EST 
for purposes of section 48E.
    (a) Qualified investment with respect to a qualified facility.
    (1) In general.
    (2) Total basis amount.
    (b) Qualified facility.
    (1) In general.
    (2) Placed in service.
    (i) In general.
    (ii) Qualified facility subject to Sec.  1.48-4 election to 
treat lessee as purchaser.
    (c) Qualified property.
    (1) In general.
    (2) Location of property.
    (d) Property included in qualified facility.
    (1) In general.
    (2) Unit of a qualified facility.
    (i) In general.
    (ii) Functionally interdependent.
    (3) Integral part.
    (i) In general.
    (ii) Power conditioning and transfer equipment.
    (iii) Roads.
    (iv) Fences.
    (v) Buildings.
    (vi) Shared integral property.
    (vii) Examples.
    (e) Definitions related to requirements for qualified property.
    (1) Tangible personal property.
    (2) Other tangible property.
    (3) Depreciation allowable.
    (i) In general.
    (ii) Exclusions from allowable.
    (4) Construction, reconstruction, or erection of the property.
    (5) Acquisition of qualified property.
    (6) Original use of the property.
    (7) Retrofitted qualified facility.
    (f) Coordination with other credits.
    (1) In general.
    (2) Allowed.
    (3) Examples.
    (g) EST.
    (1) Property included in EST.
    (2) Unit of EST.
    (i) In general.
    (ii) Functionally interdependent.
    (3) Integral part.
    (4) Qualified investment with respect to EST.
    (5) Placed in service.
    (i) In general.
    (ii) EST subject to Sec.  1.48-4 election to treat lessee as 
purchaser.
    (6) Types of EST.
    (i) Electrical energy storage property.
    (ii) Thermal energy storage property.
    (iii) Hydrogen energy storage property.
    (7) Modification of EST.
    (h) Applicability date.
Sec.  1.48E-3 Rules relating to the increased credit for prevailing 
wage and apprenticeship.
    (a) In general.
    (b) Qualified facility or EST requirements.
    (c) Nameplate capacity for purposes of the One Megawatt 
Exception.
    (1) Qualified facilities.
    (2) Nameplate capacity for qualified facilities that generate in 
direct current for purposes of the One Megawatt Exception.
    (3) EST.
    (i) In general.
    (ii) Electrical energy storage property.
    (iii) Thermal energy storage property.
    (iv) Hydrogen energy storage property.
    (4) Integrated operations.
    (i) One Megawatt Exception.
    (ii) EST One Megawatt Exception.
    (d) Transition waiver of penalty for prevailing wage 
requirements.
    (e) No alteration or repair during recapture period described in 
Sec.  1.48-13(c)(3).
    (f) Applicability date.
Sec.  1.48E-4 Rules of general application.
    (a) Qualified interconnection costs included in certain lower-
output qualified facilities.
    (1) In general.
    (2) Qualified interconnection property.
    (3) Five-Megawatt Limitation.
    (i) In general.
    (ii) Nameplate capacity for purposes of the Five-Megawatt 
Limitation.
    (iii) Nameplate capacity for qualified facilities that generate 
in direct current for purposes of the Five-Megawatt Limitation.
    (4) Interconnection agreement.
    (5) Utility.
    (6) Reduction to amounts chargeable to capital account.
    (7) Examples.
    (b) Expansion of facility; Incremental production (Incremental 
Production Rule).
    (1) In general.
    (2) Measurement standard.
    (3) Special rule for restarted facilities.
    (4) Computation of qualified investment for a new unit or an 
addition of capacity.
    (i) New unit.
    (ii) Addition of capacity.
    (5) Examples.
    (c) Retrofit of an existing facility (80/20 Rule).
    (1) In general.
    (2) Expenditures taken into account.
    (3) Cost of new components.
    (4) New costs.
    (5) Excluded costs.
    (6) Examples.
    (d) Special rules regarding ownership.
    (1) Qualified investment with respect to a qualified facility or 
EST.
    (2) Multiple owners.
    (3) Section 761(a) election.
    (4) Examples.
    (e) Coordination rule for section 42 credits and section 48E 
credits.
    (f) Recapture.
    (1) In general.
    (2) Recapture event.
    (i) In general.
    (ii) Changes to the Annual Table.
    (iii) Yearly determination.
    (iv) Carryback and carryforward adjustments.
    (3) Recapture amount.
    (i) In general.
    (ii) Applicable recapture percentage.
    (4) Recapture period.
    (5) Increase in tax for recapture.
    (g) Qualified progress expenditure election.
    (h) Incremental cost.
    (i) Cross references.
    (j) Applicability date.
Sec.  1.48E-5 Greenhouse gas emissions rates for qualified 
facilities under section 48E.
    (a) In general.
    (b) Definitions.
    (c) Non-C&G Facilities.
    (d) C&G Facilities.
    (e) Use of methane from certain sources to produce electricity.
    (f) Carbon capture and sequestration.
    (g) Annual publication of emissions rates.
    (h) Provisional emissions rates.
    (1) In general.
    (2) Rate not established.
    (3) Process for filing a PER petition.
    (4) PER determination.
    (5) Emissions value request process.
    (6) LCA model for determining an emissions value for C&G 
Facilities.
    (7) Effect of PER.
    (i) Determining anticipated greenhouse gas emissions rate.
    (1) In general.
    (2) Examples of objective indicia.
    (j) Reliance on Annual Table or Provisional Emissions Rate.
    (k) Substantiation.
    (1) In general.
    (2) Sufficient substantiation.

[[Page 4112]]

    (l) Applicability date.


Sec.  1.48E-1  Clean electricity investment credit.

    (a) Overview--(1) In general. For purposes of section 46 of the 
Internal Revenue Code (Code), the section 48E credit (defined in 
paragraph (a)(10) of this section) is determined under section 48E of 
the Code and the section 48E regulations (defined in paragraph (a)(11) 
of this section). This paragraph (a) provides definitions of terms 
that, unless otherwise specified, apply for purposes of section 48E, 
the section 48E regulations, and any provision of the Code or this 
chapter that expressly refers to any provision of section 48E or the 
section 48E regulations. Paragraph (b) of this section provides rules 
for determining the amount of the section 48E credit for any taxable 
year. Paragraph (c) of this section provides rules regarding the phase-
out of the section 48E credit. See Sec.  1.48E-2 for rules relating to 
qualified investments in qualified facilities and energy storage 
technology (EST) for purposes of the section 48E credit. See Sec.  
1.48E-4 for rules of general application for the section 48E credit. 
See Sec.  1.48E-5 for rules to determine greenhouse gas emissions rates 
for qualified facilities under section 48E.
    (2) Claim. For purposes of determining a taxpayer's section 48E 
credit with respect to a qualified facility or EST or a credit 
described in section 48E(b)(3)(C), the term claim means filing a 
completed Form 3468, Investment Credit, or any successor form(s), or 
other relevant form as it relates to the credits described in section 
48E(b)(3)(C), 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 or EST is placed in 
service, and for the taxable year in which the facility for which the 
credit described in section 48E(b)(3)(C) is placed in service. It 
includes making an election under section 6417 or 6418 of the Code and 
26 CFR 1.6417-1 and 1.6418-1, respectfully, with respect to such 
section 48E credit on the taxpayer's filed return.
    (3) Code. The term Code means the Internal Revenue Code.
    (4) EST. The term EST for purposes of the section 48E credit means 
energy storage technology as defined in Sec.  1.48E-2(g).
    (5) kWh. The term kWh means kilowatt hours.
    (6) Qualified facility. The term qualified facility for purposes of 
the section 48E credit has the meaning provided in Sec.  1.48E-2(b).
    (7) Qualified investment with respect to a qualified facility. The 
term qualified investment with respect to a qualified facility for 
purposes of the section 48E credit has the meaning provided in Sec.  
1.48E-2(a).
    (8) Qualified investment with respect to EST. The term qualified 
investment with respect to EST for purposes of the section 48E credit 
has the meaning provided in Sec.  1.48E-2(g)(4).
    (9) Secretary. The term Secretary means the Secretary of the 
Treasury or their delegate.
    (10) Section 48E credit. The term section 48E credit means the 
clean electricity investment credit determined under section 48E of the 
Code and the section 48E regulations.
    (11) Section 48E regulations. The term section 48E regulations 
means this section and Sec. Sec.  1.48E-2 through 1.48E-5.
    (12) Waste energy recovery property (WERP). 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, and associated equipment.
    (b) Credit amount--(1) In general. For purposes of section 46 of 
the Code, the section 48E credit for any taxable year is an amount 
equal to the applicable percentage of the qualified investment for such 
taxable year with respect to any qualified facility and any EST.
    (2) Applicable percentage. The term applicable percentage means the 
base rate described in paragraph (b)(3) of this section or the 
alternative rate described in paragraph (b)(4) of this section. The 
applicable percentage may be increased as provided in section 
48E(a)(3)(A) and paragraph (b)(5) of this section in the case of a 
qualified facility that is located in an energy community. Similarly, 
the applicable percentage may be increased as provided in section 
48E(a)(3)(B) and paragraph (b)(6) of this section in the case of a 
qualified facility that satisfies the domestic content requirements.
    (3) Base rate. Under section 48E(a)(2)(A)(i) and (B)(i), in the 
case of any qualified facility or EST that does not satisfy the 
requirements provided in section 48E(a)(2)(A)(ii) or (B)(ii), the 
applicable percentage is the base rate, which is 6 percent.
    (4) Alternative rate. In the case of any qualified facility or EST 
that satisfies the prevailing wage and apprenticeship requirements 
provided in section 48E(a)(2)(A)(ii) or (B)(ii), the applicable 
percentage is the alternative rate, which is 30 percent.
    (5) Energy communities increase in credit rate--(i) In general. In 
the case of any qualified facility or EST that is placed in service 
within an energy community (as defined in section 45(b)(11)(B)), the 
applicable percentage under section 48E(a)(2) and paragraph (b)(2) of 
this section will be increased by the applicable credit rate increase 
described in section 48E(a)(3)(A)(ii) and paragraph (b)(5)(ii) of this 
section.
    (ii) Applicable credit rate increase. In the case of any qualified 
investment with respect to a qualified facility or EST to which the 
base rate is applicable, the applicable credit rate increase is 2 
percentage points, and with respect to any qualified investment with 
respect to a qualified facility or EST to which the alternative rate is 
applicable, the applicable credit rate increase is 10 percentage 
points.
    (6) Domestic content increase in credit rate--(i) In general. In 
the case of any qualified facility or EST that satisfies the 
requirements of section 45(b)(9)(B) (domestic content requirement), the 
applicable percentage under section 48E(a)(2) and paragraph (b)(2) of 
this section will be increased by the applicable credit rate increase 
described in paragraph (b)(6)(ii) of this section.
    (ii) Applicable credit rate increase. In the case of any qualified 
investment with respect to a qualified facility or EST to which the 
base rate is applicable, 2 percentage points, and with respect to any 
qualified investment with respect to a qualified facility or EST to 
which the alternative rate is applicable, 10 percentage points.
    (c) Credit phase-out--(1) In general. The amount of the credit as 
determined under section 48E(a) and paragraph (b) of this section for 
any qualified facility or EST, the construction of which begins during 
a calendar year described in section 48E(e)(2) and paragraph (c)(2) of 
this section is equal to the product of--
    (i) The amount of the credit determined under section 48E(a) and 
paragraph (b) of this section without regard to section 48E(e) and 
paragraph (c) of this section; multiplied by
    (ii) The phase-out percentage under section 48E(e)(2) and paragraph 
(c)(2) of this section.
    (2) Phase-out percentage. The phase-out percentage under this 
paragraph (c)(2) is equal to--
    (i) 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, 100 percent;

[[Page 4113]]

    (ii) 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, 75 percent;
    (iii) 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, 50 percent; and
    (iv) 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 paragraph (c)(2)(iii) 
of this section, 0 percent.
    (3) Applicable year. For purposes of this paragraph (c), the term 
applicable year has the same meaning provided under Sec.  1.45Y-
1(c)(3).
    (d) Related taxpayers--(1) Definition. For purposes of the section 
48E credit, the term related taxpayers means members of a group of 
trades or businesses that are under common control (as defined in Sec.  
1.52-1(b)).
    (2) Related taxpayer rule. For purposes of the section 48E credit, 
related taxpayers are treated as one taxpayer in determining whether a 
taxpayer has made an investment in a qualified facility or EST with 
respect to which a section 48E credit may be determined.
    (e) Applicability date. This section applies to qualified 
facilities and ESTs placed in service after December 31, 2024, and 
during a taxable year ending on or after January 15, 2025.


Sec.  1.48E-2  Qualified investments in qualified facilities and EST 
for purposes of section 48E.

    (a) Qualified investment with respect to a qualified facility--(1) 
In general. A qualified investment of a taxpayer for a taxable year 
with respect to a qualified facility is the total basis amount for the 
taxable year with respect to the qualified facility.
    (2) Total basis amount. The total basis amount is the sum of:
    (i) The basis of any qualified property that is a part of the 
qualified facility and that is placed in service by the taxpayer during 
the taxable year; plus
    (ii) The amount of any expenditures paid or incurred by the 
taxpayer for qualified interconnection property (as defined in section 
Sec.  1.48E-4(a)(2)) in connection with a qualified facility which has 
a maximum net output of not greater than five megawatts (as measured in 
alternating current), that was placed in service during the taxable 
year of the taxpayer, and that are properly chargeable to the capital 
account.
    (b) Qualified facility--(1) In general. A qualified facility is a 
facility that:
    (i) Is used for the generation of electricity, meaning that it is a 
net generator of electricity taking into account any electricity 
consumed by the facility;
    (ii) Is placed in service by the taxpayer after December 31, 2024; 
and
    (iii) Has an anticipated greenhouse gas emissions rate of not 
greater than zero (as determined under the rules provided in Sec.  
1.48E-5).
    (2) Placed in service--(i) In general. A qualified facility is 
considered placed in service in the earlier of:
    (A) The taxable year in which, under the taxpayer's depreciation 
practice, the period for depreciation with respect to such qualified 
facility begins; or
    (B) The taxable year in which the qualified facility is placed in a 
condition or state of readiness and availability to produce 
electricity, whether in a trade or business or in the production of 
income. A qualified facility in a condition or state of readiness and 
availability to produce electricity includes, but is not limited to, 
components of property that are acquired and set aside during the 
taxable year for use as replacements for a particular qualified 
facility (or facilities) in order to avoid operational time loss and 
equipment that is acquired for a specifically assigned function and is 
operational but is undergoing testing to eliminate any defects. 
However, components of property acquired to be used in the construction 
of a qualified facility are not considered in a condition or state of 
readiness and availability for a specifically assigned function.
    (ii) Qualified facility subject to Sec.  1.48-4 election to treat 
lessee as purchaser. Notwithstanding paragraph (b)(2)(i) of this 
section, a qualified facility with respect to which an election is made 
under section 50(d)(5) of the Code and 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.
    (c) Qualified property--(1) In general. For purposes of this 
paragraph (c), the term qualified property means all property owned by 
the taxpayer that meets all of the requirements of paragraphs (c)(1)(i) 
through (iii) of this section:
    (i) The property is tangible personal property (as defined in 
paragraph (e)(1) of this section) or other tangible property (as 
defined in paragraph (e)(2) of this section) but only if such other 
tangible property is used as an integral part of the qualified 
facility;
    (ii) Depreciation (or amortization in lieu of depreciation) is 
allowable (as defined in paragraph (e)(3) of this section) with respect 
to the property; and
    (iii) Either--
    (A) The construction, reconstruction, or erection of the property 
is completed by the taxpayer (as defined in paragraph (e)(4) of this 
section) with respect to the property; or
    (B) The taxpayer acquires the property (as defined in paragraph 
(e)(5) of this section) and the original use of the property (as 
defined in paragraph (e)(6) of this section) commences with the 
taxpayer.
    (2) Location of property. Any component of qualified property that 
otherwise satisfies the requirements of this paragraph (c) is part of a 
qualified facility regardless of where such component is located.
    (d) Property included in qualified facility--(1) In general. A 
qualified facility includes a unit of a qualified facility (as defined 
in paragraph (d)(2) of this section) owned by the taxpayer. A qualified 
facility also includes components of qualified property owned by the 
taxpayer that are an integral part (as defined in paragraph (d)(3) of 
this section) of the qualified facility. Any component of qualified 
property that meets the requirements of this paragraph (d) is part of a 
qualified facility regardless of where such component of qualified 
property is located. A qualified facility does not include any 
electrical transmission equipment, such as electrical transmission 
lines and towers, or any equipment beyond the electrical transmission 
stage. See Sec.  1.48E-4(b) regarding the Incremental Production Rule 
and Sec.  1.48E-4(c) for rules regarding a retrofitted qualified 
facility (80/20 rule).
    (2) Unit of a qualified facility--(i) In general. For purposes of 
the section 48E credit, a unit of a qualified facility includes all 
functionally interdependent components of property (as defined in 
paragraph (d)(2)(ii) of this section) owned by the taxpayer that are 
operated together and that can operate apart from other property to 
produce electricity. No provision of this section, Sec.  1.48E-1, or 
Sec. Sec.  1.48E-3 through 1.48E-5 uses the term unit in respect of a 
qualified facility with any meaning other than that provided in this 
paragraph (d)(2)(i).
    (ii) Functionally interdependent. Components of property are 
functionally interdependent if the placing in service of each of the 
components is dependent upon the placing in service of the other 
components to generate electricity.
    (3) Integral part--(i) In general. For purposes of the section 48E 
credit, a

[[Page 4114]]

component of property owned by a taxpayer is an integral part of a 
qualified facility if it is used directly in the intended function of 
the qualified facility and is essential to the completeness of such 
function. Property that is an integral part of a qualified facility is 
part of the qualified facility. A taxpayer may not claim the section 
48E credit for any property not owned by the taxpayer that is an 
integral part of the qualified facility owned by the taxpayer.
    (ii) Power conditioning and transfer equipment. Power conditioning 
equipment and transfer equipment are integral parts of a qualified 
facility. Power conditioning equipment includes, but is not limited to, 
transformers, inverters and converters, which modify the 
characteristics of electricity into a form suitable for use, 
transmission, or distribution. Parts related to the functioning or 
protection of power conditioning equipment are also treated as power 
conditioning equipment and include, but are not limited to, switches, 
circuit breakers, arrestors, and hardware used to monitor, operate, and 
protect power conditioning equipment. Transfer equipment includes 
components of property that allow for the aggregation of electricity 
generated by a qualified facility and components of property that alter 
voltage to permit electricity to be transferred to a transmission or 
distribution line. Transfer equipment does not include transmission or 
distribution lines. Examples of transfer equipment include, but are not 
limited to, wires, cables, and combiner boxes that conduct electricity. 
Parts related to the functioning or protection of transfer equipment 
are also treated as transfer equipment and may include items such as 
current transformers used for metering, electrical interrupters (such 
as circuit breakers fuses, and other switches) and hardware used to 
monitor, operate, and protect transfer equipment.
    (iii) Roads. Roads that are integral to the intended function of 
the qualified facility such as onsite roads that are used to operate 
and maintain the qualified facility are an integral part of a qualified 
facility. Roads used primarily to access 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.
    (iv) Fences. Fencing is not an integral part of a qualified 
facility because it is not integral to the intended function of the 
qualified facility.
    (v) Buildings. Generally, buildings are not integral parts of a 
qualified facility because they are not integral to the intended 
function of the qualified facility. For purposes of section 48E, a 
structure that is essentially an item of machinery or equipment is not 
considered a building. In addition, a structure is not a building if it 
houses components of property that are integral to the intended 
function of the qualified facility and 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.
    (vi) Shared integral property. 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 qualified facility for which the taxpayer is 
claiming a section 48E credit. 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. In addition, a component 
of property that is shared by a qualified facility as defined by 
section 48E(b)(3) (48E Qualified Facility) and a qualified facility as 
defined in 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.
    (vii) Examples. This paragraph (d)(3)(vii) provides examples 
illustrating the rules of this paragraph (d).
    (A) Example 1. Co-located qualified facilities owned by the same 
taxpayer that share integral property. X constructs and owns a solar 
facility (Solar Facility) and nearby also constructs and owns a wind 
facility (Wind Facility) that are each a qualified facility. The Solar 
Facility and Wind Facility each connect to a shared transformer that 
steps up the electricity produced by each qualified facilities to 
electrical grid voltage before it is transmitted to the electrical grid 
through an intertie. X assigns 50% of the cost of the shared 
transformer to the Solar Facility and the Wind Facility, respectively. 
The fact that the Solar Facility and Wind Facility share property that 
is integral to both does not impact the ability of X to claim a section 
48E credit for both qualified facilities. When X places the qualified 
facilities in service, 50% of the cost of the transformer is included 
in X's basis in each of the qualified facilities for purposes of 
computing the section 48E credit.
    (B) Example 2. Co-located qualified facilities owned by different 
taxpayers that share integral property. X constructs and owns a solar 
facility (Solar Facility), and nearby Y constructs and owns a wind 
facility (Wind Facility) that are each a qualified facility. The Solar 
Facility and the Wind Facility both connect to a shared transformer 
that steps up the electricity produced by both qualified facilities to 
electrical grid voltage before it is transmitted to the electrical grid 
through an intertie. X and Y each pay 50% of the cost of the shared 
transformer. The fact that the Solar Facility and Wind Facility share 
property that is integral to both does not impact the ability of X or Y 
to claim a section 48E credit for their respective qualified 
facilities. When X and Y place their respective qualified facilities in 
service, 50% of the cost of the transformer is included in X's and Y's 
basis in their respective qualified facilities for purposes of 
computing the section 48E credit.
    (C) Example 3. Co-located qualified facility and Energy Storage 
Technology (EST) owned by the same taxpayer. X constructs and owns a 
wind facility (Wind Facility) that is co-located with an EST that X 
also constructs and owns. The Wind Facility and EST share transfer 
equipment that is integral to both. X assigns 50% of the cost of the 
shared transfer equipment to the Wind Facility and 50% of the cost to 
the EST. The fact that the Wind Facility and EST share property that is 
integral to both does not impact the ability of X to claim a section 
48E credit for the Wind Facility and the EST. X may include 50% of the 
cost of the transfer equipment in its basis to determine a section 48E 
credit for the Wind Facility and the EST.
    (D) Example 4. Co-located qualified facility and Energy Storage 
Technology owned by different taxpayers. X constructs and owns a solar 
facility that is a qualified facility (Solar Facility) and is co-
located with an EST constructed and owned by Y. The Solar Facility and 
EST share transfer equipment that is integral to both. X and Y each 
incur 50% of the cost of the transfer equipment. The fact that the 
Solar Facility and EST share property that is integral to both does not 
impact the

[[Page 4115]]

ability of X to claim a section 48E credit for the Solar Facility or Y 
to claim a section 48E credit for the EST. When X and Y place in 
service the Solar Facility and EST, for purposes of computing the 
section 48E credit, 50% of the cost of the transfer equipment is 
included in X's basis in the Solar Facility and 50% of the cost is 
included in Y's basis in the EST.
    (E) Example 5. Qualified facility with integral property owned by a 
different taxpayer. X constructs and owns a hydropower production 
facility that is a qualified facility (Hydropower Facility). The 
Hydropower Facility connects to a dam owned by Y, a government entity, 
that is an integral part of the Hydropower Facility. X pays for upkeep 
of the dam. The fact that X does not own the dam does not impact the 
ability of X to claim a section 48E credit for the Hydropower Facility. 
When X places in service the Hydropower Facility, for purposes of 
computing the section 48E credit, the cost incurred by X related to the 
dam would not be included in X's basis in the Qualified Facility 
because X does not own the dam.
    (e) Definitions related to requirements for qualified property--(1) 
Tangible personal property. The term tangible personal property means 
any tangible property except land or improvements thereto, such as 
buildings or other inherently permanent structures (including items 
that are structural components of such buildings or structures. 
Tangible personal property includes all property (other than structural 
components) that is contained in or attached to a building. Further, 
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. Machinery located outside of a building is qualified property 
if it is used for the generation of electricity and the components of 
machinery are functionally interdependent. Local law does not control 
whether property is tangible property or is tangible personal property 
for purposes of the section 48E credit. Thus, tangible property may be 
tangible personal property for purposes of the section 48E credit even 
though under local law the property is considered a fixture and 
therefore is real property under local law.
    (2) Other tangible property. The term other tangible property means 
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. Other tangible property may be 
tangible property for purposes of the section 48E credit even though 
under local law the property is considered a fixture and is therefore 
real property under local law.
    (3) Depreciation allowable--(i) In general. For purposes of 
applying paragraph (c) of this section, depreciation (or amortization 
in lieu of depreciation) (collectively, depreciation) is allowable with 
respect to the 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). Further, if an 
adjustment with respect to the Federal income tax or Federal return, as 
appropriate, 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.
    (ii) Exclusions from allowable. For purposes of paragraph (c) of 
this section, 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).
    (4) Construction, reconstruction, or erection of the property. The 
term construction, reconstruction, or erection of the property means 
work performed to construct, reconstruct, or erect property either by 
the taxpayer or for the taxpayer in accordance with the taxpayer's 
specifications.
    (5) Acquisition of qualified property. The term acquisition of 
qualified property means a transaction by which a taxpayer acquires the 
rights and obligations to establish tax ownership of the property for 
Federal tax purposes.
    (6) Original use of the property. The term original use of the 
property means the first use to which the unit of property is put, 
whether or not such use is by the taxpayer.
    (7) Retrofitted qualified facility. 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 Sec.  1.48E-4(c) 
regarding retrofitted qualified facilities (80/20 Rule) apply. The 
question of whether a qualified facility meets the 80/20 Rule is a 
facts and circumstances determination.
    (f) Coordination with other credits--(1) In general. The term 
qualified facility (as defined in section 48E(b)(3)) and paragraph (b) 
of this section does not include any facility for which a credit 
determined under section 45, 45J, 45Q, 45U, 45Y, 48, or 48A is allowed 
under section 38 of the Code for the taxable year or any prior taxable 
year. A taxpayer that directly owns a qualified facility (as defined in 
section 48E(b)(3)) for which the taxpayer 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 to the taxpayer with respect to the qualified facility. 
Nothing in this paragraph (f) 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 of the Code for the taxable year or any prior 
taxable year.
    (2) Allowed. For purposes of this paragraph (f), the term allowed 
only includes credits that taxpayers have claimed on a Federal income 
tax return or Federal return, as appropriate, and that the Internal 
Revenue Service (IRS) has not challenged in terms of the taxpayer's 
eligibility.
    (3) Examples. This paragraph (f)(3) provides examples illustrating 
the rules provided in this paragraph (f).
    (i) Example 1. Taxpayer claims a section 45Y credit on a solar farm 
and section 48E credit on co-located Energy Storage Technology. X owns 
a solar farm that is a qualifying facility (as defined in Sec.  1.45Y-
2(a)) (Solar Qualified Facility), and a co-located EST (Energy 
Storage). The Energy Storage is not part of the Solar Qualified 
Facility, and therefore X may claim the section 45Y credit based on the 
kWh of electricity produced by the Solar Qualified Facility, and X may 
also claim the section 48E credit based on its qualified investment in 
the Energy Storage.
    (ii) Example 2. Different taxpayers claim a section 45Y credit for 
a solar farm and a co-located Energy Storage Technology. X owns a solar 
farm that is a qualifying facility (as defined in Sec.  1.45Y-2(a)) 
(Solar Qualified Facility), and Y owns a co-located EST (Energy 
Storage). The Energy Storage is not part of the Solar Qualified 
Facility, and therefore, X may claim the section 45Y credit based on 
the kWh of electricity produced by the Solar Qualified Facility, and Y 
may claim the section

[[Page 4116]]

48E credit based on its qualified investment in the Energy Storage.
    (iii) Example 3. Taxpayer claiming a section 48E credit; another 
credit is not allowed. X owns a wind facility that satisfies the 
requirements of a qualified facility under section 48E as well as the 
requirements of a qualified facility as defined in Sec.  1.45Y-2(a) 
under section 45Y. X claims a section 45Y credit with respect to the 
wind facility. While a credit may be available with regard to the wind 
facility under section 48E, because X has already claimed a section 45Y 
credit with respect to the wind facility, a section 48E credit is not 
allowed. Local law is not controlling for purposes of determining 
whether property is or is not tangible property or tangible personal 
property. Thus, tangible property may be personal property for purposes 
of the energy credit even though under local law the property is 
considered a fixture and therefore real property.
    (iv) Example 4. Interaction of section 48E and section 45Q credits 
for single qualified facility. X owns a qualified facility (Facility A) 
that includes carbon capture equipment, which is needed for the 
facility to meet the zero greenhouse gas requirement, so it is 
functionally interdependent to the production of electricity by the 
Facility A. X uses the carbon capture equipment to capture and utilize 
(as described in section 45Q(f)(5)) qualified carbon dioxide and 
claimed a section 45Q credit in the current taxable year. As a result, 
X cannot claim a section 48E credit for its 48E Facility A because a 
qualified facility does not include a facility for which a credit 
determined under section 45Q is allowed.
    (v) Example 5. Interaction of section 48E and section 45Q credits 
for co-located qualified facilities. Assume the same facts as in 
paragraph (f)(3)(iv) of this section (Example 4), except that X owns a 
co-located qualified facility (Facility B) that also includes carbon 
capture equipment, which is needed for the facility to meet the zero 
greenhouse gas requirement, so it is functionally interdependent to the 
production of electricity by the Facility B. X uses the carbon capture 
equipment to capture and utilize (as described in section 45Q(f)(5)) 
qualified carbon dioxide, but does not claim a section 45Q credit with 
respect to the Facility B. While X claimed a section 45Q credit in the 
current taxable year for the Facility A (see Example 4), the Facility B 
is not part of the Facility A, and, therefore, X may claim the section 
48E credit for its Facility B.
    (g) EST--(1) Property included in EST. An EST includes a unit of 
energy storage technology (unit of EST) (as defined in paragraph (g)(2) 
of this section) that meets the requirements of paragraph (g)(2)(ii) of 
this section. An EST also includes property owned by the taxpayer that 
is an integral part (as defined in paragraph (g)(3) of this section) of 
the EST. An EST does not include equipment that is an addition or 
modification to an existing EST. For purposes of the section 48E 
credit, EST includes electrical energy storage property (as described 
in paragraph (g)(6)(i) of this section), thermal energy storage 
property (as described in paragraph (g)(6)(ii) of this section), and 
hydrogen energy storage property (as described in paragraph (g)(6)(iii) 
of this section).
    (2) Unit of EST--(i) In general. For purposes of the section 48E 
credit, a unit of EST includes all functionally interdependent 
components of property (as defined in paragraph (g)(2)(ii) of this 
section) owned by the taxpayer that are operated together and that can 
operate apart from other property to perform the intended function of 
the EST. No provision of this section, Sec.  1.48E-1, or Sec. 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 this paragraph (g)(2)(i).
    (ii) Functionally interdependent. Components of property 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. For purposes of the section 48E credit, property 
owned by a taxpayer is an integral part of an 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. Property that is an 
integral part of an EST is part of that EST. A taxpayer may not claim 
the section 48E credit for any property not owned by the taxpayer that 
is an integral part of EST owned by the taxpayer.
    (4) Qualified investment with respect to EST. The qualified 
investment with respect to any EST for any taxable year is the basis of 
any EST placed in service by the taxpayer during such taxable year.
    (5) Placed in service--(i) In general. An EST is considered placed 
in service in the earlier of:
    (A) The taxable year in which, under the taxpayer's depreciation 
practice, the period for depreciation with respect to such EST begins; 
or
    (B) The taxable year in which the EST is placed in a condition or 
state of readiness and availability for the intended function of the 
EST, whether in a trade or business or in the production of income. An 
EST in a condition or state of readiness and availability for its 
intended function includes, but is not limited to, components of 
property that are acquired and set aside during the taxable year for 
use as replacements for a particular EST (or ESTs) in order to avoid 
operational time loss and equipment that is acquired for a specifically 
assigned function and is operational but is undergoing testing to 
eliminate any defects. However, components of property acquired to be 
used in the construction of an EST are not considered in a condition or 
state of readiness and availability for a specifically assigned 
function.
    (ii) EST subject to Sec.  1.48-4 election to treat lessee as 
purchaser. Notwithstanding paragraph (g)(5)(i) of this section, EST 
with respect to which an election is made under section 50(d)(5) of the 
Code and 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 EST--(i) Electrical energy storage property. 
Electrical 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 receives, stores, and delivers 
energy for conversion to electricity, and has a nameplate capacity of 
not less than 5 kWh. For example, subject to the exclusion for property 
primarily used in the transportation of goods or individuals, 
electrical energy storage property includes but is not limited to 
rechargeable electrochemical batteries of all types (such as lithium-
ion, vanadium redox flow, sodium sulfur, and lead-acid); 
ultracapacitors; physical storage such as pumped storage hydropower, 
compressed air storage, flywheels; and reversible fuel cells.
    (ii) Thermal energy storage property--(A) In general. Thermal 
energy storage property is 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. 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. It does not

[[Page 4117]]

include property that transforms other forms of energy into heat in the 
first instance. Property that ``removes heat from, or adds heat to, a 
storage medium for subsequent use'' is property that is designed with 
the particular purpose of substantially altering the time profile of 
when heat added to or removed from the thermal storage medium can be 
used for heating or cooling of the interior of a residential or 
commercial building. Paragraph (g)(6)(ii)(B) of this section provides a 
safe harbor for determining whether a thermal energy storage property 
has such a purpose. Thermal energy storage property does not include a 
swimming pool, combined heat and power system property (as defined in 
section 45Y(g)(2)), or a building or its structural components. For 
example, thermal energy storage property includes, but is not limited 
to, a system that adds heat to bricks heated to high temperatures that 
later use this stored energy to heat a building through the HVAC 
system; thermal ice storage systems that use electricity to run a 
refrigeration cycle to produce ice that is later connected to the HVAC 
system as an exchange medium for air conditioning a building, heat pump 
systems that store thermal energy in an underground tank, an artificial 
pit, an aqueous solution, a borehole field, or a solid-liquid phase 
change material to be extracted for later use for heating and/or 
cooling; and air-to-water heat pump systems with a water storage tank. 
However, consistent with Sec.  1.48-14(d), if thermal energy storage 
property, such as a heat pump system, includes equipment, such as a 
heat pump, that also serves a purpose in an HVAC system that is 
installed in connection with the thermal energy storage property, the 
taxpayer's qualified investment with respect to the thermal energy 
storage property includes the total cost of the thermal energy storage 
property and HVAC system less the cost of an HVAC system without 
thermal storage capacity that would meet the same functional heating or 
cooling needs as the heat pump system with a storage medium, other than 
time shifting of heating or cooling. See Sec.  1.48-14(h) for 
application of the Incremental Cost Rule.
    (B) Safe harbor. A thermal energy storage property will be deemed 
to have the purpose of substantially altering the time profile of when 
heat added to or removed from the thermal storage medium can be used to 
heat or cool the interior of a residential or commercial building if 
that thermal energy storage property is capable of storing energy that 
is sufficient to provide heating or cooling of the interior of a 
residential or commercial building for a minimum of one hour.
    (iii) Hydrogen energy storage property. 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. Hydrogen energy storage property 
includes, but is not limited to, above ground storage tanks, 
underground storage facilities, and associated compressors. Property 
that is an integral part of hydrogen energy storage property includes, 
but is not limited to, hydrogen liquefaction equipment and gathering 
and distribution lines within a hydrogen energy storage property.
    (7) Modification of EST. With respect to an electrical energy 
storage property or a hydrogen energy storage property, modified as set 
forth in this paragraph (g)(7), such property will be treated as an 
electrical energy storage property (as described in paragraph (g)(6)(i) 
of this section) or a hydrogen energy storage property (as described in 
paragraph (g)(6)(iii) of this section), 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 this paragraph (g)(7) and section 48E. This paragraph 
(g)(7) applies to any electrical energy storage property and hydrogen 
energy storage property that either:
    (i) Was placed in service before August 16, 2022, and would be 
described in section 48(c)(6)(A)(i), except that such property had a 
nameplate capacity of less than 5 kWh and is modified in a manner that 
such property (after such modification) has a nameplate capacity of not 
less than 5 kWh; or
    (ii) Is described in section 48(c)(6)(A)(i) and is modified in a 
manner that such property (after such modification) has an increase in 
nameplate capacity of not less than 5 kWh. The increase in nameplate 
capacity is equal to the difference between nameplate capacity 
immediately after the modification and nameplate capacity immediately 
prior to the modification.
    (h) Applicability date. This section applies to qualified 
facilities and EST placed in service after December 31, 2024, and 
during a taxable year ending on or after January 15, 2025.


Sec.  1.48E-3  Rules relating to the increased credit for prevailing 
wage and apprenticeship.

    (a) In general. If any qualified facility or EST satisfies the 
requirements in paragraph (b) of this section, the applicable 
percentage used for calculating the amount of the credit for a 
qualified investment determined under section 48E(a) for the taxable 
year equals 30 percent.
    (b) Qualified facility or EST requirements. A qualified facility or 
EST satisfies the requirements of this paragraph (b) if it is a 
facility described in one of paragraphs (b)(1) through (6) of this 
section:
    (1) A qualified facility with a maximum net output of less than one 
megawatt of electrical energy (as measured in alternating current) 
based on the nameplate capacity as provided in paragraph (c) of this 
section (One Megawatt Exception);
    (2) A qualified facility the construction of which began prior to 
January 29, 2023;
    (3) A qualified facility that meets the prevailing wage 
requirements of section 48E(d)(3) and Sec. Sec.  1.45-7(a)(2) and (3) 
and (b) through (d) and 1.48-13(c), the apprenticeship requirements of 
section 45(b)(8) and Sec.  1.45-8, and the recordkeeping and reporting 
requirements of Sec.  1.45-12;
    (4) An EST with a capacity of less than one megawatt based on the 
nameplate capacity as provided in paragraph (c) of this section (EST 
One Megawatt Exception);
    (5) An EST the construction of which began prior to January 29, 
2023; or
    (6) An EST that satisfies the prevailing wage requirements of 
section 48E(d)(3) and Sec. Sec.  1.45-7(a)(2) and (3) and (b) through 
(d) and 1.48-13(c), the apprenticeship requirements of section 45(b)(8) 
and Sec.  1.45-8, and the recordkeeping and reporting requirements of 
Sec.  1.45-12.
    (c) Nameplate capacity for purposes of the One Megawatt Exception--
(1) Qualified facilities. For purposes of paragraph (b)(1) of this 
section, whether a qualified facility has a maximum net output of less 
than 1 megawatt (MW) of electrical energy (as measured in alternating 
current) is determined based on the nameplate capacity of the facility. 
If a qualified facility has integrated operations (as defined in 
paragraph (c)(4)(i) of this section) with one or more other qualified 
facilities, then the aggregate nameplate capacity of the qualified 
facilities is used for the purposes of determining if the qualified 
facilities satisfy the One Megawatt Exception. If applicable, taxpayers 
should use the International Standard

[[Page 4118]]

Organization (ISO) conditions to measure the maximum electrical 
generating output of a facility.
    (2) Nameplate capacity for qualified facilities that generate in 
direct current for purposes of the One Megawatt Exception. For 
qualified facilities that generate electricity in direct current, the 
taxpayer determines the maximum net output (in alternating current) of 
each unit of qualified facility by using the lesser of:
    (i) The sum of the nameplate generating capacities within the unit 
of qualified facility in direct current, which is deemed the nameplate 
generating capacity of the unit of qualified facility in alternating 
current; or
    (ii) The nameplate capacity of the first component of property that 
inverts the direct current electricity into alternating current.
    (3) EST--(i) In general. Paragraphs (c)(3)(ii) through (iv) of this 
section provide rules for applying the EST One Megawatt Exception 
described in paragraph (b)(4) of this section to different types of 
energy storage properties. If the EST has integrated operations (as 
defined in paragraph (c)(4)(ii) of this section) with one or more other 
ESTs, then the aggregate nameplate capacity of the ESTs is used for the 
purposes of the EST One Megawatt Exception. If applicable, taxpayers 
should use the ISO conditions to measure the maximum net output of an 
EST.
    (ii) Electrical energy storage property. In the case of electrical 
energy storage property (as defined in Sec.  1.48E-2(g)(6)(i)), the EST 
One Megawatt Exception is determined by using the storage device's 
maximum net output. If the output of electrical energy storage property 
is in direct current, taxpayer should apply the rules of paragraph 
(c)(2) of this section.
    (iii) Thermal energy storage property. In the case of thermal 
energy storage property (as defined in Sec.  1.48E-2(g)(6)(ii)), the 
EST One Megawatt Exception is determined by using the property's 
maximum net output. The maximum net output in MW is calculated by using 
a conversion whereby one MW is equal to 3.4 million British Thermal 
Units per hour (mmBtu/hour) for heating and 284 tons for cooling (Btu 
per hour/3,412,140 = MW). The maximum net output is the maximum 
instantaneous rate of discharge and is determined based on the 
nameplate capacity of the equipment that generates or distributes 
thermal energy for productive use (including distributing the thermal 
energy from the storage medium). For purposes of determining the 
maximum net output of thermal energy storage property, if the nameplate 
capacity of the thermal energy storage is not available, the nameplate 
capacity of the equipment delivering thermal energy to the thermal 
energy storage may be used. For thermal energy storage property 
distributing thermal energy to a building or buildings, the nameplate 
capacity can be assessed as either the aggregate maximum thermal 
capacity of all individual heating or cooling elements within the 
building or buildings, or as the maximum thermal output that the 
thermal energy storage property is capable of delivering to a building 
or buildings at any given moment. The maximum thermal capacity of an 
entire thermal energy storage property is capable of delivering at any 
given moment does not take into account the capacity of redundant 
equipment if such equipment is not operated when the system is at 
maximum output during normal operation. For thermal energy storage 
property and other energy property that generates or distributes 
thermal energy for a productive use, the maximum thermal capacity that 
the entire system is capable of delivering is considered to be the 
greater of the rate of cooling or the rate of heating of the aggregate 
of the nameplate capacity of the equipment distributing energy for 
productive use, including distributing the thermal energy from the 
thermal energy storage medium to the building or buildings. If such 
nameplate capacity is unavailable, in the case of thermal energy 
storage property only, the maximum thermal capacity may instead be 
considered to be the greater of the rate of cooling or the rate of 
heating of the aggregate of the nameplate capacity of all the equipment 
delivering energy to the thermal energy storage property in the 
project.
    (iv) Hydrogen energy storage property. In the case of a hydrogen 
energy storage property (as defined in Sec.  1.48E-2(g)(6)(iii)), the 
EST One Megawatt Exception is determined by using the property's 
maximum net output. The maximum net output in MW is calculated by using 
a conversion whereby one MW is equal to 3.4 mmBtu/hour of hydrogen or 
equivalently 10,500 standard cubic feet (scf) per hour of hydrogen.
    (4) Integrated operations--(i) One Megawatt Exception. Solely for 
the purposes of the One Megawatt Exception described in paragraph 
(b)(1) of this section, a qualified facility is treated as having 
integrated operations with any other qualified facility of the same 
technology type if the facilities are:
    (A) Owned by the same or related taxpayers;
    (B) Placed in service in the same taxable year; and
    (C) Transmit electricity generated by the facilities through the 
same point of interconnection or, if the facilities are not grid-
connected or are delivering electricity directly to an end user behind 
a utility meter, are able to support the same end user.
    (ii) EST One Megawatt Exception. Solely for the purposes of the EST 
One Megawatt Exception described in paragraph (b)(4) of this section, 
an EST is treated as having integrated operations with any other EST of 
the same technology type if the ESTs are:
    (A) Owned by the same or related taxpayers;
    (B) Placed in service in the same taxable year; and
    (C) Transmit energy through the same point of interconnection or, 
if the ESTs are not grid-connected or are providing storage directly to 
an end user behind a utility meter, are able to support the same end 
user. In the case of EST described in paragraphs (c)(3)(iii) and (iv) 
of this section, which use the same piping and distribution systems for 
the respective type of EST.
    (d) Transition waiver of penalty for prevailing wage requirements. 
For purposes of the transition waiver described in Sec.  1.48-13(c)(2) 
(by reference to Sec.  1.45-7(c)(6)(iii)), the penalty payment required 
by Sec.  1.45-7(c)(1)(ii) to cure a failure to satisfy the prevailing 
wage requirements in paragraph (b)(3) or (6) of this section is waived 
with respect to a laborer or mechanic who performed work in the 
construction, alteration, or repair of an energy project on or after 
January 29, 2023, and prior to January 15, 2025, if the taxpayer relied 
upon Notice 2022-61, 2022-52 I.R.B. 560, or the PWA proposed 
regulations (REG-100908-23) (88 FR 60018), corrected in 88 FR 73807 
(Oct. 27, 2023), corrected in 89 FR 25550 (April 11, 2024), to 
determine when the activities of any laborer or mechanic became subject 
to the prevailing wage requirements, and the taxpayer makes the 
correction payments required by Sec.  1.45-7(c)(1)(i) with respect to 
such laborer and mechanics within 180 days of January 15, 2025.
    (e) No alteration or repair during recapture period described in 
Sec.  1.48-13(c)(3). If no alteration or repair work occurs during the 
five-year recapture period, the taxpayer is deemed to satisfy the 
prevailing wage requirements described in paragraph (b)(3) or (6) of 
this section with respect to such taxable year.

[[Page 4119]]

    (f) Applicability date. This section applies to qualified 
facilities and qualified ESTs placed in service in taxable years ending 
after January 15, 2025, and the construction of which begins after 
March 17, 2025. Taxpayers may apply this section to qualified 
facilities and qualified ESTs placed in service in taxable years ending 
on or after January 15, 2025, the construction of which begins before 
January 15, 2025, provided that taxpayers follow this section in its 
entirety and in a consistent manner.


Sec.  1.48E-4   Rules of general application.

    (a) Qualified interconnection costs included in certain lower-
output qualified facilities--(1) In general. For purposes of 
determining the section 48E credit (as defined in Sec.  1.48E-1(a)), 
the qualified investment with respect to a qualified facility (as 
defined in Sec.  1.48E-2(a)) includes amounts paid or incurred by the 
taxpayer for qualified interconnection property (as defined in 
paragraph (a)(2) of this section), in connection with a qualified 
facility (as defined in Sec.  1.48E-2(a)) that has a maximum net output 
of not greater than 5 MW (as measured in alternating current) as 
described in paragraph (a)(3) of this section (Five-Megawatt 
Limitation). 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 paragraph (a)(6) of this section. 
If the costs borne by the taxpayer are reduced by utility or non-
utility payments, Federal income tax principles may require the 
taxpayer to reduce the amounts of costs treated as paid or incurred for 
qualified interconnection property to determine a section 48E credit.
    (2) Qualified interconnection property. For purposes of this 
paragraph (a), the term qualified interconnection property means, with 
respect to a qualified facility, any tangible property that is part of 
an addition, modification, or upgrade to a transmission or distribution 
system that is required at or beyond the point at which the qualified 
facility interconnects to such transmission or distribution system in 
order to accommodate such interconnection; is either constructed, 
reconstructed, or erected by the taxpayer (as defined in Sec.  1.48E-
2(e)(4)), or for which the cost with respect to the construction, 
reconstruction, or erection of such property is paid or incurred by 
such taxpayer; and the original use (as defined in Sec.  1.48E-2(e)(6)) 
of which, pursuant to an interconnection agreement (as defined in 
paragraph (a)(4) of this section), commences with a utility (as defined 
in paragraph (a)(5) of this section). For purposes of determining the 
original use of interconnection property in the context of a sale-
leaseback or lease transaction, the principles of section 50(d)(4) of 
the Internal Revenue Code (Code) must be taken into account, as 
applicable, with such original use determined on the date of the sale-
leaseback or lease. Qualified interconnection property is not part of a 
qualified facility. As a result, qualified interconnection property is 
not taken into account in determining whether a qualified facility 
satisfies the requirements for the increase in credit rate for energy 
communities provided in section 48E(a)(3)(A) of the Code, the increase 
in credit rate for domestic content referenced in section 48E(a)(3)(B) 
(by reference to the rules of section 48(a)(12)) or the increase in 
credit rate for prevailing wage requirements referenced in section 
48E(d)(3) and apprenticeship requirements referenced in section 
48E(d)(4).
    (3) Five-Megawatt Limitation--(i) In general. For purposes of this 
paragraph (a), the Five-Megawatt Limitation is measured at the level of 
the qualified facility in accordance with section 48E(b)(1)(B). The 
maximum net output of a qualified facility is measured only by 
nameplate generating capacity (in alternating current) of the unit of 
qualified facility, which does not include the nameplate capacity of 
any integral property, at the time the qualified facility is placed in 
service. The nameplate generating capacity of the unit of qualified 
facility is measured independently from any other qualified facilities 
that share the same integral property.
    (ii) Nameplate capacity for purposes of the Five-Megawatt 
Limitation. For purposes of paragraph (a)(1) of this section, the 
determination of whether a qualified facility has a maximum net output 
of not greater than 5 MW (as measured in alternating current) is based 
on the nameplate capacity. The nameplate capacity for purposes of the 
Five-Megawatt Limitation is the maximum electrical generating output in 
megawatts that the unit of 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. If 
applicable, taxpayers should use the International Standard 
Organization (ISO) conditions to measure the maximum electrical 
generating output of a unit of qualified facility.
    (iii) Nameplate capacity for qualified facilities that generate in 
direct current for purposes of the Five-Megawatt Limitation. For 
qualified facilities that generate electricity in direct current, a 
taxpayer determines whether a qualified facility has a maximum net 
output of not greater than five MW (in alternating current) by using 
the lesser of:
    (A) The sum of the nameplate generating capacities within the unit 
of qualified facility property in direct current, which is deemed the 
nameplate generating capacity of the unit of qualified facility 
property in alternating current; or
    (B) The nameplate capacity of the first component of the qualified 
facility that inverts the direct current electricity into alternating 
current.
    (4) Interconnection agreement. For purposes of this paragraph (a), 
the term interconnection agreement means an agreement with a utility 
for the purposes of interconnecting the qualified facility owned by 
such taxpayer to the transmission or distribution system of the 
utility. In the case of the election provided under section 50(d)(5) 
(relating to certain leased property), the term includes an agreement 
regarding a qualified facility leased by such taxpayer.
    (5) Utility. For purposes of this paragraph (a), the term utility 
means the owner or operator of an electrical transmission or 
distribution system that is subject to the regulatory authority of a 
State or political subdivision thereof, any agency or instrumentality 
of the United States, a public service or public utility commission or 
other similar body of any State or political subdivision thereof, or 
the governing or ratemaking body of an electric cooperative.
    (6) Reduction to amounts chargeable to capital account. In the case 
of costs paid or incurred for qualified interconnection property as 
defined in paragraph (a)(2) of this section, amounts otherwise 
chargeable to capital account with respect to such costs must be 
reduced under rules of section 50(c) (including section 50(c)(3)).
    (7) Examples. This paragraph (a)(7) provides examples illustrating 
the application of the general rules provided in paragraph (a)(1) of 
this section and Five-Megawatt Limitation provided in this paragraph 
(a).
    (i) Example 1. Application of Five-Megawatt Limitation to an 
interconnection agreement for qualified facilities owned by taxpayer. X 
places in service two solar qualified facilities (48E Facilities) each 
with a maximum net output of 5 MW (as measured in

[[Page 4120]]

alternating current by using the nameplate capacity of an inverter, 
which is the first component of property attached to each of the 48E 
Facilities that inverts the direct current electricity into alternating 
current). The two 48E Facilities each have their own inverter, which is 
integral property to each facility, and share a step-up transformer, 
which is integral property to both facilities. As part of the 
development of the 48E Facilities, interconnection costs are required 
by the utility to modify and upgrade the transmission system at or 
beyond the common intertie to the utility's transmission system to 
accommodate the interconnection. X has an interconnection agreement 
with the utility that allows for a maximum output of 10 MW (as measured 
in alternating current). The interconnection agreement provides the 
total cost to X of the qualified interconnection property. X may 
include the costs paid or incurred by X, respectively, for qualified 
interconnection property subject to the terms of the interconnection 
agreement, to calculate X's section 48E credit for each of the 48E 
Facilities because each qualified facility has a maximum net output of 
not greater than 5 MW (alternating current).
    (ii) Example 2. Application of Five-Megawatt Limitation to an 
interconnection agreement for qualified facilities owned by separate 
taxpayers. X places in service a solar farm that is a qualified 
facility (as defined in Sec.  1.48E-2(a)) (Solar Qualified Facility) 
with a maximum net output of 5 MW (as measured in alternating current 
by using the nameplate capacity of the first component of property 
attached to the Solar Qualified Facility that inverts the direct 
current electricity into alternating current). The Solar Qualified 
Facility includes an inverter, which is integral property. Y places in 
service a wind facility (as defined in Sec.  1.48E-2(a)) (Wind 
Qualified Facility), with a maximum net output of 5 MW (as measured in 
alternating current by using the nameplate capacity of the first 
component of property attached to the Wind Qualified Facility that 
inverts the direct current electricity into alternating current). The 
Solar Qualified Facility and the Wind Qualified Facility share a step-
up transformer, which is integral to both facilities. As part of the 
development of the Solar Qualified Facility and Wind Qualified 
Facility, interconnection costs are required by the utility to modify 
and upgrade the transmission system at or beyond the common intertie to 
the utility's transmission system to accommodate the interconnection. X 
and Y are party to the same interconnection agreement with the utility 
that allows for a maximum output of 10 MW (as measured in alternating 
current). The interconnection agreement provides the total cost of the 
qualified interconnection property to X and Y. X and Y may include the 
costs paid or incurred by X and Y, respectively, for qualified 
interconnection property subject to the terms of the interconnection 
agreement, to calculate their respective section 48E credits for the 
Solar Qualified Facility and the Wind Qualified Facility because each 
has a maximum net output of not greater than 5 MW (alternating 
current).
    (iii) Example 3. Application of Five-Megawatt Limitation to an 
interconnection agreement for a single qualified facility. X develops 
three solar farms (Solar Qualified Facilities) located in close 
proximity. Each of the Solar Qualified Facilities is a unit of 
qualified facility that has a maximum net output of 4 MW. The nameplate 
capacity of each Solar Qualified Facility is determined by using the 
sum of the nameplate generating capacities within the unit of each 
Solar Qualified Facility in direct current, which is deemed the 
nameplate generating capacity of each Solar Qualified Facility in 
alternating current. Electricity from the three Solar Qualified 
Facilities feeds into a single gen-tie line and a common point of 
interconnection with the transmission system. X is party to a separate 
interconnection agreement with the utility for each of the Solar 
Qualified Facilities and each interconnection agreement allows for a 
maximum output of 10 MW (as measured in alternating current). X may 
include the costs it paid or incurred for qualified interconnection 
property for each of the Solar Qualified Facilities to calculate its 
section 48E credit for each of the Solar Qualified Facilities, subject 
to the terms of each interconnection agreement, because each of the 
Solar Qualified Facilities has a maximum net output of not greater than 
5 MW (in alternating current). X cannot include more than the total 
costs X paid or incurred for the qualified interconnection property in 
calculating the aggregate section 48E credit amount for the Solar 
Qualified Facilities.
    (iv) Example 4. Utility payment reducing costs borne by taxpayer. 
In year 1, X places in service a solar facility (Solar Qualified 
Facility) with a maximum net output of 3 MW (as measured in alternating 
current) by using the nameplate capacity of the inverter attached to 
the solar facility, which is the first component of the qualified 
facility that inverts the direct current electricity into alternating 
current. X is party to an interconnection agreement with a utility for 
the purpose of connecting the Solar Qualified Facility to the 
transmission or distribution system of the utility. Pursuant to the 
interconnection agreement, X pays $1 million to the utility, and the 
utility places in service qualified interconnection property. In year 
1, X had no reasonable expectation of any payment from the utility or 
other parties with respect to the qualified interconnection property. 
The $1 million is properly chargeable to the capital account of X, 
subject to paragraph (a)(6) of this section. X properly includes the $1 
million paid to the utility in determining its credit under section 48E 
for Year 1. In Year 4, taxpayer Y enters into an agreement with the 
utility under which Y pays the utility $100,000 for the use of 
qualified interconnection property placed in service by the utility 
pursuant to the interconnection agreement between X and the utility. 
The utility pays $100,000 to X. Under these circumstances, the payment 
from the utility in year 4 would not require X to reduce the amount 
treated as paid or incurred for the qualified interconnection property 
for the purpose of determining the section 48E credit in year 1; 
instead X would treat the payment as income.
    (v) Example 5. Non-utility payment reducing costs borne by 
taxpayer. The facts in year 1 are the same as in paragraph (a)(7)(iii) 
of this section (Example 3). In Year 4, taxpayer Y enters into an 
agreement with the utility under which Y pays X $100,000 for the use of 
qualified interconnection property placed in service by the utility 
pursuant to the interconnection agreement between X and the utility. Y 
pays $100,000 to X. In year 1, X had no reasonable expectation of any 
payment from Y for subsequent agreements with Y or other parties with 
respect to the qualified interconnection property. Under these 
circumstances, the payment from Y in year 4 would not require X to 
reduce the amount treated as paid or incurred for the qualified 
interconnection property for the purpose of determining the section 48E 
credit in year 1; instead X would treat the payment as income.
    (b) Expansion of facility; Incremental production (Incremental 
Production Rule)--(1) In general. Solely for purposes of this paragraph 
(b), 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 48E(b)(3)(A) (without 
regard to

[[Page 4121]]

section 48E(b)(3)(A)(ii)), 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. This paragraph (b) is only applicable to an addition of 
capacity or new unit that would not otherwise qualify as a separate 
qualified facility as defined in section 48E(b)(3). A new unit or an 
addition of capacity that meets the requirements of this paragraph (b) 
will be treated as a separate qualified facility. For purposes of this 
paragraph (b), a new unit or an addition of capacity requires the 
addition or replacement of qualified property (as defined in Sec.  
1.48E-2(e)), including any new or replacement integral property, added 
to a facility necessary to increase capacity. For purposes of assessing 
the One Megawatt Exception provided in section 48E(a)(2)(A)(ii)(I), the 
maximum net output for a new unit or an addition of capacity is the sum 
of the capacity of the added qualified facility and the capacity of the 
facility to which the qualified facility was added, as determined under 
Sec.  1.48E-3(c) and paragraph (b)(2) of this section.
    (2) Measurement standard. For purposes of this paragraph (b), 
taxpayers must use one of the measurement standards described in 
paragraph (b)(2)(i), (ii), or (iii) of this section to measure the 
capacity and change in capacity of a facility, except a taxpayer cannot 
use the measurement standard described in paragraph (b)(2)(ii) of this 
section if the taxpayer is able to use the measurement standard 
described in paragraph (b)(2)(i) of this section:
    (i) Modified or amended facility operating licenses from the 
Federal Energy Regulatory Commission (FERC) or the Nuclear Regulatory 
Commission (NRC), or related reports prepared by FERC or NRC as part of 
the licensing process;
    (ii) Nameplate capacity certified consistent with generally 
accepted industry standards, such as the International Standard 
Organization (ISO) conditions to measure the nameplate capacity of the 
facility consistent with the definition of nameplate capacity provided 
in 40 CFR 96.202; or
    (iii) A measurement standard prescribed by the Secretary in 
guidance published in the Internal Revenue Bulletin (see Sec.  601.601 
of this chapter).
    (3) Special rule for restarted facilities. Solely for purposes of 
this paragraph (b), a facility that is decommissioned or in the process 
of decommissioning and restarts can be considered to have increased 
capacity from a base of zero if the conditions described in each of 
paragraphs (b)(3)(i) through (iv) of this section are met:
    (i) The existing facility must have ceased operations;
    (ii) The existing facility must have a shutdown period of at least 
one calendar year during which it was not authorized to operate by its 
respective Federal regulatory authority (that is, FERC or NRC);
    (iii) The restarted facility must be eligible to restart based on 
an operating license issued by either FERC or NRC; and
    (iv) The existing facility may not have ceased operations for the 
purpose of qualifying for the special rule for restarted facilities.
    (4) Computation of qualified investment for a new unit or an 
addition of capacity. For purposes of this paragraph (b), a new unit or 
an addition of capacity requires the addition or replacement of 
components of qualified property, including any new or replacement 
integral property, added to a facility necessary to increase capacity. 
The taxpayer's qualified investment during the taxable year that 
resulted in an increased capacity of a facility by reason of a new unit 
or addition of capacity is its total qualified investment associated 
with the components of property that result in the new unit or addition 
of capacity.
    (5) Examples. This paragraph (b)(5) provides examples illustrating 
the rules of this paragraph (b).
    (i) Example 1. New Unit. X owns a hydropower facility (Facility H) 
that was originally placed in service in 2020, with a FERC license 
authorizing an installed capacity of 60 megawatts. During taxable years 
2020 through 2024, X claimed a section 45 credit for the electricity 
produced by Facility H. On July 1, 2025, as allowed by a FERC license 
amendment, X places in service components of property comprising a new 
unit that results in Facility H having an increased authorized 
installed capacity of 90 megawatts in 2025. These components of 
property meet the requirements of qualified property (as defined in 
Sec.  1.48E-2(e)). For purposes of this paragraph (b), this new unit 
will be treated as a separate facility (Facility J). X determines the 
amount of its section 48E credit based on the amount of its qualified 
investment in Facility J. Even though X claimed a section 45 credit for 
electricity produced by Facility H in taxable years 2020 through 2024, 
X can claim a section 48E credit for its qualified investment in 
Facility J. X may also continue to claim the section 45 credit through 
taxable year 2030 for electricity generated by Facility H (excluding 
the incremental electricity generation related to Facility J).
    (ii) Example 2. Addition of Capacity. Y owns a nuclear facility 
(Facility N) that was originally placed in service on January 1, 2000. 
Y claimed a section 45U credit in taxable years 2024 and 2025 for the 
electricity generated by Facility N. On January 15, 2026, Y completed 
and placed in service an investment associated with a power uprate 
approved by an NRC license amendment that involved the removal and 
replacement of components of property and placing in service additional 
components of property. Both of these replacement and additional 
components of property meet the requirements of qualified property (as 
defined in Sec.  1.48E-2(c)). NRC reports associated with the license 
amendment describe the uprate as increasing the nuclear facility's 
electrical capacity by 100 MW to 900 MW. For purposes of this paragraph 
(b), Facility N's addition of capacity equal to 100 MW is treated as a 
new separate qualified facility placed in service on January 15, 2026 
(Facility P). Y determines the amount of its section 48E credit based 
on the entire amount of its qualified investment on January 15, 2026. 
Even though Y claimed a section 45U credit in taxable years 2024 and 
2025 for the existing capacity of Facility N, Y can claim a section 48E 
credit for its investment in components of property needed to support 
the increase in capacity. Y may also continue to claim the section 45U 
credit for electricity generated by Facility N (excluding the 
incremental electricity generation related to Facility P).
    (iii) Example 3. Geothermal Turbine and Generator Additions of 
Capacity. X owns a geothermal power plant (Facility G) with a 24 MW 
nameplate capacity, which is placed in service in 2007. Over the 
subsequent years, the plant's generating capability declines because of 
physical degradation of the turbine and generator. On March 1, 2027, X 
places in service components of property at Facility G that increase 
its capacity. The turbine rotor is removed, and the eroded blades are 
replaced with new blades, with associated capital expenditures. The 
generator is refurbished by removing old subcomponents of the generator 
and replacing those with new subcomponents, as well as replacing the 
old copper windings with new windings in concert with new insulation. 
These components of property meet the requirements of qualified 
property (as defined in Sec.  1.48E-2(c)). After the upgrade, the plant 
increases its nameplate capacity to 26 MW, an

[[Page 4122]]

increase of 2 MW over the previous nameplate capacity. For purposes of 
this paragraph (b), the addition of capacity to Facility G is treated 
as a new separate qualified facility placed in service on March 1, 2027 
(Facility N). X determines the amount of its section 48E credit based 
on the amount of its qualified investment in qualified property needed 
to increase the capacity of the facility.
    (iv) Example 4. Hydropower Addition of Capacity. X owns a 
hydropower plant (Facility H) placed in service in 1960. Facility H has 
become less efficient since it was placed in service with attendant 
reductions in its generating capacity. As approved by a FERC license 
amendment, X increases Facility H's capacity by installing new 
headcovers, new turbines with integrated dissolved oxygen injection, 
and a new high pressure digital governor system. All of the existing 
turbine systems are replaced with new turbine and governor systems. The 
new turbines are more efficient, and are capable of more power output, 
than the original design installed in 1960. Improvements to the 
generators involve removing the old asphalt coated copper windings and 
purchasing and then installing new epoxy coated double wound windings. 
X adds digital controls to effectively utilize new digital governors. 
These components of property meet the requirements of qualified 
property (as defined in Sec.  1.48E-2(c)). X simultaneously invests in 
cybersecurity protection. As set forth in the FERC order amending its 
license, these investments, which are placed in service on April 15, 
2026, increase Facility H's authorized installed nameplate capacity 
from 180 MW to 190 MW, an increase of 10 MW over the previous nameplate 
capacity. For purposes of this paragraph (b), Facility H's addition of 
capacity is treated as a new separate qualified facility placed in 
service on April 16, 2026 (Facility A). X determines the amount of its 
section 48E credit based on the amount of its qualified investment in 
qualified property needed in Facility A to result in the final 190 MW 
capacity, which would not include any investments in intangible 
property, such as those that might be associated with cybersecurity 
protection.
    (v) Example 5. Nonoperational Nuclear Facility that Satisfies 
Restart Rule. T owns a nuclear facility (Facility N) that was 
originally placed in service in 1982. In 2020, Facility N ceased 
operations, began decommissioning, and the NRC no longer authorized the 
operation of Facility N. T did not cease operations at Facility N for 
the purpose of qualifying for the special rule for restarted facilities 
under section 48E. In 2028, the NRC authorized Facility N to restart, 
and, on October 1, 2028, Facility N placed in service qualified 
property that enabled Facility N to restart and resume operations, with 
an electrical capacity of 800 MW, as indicated in NRC documents related 
to the authorization to restart. For purposes of this paragraph (b), 
the restart of Facility N is considered to have increased capacity from 
a base of zero, and Facility N is treated as having an addition of 
capacity equal to 800 MW. For purposes of this paragraph (b), Facility 
N's 800 MW addition of capacity is treated as a new qualified facility 
placed in service on October 1, 2028 (Facility P). T determines the 
amount of its section 48E credit based on the amount of its qualified 
investment in qualified property needed to restart the facility.
    (c) Retrofit of an existing facility (80/20 Rule)--(1) In general. 
For purposes of section 48E(b)(3)(A)(ii), a retrofitted qualified 
facility or an energy storage technology (EST) may qualify as 
originally placed in service even if it contains some used components 
of property within the unit of qualified facility or unit of EST, 
provided that the fair market value of the used components of the unit 
of qualified facility or unit of EST is not more than 20 percent of the 
total value of the unit of qualified facility or unit of EST (that is, 
the cost of the new components of property plus the value of the used 
components of property within the unit of qualified facility or unit of 
EST) (80/20 Rule). A qualified facility or EST that meets the 80/20 
Rule may claim the section 48E credit without regard to any addition of 
capacity to the qualified facility or EST.
    (2) Expenditures taken into account. Notwithstanding the rule 
provided in paragraph (c)(1) of this section, only the cost of new 
components of the unit of qualified facility or unit of EST are taken 
into account for purposes of computing the credit determined under 
section 48E with respect to the qualified facility or EST.
    (3) Cost of new components. For purposes of this 80/20 Rule, the 
cost of new components of the unit of qualified facility or unit of EST 
includes all costs properly included in the depreciable basis of the 
new components of the unit of qualified facility.
    (4) New costs. If the taxpayer satisfies the 80/20 Rule with regard 
to the unit of qualified facility or unit of EST and the taxpayer pays 
or incurs new costs for property that is an integral part of the 
qualified facility (as defined in Sec.  1.48E-2(a)) or the EST (as 
defined in Sec.  1.48E-2(g)), the taxpayer may include these new costs 
paid or incurred for property that is an integral part of the qualified 
facility or EST in the basis of the qualified facility or EST for 
purposes of the section 48E credit.
    (5) Excluded costs. Costs incurred for new components of property 
added to used components of a unit of qualified facility or unit of EST 
may not be taken into account for purposes of the section 48E credit 
unless the taxpayer satisfies the 80/20 Rule by placing in service a 
unit of qualified facility or unit of EST for which the fair market 
value of the used components of property is not more than 20 percent of 
the total value of the unit of qualified facility or unit of EST taking 
into account the cost of the new components of property plus the value 
of the used components of property.
    (6) Examples. This paragraph (c)(6) provides examples illustrating 
the rules of this paragraph (c).
    (i) Example 1. Retrofitted facility that satisfies the 80/20 Rule. 
A owns an existing wind facility. On February 1, 2026, A replaces used 
components of unit of qualified facility of the wind facility with new 
components at a cost of $2 million. The fair market value of the 
remaining original components of the unit of qualified facility is 
$400,000, which is not more than 20 percent of the retrofitted unit of 
qualified facility's total fair market value of $2.4 million (the cost 
of the new components ($2 million) + the fair market value of the 
remaining original components of the unit of qualified facility 
($400,000)). Thus, the retrofitted wind facility will be considered 
newly placed in service for purposes of section 48E, assuming all the 
other requirements of section 48E are met, and A will be able to claim 
a section 48E credit based on its investment in 2026 ($2 million).
    (ii) Example 2. Retrofit of an existing facility that meets the 80/
20 Rule. Facility Z, a facility that was originally placed in service 
on January 1, 2026, was not a qualified facility (as defined in Sec.  
1.48E-2(a)) when it was placed in service because it did not meet the 
greenhouse gas emissions rate requirements (as determined under rules 
provided in Sec.  1.48E-5). On January 1, 2027, Facility Z was 
retrofitted and now meets the requirements to be a qualified facility 
(as defined in Sec.  1.48E-2(a)). After the retrofit, the cost of the 
new property included in the unit of qualified facility of Facility Z 
is greater than 80 percent of unit of qualified facility's total fair 
market value. Because Facility Z meets the 80/20 Rule, Facility Z is 
deemed to be originally placed in

[[Page 4123]]

service on January 1, 2027. Assuming all the other requirements of 
section 48E are met, Z may claim a section 48E credit based on its 
investment in the new components used to retrofit the existing facility 
in 2027.
    (iii) Example 3. Retrofitted nuclear facility that satisfied the 
80/20 Rule. T owns a nuclear facility (Facility N) that was originally 
placed in service on March 1, 1982. T replaces used components of 
property of the unit of qualified facility of Facility N with new 
components at a cost of $200 million, and then places in Facility N in 
service on July 15, 2026. The fair market value of the remaining 
original components of the unit of qualified facility, prior to the 
retrofit, is $30 million, which is not more than 20 percent of the unit 
of qualified facility's total fair market value of $230 million (the 
cost of the new components ($200 million) + the fair market value of 
the remaining original components of the unit of qualified facility 
($30 million)) ($30 million/$230 million = 13%). Thus, assuming all the 
other requirements of section 48E are met, Facility N will be 
considered newly placed in service on July 15, 2026, for purposes of 
section 48E, and T will be able to claim a section 48E credit based on 
its investment in the new components ($200 million).
    (iv) Example 4. Capital improvements to an existing qualified 
facility that do not satisfy the 80/20 Rule. X owns an existing 
facility, Facility C, that was originally placed in service on January 
1, 2023. X makes capital improvements to Facility C that are placed in 
service on June 6, 2026. The cost of the capital improvements to the 
unit of qualified facility of Facility C total $500,000 and the fair 
market value of the unit of qualified facility after the improvements 
is $2 million. The fair market value of the old components of the unit 
of qualified facility is $1,500,000 or 75 percent of the total fair 
market value of the Facility C after the improvements. Because the fair 
market value of the new property included in the unit of qualified 
facility is less than 80 percent of the unit of qualified facility's 
total fair market value, Facility C does not meet the 80/20 Rule.
    (v) Example 5. Upgrades to a hydropower qualified facility that 
satisfies the 80/20 Rule: Y owns a hydropower qualified facility 
(hydropower facility) and no taxpayer, including Y, has ever claimed a 
section 45 credit for the hydropower facility. The hydropower facility 
consists of a unit of qualified facility including water intake, water 
isolation mechanisms, turbine, pump, motor, and generator. The 
associated impoundment (dam) and power conditioning equipment are 
integral parts of the unit of qualified facility. Y makes upgrades to 
the unit of qualified facility by replacing the turbine, pump, motor, 
and generator with new components at a cost of $1.5 million. Y does not 
make any upgrades to the property that is an integral part of the unit 
of qualified facility. The remaining original components of the unit of 
qualified facility have a fair market value of $100,000, which is not 
more than 20 percent of the retrofitted hydropower facility's total 
value of $1.6 million (that is, the cost of the new components ($1.5 
million) + the value of the remaining original components ($100,000)). 
Thus, the retrofitted hydropower facility will be considered newly 
placed in service for purposes of section 48E, and Y will be able to 
claim a section 48E credit based on the cost of the new components 
($1.5 million).
    (d) Special rules regarding ownership--(1) Qualified investment 
with respect to a qualified facility or EST. For purposes of this 
paragraph (d), a taxpayer that owns a qualified investment with respect 
to a qualified facility or EST is eligible for the section 48E credit 
only to the extent of the taxpayer's basis in the qualified facility or 
EST. In the case of multiple taxpayers holding direct ownership through 
their qualified investments in a single qualified facility or EST (and 
such arrangement is not treated as a partnership for Federal income tax 
purposes), each taxpayer determines its basis based on its fractional 
ownership interest in the qualified facility or EST.
    (2) Multiple owners. A taxpayer must directly own at least a 
fractional interest in the entire unit of qualified facility (as 
defined in Sec.  1.48E-2(b)(2)) or unit of EST (as defined in Sec.  
1.48E-2(g)(2)) for a section 48E credit to be determined with respect 
to such taxpayer's interest. No section 48E credit may be determined 
with respect to a taxpayer's ownership of one or more separate 
components of a qualified facility or an EST if the components do not 
constitute a unit of qualified facility (as defined in Sec.  1.48E-
2(b)(2)) or unit of EST (as defined in Sec.  1.48E-2(g)(2)). However, 
the use of property owned by one taxpayer that is an integral part of a 
qualified facility or EST owned by another taxpayer will not prevent a 
section 48E credit from being determined with respect to the second 
taxpayer's qualified investment in a qualified facility or EST (though 
neither taxpayer would be eligible for a section 48E credit with 
respect to the first taxpayer's property). See Sec.  1.48E-2(b)(3)(vi) 
for rules regarding shared integral property.
    (3) Section 761(a) election. If a qualified facility or EST 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 or EST will be treated as a 
separate qualified facility or EST owned by such member.
    (4) Examples. The following examples illustrate the rules in this 
paragraph (d). In each example, X and Y are unrelated taxpayers.
    (i) Example 1. Fractional ownership required to satisfy section 
48E. X and Y each own a direct fractional ownership interest in an 
entire qualified facility (as defined in Sec.  1.48E-2(b)) and as a 
result, a section 48E credit may be determined with respect to X's and 
Y's qualified investment in their fractional ownership interests in the 
qualified facility.
    (ii) Example 2. Ownership of separate components of property that 
are part of a qualified facility. X and Y each own separate components 
of a qualified facility, which taken together would constitute a unit 
of qualified facility but taken separately would not constitute a unit 
of qualified facility. X owns component A and Y owns component B. No 
section 48E credit may be determined with respect to either component A 
or component B because X and Y each owns a separate component of a 
qualified facility that does not constitute a unit of qualified 
facility (as defined in Sec.  1.48E-2(b)(2)).
    (iii) Example 3. Separate ownership of property that is an integral 
part of separate qualified facilities. X owns a solar farm that is a 
qualified facility (as defined in Sec.  1.48E-2(b)) (Solar Qualified 
Facility), which includes property that is an integral part of the 
Solar Qualified Facility, specifically a transformer in which the 
electricity is stepped up to electrical grid voltage before being 
transmitted to the electrical grid through an intertie. Y owns a wind 
facility that is a qualified facility (as defined in Sec.  1.48E-2(b)) 
(Wind Qualified Facility) that connects to X's transformer. X and Y are 
not related persons within the meaning of paragraph (d)(4)(i) of this 
section. Because Y does not hold an ownership interest in the 
transformer, Y may compute its section 48E credit for the Wind 
Qualified Facility, but it may not include any costs relating to the 
transformer in its section 48E credit base.
    (iv) Example 4. Related taxpayers and property that is an integral 
part. X owns a wind facility that is a unit of qualified facility and a 
solar facility that is a unit of qualified facility. Both the wind 
facility and the solar facility are connected to a transformer where 
the

[[Page 4124]]

electricity is stepped up to electrical grid voltage before being 
transmitted to the electrical grid through an intertie. The transformer 
is an integral part of both the wind facility and the solar facility 
(within the meaning of Sec.  1.48E-2(d)(3)(i)) and is owned by Y. X and 
Y are related persons within the meaning of paragraph (d)(4)(i) of this 
section. X and Y are treated as one taxpayer under paragraph (d)(4)(ii) 
of this section. X may include the basis of the transformer in 
computing its section 48E credit with respect to the wind facility and 
the solar facility (but may not include more than 100% of that basis in 
the aggregate).
    (e) Coordination rule for section 42 credits and section 48E 
credits. As provided under section 50(c)(3)(C) of the Code, in 
determining eligible basis for purposes of calculating a credit under 
section 42 of the Code (section 42 credit), a taxpayer is not required 
to reduce its basis in a qualified facility or EST by the amount of the 
section 48E credit determined with respect to the taxpayer's qualified 
investment with respect to such qualified facility or EST. The 
qualified investment with respect to a qualified facility or EST 
property may be used to determine a section 48E credit and may also be 
included in eligible basis to determine a section 42 credit. See 
paragraph (d) of this section for special rules regarding ownership.
    (f) Recapture--(1) In general. The credit calculated under section 
48E(a) and Sec.  1.48E-1(b) is subject to general recapture rules under 
section 50(a). Additionally, section 48E(g) provides for recapture for 
any qualified facility for which a taxpayer claimed a section 48E 
credit that has a greenhouse gas emissions rate (as determined under 
rules provided in Sec.  1.45Y-5) of greater than 10 grams of 
CO2e per kWh during the five-year period beginning on the 
date such qualified facility is originally placed in service (five-year 
recapture period).
    (2) Recapture event--(i) In general. Any event that results in a 
qualified facility having a greenhouse gas emissions rate (as 
determined under rules provided in Sec.  1.45Y-5) of greater than 10 
grams of CO2e per kWh during the five-year period is a 
recapture event. If a qualified facility's greenhouse gas emissions 
rate exceeds 10 grams of CO2e per kWh, the section 48E 
credit is subject to recapture.
    (ii) Changes to the Annual Table. A change to the greenhouse gas 
emissions rate for a type or category of facility that is published in 
the Annual Table (as defined in Sec.  1.48E-5(f)) after a facility is 
placed in service does not result in a recapture event.
    (iii) Yearly determination--(A) In general. A determination of 
whether a recapture event occurred under this paragraph (f)(2) must be 
made for each taxable year (or portion thereof) occurring within the 
five-year recapture period, beginning with the taxable year ending 
after the date the qualified facility is placed in service. Thus, for 
each taxable year that begins or ends within the five-year recapture 
period, the taxpayer must determine, for any qualified facility for 
which it has claimed the section 48E credit, whether such facility has 
maintained a greenhouse gas emissions rate of not greater than 10 grams 
of CO2e per kWh.
    (B) Annual reporting requirement. A taxpayer that has claimed the 
section 48E credit amount under Sec.  1.48E-1(b), including a taxpayer 
that has transferred a specified credit portion under section 6418 of 
the Code, is required to provide to the IRS information on the 
greenhouse gas emissions rate of the qualified facility during the 
recapture period at the time and in the form and manner prescribed in 
IRS forms or instructions or in publications or guidance published in 
the Internal Revenue Bulletin. See Sec.  601.601 of this chapter.
    (iv) Carryback and carryforward adjustments. In the case of any 
recapture event described in this paragraph (f)(2), the carrybacks and 
carryforwards under section 39 of the Code must be adjusted by reason 
of such recapture event.
    (3) Recapture amount--(i) In general. If a recapture event occurred 
as described in paragraph (f)(2) of this section, the tax under chapter 
1 of the Code for the taxable year in which the recapture event occurs 
is increased by an amount equal to the applicable recapture percentage 
multiplied by the credit amount that was claimed by the taxpayer under 
Sec.  1.48E-1(b).
    (ii) Applicable recapture percentage. If the recapture event 
occurs:
    (A) Within one full year after the property is placed in service, 
the recapture percentage is 100;
    (B) Within one full year after the close of the period described in 
paragraph (f)(3)(ii)(A) of this section, the recapture percentage is 
80;
    (C) Within one full year after the close of the period described in 
paragraph (f)(3)(ii)(B) of this section, the recapture percentage is 
60;
    (D) Within one full year after the close of the period described in 
paragraph (f)(3)(ii)(C) of this section, the recapture percentage is 
40; and
    (E) Within one full year after the close of the period described in 
paragraph (f)(3)(ii)(D) of this section, the recapture percentage is 
20.
    (4) Recapture period. The five-year recapture period begins on the 
date the qualified facility is placed in service and ends on the date 
that is five full years after the placed in service date. Each 365-day 
period (366-day period in case of a leap year) within the five-year 
recapture period is a separate recapture year for recapture purposes.
    (5) Increase in tax for recapture. The increase in tax under 
chapter 1 of the Code for the recapture of the credit amount claimed 
under section 48E(a) and Sec.  1.48E-1(b) occurs in the year of the 
recapture event.
    (g) Qualified progress expenditure election. A taxpayer may elect, 
as provided in Sec.  1.46-5, to increase the qualified investment with 
respect to any qualified facility or EST of an eligible taxpayer for 
the taxable year, by any qualified progress expenditures made after 
August 16, 2022.
    (h) Incremental cost--(1) In general. For purposes of section 48E, 
if a component of qualified property of a qualified facility or 
component of property of an EST is also used for a purpose other than 
the intended function of the qualified facility or EST, only the 
incremental cost of such component is included in the basis of the 
qualified facility or EST. The term incremental cost means the excess 
of the total cost of a component over the amount that would have been 
expended for the component if that component were used for a non-
qualifying purpose.
    (2) Example. A installs a solar qualified facility above the 
surface of an existing roof of a building that A owns. The solar 
qualified facility uses bifacial panels that convert to energy the 
light that strikes both the front and back of the panels. Therefore, 
along with installing the bifacial panels, A is reroofing their 
building with a reflective roof that has a highly reflective surface. 
Because the reflective roof enables the panels' generation of 
significant amounts of electricity from reflected sunlight, when 
installed in connection with the solar qualified facility, it 
constitutes part of that solar qualified facility to the extent that 
the cost of the reflective roof exceeds the cost of reroofing A's 
building with a non-reflective roof. The cost of reroofing with the 
reflective roof is $15,000 whereas the cost of a reroofing with a 
standard roof for the building would be $10,000. The incremental cost 
of the reflective roof is $5,000, and that amount is included in A's 
basis in the solar qualified facility for purposes of the section 48E 
credit.

[[Page 4125]]

    (i) Cross references. (1) To determine applicable recapture rules, 
see section 50(a) of the Code.
    (2) For rules regarding the credit eligibility of property used 
outside the United States, see section 50(b)(1) of the Code.
    (3) For rules regarding the credit eligibility of property used by 
certain tax-exempt organizations, see section 50(b)(3) of the Code. See 
section 6417(d)(2) of the Code for an exception to the rule in section 
50(b)(3) in the case of an applicable entity making an elective payment 
election.
    (4) For application of the normalization rules to the section 48E 
credit in the case of certain regulated companies, including rules 
regarding the election not to apply the normalization rules to EST (as 
defined in section 48(c)(6) of the Code without regard to section 
48(c)(6)(D) of the Code), see section 50(d)(2) of the Code.
    (5) For rules relating to certain leased property, see section 
50(d)(5) of the Code.
    (j) Applicability date. This section applies to qualified 
facilities and ESTs placed in service after December 31, 2024, and 
during a taxable year ending on or after January 15, 2025.


Sec.  1.48E-5  Greenhouse gas emissions rates for qualified facilities 
under section 48E.

    (a) In general. Section 48E(b)(3)(B)(ii) provides that rules 
similar to the rules of section 45Y(b)(2) regarding greenhouse 
emissions rates apply for purposes of section 48E. Paragraphs (b) 
through (f) of this section thus provide that the definitions and rules 
regarding greenhouse gas emissions rate requirements (as determined 
under rules provided in Sec.  1.45Y-5) apply for purposes of section 
48E and this section. Paragraph (g) of this section provides rules 
related to provisional emissions rates for purposes of section 48E and 
this section. Paragraph (h) of this section provides rules for 
determining an anticipated greenhouse gas emissions rate. Paragraph (i) 
of this section provides rules regarding reliance on the annual 
publication of emissions rates and provisional emissions rates. 
Finally, paragraph (j) of this section provides rules regarding 
substantiation requirements.
    (b) Definitions. The definitions provided in Sec.  1.45Y-5(b) apply 
for purposes of section 48E and this section.
    (c) Non-C&G Facilities. The rules provided in Sec.  1.45Y-5(c) 
apply for purposes of determining greenhouse gas emissions rates for 
Non-C&G Facilities for purposes of section 48E and this section.
    (d) C&G Facilities. The rules provided in Sec.  1.45Y-5(d) apply 
for purposes of determining greenhouse gas emissions rates for C&G 
Facilities for purposes of section 48E and this section.
    (e) Use of methane from certain sources to produce electricity. The 
rules provided in Sec.  1.45Y-5(e) regarding the use of methane from 
certain sources to produce electricity apply for purposes of section 
48E and this section.
    (f) Carbon capture and sequestration. The rules provided in Sec.  
1.45Y-5(f) regarding carbon capture and sequestration apply for 
purposes of section 48E and this section.
    (g) Annual publication of emissions rates. The rules provided in 
Sec.  1.45Y-5(g) regarding the annual publication of a table (Annual 
Table) that sets forth the greenhouse gas emissions rates for types or 
categories of facilities apply for purposes of section 48E and this 
section.
    (h) Provisional emissions rates--(1) In general. In the case of any 
facility for which an 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 emissions rate with respect to 
such facility (Provisional Emissions Rate or PER). A PER must be 
determined and obtained under the rules of this section.
    (2) Rate not established. An emissions rate has not been 
established by the Secretary for a facility for purposes of sections 
45Y(b)(2)(C)(ii) and 48E(b)(3)(B)(ii) if such facility is not described 
in the Annual Table. If a taxpayer's request for an emissions value 
pursuant to paragraph (h)(5) of this section is pending at the time 
such facility is or becomes described in the Annual Table, the 
taxpayer's request for an emissions value will be automatically denied.
    (3) Process for filing a PER petition. 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 taxable year in which the taxpayer claims the 
section 48E credit with respect to the facility to which the PER 
petition relates. The PER petition must contain an emissions value and, 
if applicable, the associated letter from DOE. An emissions value may 
be obtained from DOE or by using the designated LCA model in accordance 
with paragraph (h)(6) of this section. 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 of the National 
Laboratories, in consultation with other Federal agency experts as 
appropriate, consistent with this section. A taxpayer must retain in 
its books and records the application and correspondence to and from 
DOE including a copy of the taxpayer's request to DOE for an emissions 
value and any information provided by the taxpayer to DOE pursuant to 
the emissions value request process provided in paragraph (h)(5) of 
this section. Alternatively, an emissions value can be determined by 
the taxpayer for a facility using the most the recent version of an LCA 
model, as of the time the PER petition is filed, that has been 
designated by the Secretary for such use under paragraph (h)(6) of this 
section. If an emissions value is determined using the designated LCA 
model under paragraph (h)(6) of this section, a taxpayer is required to 
provide to the IRS information to support its determination in the form 
and manner prescribed in IRS forms or instructions or in publications 
or guidance published in the Internal Revenue Bulletin. See Sec.  
601.601 of this chapter. A taxpayer may not request an emissions value 
from DOE for a facility for which an emissions value can be determined 
using the most recent version of an LCA model or models designated for 
such use under paragraph (h)(6) of this section.
    (4) PER determination. Upon the IRS's acceptance of the taxpayer's 
return to which a PER petition is attached, the emissions value of the 
facility specified on such petition is deemed accepted. A taxpayer can 
rely upon an emissions value provided by DOE for purposes of claiming a 
section 48E 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 LCA model 
designated under paragraph (h)(6) of this section, 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. However, 
the taxpayer must also comply with all applicable requirements for the 
section 48E credit and any information, representations, or other data 
supporting an emissions value are subject to later examination by the 
IRS.
    (5) Emissions value request process. An applicant that submits a 
request for an emissions value must follow the procedures specified by 
DOE to request and obtain such emissions value.

[[Page 4126]]

Emissions values will be determined consistent with the rules provided 
in this section. An applicant can 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. DOE may decline to 
review applications that are not responsive, including those 
applications that relate to a facility described in the Annual Table 
(consistent with paragraph (h)(2) of this section) or a facility for 
which an emissions value can be determined by an LCA model under 
paragraph (h)(6) of this section (consistent with paragraph (h)(3) of 
this section), or applications that are incomplete. Applicants must 
follow DOE's guidance and procedures for requesting and obtaining an 
emissions value from DOE. DOE will publish this guidance and 
procedures, including a process for, under limited circumstances, a 
revision to DOE's initial assessment of an emissions value on the basis 
of revised technical information or facility design and operation.
    (6) LCA model for determining an emissions value for C&G 
Facilities. The rules provided in Sec.  1.45Y-5(h)(6) regarding the 
designation of an LCA model or models for determining an emissions 
value for C&G Facilities apply for purposes of section 48E and this 
section.
    (7) Effect of PER. A taxpayer who files for a PER must use a PER 
determined by the Secretary to determine eligibility for the section 
48E credit, provided all other requirements of section 48E are met. 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 48E credit is claimed. Further, a PER 
determination does not signify that the IRS has determined that the 
requirements of section 48E have been satisfied for any taxable year.
    (i) Determining anticipated greenhouse gas emissions rate--(1) In 
general. A facility's anticipated greenhouse gas emissions rate must be 
objectively determined based on an examination of all the facts and 
circumstances. Certain Non-C&G Facilities, such as the facilities 
described in Sec.  1.45Y-5(c)(2), may have an anticipated greenhouse 
gas emissions rate that is not greater than zero based on the 
technology and practices they rely upon to generate electricity. For 
facilities that require the use of certain fuel sources, which may 
vary, or carbon capture and sequestration, to generate electricity with 
a greenhouse gas emissions rate that is not greater than zero, 
objective indicia that such facilities will use such fuel sources or 
operate such carbon capture equipment, as applicable, in a manner that 
results in a greenhouse gas emissions rate that is not greater than 
zero for at least 10 years beginning from the date the facility is 
placed in service are required to establish a reasonable expectation 
that the combination of fuel, type of facility, and practice will 
result in a greenhouse gas emissions rate that is not greater than 
zero. Taxpayers must attest under penalty of perjury that the 
anticipated greenhouse gas emissions rate as determined under the 
statute and these final regulations is not greater than zero. A 
facility subject to legally binding Federal or State permit conditions 
requiring that the facility operate in a manner that would be 
incompatible with a greenhouse gas emissions rate of not greater than 
zero is not a facility for which the anticipated greenhouse gas 
emissions rate is not greater than zero.
    (2) Examples of objective indicia. Examples of objective indicia 
that may establish an anticipated greenhouse gas emissions rate that is 
not greater than zero for specific elements of the type of facility, 
fuel source, or practice include, but are not limited to:
    (i) Co-location of the facility with a fuel source (for example, an 
anaerobic digester) for which the combination of fuel, type of 
facility, and practice is reasonably expected to result in a greenhouse 
gas emissions rate that is not greater than zero;
    (ii) A 10-year binding written contract to purchase fuels for which 
the combination of fuel, type of facility, and practice is reasonably 
expected to result in a greenhouse gas emissions rate that is not 
greater than zero;
    (iii) A facility type that only accommodates one type of fuel or a 
small range of fuels for which the combination of fuel, type of 
facility, and practice is reasonably expected to result in a greenhouse 
gas emissions rate that is not greater than zero;
    (iv) A 10-year binding written contract for the permanent 
geological storage (including after injection into an enhanced oil and 
gas recovery (EOR) project) or utilization of qualified carbon dioxide 
from the facility for which the combination of fuel, type of facility, 
and capture and practice is reasonably expected to result in a 
greenhouse gas emissions rate that is not greater than zero; or
    (v) A legally binding Federal or State air permit which requires, 
as a condition of the permit, that the facility operates in a manner 
for which the combination of fuel, type of facility, and practice is 
reasonably expected to result in a greenhouse gas emissions rate that 
is not greater than zero and that any captured carbon dioxide is 
permanently geologically stored and subjects the holder to civil or 
criminal penalties in the event the relevant permit requirements are 
breached.
    (j) Reliance on Annual Table or provisional emissions rate. 
Taxpayers may rely on the Annual Table in effect as of the date a 
facility began construction or the provisional emissions rate 
determined by the Secretary for the taxpayer's facility under paragraph 
(h)(4) of this section to determine the facility's greenhouse gas 
emissions rate, 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.
    (k) Substantiation--(1) In general. A taxpayer must maintain in its 
books and records documentation regarding the design and operation of a 
facility that establishes that such facility had an anticipated 
greenhouse gas emissions rate that is not greater than zero in the year 
in which the section 48E credit is determined and operated with a 
greenhouse gas emissions rate that is not greater than 10 grams of 
CO2e per kWh during each year of the recapture period that 
applies for purposes of section 48E(g).
    (2) Sufficient substantiation. Documentation sufficient to 
substantiate that a facility had a greenhouse gas emissions rate, as 
determined under this section, not greater than 10 grams of 
CO2e per kWh during each year of the recapture period that 
applies for purposes of section 48E(g) includes documentation or a 
report prepared by an unrelated party that verifies the facility's 
actual emissions rate. A facility described in Sec.  1.45Y-5(c)(2) can 
maintain sufficient documentation to demonstrate a greenhouse gas 
emissions rate that is not greater than 10 grams of CO2e per 
kWh during each year of the recapture period that applies for purposes 
of section 48E(g) by showing that it is the type of facility described 
in Sec.  1.45Y-5(c)(2). The Secretary may determine that other types of 
facilities can sufficiently substantiate a greenhouse gas emissions 
rate, as determined under this section, that is

[[Page 4127]]

not greater than 10 grams of CO2e per kWh during each year 
of the recapture period that applies for purposes of section 48E(g) 
with certain documentation and will describe such facilities and 
documentation in IRS forms or instructions or in publications or 
guidance published in the Internal Revenue Bulletin. See Sec.  601.601 
of this chapter. For such other types of facilities that utilize 
biomass feedstocks, the taxpayer must substantiate that the source of 
such fuels or feedstocks used are consistent with the taxpayer's 
claims. For all facilities that utilize unmarketable feedstocks that 
are indistinguishable from marketable feedstocks (for instance, after 
processing), the taxpayer will be required to maintain documentation 
substantiating the origin and original form of the feedstock.
    (l) Applicability date. This section applies to qualified 
facilities placed in service after December 31, 2024, and during a 
taxable year ending on or after January 15, 2025.

Douglas W. O'Donnell,
Deputy Commissioner.
    Approved: December 31, 2024.
Aviva R. Aron-Dine,
Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2025-00196 Filed 1-7-25; 4:15 pm]
BILLING CODE 4830-01-P`