A New Chapter for Clean Energy Credits: The Section 45Y and 48E Transition

A new statutory framework for clean energy tax credits

To make clean energy tax credits more technology-neutral, the Inflation Reduction Act (IRA) introduced a new statutory framework. The credits — designed to be more widely applicable among various clean electricity technologies — include tax incentives for wind, solar, hydropower, marine and hydrokinetic, geothermal, nuclear fission, fusion energy, and waste energy recovery properties. 

Specifically, the production tax credit (PTC) under Section 45 was replaced with Section 45Y, and the investment tax credit under Section 48 was replaced with Section 48E. The changes are effective January 1, 2025. 

The new Section 45Y and 48E qualification standards and their impacts

Qualification standards under Sections 45Y and 48E are different than those under historical Sections 45 and 48. Generally, the new framework only applies to electricity-producing technologies and systems, with the notable exception of energy storage technology which also qualifies for the Section 48E credit. Technologies such as microgrid controllers and electrochromic glass that qualified for the ITC under Section 48 will not qualify under Section 48E, since they do not actually generate electricity. 

The new requirements also impact biogas and renewable natural gas facilities, which often do not generate electricity but rather create biofuels, and do not qualify for Section 45Y or Section 48E credits. However, facilities generating biofuels may be eligible for the Section 45Z clean fuel production credit, also created by the IRA. 

The new framework only incentivizes projects achieving zero greenhouse gas (GHG) emissions, meaning technologies such as combined heat and power systems and certain types of biomass facilities — which could qualify under the old rules — will no longer qualify since they partly rely on combustion and thus create GHG emissions.

While the shift to the new credit regime is intended to simplify project qualification and provide certainty to taxpayers, like any major tax law change, the transition may involve some complexity and challenges as organizations seek to understand the new rules and apply them to their clean energy projects. In some cases, organizations may be encouraged to change their projects’ investment and technical focus to generate the valuable tax credits that have long been at the heart of the renewables sector.

Like any major tax law change, the transition may involve complexity and challenges as organizations seek to understand the new rules and apply them to their clean energy projects.  

Final Section 45Y and 48E regulations issued

In early January 2025, the U.S. Department of Treasury issued much-anticipated final regulations implementing Sections 45Y and 48E. The final rules largely adopt proposed regulations issued in May 2024, but contain some notable changes. 

The proposed regulations provided guidance for calculating and determining GHG emission rates, as well as petitioning for provisional emission rates (PER). The proposed rules categorized clean energy facilities into two groups: those using combustion and gasification (C&G) and those that don’t (non-C&G). Facilities in the first category are required to complete a lifecycle analysis of GHG emissions. The government received thousands of comments in response to the proposed guidance.

The final regulations expand on the credits’ workability, especially for C&G facilities, and maintain C&G facilities must demonstrate they are non-emitting. The final rules establish several processes whereby both C&G and non-C&G facilities can prove eligibility. 

Treasury will publish an annual table detailing which categories of facilities have GHG emissions rates not greater than zero. The first of such tables was issued on January 15, 2025 in Revenue Procedure 2025-14. There is also a process for taxpayers to obtain a PER from the U.S. Department of Energy for facilities not listed in the annual table. 

The finalized rules also retain the definitions of C&G facilities and non-C&G facilities and recognize the statute has different rules for determining GHG emissions rates for each type. In response to comments regarding these rules, the final regulations clarify emissions included in the determination of GHG emissions are those occurring from the processes transforming the input energy source into electricity. 

Following the energy industry’s push for greater inclusivity of other technologies, the final rules offer guidance to make clear how technologies can qualify in the future, along with how lifecycle analysis assessments can be performed.

Notable provisions in the final rules 

Beginning of construction rules 

The beginning of construction rule is relevant for a variety reasons, including evaluating whether the prevailing wage and apprenticeship rules apply to attain bonus credits and determining the timing of credit phaseouts after GHG targets are met. 

For projects claiming the new technology-neutral credits, Treasury maintains the longstanding safe-harbor rules for beginning construction and continuous construction. Per the finalized regulations, taxpayers should use the guidance provided in IRS Notice 2022-61 to determine the beginning of construction of a facility by applying the Physical Work Test or Five Percent Safe Harbor principles found in IRS Notice 2013-29. 

Under the Physical Work Test, construction begins when physical work of a significant nature begins, while under the Five Percent Safe Harbor, construction begins when 5% or more of the facility’s total cost has been paid or incurred. 

Taxpayers satisfying either of these tests will be deemed to have begun construction if they also meet continuity requirements (a facility must be placed in service no more than four calendar years after the calendar year in which construction began). This provides clarification for projects that didn’t start construction in 2024 and therefore are not eligible for a safe harbor under the legacy energy credits. 

Retrofitted property 

If a qualified facility is later retrofitted to meet the 80/20 rule, it will be deemed a new qualified facility and eligible for both credits under Sections 45Y or 48E, regardless of whether tax credits under predecessor provisions (e.g., Sections 45, 48) were previously taken on the property. Per the 80/20 rule, a qualified facility can be regarded as originally placed in service even if it includes some used property, provided the used property constitutes no more than 20% of the qualified facility’s total value.

The final regulations also added an anti-abuse rule to prevent facilities from qualifying for the special rule for restarted facilities by ceasing operation. Additionally, after pushback from the industry, Treasury removed an end-use requirement for hydrogen energy storage projects. The initial rules proposed hydrogen storage projects could qualify if the hydrogen was used only for electricity. The final rules remove this requirement, as storage companies may not know how customers use hydrogen.

Nameplate capacity

Both credits offer an alternate credit rate (base credit rate multiplied by a factor of five) for those qualified projects meeting prevailing wage and apprenticeship (PWA) requirements, a major theme under the IRA enacted to encourage high-paying jobs on energy projects. Exceptions to the PWA requirements exist if a qualified facility has a maximum net output of less than one megawatt. 

Treasury and the IRS explain in the final regulations that determining whether a qualified facility has a maximum net output of less than one megawatt is based on the nameplate capacity of such facility. They further provide rules on measuring nameplate capacity, in particular for those qualified facilities with operations integrated with other qualified facilities. 

Rules specific to Section 45Y 

For qualified projects meeting PWA requirements (or having an output less than one megawatt), Section 45Y provides taxpayers with a credit of 1.5 cents per kilowatt of electricity produced and sold or stored at facilities placed into service after 2024 with zero or negative GHG emissions. The final regulations maintained much of the proposed guidance related to this specific credit; however, they did update definitions for some terms specific to Section 45Y such as “metering device,” “related and unrelated persons,” “credit phaseout,” “qualified facility,” “combined heat and power property,” and “the 80/20 rule.”

Electricity generated at a qualified facility must be sold to an unrelated party, similar to the historical Section 45 PTC. However, the final regulations and statute allow the credit for electricity produced and either sold, consumed, or stored by the taxpayer if a metering device is owned and operated by an unrelated entity. Additionally, Treasury and the IRS decided not to adopt the rules from Section 45 and Notice 2008-60 that would have considered sales to related parties for resale to be sales to unrelated parties.

Rules specific to Section 48E

For qualified projects meeting PWA requirements (or having an output less than one megawatt), Section 48E provides a credit of 30% for clean electricity investments in the year the facility is placed in service. 

While the finalized regulations generally adhered to the PWA rules found in the applicable PWA regulations and in the historical statutes, Treasury and the IRS provided clarification that the PWA requirements must be satisfied on a facility-by-facility basis rather than a project-by-project basis as was the case under the previous ITC and PTC framework.  

The final rules under Section 48E also adopted a similar treatment for the inclusion of interconnection costs as the guidance finalized under the Section 48 ITC published in December 2024. As such, a qualified investment can include amounts for qualified interconnection property if the facility has a maximum net output not greater than five megawatts, as measured in alternating current. 

Additionally, the finalized rules define and treat “qualified facilities” and “energy storage technology” separately. Thus, solar and storage facilities cannot be combined to determine eligibility. Each facility must claim the credit separately, as applicable. Such a rule may affect the application of the PWA requirements, as well as eligibility for domestic content and energy community adders.

The final regulations also maintain the proposed ownership rules where a taxpayer is eligible for the Section 48E ITC only if it directly owns at least a fractional interest in the entire unit of a qualified facility or unit of an energy storage technology. Offshore wind projects are particularly impacted by this ownership rule.

With these specific regulations, Treasury believed immediate effectiveness was consistent with congressional intent. 

Accelerated effective date

Finalized Treasury regulations are normally scheduled to go into effect 30 days after their publication date. Released in early January of this year, the 30-day timeline for the finalized regulations under Sections 45Y and 48E would have extended into President Donald Trump’s administration. However, the regulations instead went into effect immediately after Treasury finalized the rule using the “good-cause exemption.” 

Typically, such an exemption is used when there is good cause to forgo the 30-day review period. With these specific regulations, Treasury believed immediate effectiveness was consistent with congressional intent. 

The Trump administration can still challenge the good-cause exemption, however. The final regulations are also subject to the Congressional Review Act and could be overturned by Congress. If such a challenge does take place, the preceding proposed rules would be expected to govern.

How CLA can help with your energy credit transition 

CLA’s renewable energy practice serves clients throughout the full lifecycle of their clean energy projects. From project cash flow modeling to tax credit monetization, our team helps investors, developers, and project owners enhance project returns and operational efficiencies. 

Contact your CLA professional to discuss what this latest development means for your organization. 

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