Summary:

The Clean Energy Production Tax Credit, IRS Section 45Y, is a renewable energy tax credit created to incentivize clean energy production [Production Tax Credit]. The new IRS Section 45Y tax credit will replace the old Production Tax Credit [IRS Section 45] beginning in 2025. IRS Section 45Y applies to electricity produced with the elimination of the “qualified resource” requirement of IRS Section 45. The removal of the qualified resource criteria makes the credit available to any new facility placed in production in 2025 or later regardless of the type of energy facility.

The incentives focus on assisting established clean energy sources, such as wind, solar, and hydroelectricity as well as offer new clean energy technology a mechanism to receive a tax credit for innovation in clean electricity production. The credit is only available for new facilities, defined as a “qualified facility” placed in production in 2025 or later. Once qualified, a new facility would remain eligible for ten years, assuming the GHG (greenhouse gas emissions expressed in CO2e/kWh) thresholds are met.

The credit is calculated based on greenhouse gas emissions and must produce zero or negative net emissions as a facility to qualify. The transferable tax credit is available for a three-year period from the time a facility first qualifies. The credit focuses on large production facilities, and thresholds are generally too high for retail taxpayers to meet.

Date in Effect

January 1, 2025 – December 31, 2032*

*A phase-out begins in 2032 or when U.S. greenhouse gas emissions from electricity are 25% of the total 2022 emissions or lower. This is defined as the “applicable year.”
*Once the applicable year is reached, a phase out of the credit will begin for the proceeding three years.*

Calculation Details:

The calculation is dependent on the type of energy facility producing the electricity. Certain base thresholds must be met, in terms of production, to qualify. The eligible facility must maintain net GHG emissions at or below zero to remain eligible. The base credit available under IRS Section 45Y is $0.03/kWh (kilowatt hour). Facilities may increase this by 5x, to $0.15/kWh (kilowatt hour) if prevailing wage and apprenticeship requirements are met.

An additional 20% bonus is also available via two separate 10% enhanced multipliers 10% increased for projects meeting certain domestic content requirements for steel, iron, and manufactured products. The guidelines for the threshold are likely to change and have still not been completely published as of today (2023). It is likely to require 45% - 55% of materials to be domestic in order to receive this bonus. 10% increase if eligible facility is located in a defined energy community. A map of applicable geographies can be accessed here.

Finally, once the applicable year is reached, a phase out calculation must be performed to determine the eligible transferable tax credit. See example at the end of the section.

Credit Pre Bonus =IF[(Prevailing wage and apprenticeship requirement = met, THEN(Total kWh produced * $0.15), ELSE(Total kWh produced * $0.03)]

Credit Bonus 1 =IF[(Domestic content requirement = met, THEN(10% * Credit Pre Bonus), ELSE(0%)] + Credit Pre Bonus

Final Credit Calc =IF[(Located in eligible community = met, THEN(10% * Credit Bonus), ELSE(0%)] + Credit Bonus 1

*Calculation above assumes an eligible facility meeting the GHG emissions of zero or below and no phase out impact*

Phase out further details and example:
Under current guidance (2023), the phase out will be determined through a calculation of the “average referenced price.” This is set by the Secretary, considers inflation, and is published in the Federal Register each year no later than April 1. Any sale of electricity above this set price would then be used as the numerator in a ratio divided by $0.03 to determine what percent of the credit was phased out.

For example:
Applicable year is reached in 2029
Average referenced price in year 2030 = $0.09
Eligible Facility ABC has an average energy price of $0.11
Eligible Facility ABC produces clean energy that results in $300
The spread above the averaged referenced price is $0.02 ($0.11 - $0.09)

The ratio would be 66% ($0.02/$0.03) phase out
Eligible Facility ABC would be able to claim a credit for $100 [$300 * (100-66)]

Filing Requirements:

• Register and obtain unique identifier number from the Internal Revenue Service

• File tax return for self, or if transferring the credit for cash, then reflect the sale of both buyer and seller’s tax return

• Independent third-party Life Cycle Assessment (LCA)

Direct Pay:

Direct Pay is an election that allows the taxpayer to sell directly to the Internal Revenue Service. Section 45Y transferable tax credits allow the following entities to make this election:

• Tax-exempt organizations

• States

• Political subdivisions

• The Tennessee Valley Authority

• Indian Tribal governments

• Alaska Native Corporations

• Rural electricity co-ops.
  
  *Applies separately with regard to each facility*

Miscellaneous:

• IRC Section 45Y PTC would be five-year property for purposes of the Modified

• Accelerated Cost Recovery System (MACRS) under IRC Section 168
  Must complete a Life-Cycle Assessment (LCA) Report prior to claiming the credit