A proposed rule issued May 29 by the U.S. Treasury Dept. and Internal Revenue Service offers guidance that could incentivize new clean energy projects with “technology-neutral” tax credits. Projects coming online starting next year, including some using fossil fuels, could qualify for the credits, with additional amounts added for factors including prevailing wages, apprenticeship, domestic content and energy community location.
The Clean Electricity Production Credit, Section 45Y of the U.S. tax code, and Clean Electricity Investment Credit, Section 48E, which lawmakers established under the 2022 Inflation Reduction Act, are set to replace a pair of similar credits that are technology-specific and limited to projects starting construction before next year. Under the proposed rule, the new credits would apply to wind, solar, hydropower, marine, hydrokinetic, nuclear fission and fusion, geothermal and some waste energy recovery property projects.
“The technology-neutral market incentives are essential to expanding America’s domestic clean energy production and strengthening our energy independence,” said JC Sandberg, chief advocacy officer of the American Clean Power Association.
The rule also proposes that any future changes to the designated zero-greenhouse-gas-emission technologies must be analyzed by the U.S. Dept. of Energy and other experts. Additionally, it provides clarity on issues including how energy storage technologies could qualify for one of the credits and eligibility of interconnection costs.
“The clean electricity tax credits created under the [Act] provide certainty to the market and are poised to drive substantial further growth and lower utility bills over the long-run,” U.S. Treasury Secretary Janet Yellen said in a statement.
Combustion and Gasification
The Biden administration has framed the credits as part of its goal to create a U.S. carbon-pollution-free power sector by 2035 and net-zero emissions economy by 2050, but fossil fuel projects would not be automatically disqualified for the credits under the proposed rule.
However, projects relying on combustion or gasification to produce electricity must “undergo a lifecycle greenhouse gas analysis to confirm their net-zero emissions status,” said Treasury, which now seeks comments related to those analyses as part of the rulemaking process.
Potential incentives for projects involving woody biomass, incineration and methane biogas drew concern from environmental advocates, who say they can cause even more pollution than fossil fuels.
“Treasury and IRS must protect taxpayer dollars from being used for incentivizing harmful practices like trash burning, factory farming and forest clearcutting,” said Sarah Lutz, senior climate campaigner at Friends of the Earth, in a statement.
In a comment to Treasury officials last year, a consortium of environmental groups including Earthjustice, Natural Resources Defense Council and the Sierra Club urged the department to avoid funding biofuel projects.
Still, the credits are expected to hasten the pace of decarbonization.
In a report on the credits released earlier this month, research firm Rhodium Group projected they would help reduce greenhouse gas emissions by between 300 million and 400 million tons and boost development of 650 GW more clean electricity capacity through 2035, compared to having no credits.
Rhodium Group also projected savings to consumers of between $16 billion and $34 billion in electricity costs by 2035 as a result of the credits.
A 60-day public comment period on the proposed rule will open once it is published in the Federal Register, with a Treasury hearing planned Aug. 12-13.
