As the clock winds down on 2024, one of the major questions businesses in the energy space are mulling is what the future may hold for the clean energy production and investment tax credits enacted under the Biden administration’s Inflation Reduction Act (IRA).
These new “tech-neutral” credits and clean fuel production credits, which go into effect in 2025, mark a significant departure from the historical approach taken to US clean energy incentives, and many current and future clean energy projects could be shaped by how these evolving policies are implemented.
These credits replace the existing Section 45 Production Tax Credit, Section 48 Investment Tax Credit and a variety of clean fuel production credits, which have been in place for decades. The expiring credits are only available to projects whose construction began before 2025; projects placed in service beginning in January 2025 will be transitioned to the new, tech-neutral Clean Electricity Production Credit (Section 45Y) and Clean Electricity Investment Credit (Section 48E), with fuels transitioning into the Clean Fuels Production Credit (Section 45Z). Therefore, there are a number of considerations for projects that straddle the 2024 and 2025 horizon.
Unlike their predecessors, these new credits provide incentives to facilities that achieve net zero greenhouse gas (GHG) emissions regardless of the technology used and generally require taxpayers to track emissions for credit eligibility. The credits “provide the ability for new zero greenhouse gas emissions technologies to develop over time,” according to the Treasury Department, thereby confirming that these credits are intended to encompass novel, future technologies.
The proposed regulations issued in May specify certain traditional clean energy technologies are categorized as zero-GHG emissions facilities, including wind and solar projects. However, other technologies that currently qualify for the existing credits, such as qualified biogas projects, may no longer qualify for the new credits based on their emissions profiles.
With the impending changes in administration and composition of the incoming Congress, the future of these credits becomes even more uncertain. Historically, when a change in control of government is imminent, work streams are impacted to varying degrees, in some cases with a rush to finish out projects and in others with a pause in activity.
Understanding the potential implications for specific energy projects is critical because many clean energy projects are capital-intensive and have long lead times for construction. Furthermore, as tax credits may finance anywhere from 30% to 50% of the capital invested in a project, millions of dollars may be at stake for each project.
Companies exploring technology innovations that are not enumerated on the list of zero-GHG emissions facilities will find themselves seeking further guidance on how Treasury and IRS will measure their emissions footprint. Investors in many types of energy projects are awaiting details that will help them determine whether their projects will qualify and what will be required of them. Additionally, even companies that are certain they will qualify for the tech-neutral credits are still engaging in modeling exercises to see which credit regime is most appropriate for their situation.
Investors in facilities using technologies that qualify for the existing tax credit regime but that are not explicitly listed as qualifying as zero-GHG emissions facilities under the new rules must weigh whether to try to start construction in 2024 and be eligible for tax credits under current rules or face future uncertainty. For example, a number of qualified biogas projects (ex. renewable natural gas projects) have seen accelerated timelines to start construction before the end of the year to avoid uncertainty and be grandfathered under the existing investment tax credit rules.
However, the “begun construction” requirement is a tax-based definition with two alternative tests: either the company has to start physical work of a significant nature or pay or incur 5% or more of the total cost of the project. Additionally, once construction has begun, companies must show they have done continuous work until the asset is placed in service or otherwise meet a timing safe harbor.
While final regulations may bring greater short-term clarity about credit implementation and eligibility, energy policy uncertainty may continue into 2025 as the change in political makeup of the executive and legislative branches could have an impact on energy-specific rules and regulations. Republicans and Democrats have different energy policy agendas, but even within the parties there isn’t complete agreement on a specific energy policy future. The incoming Trump administration is expected to place greater emphasis on fossil fuels and possibly prospectively repeal some of the benefits enacted under President Biden. However, policymakers have historically frowned upon retroactive repeal of tax laws due to the economic uncertainty it creates.
The composition of Congress will also affect the future of energy tax policies overall. With Republicans controlling the White House, the Senate and projected to control the House, targeted repeal or phase-out of IRA clean energy tax credits is possible.
The outlook is further complicated by the legislative focus in 2025 on the so-called “tax cliff” and expiring provisions of the 2017 Tax Cuts and Jobs Act (TCJA). At the end of 2025, most TCJA provisions expire, a likely catalyst for tax legislation. There have been calls from members of both parties to pay for at least a portion of any TCJA extensions due to concerns about the federal debt and deficit.
This is where the focus on the IRA clean energy tax credits, including the tech-neutral credits, could intensify. The estimated 10-year costs of the IRA’s energy credits have risen over the past several years, from $271 billion (Joint Committee on Taxation, August 2022) to $1.2 trillion (Goldman Sachs, April 2023). As more companies work to comply with requirements to qualify for the credits, the costs continue to grow. While wholesale repeal of the IRA is unlikely, in an environment where legislators are looking for revenue offsets for TCJA-related legislation, it is possible that they could seek to modify the rules around IRA credits in the future or sunset them earlier.
When it comes to tech-neutral tax incentives, the policies, like the technologies, are still evolving and will continue to do so. There are many stakeholders – across communities, regions, industries and political parties – that will be affected by how these credits and the related policies are implemented. It will be important for companies exploring clean energy projects to model out different potential scenarios and the implications for their businesses so they are prepared to engage with policymakers and explain what may be at stake.
1. What kinds of modeling, if any, have you considered for different potential energy tax policy scenarios in planning specific clean energy projects?
2. Have you evaluated how existing and contemplated energy projects could be impacted by potential changes to the clean energy tax credits?
3. How might your eligibility change for tax credits under the different credit regimes, and how might that affect your potential projects?
4. How have you factored the pending rule changes for clean energy tax credits into the construction timing for any current energy projects?
5. Are you familiar with the IRS rules on when construction is treated as beginning and when a project is placed in service for purposes of understanding key dates in clean energy tax credit qualification?
Aruna Kalyanam, based in Washington, DC, has decades of experience in tax policy, including roles as Deputy Assistant Secretary for Tax and Budget at the U.S. Treasury and on the House Ways and Means Committee. She now serves as Americas Tax Policy Leader with Ernst & Young, focusing on U.S. legislative and tax policy. Aruna holds a JD from American University and a BA from Washington University in St. Louis.
Aparna Koneru is a principal at Ernst & Young LLP in Houston, specializing in domestic and international tax matters. She has extensive experience in tax planning for mergers and acquisitions, cross-border transactions, energy projects, and financing structures, including renewable energy, hydrogen, and CCS/CCUS projects. Aparna is a past chair of the Houston Bar Association Tax Section and frequently speaks on the Inflation Reduction Act and tax credit strategies.
The views reflected in this article are those of the authors and do not necessarily reflect those of Ernst & Young LLP or other members of the EY organization. The information in this article is provided solely for the purpose of enhancing knowledge. It does not provide accounting, tax, or other professional advice. Copyright 2024 Ernst & Young LLP. All rights reserved.
