The U.S. Department of the Treasury has issued final regulations for the Section 48 Energy Credit, also known as the Investment Tax Credit (ITC), which typically provides a 30% tax credit for clean energy projects.

This credit starts at a base rate of 6%, but projects can qualify for the full 30% if they meet prevailing wage requirements. Additionally, projects located in eligible energy communities can receive an extra 10% tax credit. Another 10% credit is available for projects that use domestic content.

This credit applies to investments in renewable energy systems, biogas property, interconnection property, and energy storage technologies. The final regulations clarify eligibility for various technologies and finalize requirements for prevailing wages and apprenticeships related to the ITC.

Energy storage technology is specifically addressed under Section 48(a)(3)(A)(ix) and Section 48(c)(6)(A)(i). It includes systems that store and deliver energy for electricity production or, in the case of hydrogen, store energy for later conversion. These systems must have a minimum capacity of 5 kWh. Thermal energy storage systems, which are directly linked to heating, ventilation, and air conditioning (HVAC) systems for heating or cooling buildings, are also covered, with some exclusions like swimming pools and combined heat and power (CHP) systems.

If the property is modified to meet the 5-kWh threshold after August 16, 2022, it can qualify, though the property’s original value is excluded from the credit calculation.

The rules for hydrogen energy storage systems originally proposed that hydrogen be used only for energy production, but this requirement has been removed in the final regulations due to concerns over implementation difficulties. Hydrogen liquefaction equipment and the systems used to gather and distribute hydrogen within the storage property are considered integral parts of the technology. However, equipment used mainly for transportation, such as pipelines and trailers, remains excluded.

Electrical energy storage technologies, such as rechargeable batteries, ultracapacitors, and pumped storage hydropower, must also meet the 5-kWh capacity requirement to qualify. The final regulations are designed to be flexible and applicable to a broad range of current and future technologies. While specific clarifications were not made for every technology, the Treasury and IRS emphasize that eligibility should be determined based on the function of the property rather than a detailed list of qualifying technologies.

Thermal energy storage systems, which are connected to HVAC systems and store energy for later use in heating or cooling, are also eligible for the ITC.

For solar energy projects, all panels connected to a common inverter are treated as a single unit of energy property. Similarly, for rooftop solar projects, all components on a single roof are considered a single unit of energy property.

Section 48(a)(10) outlines the prevailing wage and apprenticeship requirements. Taxpayers may bypass these requirements under the Beginning of Construction (BOC) Exception if construction began before January 29, 2023. If the BOC exception does not apply, taxpayers must meet the prevailing wage and apprenticeship requirements to claim the increased credit amount unless other exceptions, such as the One Megawatt Exception, apply.

The final regulations also address the eligibility of energy storage technologies co-located with facilities claiming Section 45 credits, such as wind or solar power. These co-located energy storage systems qualify for the Section 48 ITC, provided they are integral to the overall facility. In addition, the regulations provide a clear framework for determining what qualifies as an “energy project” by outlining four key factors that must be met.

The types of energy properties eligible for the Section 48 credit include solar energy property, qualified fuel cell property, qualified microturbine property, small wind energy property, and energy storage technologies. For energy storage, this includes electrical storage, thermal storage, and hydrogen storage, with specific definitions for each type.

The regulations also clarify that modifications to energy storage systems, such as increasing their capacity to meet the 5-kWh requirement, will not affect their eligibility for the credit as long as the modifications meet the outlined criteria.

For geothermal heat pumps eligible equipment must use the ground or groundwater as a thermal energy source for heating or a sink for cooling. The final regulations have expanded to include other underground fluids as a thermal energy source or sink. Heat pumps operating in a heat recovery mode are not included unless explicitly designed to use ground or underground fluids. The final rules clarify that the owner of underground coils can claim the investment tax credit if they own at least one heat pump used in conjunction with the coils.

Offshore wind projects may qualify for energy credits under specific criteria set forth in section 48 of the Internal Revenue Code. The Inflation Reduction Act (IRA) provides increased tax credits for offshore wind projects, including additional benefits for projects located in energy communities and those meeting prevailing wage and apprenticeship requirements.The final rules retain the clarification made in the proposed rules that owners of offshore wind farms can claim the credit for power conditioning and transfer equipment that they own.

Offshore wind projects that initially meet criteria (e.g., apprenticeship and wage standards) but later fail to comply may face credit recapture.

These final regulations aim to provide clear guidance and flexibility for a wide range of clean energy technologies while ensuring taxpayers can easily understand the requirements for claiming the ITC.

Recently, the Treasury and IRS released the final Advanced Manufacturing Production Credit regulations to boost the growth of domestic clean energy manufacturing under the Inflation Reduction Act.

In August last year, the Treasury Department and IRS proposed rules and guidelines under the Inflation Reduction Act to harmonize sustainable energy and employment opportunities and solidify commitment to the “Investing in America” agenda.