On April 29, 2024, the U.S. Treasury announced the second round of the 48C tax credit for clean energy manufacturing. Below is our analysis of this announcement.
Key Takeaways
- Inflation Reduction Act renewed the Section 48C of the Internal Revenue Code, providing $10 billion in credits for qualifying advanced energy products. The legislation also specifies that $4 billion of which must go to projects in energy communities;[1]
- 48C provides a 30 percent CapEx tax credit for qualifying facilities;
- To qualify for the credit, a project must create, expand or modify an industrial or manufacturing facility for the production or recycling of numerous clean energy technologies;
- Winners of the first round of funding were recently announced, and IRS just announced that the $6 billion will be made available this year for the second round.
Overview
When Congress passed the Inflation Reduction Act of 2022 (IRA), it reinstated (and expanded) the Section 48C tax credit from the American Recovery and Reinvestment Act of 2009. Expired since 2013, the law provides $10 billion in credits for qualifying advanced energy projects, $4 billion of which must be allocated projects located in energy communities.1
The credit is an investment tax credit, meaning it equals 30 percent of the qualified investment for such taxable year with respect to any qualifying advanced energy project placed in service in the taxable year. Like most of the credits created or extended in the IRA, the credit’s value is reduced to six percent if prevailing wage and apprenticeship requirements are not satisfied.
For round two, the Treasury Department is making $6 billion available, with $2.5 billion set aside for projects in energy communities.
No Double Dipping: For any company considering this credit, it is important to note that the law makes clear that any entity interested in utilizing 48C, is ineligible if the project in question is allowed under Sections 48B (qualifying gasification project credit), 48E (clean electricity investment credit), 45Q (carbon oxide sequestration credit), or 45V(clean hydrogen production credit).
Special Consideration: Related to Battery Manufacturing: Similarly, if a battery manufacturing facility was constructed using 48C, then it is ineligible for the Section 45X (advanced manufacturing credit). However, this would only apply to the facility in question, meaning a company could use 48Cfor one facility, and 45X for another.
What Projects Are Eligible for 48C?
According to the guidance, qualifying advanced energy project includes ones that:
1. Refurbishes, expands or establishes an industrial or manufacturing facility for the production or recycling of:
a. property designed to be used to produce energy from the sun, water, wind, geothermal deposits (within the meaning of Section 613(e)(2)) or other renewable resources;
b. fuel cells, microturbines or an energy storage systems and components;
c. grid modernization equipment or components;
d. property designed to capture, remove, use or sequester carbon dioxide emissions;
e. equipment designed to refine, electrolyze or blend any fuel, chemical or product that is renewable or low-carbon and low-emission;
f. property designed to produce energy conservation technologies; or
g. other advanced energy property designed to reduce greenhouse gas (GHG) emissions, as may be determined by the U.S. Secretary of the Treasury.
Examples under this criteria: Eligible projects under this definition include the production or recycling of include solar panels and their specialized support structures; wind turbines, towers, floating offshore platforms and related equipment; stationary batteries; microturbines for combined heat and power systems; grid equipment for electricity delivery; carbon capture equipment necessary to compress, treat, process, liquefy, pump or perform some other physical action to capture carbon oxides, including solvents; electrolyzers; battery electric and plug-in hybrid electric vehicles; specialized components and equipment for nuclear power reactors or their fuels; and equipment used to reduce the emissions of industrial processes.
2. Refurbishes an industrial or manufacturing facility with equipment designed to reduce GHG emissions by at least 20 percent through the installation of:
a. low- or zero-carbon process heat systems;
b. carbon capture, transport, utilization and storage systems;
c. energy efficiency and reduction in waste from industrial processes; or
d. any other industrial technology designed to reduce GHG emissions, as determined by the U.S. Secretary of the Treasury.
Examples under this criteria: Electric heat pumps, combined heat and power (CHP) systems; technologies that reduce direct fuel use, electricity use or waste in industrial applications; and electrification of direct fuel use processes, adoption of renewable or low-emissions fuels and feedstock.
3. Refurbishes, expands or creates an industrial facility for the processing, refining or recycling of critical materials, such as:
a. An industrial facility produces, processes or refines materials or products from raw or manufactured inputs. A manufacturing facility makes or processes raw materials into finished products (or accomplishes any intermediate stage in that process).
b. A recycling facility is a facility that: reclaims, recovers or otherwise processes waste materials (including, but not limited to, property and components of property at end-of-service), the result of which is a useful product or material for use in the manufacture of a useful product.
How Can Companies Apply for the Credit?
Unlike every other energy credit developed through the IRA, the 48C credit is capped at $10 billion. As a result, implementation of the credit will function more like a grant, with the Administration providing at least two cycles of credit allocation.
Therefore, Taxpayers interested in applying for an allocation of Section 48C should make note of the following deadlines:
- Round 2 concept papers are due by June 27, 2024, via an online portal;
- DOE will review these submissions and offer applicants an encourage or discourage evaluation. Companies will then be given 50 days to submit a full application;
- By January 15th, 2025,the IRS will notify each applicant whether their application was accepted or rejected. If accepted, the IRS issues an allocation letter specifying the credit amount.
To determine the recipients of the credit, the U.S. Department of Energy (DOE) will review concept papers and provide applicants a letter of encouragement or discouragement for submissions of a full application for credit allocation (also mirroring the grantmaking process).
Applicants will be expected to provide information regarding board membership, ownership structure and foreign relationships, as well as sources of, and any plans to export, critical minerals. After review of the full application, DOE will provide a recommendation and ranking only if it determines that the project has a reasonable expectation of commercial viability and merits a recommendation to the IRS.
In addition to the technical criteria under Section 48C (discussed above), DOE indicates it may consider one or more policy factors in determining which Round 2 applications merit selection:
- To achieve maximum benefits to strengthen U.S. industrial competitiveness and clean energy supply chains, as well as to promote high-quality jobs and community benefits, DOE may consider giving priority to qualifying advanced energy projects not eligible for support from other DOE financial assistance programs funded by the Infrastructure Investment and Jobs Act or IRA.
- To help build more resilient, diverse and secure U.S. clean energy supply chains, DOE may consider whether proposed projects address specific gaps, vulnerabilities or risks in the domestic production of clean energy products. Additional guidance will specify priority technologies that would address these gaps, vulnerabilities and risks to relevant domestic supply chains.
Each applicant has two years from the date of acceptance by the Secretary of Energy during which to provide to the Secretary evidence that the requirements of the certification have been met. An applicant that receives a certification has two years from the date of issuance of the certification to place the project in service, and if such project is not placed in service by that time, then the certification is no longer valid.
Securing Energy Community Designation
Previously released guidance identified the steps necessary to qualify for the 48C credit in an energy community. To do so, the Administration has established a “Footprint Test.” The Footprint Test provides that a 48CFacility is considered located within a 48C(e) Energy Communities Census Tract if 50 percent or more of its square footage is in an area that qualifies as an Energy Communities Census Tract. This percentage is determined by dividing the square footage of the 48C Facility that is in a 48C Energy Communities Census Tract by the total square footage of the facility.
A taxpayer can determine whether its project is located within a 48C(e) Energy Communities Census Tract by referring to the Energy Communities Census Tracts map.
Priority Areas of Focus
The new guidance also includes a list of priority topic areas for each eligible category.
Clean Energy and Manufacturing Projects
- Clean Hydrogen: Manufacturing of electrolyzers, fuel cells, and associated components (including gas diffusion layers, bipolar plates, and power electronics).
- Electric Grid: Manufacturing of transformers, materials (including electrical steel, amorphous alloy), power electronics, and other grid components and equipment (including MVDC/HVDC converter station components and switchgears).
- Electric Heat Pumps: Manufacturing of air-source or ground-source heat pump components and infrastructure, particularly reversing valves, control circuits, compressors, and heat exchangers.
- Electric Vehicles: Manufacturing of power electronics (including semiconductors, modules, and circuits for EV motor traction drives, on-board EV chargers, DC/DC converters, and EV charging stations), permanent magnets, and battery components for use in electric vehicle motors.
- Nuclear Energy: Manufacturing of specialized components and equipment for nuclear power reactors or their fuels(including fabrication of fuels, and manufacturing of equipment for conversion, enrichment, and deconversion), for both existing reactors and new reactor deployments.
- Solar Energy: Polysilicon, wafer production facilities, ingot and wafer production tools, and solar glass production facilities.
- Sustainable Aviation Fuels: Manufacturing of equipment needed for low-carbon aviation fuel production(including feedstock handling equipment and pre- treatment reactors).
- Wind Energy: Component production facilities and specialized steel production, particularly for offshore wind, such as monopile-grade steel and towers; recycling of wind components, particularly blades.
Greenhouse Gas Emission Reduction Projects
DOE will give priority to projects that advance the commercial viability and uptake of replicable decarbonization efforts in major industrial applications (e.g., cement, iron and steel, aluminum, chemicals, and other energy- intensive manufacturing sectors), including innovative solutions, and to projects that align with one or more cross-cutting industrial decarbonization techniques, such as energy efficiency, electrification, low-carbon fuels, feedstocks, and energy sources (LCFFES), material efficiency or substitution, and carbon capture utilization and storage (CCUS).
Critical Materials Projects
When evaluating the strengthening U.S. Supply Chains and Domestic Manufacturing fora Net-Zero Economy criterion, DOE will take into consideration whether the project addresses critical materials as determined by the Secretary of Energy, as described in Appendix A(3)(b).
If you have questions about how this credit might impact your company, feel free to reach out to a member of the 38 North team.
[1] An energy community is defined as brownfield sites, any census tract (or adjoining tract) that had either a coal mine close after 1999or coal-fired electric generating unit retired after 2009, or any area that during the period after 2009 had 0.17 percent or greater direct employment or 25percent or greater local tax revenues related to extraction, processing, transport or storage of coal, oil or natural gas; and has any unemployment rate at or above the national average unemployment rate for the previous year.