Notice 2023-18: Qualifying Advanced Energy Project Credit

Notice 2023-18 provides guidance for the Qualifying Advanced Energy Project Credit program, established under Section 48C of the Internal Revenue Code and expanded by the Inflation Reduction Act of 2022. The notice outlines the procedures for taxpayers to apply for an allocation of this tax credit, which totals $10 billion. It explains the application process and eligibility requirements for the funding.

Defining a Qualifying Advanced Energy Project

A qualifying advanced energy project is defined under three categories. The first includes projects that re-equip, expand, or establish a facility for the production or recycling of clean energy property. This covers technologies such as equipment for solar, wind, and geothermal energy, as well as fuel cells, energy storage systems, energy conservation technologies, and electric vehicles with their charging infrastructure.

A second project category involves re-equipping an existing industrial or manufacturing facility with equipment designed to reduce its greenhouse gas emissions by at least 20 percent. This provision targets the modernization of legacy industrial sites, encouraging them to adopt cleaner production methods through a verifiable decrease in their carbon footprint.

The third category is for projects that re-equip, expand, or establish a facility for the processing, refining, or recycling of critical materials. This is aimed at strengthening domestic supply chains for materials essential to clean energy technologies. The definition of critical materials is based on lists maintained by the Secretary of the Interior, supporting the production of resources for batteries and magnets.

The investment tax credit is 30% of the qualified investment in these projects, provided the project meets specific prevailing wage and apprenticeship requirements. If these labor standards are not met, the credit rate is reduced to 6%. This structure is intended to incentivize both clean energy manufacturing and the creation of high-quality jobs.

Information Required for the Concept Paper

Applicants begin the process by submitting a concept paper to the Department of Energy (DOE) for review. This document requires specific information about the proposed project, including its name, the physical address of the facility, and comprehensive contact information for the applicant. This data allows the DOE to identify and communicate with the project sponsor.

The concept paper must include a detailed project description that articulates its scope, objectives, and the specific qualifying activities it will undertake. Applicants also need to provide a timeline with estimated dates for key milestones, including the start of construction and the date the project will be placed in service. This information allows the DOE to assess the project’s readiness.

The concept paper must address the project’s commercial viability. This involves presenting a business plan, detailing expected market demand, and providing evidence that the project has a reasonable expectation of profitability. The applicant must also describe their technical and financial capacity to execute the project, demonstrating they have the necessary resources.

Finally, the concept paper must outline the project’s expected contributions to community and workforce engagement. Applicants are required to describe how the project will create quality jobs, interact with local communities, and advance environmental justice goals. This includes detailing plans for workforce training, local hiring, and engagement with disadvantaged communities.

The Application and Allocation Process

The first step for a taxpayer is to submit the concept paper through the designated DOE online portal, known as the 48C Portal. This submission initiates the formal review process. The DOE then evaluates the concept paper against the program’s criteria to determine its potential for success and alignment with policy goals.

Following its review, the DOE will issue a letter to the applicant that either encourages or discourages the submission of a full Section 48C application. A letter of discouragement does not disqualify an applicant from moving forward. All taxpayers who submit a concept paper are eligible to submit a full application regardless of the DOE’s initial feedback.

The next stage is submitting the formal application for the credit through the 48C Portal. The DOE conducts a more thorough review of the application and provides a recommendation to the Internal Revenue Service (IRS). The DOE will rank the recommended projects based on its analysis.

Based on the DOE’s recommendations, the IRS makes the final decision on credit allocation. The IRS sends an allocation letter to successful applicants specifying the credit amount, while unsuccessful applicants receive a denial letter. After the first round of funding was allocated, guidance was issued to announce a second round.

Special Considerations for Energy Communities

A key feature of the program is its focus on “energy communities,” with at least $4 billion of the total $10 billion in credits allocated to projects in these areas. This carve-out is designed to direct investment toward regions historically reliant on the fossil fuel industry. These areas may be experiencing economic disruption due to the energy transition.

An energy community census tract is defined in several ways. It can be an area that has had a coal mine closure or a coal-fired electric generating unit retired since 2009. The definition also includes areas with a significant history of employment or local tax revenues from coal, oil, or natural gas. The IRS provides a mapping tool to help taxpayers identify these census tracts.

Having a project located within one of these census tracts is a substantial advantage in the selection process. The set-aside means that projects in these locations may face less competition for a dedicated pool of funds. This increases their likelihood of receiving a credit allocation.

To qualify, a facility must have 50 percent or more of its square footage located within an energy community census tract. This geographic requirement is an important criterion that the DOE uses when evaluating and recommending projects to the IRS. Applicants with projects in these areas should clearly document this status in their application materials.