What Is the 45Y Clean Electricity Production Credit?

The Clean Electricity Production Credit, introduced under Section 45Y of the Internal Revenue Code by the Inflation Reduction Act (IRA), is a technology-neutral incentive designed to encourage the generation of electricity from sources that produce zero greenhouse gas emissions. This credit replaces the previous Section 45 production tax credit for new facilities, moving the focus from the type of technology used to the facility’s environmental output. The incentive is provided for each kilowatt-hour of clean electricity produced and sold, supporting the transition to a cleaner national energy grid.

Qualifying for the Credit

Eligibility for the Section 45Y credit depends on the taxpayer and the characteristics of the electricity-generating facility. The credit is available to taxpayers who own a qualified facility and either sell the electricity produced to an unrelated party or, in the case of certain facilities, use or store it. This structure ties the incentive to the productive output of clean energy.

A qualified facility is defined as one used for generating electricity that is placed in service after December 31, 2024. The facility must have a greenhouse gas emissions rate of not greater than zero. While the credit is technology-neutral, this emissions standard means that technologies like wind, solar, hydropower, and nuclear fission and fusion are expected to qualify. The credit is available for a 10-year period beginning on the date the facility is first placed into service.

Calculating the Credit Value

The value of the 45Y credit is determined by a two-tiered structure with a base rate and a bonus rate. The base credit amount is 0.3 cents per kilowatt-hour (kWh) of electricity the facility produces and sells. This base rate is subject to annual adjustments for inflation. For projects that meet specific labor standards, a bonus rate is available.

This bonus rate is five times the base amount, resulting in a credit of 1.5 cents per kWh, also adjusted for inflation. The final credit amount is calculated by multiplying the applicable rate by the total kilowatt-hours of electricity produced and sold during the taxable year.

The credit’s value can be increased through two additional 10% bonus adders. One 10% increase is available for projects that meet domestic content requirements for components sourced from within the United States. A separate 10% adder is available for projects located in designated energy communities. These adders are applied to the credit rate.

Requirements for Bonus Credit Rates

Prevailing Wage and Apprenticeship (PWA)

Achieving the 5x bonus credit rate requires satisfying both prevailing wage and apprenticeship standards. Prevailing wage rules mandate that all laborers and mechanics employed in the construction, alteration, or repair of the facility are paid wages at rates no less than the prevailing local rates for similar work, as determined by the Department of Labor.

The apprenticeship requirement stipulates that a certain percentage of the total labor hours for the project’s construction, alteration, or repair must be performed by qualified apprentices from a registered apprenticeship program. Facilities with a maximum net output of less than one megawatt are exempt from these PWA requirements and automatically qualify for the higher bonus rate.

Domestic Content Bonus

A 10% bonus can be added to the credit rate if the project meets domestic content requirements. To qualify, the project must certify that any steel or iron used in its construction is produced in the United States. Additionally, a specified percentage of the total cost of the facility’s manufactured products and components must be attributable to products that were mined, produced, or manufactured domestically.

Energy Community Bonus

An additional 10% bonus is available for projects located within a designated energy community. An energy community is defined in one of three ways: a brownfield site; a metropolitan or non-metropolitan statistical area that has or had significant employment in the fossil fuel sector and an unemployment rate at or above the national average; or a census tract where a coal mine has closed or a coal-fired power plant has been retired.

How to Claim the Credit

The Clean Electricity Production Credit is claimed as a component of the General Business Credit. Taxpayers will need to file Form 3800, General Business Credit, along with their main income tax return. The IRS is expected to release a specific source form for the 45Y credit that will be used to calculate the credit amount before it is carried to Form 3800.

Monetization Options

The Inflation Reduction Act introduced two ways for taxpayers to realize the value of the credit, even if they lack sufficient tax liability. The first option, “direct pay,” allows certain tax-exempt entities, such as municipal utilities and electric cooperatives, to receive the credit amount as a direct cash payment from the IRS.

The second option is “transferability,” which permits eligible taxpayers to sell their earned tax credits to an unrelated third party in exchange for cash. This creates a market for the credits, allowing project developers to monetize the credits to secure financing. The buyer of the credit can then use it to offset their own tax liability.