What Is the 45Y Clean Electricity Production Credit?

The Inflation Reduction Act of 2022 created the Section 45Y Clean Electricity Production Tax Credit. This credit shifts federal policy to a technology-neutral approach, incentivizing clean electricity generation regardless of the method used, and it replaces the former Section 45 Production Tax Credit (PTC). The purpose of the 45Y credit is to encourage private investment in new power generation that does not produce greenhouse gas emissions. By not limiting the credit to a list of approved technologies, the legislation fosters innovation for future advancements in clean energy.

Determining Facility Eligibility

A facility’s eligibility for the 45Y credit depends on two conditions. The first is that the facility must be placed in service after December 31, 2024. Projects that begin construction before 2025 may fall under the old Section 45 PTC rules.

The second requirement is that the facility must be used for generating electricity and have a greenhouse gas emissions rate no greater than zero. The Internal Revenue Service (IRS) is tasked with publishing annual tables of emissions rates for different types of facilities. Technologies such as wind, solar, geothermal, hydropower, and marine and hydrokinetic energy are presumed to meet the zero-emissions threshold.

This technology-neutral standard sets an environmental performance benchmark instead of listing specific qualifying technologies. For facilities using combustion or gasification, the emissions rate calculation must account for lifecycle greenhouse gas emissions. The credit is available for the first 10 years of a facility’s operation, beginning on the date it was placed in service. The credit is scheduled to begin phasing out in 2032 or when U.S. electricity production emissions fall to 25% of 2022 levels, whichever is later.

Calculating the Credit Amount

The 45Y credit calculation starts with a base rate that is subject to multipliers. The base credit is 0.3 cents per kilowatt-hour (kWh) of electricity produced and sold to an unrelated party, an amount adjusted annually for inflation.

A five-fold multiplier is available if a project satisfies the Prevailing Wage and Apprenticeship (PWA) requirements for labor during its construction, alteration, or repair. Meeting these PWA standards increases the credit rate to 1.5 cents per kWh. Facilities with a maximum net output of less than one megawatt are exempt from the PWA requirements to receive this higher rate.

Taxpayers can increase the credit value with two separate 10% bonus adders. The first is for projects meeting domestic content requirements for components sourced from the United States. The second 10% adder applies if the facility is in a designated “energy community,” such as an area with historical ties to the fossil fuel industry.

Meeting Labor and Sourcing Requirements

Prevailing Wage Requirements

To receive the 5x credit multiplier, taxpayers must pay all laborers and mechanics prevailing wages during the facility’s construction, alteration, or repair. These wage rates are determined by the Department of Labor and vary by location and job type. Taxpayers must obtain the correct wage determinations for their project’s locality and keep records showing that all contractors have paid their workers accordingly. This requirement applies throughout the construction phase and for any subsequent alteration or repair work.

Apprenticeship Requirements

The second PWA component requires using qualified apprentices from a program recognized by the Department of Labor or a state agency. For projects beginning construction in 2024 or later, apprentices must perform 15% of the total labor hours. Projects must also comply with the registered programs’ apprentice-to-journeyworker ratios.

A “good faith effort” exception is available if a taxpayer is unable to meet the apprenticeship requirements despite requesting qualified apprentices from a registered program. To qualify for this exception, the taxpayer must submit a timely request to a registered program and be denied, or the program must fail to respond within five business days. Documentation of these requests and any responses is necessary to substantiate a claim for the exception.

Domestic Content Rules

The 10% domestic content bonus requires sourcing a specified portion of components from the U.S. The rules for this bonus differentiate between structural materials and manufactured products. For steel and iron, all manufacturing processes must occur domestically. For manufactured products, a certain percentage of the total component cost must be from components mined, produced, or manufactured in the U.S. This required percentage is 45% for facilities beginning construction in 2025, 50% in 2026, and 55% for facilities beginning construction after 2026.

Claiming the Credit

After a facility is operational and compliant, taxpayers can monetize the 45Y credit. The standard method is to apply the credit against federal income tax liability by reporting it on the appropriate tax forms, such as Form 3800, General Business Credit.

The Inflation Reduction Act also provides two other monetization options. The first is direct pay, or elective pay, which allows tax-exempt organizations, governments, and other specified entities to receive the credit’s value as a direct cash payment from the IRS, even with no tax liability. An entity must make a formal election with the IRS to use this option.

The second option is transferability. This provision allows an eligible taxpayer to sell all or a portion of their earned tax credit to an unrelated third party in exchange for cash. The buyer can then use the purchased credit to reduce their own tax liability. This creates a market for the credits, providing a path for project developers to receive a cash benefit without needing a large tax bill themselves. The transfer must be properly documented and reported to the IRS by both the seller and the buyer.