Definition of Energy Property and Rules Applicable to the Energy Credit

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 10015]

RIN 1545-BO40

Definition of Energy Property and Rules Applicable to the Energy Credit

AGENCY:

Internal Revenue Service (IRS), Treasury.

ACTION:

Final regulations.

SUMMARY:

This document sets forth final rules relating to the energy credit, including rules for determining whether investments in energy property are eligible for the energy credit and for implementing certain amendments made by the Inflation Reduction Act of 2022. The final regulations impact taxpayers who invest in energy property eligible for the energy credit.

DATES:

Effective date:

These regulations are effective on December 12, 2024.

Applicability dates:

For dates of applicability, see §§ 1.48-9(g), 1.48-13(f), 1.48-14(j), and 1.6418-5(j).

FOR FURTHER INFORMATION CONTACT:

Concerning the regulations, the IRS Office of the Associate Chief Counsel (Passthroughs and Special Industries) at (202) 317-6853 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Authority

This document contains amendments to the Income Tax Regulations (26 CFR part 1) under sections 48 and 6418 of the Internal Revenue Code (Code) issued by the Secretary of the Treasury or her delegate (Secretary) pursuant to the authority granted under sections 45(b)(12), 48(a)(3)(D), and (a)(16), 6418(g) and (h), and 7805(a) of the Code (final regulations).

Section 48(a)(3)(D) provides a specific delegation of authority for the Secretary to prescribe by regulations performance and quality standards for energy property after consulting with the Secretary of Energy.

Sections 45(b)(12) and 48(a)(16) provide specific delegations of authority with respect to the requirements of section 45(b), including the prevailing wage and apprenticeship (PWA) requirements of section 45(b)(7) and (8), as incorporated by section 48(a)(10) and (11), with each stating, “[t]he Secretary shall issue such regulations or other guidance as the Secretary determines necessary to carry out the purposes of this subsection, including regulations or other guidance which provides for requirements for recordkeeping or information reporting for purposes of administering the requirements of this subsection.” Section 48(a)(10)(C) grants authority for the Secretary to provide, by regulations or other guidance, for recapturing the benefit of any increase in the credit allowed under section 48(a) allowed to an energy project that initially satisfies the PWA requirements if such energy project should later fail to satisfy such requirements during the recapture period by applying rules similar to the rules of section 50(a) of the Code. Section 48(a)(16) provides a general grant of regulatory authority for section 48(a), by stating: “The Secretary shall issue such regulations or other guidance as the Secretary determines necessary to carry out the purposes of this subsection, including regulations or other guidance which provides for requirements for recordkeeping or information reporting for purposes of administering the requirements of this subsection.”

Section 6418(g) provides several specific delegations of authority to the Secretary with regard to enforcing requirements for valid transfers of certain Federal income tax credits under section 6418 and recapturing excessive credit transfers. Section 6418(h) provides a specific delegation of authority with respect to the transfer of credits under section 6418, stating, in part, that “[t]he Secretary shall issue such regulations or other guidance as may be necessary to carry out the purposes of this section.”

Finally, section 7805(a) authorizes the Secretary to “prescribe all needful rules and regulations for the enforcement of [the Code], including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.”

Background

I. Overview

Section 38 of the Code allows certain business credits against the Federal income tax imposed by chapter 1 of the Code (chapter 1). Among the credits allowed by section 38 are the investment credit determined under section 46 of the Code, which includes the energy credit determined under section 48 (section 48 credit). See sections 38(b)(1) and 46(2). Section 48(a)(1) generally provides that the section 48 credit for any taxable year is the energy percentage of the basis of each energy property placed in service during such taxable year. For most types of energy property, eligibility for the section 48 credit and, in some cases, the amount of the section 48 credit depends upon meeting certain deadlines for beginning construction of the energy property or for placing the energy property in service.

Section 48 originally was enacted by section 2 of the Revenue Act of 1962, Public Law 87-834, 76 Stat. 960, 963 (October 16, 1962), to spur economic growth by encouraging investments in various capital projects across many industries including energy, transportation, and communications. Section 48 has been amended many times since its enactment, most recently by section 13102 of Public Law 117-169, 136 Stat. 1818 (August 16, 2022), commonly known as the Inflation Reduction Act of 2022 (IRA). The IRA amended section 48 in several ways, including by making additional types of energy property eligible for the section 48 credit, providing a special rule to allow certain lower-output energy properties to include amounts paid for qualified interconnection property in connection with the installation of energy property, and providing an increased credit amount for energy projects that satisfy prevailing wage and apprenticeship requirements, a domestic content bonus credit amount, and an increase in credit rate for energy communities.

The Income Tax Regulations at § 1.48-9 in effect prior to December 12, 2024 (former § 1.48-9), which provide definitions and rules for determining whether property is energy property eligible for the section 48 credit, originally were published on January 23, 1981 (T.D. 7765, 46 FR 7287). Those regulations were amended on July 21, 1987 (T.D. 8147, 52 FR 27336) to provide rules for dual use property. Thus, former § 1.48-9 has not been updated since 1987, which is before many of the current types of energy property became eligible for the section 48 credit.

II. Prior Guidance

Prior to proposing the amendments to the regulations under section 48 being finalized by this treasury decision, the Department of the Treasury (Treasury Department) and the IRS twice requested comments on issues to be addressed in these regulations. On October 26, 2015, the Treasury Department and the IRS published Notice 2015-70, 2015-43 I.R.B. 604, requesting comments regarding statutory updates to section 48 preceding those made by the IRA. On October 24, 2022, in response to the passage of the IRA, the Treasury Department and the IRS published Notice 2022-49, 2022-43 I.R.B. 321, requesting general as well as specific

comments on issues arising under section 48, among other sections, that were amended or added by the IRA.

On August 30, 2023, the Treasury Department and the IRS published a notice of proposed rulemaking (REG-100908-23) in the

Federal Register

(88 FR 60018),

corrected

in 88 FR 73807 (Oct. 27, 2023),

corrected

in 89 FR 25550 (April 11, 2024), proposing rules regarding the increased credit amounts available for taxpayers satisfying PWA requirements established by the IRA (PWA Proposed Regulations). Comments were requested and a public hearing was held November 21, 2023.

On November 22, 2023, after consideration of all the comments submitted in response to Notice 2015-70 and Notice 2022-49, and after consultation with the Department of Energy (DOE), the Treasury Department and the IRS published a notice of proposed rulemaking and a notice of public hearing (REG-132569-17) in the

Federal Register

(88 FR 82188),

corrected in

89 FR 2182 (January 12, 2024), proposing rules that would provide guidance under section 48 (Proposed Regulations). On February 22, 2024, the Treasury Department and the IRS published a second correction to the Proposed Regulations in the

Federal Register

(89 FR 13293) that re-opened the comment period through March 25, 2024 (Correction). The Proposed Regulations withdrew certain portions of the PWA Proposed Regulations and re-proposed regulations that would provide additional guidance on the PWA requirements under section 48, including the statutory exception for energy projects with a maximum output of less than one megawatt (MW) and the recapture rules under section 48(a)(10)(C) related to the PWA requirements.

Although the Proposed Regulations withdrew certain portions of the PWA Proposed Regulations, the Explanation of Provisions section in the preamble to the PWA Proposed Regulations generally remained relevant. Therefore, to the extent consistent with the preamble to the Proposed Regulations, the Explanation of Provisions section of the PWA Proposed Regulations was incorporated in the preamble to the Proposed Regulations.

The preamble to the Proposed Regulations did not address written comments that were submitted in response to the PWA Proposed Regulations. Any comments received in response to the Proposed Regulations, including comments on the re-proposed regulations addressing the PWA requirements specific to section 48, are addressed in the Summary of Comments and Explanation of Revisions section of this preamble. The Proposed Regulations did not extend the comment period or affect the scheduled hearing for the PWA Proposed Regulations. The PWA Proposed Regulations, other than the portions that were withdrawn, were adopted as final regulations by Treasury Decision (T.D. 9998), which was published in the

Federal Register

(89 FR 53184) on June 25, 2024 (PWA Final Regulations).

On June 21, 2023, the Treasury Department and the IRS published a notice of proposed rulemaking (REG-101610-23) in the

Federal Register

(88 FR 40496) proposing rules concerning the election under section 6418 to transfer certain Federal income tax credits, including the section 48 credit (6418 Proposed Regulations). Proposed § 1.6418-5 of the 6418 Proposed Regulations included proposed rules addressing notification requirements and the impact of the credit recapture rules under sections 50(a), 49(b), and 45Q(f)(4) on the transfer of Federal income tax credits. Comments were requested and a public hearing on the 6418 Proposed Regulations was held on August 23, 2023.

The Proposed Regulations would supplement the 6418 Proposed Regulations by adding provisions to proposed § 1.6418-5 addressing notification requirements and the impact of the recapture rules for failing to satisfy the PWA requirements under section 48(a)(10) if an election under § 1.6418-2 or § 1.6418-3 has been made. The preamble to the Proposed Regulations did not address written comments that were submitted in response to the regulations proposed in the 6418 Proposed Regulations. Any comments received in response to the Proposed Regulations, including the additions to proposed § 1.6418-5 described in the Proposed Regulations, are addressed in the Summary of Comments and Explanation of Revisions section of this preamble. The Proposed Regulations did not otherwise extend the comment period for the 6418 Proposed Regulations. On April 30, 2024, a Treasury Decision (T.D. 9993) adopting the 6418 Proposed Regulations as final regulations (6418 Final Regulations) was published in the

Federal Register

(89 FR 34770). The 6418 Final Regulations did not finalize the portion of proposed § 1.6418-5 that was included in the Proposed Regulations.

Summary of Comments and Explanation of Revisions

The Treasury Department and the IRS received 350 written comments in response to the Proposed Regulations. The comments are available for public inspection at

https://www.regulations.gov

or upon request. After full consideration of the comments received in response to the Proposed Regulations, these final regulations adopt the Proposed Regulations with modifications as described in this Summary of Comments and Explanation of Revisions.

Comments addressing the requirements for energy property are described in part I of this Summary of Comments and Explanation of Revisions. Comments addressing the PWA requirements are described in part II of this Summary of Comments and Explanation of Revisions. Comments addressing rules applicable to energy property are described in part III of this Summary of Comments and Explanation of Revisions.

Comments summarizing the statute or the Proposed Regulations, recommending statutory revisions, or addressing issues that are outside the scope of this rulemaking (such as revising other Federal regulations and recommending changes to IRS forms) generally are not addressed in this Summary of Comments and Explanation of Revisions or adopted in these final regulations. In addition to modifications described in this Summary of Comments and Explanation of Revisions, the final regulations also include non-substantive grammatical or stylistic changes to the Proposed Regulations. Unless otherwise indicated in this Summary of Comments and Explanation of Revisions, provisions of the Proposed Regulations with respect to which no comments were received are adopted without substantive change.

I. Requirements for Energy Property

For purposes of the section 48 credit, energy property consists of all the components of property that meet the statutory requirements for an energy property as defined by section 48(a)(3) and (c).

Section 48(a)(3)(B) through (D) provide general requirements for all types of energy property. Section 48(a)(3)(B) limits energy property to property that is constructed, reconstructed, or erected by the taxpayer or that the taxpayer acquires if the original use of such property commences with the taxpayer. Section 48(a)(3)(C) provides that to be eligible as energy property, depreciation (or amortization in lieu of depreciation) must be allowable for the property. Section 48(a)(3)(D) provides that to be eligible as energy property, the property must also meet any performance and

quality standards that have been prescribed by the Secretary, after consultation with the Secretary of Energy, and are in effect at the time of the taxpayer's acquisition of the property. Under section 48(a)(3), energy property does not include property that is part of a qualified facility the production from which is allowed a renewable electricity production credit determined under section 45 (section 45 credit) for the taxable year or any prior taxable year. Lastly, if the statutory text of section 48 provides dates by which construction of energy property must begin or when energy property must be placed in service, such energy property must meet those deadlines to be eligible for the section 48 credit at specified energy percentages.

A. Definitions Related to Requirements for Energy Property

Before 1990, section 48 defined the term “section 38 property” to include, among other types of property, energy property eligible for the section 48 credit. The Revenue Reconciliation Act of 1990, Public Law 101-508, 104 Stat. 1388 (November 5, 1990) removed the term “section 38 property” in amending section 48. However, section 48 is one of the credits that comprise the investment credit for any taxable year determined under section 46, which is included in section 38(b)(1) and remains subject to the general business credit rules under section 38. As a result, rules related to “section 38 property” remain generally applicable to the section 48 credit.

Sections 1.48-1 and 1.48-2 provide guidance with respect to section 38 property. Section 1.48-1 was last substantially revised on October 11, 1988 (T.D. 8233, 53 FR 39592) and § 1.48-2 was last revised on June 28, 1985 (T.D. 8031, 50 FR 26698). Although subsequent amendments to section 48 have made some of the rules provided by these regulations inapplicable, those rules continue to provide useful definitions related to requirements for energy property, some of which would be adopted under proposed § 1.48-9.

1. Performance and Quality Standards for Energy Property

Section 48(a)(3)(D) provides that energy property is property that meets the performance and quality standards (if any) that have been prescribed by the Secretary by regulations (after consultation with the Secretary of Energy) and are in effect at the time of the acquisition of the property. Former § 1.48-9(m)(1) provided that “energy property must meet quality and performance standards, if any, that have been prescribed by the Secretary (after consultation with the Secretary of Energy) and are in effect at the time of acquisition.” Generally, proposed § 1.48-9(c)(2)(i) would adopt this rule for performance and quality standards for energy property from former § 1.48-9(m)(1) by providing that energy property must meet performance and quality standards, if any, which have been prescribed by the Secretary (after consultation with the Secretary of Energy) and are in effect at the time of acquisition of the energy property. The final regulations adopt this rule as proposed.

2. Performance and Quality Standards for Electrochromic Glass Property

Proposed § 1.48-9(c)(2)(ii)(B) would provide rules for performance and quality standards for electrochromic glass property by stating that to be eligible for the section 48 credit, electrochromic windows must be rated in accordance with the National Fenestration Rating Council (NFRC) and secondary glazing systems must be rated in accordance with the Attachments Energy Rating Council (AERC) Rating and Certification Process, or subsequent revisions.

A few commenters addressed the performance and quality standards for electrochromic glass provided in the Proposed Regulations. Generally, these commenters suggested methods to satisfy the NFRC rating requirement and were particularly interested in a simulation-based process. For example, a commenter advocated for a process that emphasizes simulation-based validation to expedite compliance and reduce barriers to implementation, particularly given the lengthy delays associated with physical testing. This commenter stated that simulations, supported by advanced and reliable modeling software, have become a standard practice within the industry. Another commenter also emphasized the need to use simulations to satisfy the NFRC rating requirement.

In response to these comments, the Treasury Department and the IRS consulted with the DOE and learned that the existing NRFC and the AERC ratings systems incorporate simulation methodologies that should address the commenters' concerns. Accordingly, the final regulations adopt this rule as proposed.

3. Placed in Service

a. General Rules

Section 48(a) provides that the section 48 credit for any taxable year is the energy percentage of the basis of each energy property placed in service during such taxable year. As part of the regulations under section 46 for the investment credit, § 1.46-3(d)(1) provides general rules for determining when a taxpayer has placed a property in service for purposes of the section 48 credit. Under § 1.46-3(d)(1) property is considered placed in service in the earlier of the taxable year in which, under the taxpayer's depreciation practice, the period for depreciation with respect to such property begins; or the taxable year in which the property is placed in a condition or state of readiness and availability for a specifically assigned function, whether in a trade or business, in the production of income, in a tax-exempt activity, or in a personal activity.

Proposed § 1.48-9(b)(5) largely proposed to adopt the general rules of § 1.46-3(d)(1) for determining when a taxpayer has placed an energy property in service. However, to be eligible for the section 48 credit, energy property must be property with respect to which depreciation (or amortization in lieu of depreciation) is allowable. Accordingly, proposed § 1.48-9(b)(5)(i) would provide that the taxable year in which energy property is placed in service is the earlier of the taxable year in which, under the taxpayer's depreciation practice, the period for depreciation of such property begins, or the taxable year in which the energy property is placed in a condition or state of readiness and availability for a specifically assigned function in either a trade or business or in the production of income.

A commenter requested that the final regulations provide a different placed in service rule for energy storage technology. Because energy storage technology may charge and discharge prior to commercial readiness, the commenter suggested that energy storage technology should be treated as placed in service when: (i) such property has all licenses, permits, and approvals required to store and dispatch power; (ii) pre-operational testing is complete; (iii) the taxpayer has title to the property; and (iv) the property is available to store and discharge power on a regular, commercial basis.

Proposed § 1.48-9(b)(5) would adopt the general placed in service rules of § 1.46-3(d)(1), which have applied to the section 48 credit since its enactment, with a modification to reflect the requirement that the property be eligible for depreciation or amortization. Until the IRA amended section 48, energy storage property (referred to as “energy storage technology” after the IRA amendments)

was considered a component of energy property. Without providing specific indicia that an energy property is placed in service, the rule provided at proposed § 1.48-9(b)(5) would provide general principles for a taxpayer to determine when an energy property has been placed in service that are broadly applicable to all types of energy property, well-understood, and widely relied upon by industry. The general principles provided by the final rule are sufficiently broad to address the commenter's concerns. Therefore, the final regulations do not adopt these comments and instead adopt the placed in service rules as proposed.

b. Lease-Passthrough Election

Section 1.46-3(d)(3) provides that, notwithstanding the provisions of § 1.46-3(d)(1), property with respect to which an election is made under § 1.48-4 to treat the lessee as having purchased such property is considered placed in service by the lessor in the taxable year in which possession is transferred to such lessee. Proposed § 1.48-9(b)(5)(ii) would adopt the special rule from § 1.46-3(d)(3) for determining when a leased property has been placed in service. Several commenters provided comments relating to the rule for leased property in the context of qualified biogas property.

A commenter requested clarification on the application of the lease passthrough election under § 1.48-4 to treat a lessee as having purchased such energy property from the lessor with respect to any property comprising a qualified biogas property, including both component properties considered functionally interdependent as a single unit of energy property and property treated as an integral part of energy property. This commenter asked for illustrative examples of the application of the lease passthrough election in the context of a renewable natural gas (RNG) qualified biogas property if the equipment comprising the qualifying biogas production property, including equipment treated as an integral part of the qualifying biogas property, is owned by multiple taxpayers.

Another commenter suggested allowing a single taxpayer to consolidate deemed ownership of an entire qualified biogas property to permit a more efficient use and/or transfer of the section 48 credit under the section 6418 credit transfer rules by relying on existing lease passthrough rules that apply to energy property. The commenter asserted that this would permit greater qualified investment and use of the section 48 credit if, for regulatory or environmental permitting reasons, some portion of the section 48 credit-eligible qualified biogas property simply cannot be owned by a single or related taxpayers. The commenter acknowledged that under the 6418 Proposed Regulations, the transfer of the tax credits to a lessee under a lease passthrough election will preclude further transfers under section 6418.

Guidance on eligibility for the lease passthrough election is beyond the scope of the Proposed Regulations because proposed § 1.48-9(b)(5)(ii) merely proposed a rule for determining when property with respect to which a lease passthrough election is made under § 1.48-4 is placed in service. Guidance on eligibility for the lease passthrough election is addressed elsewhere, such as in § 1.48-4 and the 6418 Final Regulations. Accordingly, these final regulations do not adopt these comments.

4. Acquisition of Energy Property

Proposed § 1.48-9(b)(2) would provide that the term acquisition of energy property means a transaction by which a taxpayer obtains rights and obligations with respect to energy property, including title to the energy property under the law of the jurisdiction in which the energy property is placed in service, unless the property is possessed or controlled by the taxpayer as a lessee, and physical possession or control of the energy property. This definition was intended to require that the taxpayer establish tax ownership of the energy property for Federal income tax purposes. The final regulations modify the definition in proposed § 1.48-9(b)(2) to make this requirement explicit.

B. Types of Energy Property

Proposed § 1.48-9(e) would expand the definitions of energy property provided in former § 1.48-9 to account for new technologies that were added by amendments to section 48, including by the IRA. Generally, the definitions of the types of energy property provided in the Proposed Regulations incorporate the definitions provided in section 48(a)(3) and (c) but do not provide specific beginning of construction or placed in service deadlines. Taxpayers should refer to the current definitions of energy property provided by section 48 for specific requirements applicable to each type of energy property. The definitions of the types of energy property provided in proposed § 1.48-9(e) were developed by the Treasury Department and the IRS in consultation with the DOE.

Some commenters requested clarification concerning whether a particular type of technology would fall into one of the categories of energy property. For example, a commenter requested guidance concerning what type of energy property would include sewage energy recovery property and provided three options: geothermal heat pump (GHP) property by reference to “underground fluids,” energy storage technology, or waste energy recovery property (WERP). A definitive response to such comments would require the Treasury Department and the IRS to conduct a complete factual analysis of the property in question, which may include information that was not provided by the commenters. Because more information is needed to make the determinations requested by the commenters, these final regulations do not address the requested clarifications concerning the categorization of specific technologies.

1. Combined Heat and Power System Property

Section 48(a)(3)(A)(v) includes combined heat and power system (CHP) property as a type of energy property. Section 48(c)(3)(A) defines CHP property as property comprising a system that, among other requirements, uses the same energy source for the simultaneous or sequential generation of electrical power, mechanical shaft power, or both, in combination with the generation of steam or other forms of useful thermal energy (including heating and cooling applications). Section 48(c)(3)(A) further provides, in part, that a CHP property must produce at least 20 percent of its total useful energy in the form of thermal energy that is not used to produce electrical or mechanical power (or combination thereof), and at least 20 percent of its total useful energy in the form of electrical or mechanical power (or combination thereof), and that the energy efficiency percentage of the system must exceed 60 percent.

Section 48(c)(3)(B) provides that the amount of the section 48 credit with respect to CHP property is reduced to the extent that a CHP property has an electrical or mechanical capacity in excess of applicable limits. Subject to the exception for CHP property that uses closed or open-loop biomass as feedstock, CHP property with capacity in excess of the applicable capacity limit (15 MW or a mechanical capacity of more than 20,000 horsepower or an equivalent combination of electrical and mechanical energy capacities) is eligible for only a fraction of the otherwise allowable section 48 credit. This fraction is equal to the applicable capacity limit divided by the capacity of the CHP property. However, CHP

property with a capacity in excess of 50 MW or a mechanical energy capacity in excess of 67,000 horsepower or an equivalent combination of electrical and mechanical energy capacities does not qualify for the section 48 credit.

Section 48(c)(3)(C) provides that the energy efficiency percentage of a CHP property is the fraction (i) the numerator of which is the total useful electrical, thermal, and mechanical power produced by the system at normal operating rates, and expected to be consumed in its normal application, and (ii) the denominator of which is the lower heating value of the fuel sources for the system. The energy efficiency percentage and the percentages under section 48(c)(3)(A)(ii) are determined on a British thermal unit (Btu) basis. Section 48(c)(3)(C)(iii) specifically provides that the term “combined heat and power system property” does not include property used to transport an energy source to the facility or to distribute energy produced by the facility.

Additionally, section 48(c)(3)(D) provides that a CHP property with a fuel source that is at least 90 percent from closed or open-loop biomass that would otherwise qualify for the section 48 credit but for the failure to meet the efficiency standard is eligible for a credit reduced in proportion to the degree to which the system fails to meet the efficiency standard. For example, a system that would otherwise be required to meet the 60-percent efficiency standard, but that only achieves 30-percent efficiency, would be permitted to claim a credit equal to one-half of the otherwise allowable credit.

Proposed § 1.48-9(e)(6)(i) would provide generally that CHP property is property comprising a system that uses the same energy source for the simultaneous or sequential generation of electrical power, mechanical shaft power, or both, in combination with the generation of steam or other forms of useful thermal energy (including heating and cooling applications). Proposed § 1.48-9(e)(6)(i) would also provide that CHP property must produce at least 20 percent of its total useful energy in the form of thermal energy that is not used to produce electrical or mechanical power (or combination thereof), and at least 20 percent of its total useful energy in the form of electrical or mechanical power (or combination thereof). Further, proposed § 1.48-9(e)(6)(i) would provide that the energy efficiency percentage of CHP property must exceed 60 percent (except in the case of CHP systems that use biomass within the meaning of section 45). Proposed § 1.48-9(e)(6)(i) would also provide that CHP property does not include any property comprising a system if such system has a capacity in excess of 50 MW or a mechanical energy capacity in excess of 67,000 horsepower or an equivalent combination of electrical and mechanical energy capacities. Proposed § 1.48-9(e)(6)(ii) would provide that CHP property does not include property used to transport the energy source to the generating facility or to distribute energy produced by the facility.

A commenter requested that the final regulations clarify whether a CHP property would be eligible for the section 48 credit, assuming all other criteria are met, if the fuel source is exclusively non-renewable natural gas. There is no requirement that a CHP property use a specific fuel or feedstock. The Treasury Department and the IRS emphasize that all CHP property must meet the requirements of section 48(c)(3) and those provided in proposed § 1.48-9(e)(6)(i), which the final regulations adopt as proposed.

2. Geothermal Heat Pump Property

Section 48(a)(3)(A)(vii) provides, in part, that energy property includes equipment that uses the ground or ground water as a thermal energy source to heat a structure or as a thermal energy sink to cool a structure (geothermal heat pump or GHP property). Proposed § 1.48-9(e)(8) would adopt the statutory definition of GHP property while providing the modification that in addition to the ground and ground water, other underground working fluids may be used as a thermal energy source or as a thermal energy sink. Accordingly, proposed § 1.48-9(e)(8) would provide that GHP property is equipment that uses the ground, ground water, or other underground fluids as a thermal energy source to heat a structure or as a thermal energy sink to cool a structure.

Several commenters requested revisions to the definition of GHP property to include recovered heat as a thermal energy source. For example, representative of these comments, a commenter requested clarification that equipment used to circulate recovered heat qualifies as GHP property. This commenter asserted that the same GHP property that uses a ground heat exchanger as a source or sink can be designed to operate in a heat recovery mode, simply recycling heat around a building if the potential exists. Another commenter noted that the use of GHP property in heat recovery mode should be considered a qualified energy source for purposes of the calculation to determine whether the GHP property qualifies as dual use property.

As defined in proposed § 1.48-14(b)(1), the term “dual use property” would mean property that uses energy derived from both a qualifying source (that is, from an energy property including a qualified facility for which a section 48(a)(5) election has been made) and from a non-qualifying source (that is, sources other than an energy property including a qualified facility for which a section 48(a)(5) election has been made). As proposed § 1.48-14(b)(2) would further provide, if dual use property uses energy derived from both a qualifying source and a non-qualifying source it will qualify as energy property if its use of energy from non-qualifying sources does not exceed 50 percent of its total energy input during an annual measuring period (Dual Use Rule). Further, if the energy used from qualifying sources is between 50 percent and 100 percent, only a proportionate amount of the basis of the energy property will be taken into account in computing the amount of the section 48 credit. For example, if 80 percent of the energy used by a dual use property is from qualifying sources, 80 percent of the basis of the dual use property will be taken into account in computing the amount of the section 48 credit.

The Treasury Department and the IRS decline to adopt these suggested revisions because they would conflict with the statutory definition of GHP property. Section 48(a)(3)(A)(vii) specifically provides that GHP property includes equipment that uses the ground or ground water as a thermal energy source. While the Proposed Regulations would provide that underground fluids may be included, this is a clarification that underground fluids other than water may offer another medium that contains thermal energy from the ground or ground water. The statute does not include any other thermal energy sources. For further discussion of the Dual Use Rule see part III.B. of this Summary of Comments and Explanation of Revisions.

Additionally, a few commenters suggested expanding the definition to allow GHP property to be used to heat domestic hot water in addition to a structure. For example, a commenter requested that the final rule clarify that domestic hot water generation by GHP property is included in the definition of GHP property. Another commenter asserted that GHP property eligible for the section 48 credit should also be permitted to provide hot water generation because it would be counterintuitive if heating hot water for space conditioning is included in the

definitions, but heating of domestic hot water is not. The statute requires GHP property heat a structure or cool a structure; therefore, the suggestion to expand the definition is not authorized by the statute. The Treasury Department and the IRS decline to adopt these suggested revisions. The final regulations adopt this rule as proposed.

A commenter mentioned that the energy property definition in proposed § 1.48-9(e)(3) concerning geothermal energy property includes clarifying language on the scope of included property, specifically addressing production and distribution equipment. The commenter recommended including similar language for GHP property described in section 48(a)(3)(A)(vii). The Treasury Department and the IRS declined to adopt this suggestion in the Proposed Regulations, and explained in the preamble to the Proposed Regulations that, while section 48(a)(3)(A)(vii) does not specify energy distribution equipment and components of a building's heating and/or cooling system as components of GHP property, such equipment may be integral to the function of the GHP property to heat or cool a structure. Thus, energy distribution equipment may be considered GHP property for the reasons stated in the preamble to the Proposed Regulations.

3. Waste Energy Recovery Property

Section 48(a)(3)(A)(viii) provides that energy property includes waste energy recovery property (WERP). Section 48(c)(5) defines WERP as property (with a capacity not in excess of 50 MW) that generates electricity solely from heat from buildings or equipment if the primary purpose of such building or equipment is not the generation of electricity. Additionally, section 48(c)(5)(C) prevents taxpayers from claiming a double benefit by providing that any property that could be treated as WERP (determined without regard to section 48(c)(5)(C)) and is part of a CHP property is not treated as WERP for purposes of section 48 unless the taxpayer elects not to treat such system as a CHP property for purposes of section 48.

Proposed § 1.48-9(e)(9)(i) would provide that WERP is property that generates electricity solely from heat from buildings or equipment if the primary purpose of such building or equipment is not the generation of electricity. Proposed § 1.48-9(e)(9)(i) would also provide examples of buildings or equipment the primary purpose of which is not the generation of electricity including, but not limited to, manufacturing plants, medical care facilities, facilities on college campuses, pipeline compressor stations, and associated equipment. Further, proposed § 1.48-9(e)(9)(i) would provide that WERP does not include any property that has a capacity in excess of 50 MW. Proposed § 1.48-9(e)(9)(ii) would provide that any WERP that is part of a system that is a CHP property is not treated as WERP for purposes of section 48 unless the taxpayer elects to not treat such system as a CHP property for purposes of section 48.

Several commenters requested that specific technologies, including “pressure reduction” equipment or “pressure letdown” equipment, sometimes referred to as “turboexpanders,” which generally allow high pressure gas to expand and produce heat, be added to the examples of WERP that would be provided in proposed § 1.48-9(e)(9)(i). Another commenter requested that “pressure reduction” equipment be included as an example of WERP because pipeline transmissions (regardless of geographic distance) require high pressure, but at pressure letdown stations and within industrial facilities where the pressure is reduced, pressure reduction affords an opportunity for energy collection. A commenter requested that district energy systems paired with WERP be added to the examples of WERP, while another commenter suggested adding carbon dioxide power system technology to the examples of WERP.

In response to these requests, the Treasury Department and the IRS highlight that proposed § 1.48-9(e)(9) would provide non-exhaustive examples of buildings and facilities at which WERP may function rather than examples of technology that may qualify as WERP. This approach provides a function-oriented approach to determine whether a technology is WERP that is broad enough to encompass nascent technologies without rendering the regulations quickly obsolete. Therefore, the final regulations do not adopt the requested revisions to the definition of WERP, and the final regulations adopt this rule as proposed.

4. Energy Storage Technology

Section 48(a)(3)(A)(ix), which was added by the IRA, provides that energy property includes energy storage technology. Section 48(c)(6)(A)(i) defines energy storage technology to mean property (other than property primarily used in the transportation of goods or individuals and not for the production of electricity) that receives, stores, and delivers energy for conversion to electricity (or, in the case of hydrogen, that stores energy), and has a nameplate capacity of not less than 5 kilowatt-hours (kWh). Section 48(c)(6)(A)(ii) provides that thermal energy storage property is also energy storage technology.

Section 48(c)(6)(B) provides a rule for modifications of energy storage technology. In the case of any property that either was placed in service before August 16, 2022, and would be described in section 48(c)(6)(A)(i), except that such property has a capacity of less than 5 kWh and is modified in a manner that such property (after such modification) has a nameplate capacity of not less than 5 kWh, or is energy storage technology (as described in section 48(c)(6)(A)(i)) and is modified in a manner that such property (after such modification) has an increase in nameplate capacity of not less than 5 kWh, such property is treated as energy storage technology (as described in section 48(c)(6)(A)(i)) except that the basis of any existing property prior to such modification is not taken into account for purposes of the section 48 credit.

Section 48(c)(6)(C) defines thermal energy storage property, for purposes of section 48(c)(6), as property comprising a system that: is directly connected to a heating, ventilation, or air conditioning system; removes heat from, or adds heat to, a storage medium for subsequent use; and provides energy for the heating or cooling of the interior of a residential or commercial building. Section 48(c)(6)(C)(ii) provides that thermal energy storage property does not include a swimming pool, a CHP property, or a building or its structural components.

Commenters requested clarifications regarding the treatment of energy storage technology co-located with, an integral part of, or shared with a facility that is otherwise eligible for certain Federal tax credits. For example, a commenter requested clarification concerning boundaries between energy storage technology eligible for the section 48 credit and qualified clean hydrogen production facilities eligible for the credit under section 45V. Another commenter requested confirmation that energy storage technology, including a hydrogen energy storage property, separately qualifies for the section 48 credit regardless of whether it is part of a facility for which a credit under section 45, 45V, or 48 is or has been allowed. A commenter also requested confirmation that energy storage technology will be treated as separate property for section 48 and other Code

provisions. The Treasury Department and the IRS confirm that energy storage technology is eligible for the section 48 credit if it satisfies the requirements of section 48 even if the energy storage technology is co-located with or shared by a facility that is otherwise eligible for the section 45, 45V, or 48 credits.

a. Hydrogen Energy Storage Property

Proposed § 1.48-9(e)(10)(iv) would provide that hydrogen energy storage property is property (other than property primarily used in the transportation of goods or individuals and not for the production of electricity) that stores hydrogen and has a nameplate capacity of not less than 5 kWh, equivalent to 0.127 kg of hydrogen or 52.7 standard cubic feet (scf) of hydrogen. Proposed § 1.48-9(e)(10)(iv) would also require hydrogen energy storage property to store hydrogen that is solely used for the production of energy and not for other purposes such as for the production of end products such as fertilizer. Proposed § 1.48-9(e)(10)(iv) would also provide a non-exhaustive list of components of hydrogen energy storage property that would include, but would not be limited to, a hydrogen compressor and associated storage tank and an underground storage facility and associated compressors.

In the preamble to the Proposed Regulations, the Treasury Department and the IRS requested comments on alternative approaches to assessing limitations on the use of hydrogen energy storage property, including whether additional clarification is needed regarding the production of energy from hydrogen, and what type of documentation would be needed to demonstrate that a hydrogen energy storage property was used to store hydrogen that is solely used for the production of energy.

A commenter particularly endorsed the approach taken in the Proposed Regulations by providing that the nameplate capacity requirement for hydrogen is 0.127 kilograms for 5 kWh. The commenter suggested this rule be retained in the final regulations.

Generally, commenters disagreed with the requirement that hydrogen energy storage property must store hydrogen that is solely used for the production of energy and not for other purposes, which the commenters referred to as the “end use requirement.” For example, a commenter stated that the final regulations should be revised to align with the statutory language and asserted that the end use requirement is not in accord with legislative intent, would cause delays, is unworkable, and misaligns with the Biden Administration's U.S. National Clean Hydrogen Strategy and Roadmap. Some commenters asserted that the end use requirement is simply unworkable due to lack of tracing mechanisms once hydrogen enters the stream of commerce.

Multiple commenters also asserted that imposing an end use requirement on hydrogen energy storage property is unsupported by the statute and would be impossible to administer. Commenters expressed concerns that the end use requirement would render the credit useless, impact markets inappropriately, and lead to confusion. Commenters also asserted that section 48(c)(6)(A)(i) requires only that hydrogen energy storage property “store energy” and does not require that it actually be used for the production of energy. Another commenter noted that because hydrogen is a form of energy, that hydrogen storage is per se energy use.

With respect to administrability, commenters explained the difficulties of both requiring exclusive energy use and obtaining the information to make this determination. For example, a commenter stated that it is too difficult for the storage owner to predict how hydrogen will be used and another asserted that requiring stored hydrogen to be used solely for the production of energy would, in cases of bulk storage, be nearly impossible. Another commenter likewise stated that taxpayers do not have full control of, or even information regarding, the use of hydrogen once it leaves their storage facilities and will be unable to have the certainty needed regarding end use to obtain project financing. This commenter, along with others, also noted the significant burden of documenting the end use of the stored hydrogen. This commenter explained that currently there are no recordkeeping or documentation precedents available for a taxpayer to efficiently demonstrate the end-use of hydrogen, a fungible molecule, stored in a taxpayer's hydrogen energy storage property. The commenter asserted that because there is no available documentation pathway for tracking hydrogen molecules through to their end use, it would be both impractical and prohibitively costly for a taxpayer to develop and implement such recordkeeping practices. Another commenter requested that the end use requirement conclude with the recapture period.

Lastly, commenters explained how the end use requirement would limit the usefulness of the credit. For example, a commenter asserted that the end use requirement would render the section 48 credit largely useless as a means of encouraging the development of the large-scale hydrogen storage capability that will be essential to the establishment of a robust hydrogen ecosystem in the United States. Additionally, a commenter stated that an end use requirement would cause several problems, including deterring the provision of hydrogen storage services to a significant portion of the hydrogen market sector (for example, for ammonia production). This commenter also requested clarification regarding the appropriate treatment in a case in which hydrogen is another step removed from ammonia production with electricity production as an interim step. Generally, under the Proposed Regulations, this scenario satisfies the end use requirement.

A commenter noted that the end use requirement would lead to a risk of creating two separate markets for hydrogen: those that are able to use the section 48 credit and those that are not. Emphasizing the same points, another commenter stated that restricting the end-use of the clean hydrogen to “energy” may materially impact the ability of producers to secure offtake agreements and/or restrict the usage of hydrogen storage and transportation networks to only certain types of hydrogen end-uses.

Another commenter noted that energy storage technology neutrality is very important. This commenter stated that it believes that the “energy only” end use requirement would make hydrogen storage a second (or even third) class technology if compared to battery energy storage for purposes of the section 48 credit. The commenter added that one way of reading the positioning of hydrogen and battery storage within the same statutory provision is that this reflects the intent of Congress to not favor one form of energy storage over the other. This commenter further asserts that the absence of an end use requirement imposed on battery storage property indicates that no such requirement should be imposed on hydrogen energy storage property.

While the majority of commenters objected to including the end use requirement, several commenters provided suggestions if the end use requirement is adopted. Several of these commenters suggested the use of an allocation rule similar to the Dual Use Rule under proposed § 1.48-14(b)(2) and discussed in part III.B. of this Summary of Comments and Explanation of Revisions. A commenter suggested revising the Proposed Regulations to

require a reasonable allocation between qualifying energy uses and nonqualifying non-energy uses of stored hydrogen similar to the requirements found in the Dual Use Rule. Another commenter stated that the final regulations should provide flexibility and permit any reasonable method to establish the annual use of the stored hydrogen similar to proposed § 1.48-14(b)(2)(ii). A commenter proposed that the final regulations provide a Dual Use safe harbor for a portion of a hydrogen energy storage property.

Alternatively, several commenters suggested linking the end use requirement to the rules for the credit for production of clean hydrogen under section 45V of the Code. These commenters proposed that hydrogen energy storage be eligible for the section 48 credit regardless of end use, if the hydrogen stored is at least 50 percent qualified clean hydrogen under section 45V(c)(2).

Commenters also requested clarifications regarding what would be considered energy use for purposes of applying the end use requirement. For example, a commenter requested a clarification that the definition of energy use is inclusive of an application in which hydrogen is fully consumed in the manufacturing of a downstream molecule, which is in turn clearly used in an energy application for which hydrogen would be qualified if used directly. Another commenter noted that the examples provided in the preamble to the Proposed Regulations are too narrow and should be expanded to reflect various uses of hydrogen as energy, including ammonia as a feedstock for fuel. A commenter asked for clarification that storage of hydrogen that is solely used as energy includes hydrogen used as energy for mobility purposes. Finally, a commenter requested that the final regulations allow for the storage of hydrogen whose end use is fertilizer for food production, because prohibiting hydrogen storage used in this way may encourage the parallel development of hydrogen storage and transportation infrastructure that could otherwise be shared.

Several commenters also requested clarification regarding substantiation of the end use requirement. A commenter suggested that taxpayers be permitted to rely on the use described in commercial sales contracts without the need to track the ultimate end use of hydrogen by third-party users. Another commenter asked that taxpayers be required only to maintain documentation, such as an agreement between the two parties or a certification, that the immediate purchaser of the stored hydrogen intends to use it for energy. This commenter stated that tracking use past the point of immediate purchaser to the end use of the molecule is impossible and as a result may make the credit unavailable to a variety of hydrogen storage projects. Another commenter noted that operators of clean hydrogen transport and storage systems will need to know what sort of assurances are needed from off-takers at the limits of their system to satisfy credit eligibility and ensure limited recapture risk.

Several commenters suggested that the final regulations provide a method for a taxpayer to demonstrate that a hydrogen energy storage property was used to store hydrogen solely used for the production of energy. A commenter recommended that taxpayers be able to meet this requirement through (i) an affirmative attestation of intent by the taxpayer that owns the storage property and (ii) a five-year lookback process, with reasonable threshold tests, to determine whether a recapture has occurred and what percentage of the credit should be recaptured. Another commenter recommended that the final regulations create a rebuttable presumption of energy use allowing taxpayers to demonstrate energy end use requirements under the relevant facts and circumstances.

The Proposed Regulations would require that the hydrogen energy storage property store hydrogen solely use for the production of energy and not for other purposes such as for the production of end products such as fertilizer. After consideration of comments received, the Treasury Department and the IRS agree that section 48(c)(6)(A)(i) does not require that hydrogen energy storage property store hydrogen that will be used for the production of energy. The Treasury Department and the IRS also understand commenters' concerns regarding the administrative challenges the end use requirement presents for taxpayers and agree that the final regulations require modification. Accordingly, the final regulations do not adopt the requirement that hydrogen energy storage property store hydrogen that is solely used for the production of energy and not for other purposes such as for the production of end products such as fertilizer.

Some commenters asserted that the preamble to the Proposed Regulations indicated that hydrogen energy storage property is not limited to hydrogen. Since hydrogen may be stored within ammonia or methanol, commenters requested that the final regulations state that hydrogen storage property that stores hydrogen in the form of ammonia, methanol, or another stable medium qualifies as energy storage technology if such product is produced directly from hydrogen and subject to any use limitation provided in the regulations. Another commenter requested that the final regulations clarify that equipment used to process hydrogen into ammonia, methanol, and other carriers, as well as storage for such hydrogen carriers, is hydrogen energy storage property.

The Treasury Department and the IRS decline to adopt the comments requesting that the final regulations provide that chemical storage, that is, equipment used to store hydrogen carriers (such as ammonia and methanol), is hydrogen energy storage property. Section 48(c)(6)(A)(i) specifically references only hydrogen, not compounds containing hydrogen. While most vessels designed for hydrogen storage (both above and below ground) may be capable of storing other gases, they are usually dedicated to a single gas (and not repurposed) to avoid contamination and mixing of gases.

Many commenters also provided feedback on the non-exhaustive list of components of property that may be considered part of hydrogen energy storage property as would be provided in proposed § 1.48-9(e)(10)(iv). A commenter endorsed the inclusion of “compressor and storage tank” as a component of hydrogen energy storage property. Several commenters requested that additional components of property be added to this list, some by asserting that the components should be eligible under rules for functionally interdependent or integral property. Other commenters requested that the final regulations expand the examples of integral and functionally interdependent equipment to be more inclusive of existing and future hydrogen energy storage property technologies.

Specifically, commenters requested that hydrogen energy storage property include hydrogen liquefaction and related equipment, equipment required to operate underground hydrogen storage property, as well as dedicated hydrogen distribution equipment such as pipelines located on the storage side of custody meters, hydrogen trailers (for example, cryogenic liquid tankers, or cylinders hauled by modules or chassis) and railcars. Another commenter proposed that the final regulations treat hydrogen liquefaction equipment and related equipment in the same manner as power conditioning and transfer equipment may be treated with respect to certain energy property that generates electricity.

The Treasury Department and IRS agree that additional clarity on the definition of hydrogen energy storage property is warranted. The Treasury Department and IRS understand that hydrogen liquefaction equipment may prepare hydrogen for storage in the hydrogen energy storage property, making such property an integral part of hydrogen energy storage property.

Section 48(c)(6)(A)(i) provides that energy storage technology does not include property primarily used in the transportation of goods or individuals and not for the production of electricity. Pipelines, trailers, and railcars are property primarily used in the transportation of goods or individuals not for the production of electricity. However, hydrogen energy storage property may have gathering and distribution lines to transport hydrogen within the hydrogen energy storage property, making such property an integral part of the hydrogen energy storage property. Therefore, the gathering and distribution lines used within a hydrogen energy storage property are not pipelines used to transport hydrogen outside of the hydrogen energy storage property. The final regulations provide that property that is an integral part of hydrogen energy storage property includes, but is not limited to, hydrogen liquefaction equipment and gathering and distribution lines within a hydrogen energy storage property.

Several commenters requested clarification regarding the costs included in hydrogen energy storage property. In the context of salt caverns, a commenter asserted that the final regulations should confirm that eligible costs for a salt cavern include not only the costs to acquire and construct the eligible property but also all direct and indirect costs associated with the development and construction of the salt cavern and referenced rules under section 263A of the Code. Another commenter requested clarification regarding what equipment from an operational storage facility would be includible in basis for purposes of the section 48 credit. A commenter requested that power-to-gas methanation facility qualify as hydrogen energy storage.

As stated for other energy properties, the Treasury Department and the IRS emphasize that the rule for determining what constitutes a unit of energy property is function-based. Because more information is needed to make the determinations requested by the commenters, the final regulations do not adopt these comments.

b. Electrical Energy Storage Property

Proposed § 1.48-9(e)(10)(ii) would provide that electrical energy storage property is property (other than property primarily used in the transportation of goods or individuals and not for the production of electricity) that receives, stores, and delivers energy for conversion to electricity, and has a nameplate capacity of not less than 5 kWh. For example, subject to the exclusion for property primarily used in the transportation of goods or individuals, electrical energy storage property includes, but is not limited to, rechargeable electrochemical batteries of all types (such as lithium ion, vanadium flow, sodium sulfur, and lead-acid); ultracapacitors; physical storage such as pumped storage hydropower, compressed air storage, flywheels; and reversible fuel cells.

Multiple commenters requested clarification concerning specific technologies that may be electrical energy storage property. A commenter requested that the definition be expanded to include compressed fluid storage in addition to compressed air storage so as to include liquid and gas applications. Because these applications generally are used by pipelines, which are property primarily used in the transportation of goods or individuals and not for the production of electricity, the Treasury Department and the IRS decline to adopt these revisions.

Multiple commenters requested that load controllers be described as an integral part of electrical energy storage technology while other commenters requested that bidirectional chargers be eligible as energy storage technology. Another commenter requested that the final regulations explicitly include thermal batteries capable of storing energy for conversion to electricity in its non-exhaustive list of eligible “electrical energy storage property” due to confusion related to thermal energy storage (TES) being a separate category.

As has been noted previously, the Proposed Regulations are intended to provide a function-oriented method to determine whether a technology is energy storage technology that is broad enough to encompass nascent technologies without rendering the regulations quickly obsolete. It is impossible to enumerate every single technology that may be eligible for the section 48 credit given the ever-changing nature of the industry and technological development. Although these regulations do not list all technologies that may qualify for the section 48 credit, the Proposed Regulations provide adequate guidance and examples to illustrate the application of the rules for taxpayers to analyze a particular technology. The Treasury Department and the IRS, therefore, do not adopt commenters' requests concerning specific technologies.

Multiple commenters questioned what primarily used in the transportation in section 48(c)(6)(A)(i) means in the case of electrical energy storage property. A commenter explained that pipeline systems can be multi-tasked with a section of the pipe to act as energy storage and requested that the phrase “primarily used in the transportation of goods” specifically exclude equipment that is mobile but include stationary property such as pipelines. Another commenter requested a bright line rule for technologies that are not primarily used in transportation of goods or individuals to qualify for the section 48 credit. This commenter suggested that property, including school buses, that receives, stores, and delivers energy for conversion to electricity and that is used less than 35 percent of the hours in a calendar year for transporting goods or individuals is not primarily used for transportation. In response to these commenters, the Treasury Department and the IRS note that pipelines and school buses are both primarily used in transportation. In addition, there are other IRA tax incentives intended to benefit some technologies for which commenters seek section 48 credit eligibility. For instance, section 45W provides a tax credit for electric school buses. Furthermore, a notice of proposed rulemaking (REG-118269-23) published in the

Federal Register

(89 FR 76759) on September 19, 2024, regarding the section 30C alternative fuel vehicle refueling property credit (30C Proposed Regulations) proposed a definition for property primarily used in the transportation of goods or individuals and not for the production of electricity for purposes of sections 48 and 48E. In particular, proposed § 1.48-9(e)(10)(vi) of the 30C Proposed Regulations would provide that energy storage property is primarily used in the transportation of goods or individuals and not for the production of electricity, and therefore is not energy storage technology eligible for the section 48 credit, if a credit is claimed under section 30C for such property. Accordingly, comments regarding this proposed definition will be addressed when the 30C Proposed Regulations are finalized.

In the context of a pumped storage hydropower facility, a commenter suggested that the scope of eligible

electrical energy storage technology be defined to include all property necessary to receive, store, and deliver energy for conversion to electricity, consistent with the definition in section 48(c)(6)(A)(i), and include all tangible personal property and other tangible property up to and including the step-up transformer at the substation prior to transmission to the grid. This commenter also suggested that an example be included to illustrate these concepts. Another commenter stated that the final regulations should confirm that the term “energy storage technology” includes all the qualified property up to and including the step-up transformer at the substation prior to transmission to the grid, and that this property would include the two reservoirs, the powerhouse (including the generators, turbines, and associated electrical equipment), the piping and pumps, the tunnel, substation equipment, and other integral property.

A definitive response to such comments would require the Treasury Department and the IRS to conduct a complete factual analysis of the property in question, which may include information beyond that which was provided by the commenters. Because more information is needed to make the determinations requested by the commenters, the requested clarifications are not addressed in these final regulations.

c. Thermal Energy Storage Property

Proposed § 1.48-9(e)(10)(iii) would provide that thermal energy storage property is property comprising a system that is directly connected to a heating, ventilation, or air conditioning (HVAC) system; removes heat from, or adds heat to, a storage medium for subsequent use; and provides energy for the heating or cooling of the interior of a residential or commercial building. Thermal energy storage property includes equipment and materials, and parts related to the functioning of such equipment, to store thermal energy for later use to heat or cool, or to provide hot water for use in heating a residential or commercial building. It does not include a swimming pool, CHP property, or a building or its structural components. The Proposed Regulations included a non-exhaustive list of examples of thermal energy storage property.

Commenters requested clarifications on what constitutes thermal energy storage property. A commenter requested clarification that thermal energy storage property includes all air-source heat pumps, electric boilers, and hot water heat pumps, but does not include fossil-fuel-powered water boilers. The commenter also requested that the final regulations clarify that ground and air source heat pumps qualify as energy storage technology and suggested that thermal energy stored in one medium may be transferred and stored in a second medium for subsequent use. The commenter also requested that the use of the term “subsequent” in the definition of thermal energy storage property under section 48(c)(6)(C)(i)(II) not require a specific interval of time between storage and use for a process to qualify. Another commenter stated that the point at which the scope of thermal energy storage property ends is unclear and requested clarification regarding whether “equipment” extends to the thermal energy source for thermal energy storage property. This commenter also requested clarity on whether the thermal energy source equipment (for example, chiller, heat pump, or furnace) may be used for multiple purposes or if the thermal energy source equipment must be dedicated to the thermal energy storage property. Another commenter asked whether equipment that uses thermal energy to heat or cool a structure is also thermal energy storage property. Some commenters endorsed the proposed examples of thermal energy storage property, while other commenters requested additions, such as including “chilled water” to ice and electric boilers that use electricity to heat water and later use this stored energy to heat a building through the HVAC system.

The Treasury Department and IRS agree that the definition of thermal energy storage property requires clarification. Thermal energy storage property is defined, in part, as a system which “removes heat from, or adds heat to, a storage medium for subsequent use.” The Treasury Department and IRS, in consultation with DOE, understand the phrase “adds heat to” as including equipment that is involved in adding, or transferring, already-existing heat from one medium to the storage medium, but not equipment involved in transforming other forms of energy into heat in the first instance. Equipment that just adds (or removes) heat includes technologies, like heat pumps, that draw heat from the ambient air or other stores of heat, and add that heat to a storage medium. By contrast, equipment that transforms other forms of energy into heat in the first instance, for example through combustion or electric resistance, is not property that “removes heat from, or adds heat to” a storage medium and is therefore not an eligible component of a thermal energy storage property. For example, a conventional gas boiler with an integrated storage tank would not generally be thermal energy storage property. While the gas boiler elements would not be part of such property, the integrated storage tank, however, may be thermal energy storage property if it otherwise meets the thermal energy storage property definition. Further, an air-to-water heat pump with a thermal storage tank, for example, would generally be thermal energy storage property provided that it otherwise meets the thermal energy storage definition. This could be the case even if the heat pump also serves a purpose in the connected HVAC system's real-time heating or cooling of a building. In that case, the thermal storage tank would be thermal energy storage property and the heat pump may also qualify as part of that eligible property to the extent the taxpayer's costs exceed the cost of an HVAC system without thermal storage capacity that would meet the same functional heating or cooling needs as the heat pump system with a storage medium, other than time shifting of heating or cooling.

The Proposed Regulations included an example of electric furnaces that use electricity to heat bricks to high temperatures and later use this stored energy to heat a building through the HVAC system. The Treasury Department and IRS acknowledge that this example needs to be refined to more precisely delineate the scope of eligible thermal energy storage property. Whereas the heated bricks and equipment that adds heat generated by the furnace to those bricks, or removes heat from the bricks, is eligible thermal energy storage property, the electric furnace equipment that transforms energy into the thermal energy in the first instance is not. The final regulations clarify that thermal energy storage property does not include property that transforms other forms of energy into heat in the first instance and this example has been revised accordingly in the final regulations.

With respect to the requirement for subsequent use, the Treasury Department and IRS also agree that additional clarity is warranted. The statute requires that thermal energy storage property must be able to perform certain functions, not simply performing heat transfer. Any heat transfer may take some amount of time and heat does not immediately dissipate even if no effort is made to store it. While some may assert that such heat transfer is subsequent use, the Treasury Department and IRS disagree. A plain reading of the statute indicates that

thermal energy storage property does not include property that simply engages in heat transfer. The thermal energy storage property must be able to

store

the heat. The Treasury Department and IRS, in consultation with DOE, find that a minimum time interval for subsequent use provides certainty for taxpayers and sound tax administration. Accordingly, the final regulations clarify that property that “removes heat from, or adds heat to, a storage medium for subsequent use” is property that is designed with the particular purpose of substantially altering the time profile of when heat added to or removed from the thermal storage medium can be used to heat or cool the interior of a residential or commercial building. The final regulations also provide a safe harbor for thermal energy storage property. If the thermal energy storage property can store energy that is sufficient to provide heating or cooling of the interior of a residential or commercial building for the minimum of one hour, it is deemed to have the purpose of substantially altering the time profile of when heat added to or removed from the thermal storage medium can be used to heat or cool the interior of a residential or commercial building.

The Treasury Department and IRS have revised the definition of thermal energy storage property and the examples in the final regulations to illustrate what constitutes thermal energy storage property. These final regulations also add that thermal energy storage property may store thermal energy in an artificial pit, an aqueous solution, or a solid-liquid phase change material, in addition to the underground tank or a borehole field already included in the proposed regulation, in order to be extracted for later use for heating and/or cooling. The final regulations clarify that a heat pump system that transfers heat into and out of a storage medium is thermal energy storage property. However, consistent with § 1.48-14(d), if thermal energy storage property, such as a heat pump system, includes equipment, such as a heat pump, that also serves a purpose in an HVAC system that is installed in connection with the thermal energy storage property, the taxpayer's basis in the thermal energy storage property includes the total cost of the thermal energy storage property and HVAC system less the cost of an HVAC system without thermal storage capacity that would meet the same functional heating or cooling needs as the heat pump system with a storage medium, other than time shifting heating or cooling.

Commenters also requested clarifications regarding whether specific components may be part of thermal energy storage. A commenter requested that pipes to distribute stored thermal energy to and within buildings (including for multiple residential or commercial buildings such as through a district heating system) and equipment in building heating and/or cooling systems—such as coils, radiators, and other end-use equipment—necessary to convey stored thermal energy to building space or domestic hot water supply be included in thermal energy storage property.

With respect to the request to include pipes and equipment in building heating and/or cooling systems, the statutory definition of thermal energy storage property provides, in part, that it is directly connected to an HVAC system, not that it is an HVAC system. The Proposed Regulations would provide a function-oriented method to evaluate whether property is a functionally interdependent or an integral part of thermal energy storage property. With respect to the request to include equipment necessary to convey domestic hot water supply, the statutory definition further provides, in part, that thermal energy storage property provides energy for the heating or cooling of the interior of a residential or commercial building. The statute does not provide for stored energy for domestic hot water supply for consumptive use. Therefore, property that provides energy for domestic hot water supply exclusively for consumptive use and not for heating or cooling of the interior of such a building is not eligible under the statute. The final regulations do not adopt these comments.

Another commenter requested clarification that if property that would otherwise qualify as thermal energy storage property is connected to a district heating system that provides energy for the heating or cooling of multiple buildings, it would nonetheless be considered “directly connected to a heating, ventilation, or air conditioning system”. Proposed § 1.48-9(e)(10)(iii) would not preclude thermal energy storage technology property that is directly connected to more than one HVAC system from being a thermal energy storage property. The final regulations do not modify the example.

Commenters also requested modification of the definition of thermal energy storage property in proposed § 1.48-9(e)(10)(iii). A commenter suggested adding “refrigeration” to “is directly connected to a heating, ventilation, or air conditioning system” because industrial refrigeration systems are considered part of the HVAC system in construction. This commenter also joined another in recommending adding “industrial” to “for use in heating a residential or commercial building” to prevent restricting the use of thermal energy storage in industrial sites and to eliminate confusion regarding commercial and industrial building types. To maintain consistency with the statutory text, the final regulations maintain the wording set forth in section 48(c)(6)(C)(i)(I) and (III) as is.

Commenters also expressed concerns that the language “directly connected to . . .” in proposed § 1.48-9(e)(10)(iii) might exclude thermal energy storage property that directly functions as a heating system itself without connecting to an HVAC system. A commenter suggested providing guidance to clarify that thermal energy storage property that functions as a self-contained heating or cooling system is eligible thermal energy storage property under proposed § 1.48-9(e)(10)(iii). Section 48(c)(6)(C)(i)(I) requires that thermal energy storage property is directly connected to a heating, ventilation, or air conditioning system, but does not include the HVAC system itself as eligible thermal energy storage property. Therefore, these comments are not adopted because they would be inconsistent with the statute. However, elements of such a system could constitute eligible thermal energy storage property.

Additionally, a commenter requested clarification that thermal energy storage property may be considered battery storage technology for the purpose of claiming the credit available to residential customers under section 25D(d)(6) of the Code. The Treasury Department and the IRS decline to address this request because it is outside of the scope of section 48 and, therefore, these final regulations.

d. Modifications of Energy Storage Property

Proposed § 1.48-9(e)(10)(v) would provide that with respect to electrical energy storage property and hydrogen energy storage property placed in service after December 31, 2022, energy storage technology that is modified as set forth in proposed § 1.48-9(e)(10)(v) is treated as electrical energy storage property or hydrogen energy storage property, except that the basis of any existing property prior to such modification is not taken into account for purposes of the section 48 credit. Proposed § 1.48-9(e)(10)(v) applies to any electrical energy storage property

and hydrogen energy storage property that either: (A) was placed in service before August 16, 2022, and would be described in section 48(c)(6)(A)(i), except that such property had a capacity of less than 5 kWh and is modified in a manner that such property (after such modification) has a nameplate capacity (after such modification) of not less than 5 kWh; or (B) is described in section 48(c)(6)(A)(i) and is modified in a manner that such property (after such modification) has an increase in nameplate capacity of not less than 5 kWh.

A commenter asked if the section 48 credit is available for repurposed batteries used to build energy storage systems. Whether a battery is repurposed and eligible for the section 48 credit requires a factual determination that is beyond the scope of these regulations. The 80/20 Rule provides general rules for taxpayers that include some used components when placing in service an energy property.

Another commenter requested that the requirement that any modified energy storage property must increase the nameplate capacity of the energy storage property by 5 kWh or more be removed. Section 48(c)(6)(B) sets forth the 5 kWh requirement for modifications to energy storage property so it cannot be removed. The final regulations do not adopt this comment.

Multiple commenters requested clarification that the minimum 5 kWh capacity increase needed for modifications of energy storage under section 48(c)(6)(B) be the nameplate capacity not actual capacity (which may have decreased due to degradation). The commenters explained that focusing on nameplate capacity will provide greater certainty than measuring actual capacity. Another commenter explained that nameplate capacity should be tested at the time of purchase, rather than on the date of modification, especially due to non-degrading systems and storage augmentation. The commenter noted that if augmentations are implemented, the installed energy storage capacity of the energy storage technology is increased (original installation nameplate capacity plus the augmentation totaling the amount installed), but the nameplate capacity of the property and interconnection agreement remains unchanged.

Section 48(c)(6)(B) provides that, for purposes of the modification rule, nameplate capacity is examined at the time of the modification and must result in a nameplate capacity increase from below 5 kWh to not less than 5 kWh (for energy storage property originally placed in service before enactment of the IRA) or by at least 5 kWh (for energy storage technology placed in service after the enactment of the IRA that is later modified). Consistent with the statute, the Proposed Regulations would not take into account actual capacity but instead use nameplate capacity. The only instance in which section 48(c)(6)(B) uses the term “capacity” alone, rather than “nameplate capacity”, is nonetheless still a reference to nameplate capacity. Specifically, section 48(c)(6)(B)(i) refers to property that “would be described in subparagraph (A)(i), except that such property has a capacity of less than 5 kilowatt hours”. The referenced section 48(c)(6)(A)(i) text makes clear that the 5 kWh capacity threshold is, in fact, a nameplate capacity threshold. Therefore, for the avoidance of doubt, the final regulations at § 1.48-9(e)(10)(v)(A) clarify that the relevant pre-modification capacity is the nameplate capacity. Therefore, other than the minor clarification noted above, these comments were not adopted in the final regulations.

Additionally, a commenter requested clarification whether capacity must be added within the bounds of an existing electrical storage property enclosure, or whether the enclosure may be expanded or an additional enclosure added to accommodate the increased capacity. Another commenter requested clarification that adding new battery racks to an existing enclosure would be eligible for the section 48 credit if the nameplate capacity of the new battery rack is at least 5 kWh. The Proposed Regulations would provide no limitation on the physical space occupied by an energy storage technology and the final regulations retain this approach.

5. Qualified Biogas Property

Section 48(a)(3)(A)(x) was added by the IRA to provide that energy property includes qualified biogas property. Section 48(c)(7)(A) defines qualified biogas property as property comprising a system that converts biomass (as defined in section 45K(c)(3), as in effect on the date of enactment of section 48(a)(7) (August 16, 2022)) into a gas that consists of not less than 52 percent methane by volume, or is concentrated by such system into a gas that consists of not less than 52 percent methane, and captures such gas for sale or productive use, and not for disposal via combustion. Section 48(c)(7)(B) provides that qualified biogas property includes any property that is part of such system that cleans or conditions such gas.

Proposed § 1.48-9(e)(11) would adopt the statutory definition of qualified biogas property. Proposed § 1.48-9(f)(2)(i) would provide that components of property are considered qualified biogas property if they are functionally interdependent, that is, if the placing in service of each component is dependent upon the placing in service of each of the other components in order to perform the intended function of the qualified biogas property as described in proposed § 1.48-9(e)(11)(i). The Proposed Regulations adopted this approach because it provides a function-oriented method to determine what is considered included in a qualified biogas property and is broad enough to encompass technological changes. Additionally, proposed § 1.48-9(e)(11)(i) would provide examples of functionally interdependent components of a qualified biogas property including, but not limited to, a waste feedstock collection system, a landfill gas collection system, mixing or pumping equipment, and an anaerobic digester.

Proposed § 1.48-9(e)(11)(i) would clarify that upgrading equipment is not a functionally interdependent component of qualified biogas property. The preamble to the Proposed Regulations stated that the upgrading equipment that is necessary to condition biogas into the appropriate mixture for injection into the pipeline is not functionally interdependent with the qualified biogas property that converts biomass into a gas containing not less than 52 percent methane and captures such gas for sale or productive use as specified in the statute. The preamble to the Proposed Regulations also stated that while this upgrading equipment makes the injection of biogas into a pipeline possible, such upgrading equipment is not necessary to satisfy the statutory requirements that the biogas converted from biomass contain not less than 52 percent methane, and that it be captured for sale or productive use.

a. Correction and Cleaning and Conditioning Property

The Correction published on February 22, 2024, stated that a correction was needed to clarify that gas upgrading equipment that is necessary to concentrate the gas from qualified biogas property into the appropriate mixture for injection into a pipeline through removal of other gases such as carbon dioxide, nitrogen, or oxygen, would be energy property if it is an integral part of an energy property as defined in proposed § 1.48-9(f)(3). Accordingly, the Proposed Regulations

were corrected by revising the following sentence: “However, gas upgrading equipment necessary to concentrate the gas into the appropriate mixture for injection into a pipeline through removal of other gases such as carbon dioxide, nitrogen, or oxygen is not included in qualified biogas property.” to read as follows: “However, gas upgrading equipment necessary to concentrate the gas into the appropriate mixture for injection into a pipeline through removal of other gases such as carbon dioxide, nitrogen, or oxygen is not a functionally interdependent component (as defined in paragraph (f)(2)(ii) of this section) of qualified biogas property.”

The Proposed Regulations and Correction requested comments regarding what types of components may be included within the definition of cleaning and conditioning property provided in the definition of qualified biogas property in section 48(c)(7)(B). The Treasury Department and the IRS received numerous comments regarding the components that should be included in qualified biogas property.

Commenters universally supported the inclusion of upgrading equipment in qualified biogas property and some asserted that the Proposed Regulations' exclusion of upgrading equipment conflicts with analogous provisions in the Proposed Regulations that allow the inclusion of power conditioning and transfer equipment such as that allowed in offshore wind projects. Most commenters asserted that upgrading equipment should be considered functionally interdependent to qualified biogas property and therefore, eligible for the section 48 credit. A commenter requested that biogas energy property include a definition of system for section 48(c)(7)(A) purposes that includes all integrated property.

Commenters also expressed concern that the Proposed Regulations and the Correction unduly limit what would be included as qualified biogas property. For example, a commenter stated that property used to capture, clean, condition, upgrade, and perform “chemical, mechanical, or thermochemical conversion” are all necessary to convert biogas into usable products. Commenters explained that the Proposed Regulations would allow only biogas property with limited utility to qualify and would exclude a majority of costs related to biogas property. For example, a commenter stated that under the Proposed Regulations, property used to produce the raw biogas from the landfill, remove sulfur from the biogas, and remove the volatile organic compounds from the biogas would appear to qualify for the section 48 credit, whereas property used to remove carbon dioxide, nitrogen, and oxygen from biogas and to otherwise prepare the gas for injection into a natural gas pipeline would not qualify for the section 48 credit. The commenter asserted that the equipment used in these latter processes are essential components of a RNG system and comprise approximately 85 percent of overall capital investment in an RNG project.

A commenter asserted that the Proposed Regulations read the sale or productive use language out of the statute. Another commenter stated that the Proposed Regulations would limit eligibility for the section 48 credit to essentially raw biogas (if it can meet the 52 percent methane threshold). According to the commenter, raw biogas generally cannot be used without some treatment due to the contaminants present in the gas stream and even if the raw biogas can be used, such use is typically through combustion (that is, burned on-site for electricity or as process energy), which is excluded under the statute. The commenter explained that, at best, the Proposed Regulations may allow some medium-BTU gas, which is biogas that received only limited treatment to remove certain contaminants, to be eligible for the section 48 credit. However, medium-BTU gas is not as valuable as RNG and is typically used locally.

Generally, many commenters agreed that the utility of biogas is significantly limited without proper cleaning and conditioning. These commenters stated that, without upgrading, the extracted biogas faces considerable challenges for marketability because its high moisture content and corrosive properties make it difficult to safely store, compress, mix with other gases, transport, inject into the natural gas system, or market. Consequently, the non-upgraded biogas is of limited utility, such as on-site combustion to create process heat, generate electricity, or to be flared into the atmosphere. In contrast, a commenter described the marketable uses of upgraded RNG as including, but not limited to, advanced electricity generation in fuel cells, hydrogen production, advanced liquid fuels for aviation, and RNG for use in trucking, industrial processes, and space heating.

Generally, commenters requested the final regulations correct the treatment of “gas upgrading equipment” in the Proposed Regulations to instead treat it as property that “cleans and conditions” gas, asserting that such treatment is consistent with the plain text of the statute and the intention of Congress. To support this position, a commenter asserted that the statute and legislative history do not contemplate any limitation on what property “cleans or conditions” gas. Several commenters cited certain congressional statements regarding the Agriculture Environmental Stewardship Act to support their reading of the definition of qualified biogas property added to section 48 by the IRA.

Similarly, many commenters asserted there is a misunderstanding in the Proposed Regulations that the term “upgrading” is interchangeable with the phrase “cleaning and conditioning.” For example, a commenter stated that the exclusion of upgrading equipment appears contradictory to the statute, which expressly includes cleaning and conditioning property. This commenter noted that the Proposed Regulations misunderstand the “upgrading” process, which is an industry verbiage, but is essentially part of the “cleaning and conditioning process” necessary to process biogas to standards that support its productive use or sale. Another commenter stated that the DOE uses these terms interchangeably.

Additionally, a few commenters stated that the Proposed Regulations incorrectly implemented the 52 percent measurement as a ceiling rather than a floor. For example, a commenter pointed to the preamble to the Proposed Regulations as mistakenly interpreting that the statute was enacted to incentivize taxpayers to produce 52 percent methane (and nothing greater). The commenter stated that this is contrary to the statute, to the relevant legislative history, and to an understanding of how the quantities of biogas that can be produced by RNG developers can be used.

Several commenters also pointed to the reference to “such gas” in the statute to evidence that “such gas” refers to biogas not less than 52 percent methane and captured for sale or productive use. A commenter asserted that the reference to “such gas” provides a two-prong test. According to the commenter, first the system must convert the biomass into a gas that is between 52 percent and 100 percent methane by volume and second the system must capture “such gas for sale or productive use, and not for disposal via combustion”; thus, in the commenter's view, the reference to “such gas” is to gas described in the first prong.

Another commenter stated that the reference to “such gas” includes biogas that is at least 52 percent methane by volume. The commenter concluded therefore, that the statute does not exclude from qualified biogas property

cleaning and conditioning equipment that is used to process biogas that is already 52 percent methane by volume.

Another commenter stated that the statute uniquely and broadly defines the term “cleaning and condition property” not as the Proposed Regulations suggest, which limits its applicability to instances in which an otherwise ineligible property needs cleaning and conditioning to be eligible. Instead, the commenter noted that the Proposed Regulations' interpretation of section 48(c)(7)(B) ignores the reference to “such gas,” referring to the definition in section 48(c)(7)(A), which clearly states “any property which is part of such system which cleans or conditions such gas.” The commenter asserted that the term “such gas” refers to biogas that is not less than 52 percent methane and captured for sale or productive use, as confirmation that cleaning and conditioning equipment for gas that has already met the conditions set forth in section 48(c)(7)(A), is qualified biogas property.

Commenters also objected to the exclusion of gas upgrading equipment provided in the Proposed Regulations because commenters assert that it could negatively impact investment and financing for biogas projects, especially those on small farms, agricultural projects, and municipal projects. A commenter, who works with smaller scale farms including dairy farms, asserted that the upgrading equipment is integral to the cleaning and conditioning process, and crucial for achieving energy output suitable for productive use or sale, especially for projects in rural and remote communities. The commenter concluded that the limitation on upgrading equipment provided in the Proposed Regulations will prevent projects from moving forward and disproportionately impact small agricultural projects.

Several commenters asserted that the statute supports redefining the components of property that are considered functionally interdependent to a qualified biogas property. A commenter suggested redefining qualified biogas property as property that is placed in service to upgrade biogas for sale or a productive use beyond the point that such gas is typically vented or flared. This commenter explained that this definition properly places the focus on property used to convert an unproductive substance (such as landfill gas) into a productive substance (such as RNG).

Another commenter agreed with the inclusion of the gas upgrading equipment as integral property but stated that the Correction is limited to technology specific to upgrading for pipeline injection and therefore, is out of line with the technology neutral definition in the statute. The commenter asserted that upgrading, processing, or reforming should be viewed without limitation to specific technology and that many biomass resources may not be close to natural gas pipelines or have other limitations on pipeline injection. The commenter further stated that the focus should be on the components required for property that captures such gas for sale or productive use. Therefore, if additional onsite steps are required to process raw biogas that meets the minimum 52 percent methane content threshold into a usable product, whatever the product may be, then the property necessary to take those steps should be considered qualified biogas property.

The Treasury Department and the IRS agree with the commenters that the proposed rule addressing gas upgrading equipment is too restrictive. As commenters explained, upgrading equipment is used interchangeably with cleaning and conditioning equipment and such equipment may be needed to make the biogas suitable for sale or productive use. The Treasury Department and IRS also agree that specific upgrading equipment should not be identified for injection into a pipeline. Therefore, the final regulations provide more generally that gas upgrading equipment is cleaning and conditioning property.

Commenters requested clarifications regarding what types of equipment are considered qualified biogas property, including as functionally interdependent components or as property integral to the qualified biogas property. For example, a commenter requested that a list of equipment be included as qualifying biogas property in the final regulations including gas removal equipment, pressure and temperature control equipment, moisture removal equipment, compression equipment, thermal oxidizer equipment, gas recycling equipment, and synthetic methane production equipment. Another commenter proposed revisions to the example in proposed § 1.48-9(e)(11)(i) to include as qualified biogas property cleaning and conditioning equipment used to remove toxins or any other impurities from raw biogas or concentrate the gas into the appropriate mixture for sale or productive use through removal of other gases such as carbon dioxide, nitrogen, or oxygen. A commenter requested the inclusion of landfill municipal solid waste as a renewable resource to produce renewable natural gas as energy property because such a system may implement thermal gasification and other relevant technologies. Another commenter suggested that qualified biogas property should include the pipeline and compression equipment necessary to transport the gas from the production plant to the common carrier pipeline.

Another commenter suggested that the Proposed Regulations be modified to specifically provide that the property comprising a biogas conversion/concentration and capture system, including any property that is part of such system and that cleans and conditions, is a single unit of energy property (collectively referred to as a RNG Production System). This commenter also suggested that the gas upgrading equipment necessary to concentrate the gas into the appropriate mixture for injection into a pipeline through the removal of other gases and impurities is a functionally interdependent component of the RNG Production System. This commenter also described a second type of property, a landfill gas collection system (LFG Collection System), and noted that the LFG Collection System is property that is an integral part of, but not functionally interdependent with, the RNG Production System because the placing in service of an LFG Collection System is not dependent upon placing in service the RNG Production System, but the LFG Collection System is used directly in and essential to the completeness of the intended function of the RNG Production System. While this commenter's focus was on landfills, the commenter noted the same analysis would apply to other collection systems such as anaerobic digesters operating at farms. Some commenters asserted that anaerobic digesters were functionally interdependent property, while others asserted that anaerobic digesters were integral property.

After consultation with the DOE, the Treasury Department and IRS understand that the methane content of biogas in an anaerobic digester can vary between 44% and 68%. Thus, if biogas processed by an anaerobic digester consists of not less than 52% methane and all other statutory requirements are met, an anaerobic digester would be a unit of energy property. Commenters explained that although biogas exiting an anaerobic digester might not be put to productive use, the statute requires that qualified biogas property capture the gas “for sale or productive use.” To illustrate, if a taxpayer places in service

an anaerobic digester, which generates biogas meeting the not less than 52% methane requirement, and sells the biogas to another taxpayer who in turn places in service cleaning and conditioning property to clean such biogas, each taxpayer has a qualified biogas property and may be eligible for the section 48 tax credit. On the other hand, if the biogas in the anaerobic digester does not meet the not less than 52% methane requirement, then such digester is not, by itself, a qualified biogas property. Nevertheless, the anaerobic digester still may be an integral part of other qualified biogas property, such as a system that cleans and conditions the biogas.

The Treasury Department and the IRS intend that the final regulations provide a function-oriented approach to determining what property is considered energy property, including qualified biogas property. The Proposed Regulations provided examples of types of property that are included as qualified biogas property, which were intended to be illustrative but not exclusive. Therefore, the final regulations do not include additional examples of property that is included as qualified biogas property but do clarify that property that is an integral part of qualified biogas property includes, but is not limited to, a waste feedstock collection system, landfill gas collection system, and mixing and pumping equipment.

b. Flaring Allowance

The preamble to the Proposed Regulations explained that a commenter to Notice 2022-49 stated that some properties that produce electricity from gas using a combustion process may flare waste or tail gas, including during commissioning or maintenance periods. This commenter recommended a de minimis exception. In response to this concern, the Proposed Regulations requested comments regarding whether such an exception is necessary and what should be considered de minimis for this purpose.

All comments received in response to this request were in favor of an exception. Some comments pointed to the overarching purpose of the qualified biogas property and noted that nominal leakage should not prevent property from qualifying. For example, a commenter asserted that if the overarching purpose of the biogas is for sale or productive use, then the combustion of a de minimis portion should not prevent a property that produced such gas from being a qualified biogas property. Similarly, a commenter recommended allowing a de minimis exception for flare waste or tail gas so that otherwise eligible biomass systems will not be disqualified from the credit due to small amounts of leakage arising from normal business operations.

Another commenter pointed to the benefit of hazard reduction associated with nominal flaring. This commenter stated that flaring in appropriate circumstances should not disqualify a facility, because “flares are often required as a safety and emissions hazard reducer to be used in case of emergency, accidental release, start-up and shut-down procedures, and other rare occurrences.”

The Treasury Department and the IRS understand commenters' concerns regarding whether flaring performed for commissioning, maintenance, safety, or other reasons may impact eligibility for the section 48 tax credit. Qualified biogas property is defined, in part, as capturing biogas “for sale or productive use, and not for disposal via combustion.” The Treasury Department and the IRS interpret this statutory requirement to not impact a qualified biogas property that combusts, or flares, some biogas under standard operating conditions, provided the primary purpose of the qualified biogas property is sale or productive use of biogas and any flaring complies with all relevant Federal, State, regional Tribal, and local laws and regulations. After consulting the DOE, the Treasury Department and the IRS understand that flare permits are specific to a given biogas facility design. Determining the amount of flaring appropriate for safety purposes is specific to each qualified biogas property and enforcing that limit is best left to relevant Federal, State, regional, local, and/or Tribal regulators. Flaring performed in accordance with applicable permits from relevant Federal, State, regional, local, and/or Tribal regulators should not jeopardize a qualified biogas property's eligibility for the section 48 credit. Accordingly, the final regulations at § 1.48-9(e)(11) provide that while a qualified biogas property generally may not capture biogas for disposal via combustion, combustion in the form of flaring will not disqualify a qualified biogas property, provided the primary purpose of the qualified biogas property is sale or productive use of biogas and any flaring complies with all relevant Federal, State, regional, Tribal, and local laws and regulations.

c. Point of Measurement

Proposed § 1.48-9(e)(11)(ii) would provide that the methane content requirement described in section 48(c)(7)(A)(i) and in the Proposed Regulations is measured at the point at which gas exits the biogas production system, which may include an anaerobic digester, landfill gas collection system, or thermal gasification equipment. This measurement point was described in the Proposed Regulations as the point at which a taxpayer generally must determine whether it will convert the biogas to fuel for sale or use it directly to generate heat or to fuel an electricity generation unit.

Several commenters requested clarification regarding the point of measurement for the methane content requirement. A commenter specifically requested clarification regarding the point at which the gas exits the biogas production system. Several commenters noted that the point of measurement provided in the Proposed Regulations was incorrect because it is too early in the process. These comments responded to the Proposed Regulations as well as the Correction. This sentiment generally is consistent with the commenters' view that biogas upgrading equipment should be considered eligible biogas property.

One commenter stated that the Correction does not address the measurement point for the methane content requirement for purposes of determining whether the definition of “qualified biogas property” is met. The commenter asserted that the final rule must clarify that the 52 percent methane content requirement is measured at the point at which the biogas is going to be sold or put to productive use, which would be after the biogas has been passed through the cleaning and conditioning and/or gas upgrading equipment. The commenter suggested that a change should be made regardless of whether gas upgrading equipment is considered “integral” or “functionally interdependent.” The commenter submitted another comment after the Correction was issued urging that the methane content of 52 percent should be measured at the point at which the gas is ready for sale or applicable productive use, that is, at the end of the cleaning and conditioning process. Several commenters supported these comments and incorporated them into their own comments.

Another commenter similarly stated that the methane content should be measured at the end of the cleaning and conditioning process, which would be the point at which the biogas is going to be sold or put to a productive use, to ensure it consists of at least 52 percent methane. Many commenters have asserted that the 52 percent measurement is a floor (not a

ceiling).Therefore, even if the measurement point were to occur earlier, taxpayers that later upgrade the biogas could still satisfy the 52 percent requirement.

The Treasury Department and the IRS agree that the point of measurement in the Proposed Regulations was too early in the biogas production process, which could potentially frustrate compliance with the “sale or productive use” requirement. Therefore, the final regulations adopt at § 1.48-9(e)(11)(ii) the rule that the methane content requirement described in section 48(c)(7)(A)(i) and in the Proposed Regulations is measured at the point at which the biogas exits the qualified biogas property.

6. Microgrid Controllers

Section 48(a)(3)(A)(xi) provides that energy property includes microgrid controllers. Section 48(c)(8)(A) defines a microgrid controller as equipment that is part of a qualified microgrid and designed and used to monitor and control the energy resources and loads on such microgrid. Section 48(c)(8)(B) defines a qualified microgrid as an electrical system that includes equipment that is capable of generating not less than 4 kW and not greater than 20 MW of electricity; is capable of operating in connection with the electrical grid and as a single controllable entity with respect to such electrical grid, and independently (and disconnected) from such electrical grid; and is not part of a bulk-power system (as defined in section 215 of the Federal Power Act (16 U.S.C. 824o)).

Proposed § 1.48-9(e)(12)(i) would provide generally that a microgrid controller is equipment that is part of a qualified microgrid and is designed and used to monitor and control the energy resources and loads on such microgrid. A qualified microgrid is an electrical system that includes equipment that is capable of generating not less than 4 kW and not greater than 20 MW of electricity; is capable of operating in connection with the electrical grid and as a single controllable entity with respect to such electrical grid, and independently (and disconnected) from such electrical grid; and is not part of a bulk-power system (as defined in section 215 of the Federal Power Act (16 U.S.C. 824o)). Proposed § 1.48-9(e)(12)(ii) would provide that for purposes of proposed § 1.48-9(e)(12), a qualified microgrid includes an electrical system that is capable of operating in connection with the larger electrical grid, regardless of whether a connection to the larger electrical grid exists.

The preamble to the Proposed Regulations requested comments on whether the rules for functionally interdependent property as would be provided in proposed § 1.48-9(f)(2)(ii) would be sufficient to determine the components that should be included as part of a microgrid controller, or whether another test is needed due to the specific role of microgrid controllers and their components. A few commenters advocated for the application of the functional interdependence standard to microgrid controllers. For example, one commenter stated that the functional interdependence standard is thoughtful, provides direct language applicable to the definition of microgrid controllers, and creates an easy and thorough way to identify the multi-faceted infrastructure that goes into microgrid controllers to generate and store energy.

However, several commenters requested that particular components of property be listed specifically in the definition of microgrid controllers: optimization software, communications software, communications equipment, incoming service, cables, wiring, ethernet switches, computer hardware, load controllers, programmable logic controllers, meters and relays, building management systems, local human management interface screens, protective relays, breakers, routers, and other hardware necessary to monitor and control the energy resources and loads on a qualified microgrid.

Additionally, two commenters specifically requested the inclusion of switchgear in the definition of microgrid controllers. One of the commenters explained that switchgear is the true backbone of the microgrid controls system. However, the commenter also pointed out that switchgear is an essential part of any building's electrical operations with or without a microgrid. This commenter also noted that because switchgear is a critical piece of a building's infrastructure, it is usually also owned by the building owner. The commenters generally suggested that if switchgear is owned by the building owner but paid for by the taxpayer that owns the microgrid controller, then the cost of the switchgear should be included in the basis of the taxpayer's section 48 credit for the microgrid controller similar to the inclusion of interconnection property costs in the credit basis of certain lower-output energy properties.

The two commenters also suggested that if switchgear is part of an existing building, and a microgrid controller is added in a case in which a taxpayer is applying the 80/20 Rule, then the switchgear should not be taken into account for purposes of the 80/20 Rule. For example, one of the commenters explained that switchgear in an existing building may be sufficient for connecting microgrid controls with relevant distributed energy resources and load resources either as is or with some additional pieces of equipment and because all microgrid control components will connect through the switchgear, it is critical that the integrated but standalone microgrid control equipment is not considered as retrofitting of the switchgear in existing buildings under the 80/20 Rule. The other commenter likewise recommended that equipment integrated into switchgear to enable the installation of a microgrid controller should not be considered retrofitted equipment but a separate purchase of functionally interdependent energy property.

The Treasury Department and the IRS consulted with the DOE and confirmed that while switchgear may be a necessary part of a microgrid, switchgear is neither functionally interdependent nor integral to a microgrid controller. Switchgear plays a vital role in ensuring the reliability and safety of microgrids by managing power distribution, providing protection, and maintaining system integrity. However, the microgrid controller is responsible for the overall management and optimization of a microgrid's energy resources and its interaction with the main grid. For example, in the building context, technically a fuse or circuit breaker could be considered a switchgear, in which case they would exist in buildings with or without microgrid control. As a result, switchgear is not part of the energy property defined as a “microgrid controller” and is not taken into account for purposes of the 80/20 Rule. For further discussion of the 80/20 Rule see part III.A. of this Summary of Comments and Explanation of Revisions.

After considering comments requesting that the final regulations add more examples of specific components eligible as part of a microgrid controller, the Treasury Department and the IRS decline to do so. The Treasury Department and the IRS have further considered the unit of energy property as applied to microgrid controllers and conclude that the proposed rule is clear.

Commenters also requested clarification concerning what is included as a “microgrid” for purposes of section 48. Two commenters requested the adoption of language clarifying that an eligible microgrid includes an electrical system that is

capable of operating in connection with the larger electrical grid regardless of whether the microgrid is physically connected to the electrical grid. Another commenter noted that until it is clarified that single-family homes with systems greater than 4 kW are eligible “microgrids,” tax equity investors likely will be reluctant to finance the installation of load controllers associated with rooftop solar, storage, and residential microgrid installations. Similarly, another commenter asserted that the term “qualified microgrid” applies both to microgrids as they are conventionally known, which could involve many households or businesses, and to “nanogrids,” which usually involve a single household. Regarding the request for clarification about a microgrid needing to be physically connected to the electrical grid, proposed § 1.48-9(e)(12)(ii) already provides that a qualified microgrid includes an electrical system that is capable of operating in connection with the larger electrical grid, regardless of whether a connection to the larger electrical grid exists. Regarding the other comments, proposed § 1.48-9(e)(12)(i) adopts the statutory definition of a qualified microgrid as an electrical system that includes equipment that is capable of generating not less than 4 kW and not greater than 20 MW of electricity. This definition encompasses a wide range of technologies. To the extent that such “nanogrids” used in single family homes meet the definition under the statute and proposed § 1.48-9(e)(12)(i), it is unnecessary to change the definition to identify this certain technology. The proposed rule is adopted without change.

C. Definition of Energy Property and Scope of Included Components

Since shortly after the enactment of section 48, energy property eligible for the section 48 credit has been interpreted by the Treasury Department and the IRS to include, in addition to energy generation property, costs related to components such as power conditioning equipment, transfer equipment, and parts related to the functioning of that equipment.

On November 9, 1978, the Energy Tax Act of 1978, amended section 48 by adding a new subsection (then section 48(l)) to define “energy property.” Public Law 95-816, 92 Stat. 2174. On January 23, 1981, the Treasury Department and the IRS promulgated T.D. 7765, 46 FR 7287-01, to provide additional guidance regarding the definition of energy property. The preamble to T.D. 7765 states that “[i]n response to comments, the definition of solar energy property was expanded to make it clear that it includes storage devices, power conditioning equipment, transfer equipment, and property solely related to the functioning of those items. However, such equipment does not include transmission equipment.”

The preamble to T.D. 7765 also states that “[a] number of comments cited specific legislative history to the effect that wind energy property includes 'transfer equipment.' ” T.D. 7765 defines “transfer equipment” as including equipment that permits the aggregation of electricity generated by several windmills and equipment that alters voltage in order to permit transfer to a transmission line. T.D. 7765 adds transfer equipment, but not transmission lines, to the definition of wind energy property.

Former § 1.48-9(d)(3) defines “solar energy property” as equipment that uses solar energy to generate electricity, and includes storage devices, power conditioning equipment, transfer equipment, and parts related to the functioning of those items. This provision also provides that solar energy property used to generate electricity includes only equipment up to (but not including) the stage that transmits or uses electricity.

Former § 1.48-9(e) defines “wind energy property” as consisting of a windmill, wind-driven generator, storage devices, power conditioning equipment, transfer equipment, and parts related to the functioning of those items. Section 48(a)(3) no longer includes wind energy property as a type of energy property. However, qualified wind facilities (including qualified offshore wind facilities) may be qualified investment credit facilities that a taxpayer may elect to treat as energy property if they meet all the requirements provided in section 48(a)(5).

While not specifically addressed in section 48, guidance published in the Internal Revenue Bulletin interpreting section 48 has provided that functionally interdependent components are considered components of energy property eligible for the section 48 credit. In Notice 2018-59, 2018-28 I.R.B. 196, the Treasury Department and the IRS clarified components that are considered part of an energy property. Section 7.01(1) of Notice 2018-59 states that an energy property generally includes all components of property that are functionally interdependent (unless such equipment is an addition or modification to an energy property). Notice 2018-59 also provides that components of property are functionally interdependent if the placing in service of each component is dependent upon the placing in service of each of the other components in order to generate electricity. Further, Notice 2018-59 cites Revenue Ruling 94-31, 1994-1 C.B. 16, in stating that functionally interdependent components of property that can be operated and metered together and can begin producing electricity separately from other components of property within a larger energy project will be considered an energy property.

In the context of defining “section 38 property,” § 1.48-1(d)(4) provides that “section 38 property” is “used as an integral part of one of the specified activities [for which section 38 property may function] if it is used directly in the activity and is essential to the completeness of the activity.” Section 1.48-1(d)(4) also provides that “[p]roperty shall be considered used as an integral part of one of the specified activities if so used either by the owner of the property or by the lessee of the property.” Notice 2018-59 incorporates the concept of integral property from § 1.48-1(d) to provide that certain property that is an integral part of an energy property is included in energy property for purposes of the section 48 credit.

Notice 2018-59 also explains that property that is “functionally interdependent” to the generation of electricity is treated as a unit of energy property. Further, Notice 2018-59 provides that certain other property integral to the production of electricity is included in determining what costs to include in the basis of energy property and the date on which construction of the energy property began. Section 7.02(1) of Notice 2018-59 includes an example illustrating that, while a transmission tower located at a site where energy property is located is not energy property because transmission is not an integral part of the activity performed by the energy property, a custom-designed transformer that steps up the voltage of electricity produced at an energy property to the voltage needed for transmission is power conditioning equipment, which is an integral part of the activity performed. In addition, section 7.02(2) of Notice 2018-59 explains that onsite roads used to operate and maintain the energy property are integral to the production of electricity, but not roads used primarily to access the site or primarily for employee or visitor vehicles. Similarly, section 7.02(3) and (4) of Notice 2018-59 explain that fences are not integral to the production of

electricity nor are buildings, unless the building is essentially an item of machinery or equipment, or a structure that houses property that is integral to the activity of an energy property if the use of the structure is so closely related to the use of the housed energy property that the structure clearly can be expected to be replaced if the energy property it initially houses is replaced.

One challenge in defining components that are included in energy property is determining the components that are common to all energy property, without limiting or constraining future technological advances. To avoid limiting future energy technologies, the Treasury Department and the IRS consulted with the DOE and determined that the best option is to adopt a function-oriented approach to describe the types of components that are considered energy property. Accordingly, proposed § 1.48-9(f) would adopt the concepts of functional interdependence and property that is an integral part of an energy property as provided in guidance published in the Internal Revenue Bulletin issued previously by the Treasury Department and the IRS.

Further, consistent with prior guidance, proposed § 1.48-9(f)(1) would provide the general rule that an energy property includes a unit of energy property that meets the requirements for energy property, is not excluded from energy property, and is of a type of energy property included in section 48(a)(3). Property owned by the taxpayer that is an integral part of an energy property is treated as energy property. Energy property does not include any electrical transmission equipment, such as transmission lines and towers, or any equipment beyond the electrical transmission stage. With the exception of the modification of energy storage technology (as provided in proposed § 1.48-9(e)(10)(iii)) and the application of the 80/20 Rule (as provided in proposed § 1.48-14(a)(1)), energy property does not include equipment that is an addition or modification to an existing energy property.

1. Unit of Energy Property

Proposed § 1.48-9(f)(2)(i) would provide, in part, that the term unit of energy property means all functionally interdependent components of property (as defined in proposed § 1.48-9(f)(2)(ii)) owned by the taxpayer that are operated together and that can operate apart from other energy properties within a larger energy project (as defined in proposed § 1.48-13(d)). For rooftop solar energy property, all components of property that are installed on a single rooftop would also be considered a single unit of energy property under the Proposed Regulations.

A commenter requested additional examples regarding the “unit of energy property” with respect to electrical energy storage and other energy property. For example, the commenter requested an example illustrating that an individual battery capable of operating on its own or with other batteries is a “unit of energy property.” The commenter asserted that this should be the clear result if such a battery can “operate apart from other energy properties,” including, for example, a single storage container with multiple battery packs. The commenter noted that this is also consistent with prior guidance published in the Internal Revenue Bulletin regarding wind farms. The commenter asserted that if under this prior guidance, the addition of a new wind turbine is treated as the addition of a new unit of energy property, then the same rule should apply to batteries. A definitive response to such comments would require the Treasury Department and the IRS to conduct a complete factual analysis of the property in question, which may include information beyond that which was provided by the commenters. Because more information is needed to make the determinations requested by the commenters, the requested clarifications are not addressed in these final regulations.

With respect to solar energy property, some commenters suggested that the Proposed Regulations did not clearly draw the line between the unit of energy property and property integral to the unit of energy property. For example, a commenter stated that the final regulations need to clarify that a unit of solar energy property includes all solar panels, racks, wires, cables, and equipment connected through a single inverter (rather than all property through the transformer). This commenter referred to

Example 1

in proposed § 1.48-9(f)(5)(i) and recommended adding an example (or modifying the existing example) to clarify the components in the unit of solar energy property. This commenter explained that this is necessary to comport with the definition of a unit of energy property as all functionally interdependent components, since each group of components connected through an inverter may be operated independently. Similarly, a commenter requested that the final regulations clarify that a solar project may have multiple units of energy property connected through a single inverter. Another commenter also requested a new or revised example to illustrate that for a larger-scale ground-mounted solar array, a “unit of energy property” is a single string or block of panels connected to each other and through a common inverter.

As highlighted by commenters, solar energy property may be configured in different ways. The Treasury Department and IRS agree with commenters that clarity on how the definition of a unit of energy property is applied to solar energy property is warranted. Under the Proposed Regulations, a unit of energy property means all functionally interdependent components of property (as defined in proposed § 1.48-9(f)(2)(ii)) owned by the taxpayer that are operated together and that can operate apart from other energy properties within a larger energy project (as defined in proposed § 1.48-13(d)). In applying this definition to a solar energy property, the Treasury Department and IRS view the unit of energy property as all the solar panels that are connected to a common inverter, which would be considered an integral part of the energy property, or connected to a common electrical load, if a common inverter does not exist. Accordingly, a large, ground-mounted solar energy property may be comprised of one or more units of energy property depending upon the number of inverters. The example in the final regulations is updated to reflect this. The final regulations adopt the definition of unit of energy property as proposed.

For rooftop solar energy property, all components of property that are installed on a single rooftop would also be considered a single unit of energy property under the Proposed Regulations. The final regulations adopt this rule as proposed.

2. Functional Interdependence

Proposed § 1.48-9(f)(2)(ii)(A) would provide that except as provided in proposed § 1.48-9(f)(2)(ii)(B), with respect to components of a unit of energy property, the term functionally interdependent means that the placing in service of each component is dependent upon the placing in service of each of the other components in order to generate or store electricity, thermal energy, or hydrogen as provided by section 48(c) and as described in proposed § 1.48-9(e).

Proposed § 1.48-9(f)(2)(ii)(B) would provide that in the case of solar process heat equipment, fiber-optic solar energy property, electrochromic glass property, GHP property, qualified biogas property,

and microgrid controllers, with respect to components of such property, the term functionally interdependent means that the placing in service of each component is dependent upon the placing in service of each of the other components in order to perform the intended function of the energy property as provided by section 48(c) and as described in proposed § 1.48-9(e).

Many commenters requested that taxpayers be permitted to claim a credit for a functionally interdependent piece of property without owning the entire unit of energy property. These comments addressing ownership are discussed in part III.D. of this Summary of Comments and Explanation of Revisions.

Other commenters asserted that the statute does not require ownership of a unit of energy property; instead, the taxpayer must only own something that fits the relevant definition of “energy property.” These commenters stated that the proposed definitions of the unit of energy property based on “functional interdependence” and integral property have no basis in section 48. A commenter stated that section 48 does not require or permit the Treasury Department or the IRS to discriminate between types of energy property, whether based on functionality, ownership, or otherwise. This commenter referred to the flush language at section 48(a)(3)(D): “[energy property] shall not include any property which is part of a facility the production from which is allowed as a credit under section 45 for the taxable year or any prior taxable year.” The commenter said this language clearly signals that Congress recognizes that property may be part of a facility, but that the term “property” represents something less than a facility. The commenter also referred to Technical Advice Memorandum 8528001 (January 8, 1985) for the principle that components of property that may function together can also retain their separate identity for tax purposes. Lastly, the commenter stated that section 48 is focused on capitalized expenditures on items of property that are tangible personal property for Federal income tax purposes that are used in a trade or business. As a result, the commenter asserted that to define the types of property that qualify for the section 48 credit, taxpayers should focus on items of property that are integral to a process that Congress has chosen to incentivize, for example, the production of energy using certain inputs. This commenter requested the removal of the functional interdependence standard at proposed § 1.48-9(f) and asserted that while this standard is needed for section 45 to determine a qualified facility and for beginning of construction purposes, this standard is not needed for purposes of section 48.

Another commenter stated that the Proposed Regulations contradict the language and intent of the IRA by distinguishing between “functionally interdependent” components and “integral parts” of energy property to determine the owner or owners of energy property who may claim the section 48 credit. The commenter noted that this distinction contravenes the plain text of section 48, which permits the section 48 credit to be claimed by the owner of energy property if the original use of that energy property began with such owner.

The concept of a unit of energy property also is intertwined with the discussion of the 80/20 Rule in part III.A. of this Summary of Comments and Explanation of Revisions. In the context of the 80/20 Rule, a few commenters also did not agree with this concept. For example, a commenter highlighted the statutory language and pointed out that certain definitions of energy property use the word “equipment” as opposed to “system.” A commenter explained that some energy properties are defined as equipment that serves a function, such as solar energy property defined in section 48(a)(3)(A)(i) and GHP property defined in section 48(a)(3)(A)(vii). This commenter contrasted those definitions with statutory definitions of other types of energy property as comprising a system, such as the definition of CHP property in section 48(c)(3), thermal energy storage property as defined in section 48(c)(6)(C)(i), and qualified biogas property as defined in section 48(c)(7). The commenter concluded that the “unit of energy property” concept as provided in proposed § 1.48-9(f)(2)(i) is appropriate for energy properties defined as systems, but it should not be applied to energy properties defined as equipment.

Another commenter made a similar point about misalignment of the “unit of energy property” concept by focusing specifically on its application to geothermal energy property. The commenter stated that despite the statute defining “energy property” at the equipment level, “equipment used to produce, distribute, or use energy derived from a geothermal deposit,” the Proposed Regulations use the term “unit of energy property,” a term defined more expansively, such that it could be interpreted to be equivalent to an entire facility in the case of geothermal energy property. By using the term “unit of energy property,” the commenter asserted that the Proposed Regulations give a misleading appearance that the rules comport with the statutory text of section 48 but define that term so that it is functionally equivalent to the term “facility” as applied in section 45.

In the context of microgrid controllers, some commenters agreed with the application of the functional interdependence standard. A commenter stated that microgrids are highly customizable, and the functional interdependence standard as proposed would allow accommodation of the different engineering requirements of qualified microgrids to future-proof the definition and allow for technological advances. This commenter agreed that the functional interdependence standard is sufficiently flexible for microgrid controllers.

The statute supports the Proposed Regulations' definition and use of the terms “functionally interdependent” and “unit of energy property.” Additionally, these concepts have been adopted in previous guidance published in the Internal Revenue Bulletin under section 48, particularly Notice 2018-59, which provides guidance regarding the beginning of construction rules for the section 48 credit.

There are three key reasons for requiring an energy property to include all functionally interdependent components that are part of a unit of energy property. First, the statutory definition of each type of energy property as provided in section 48(a)(3) and (c) is included at proposed § 1.48-9(e). The unit of energy property definition at § 1.48-9(e)(2) aligns with these statutory definitions by encompassing the property required to generate electricity or perform the required function as described in the statute. If a taxpayer owns merely a component of property within a larger unit of energy property and is not required to place in service the entire unit of energy property, then in some cases there would be no certainty that the generation of electricity or other statutorily required function would be satisfied when the taxpayer claims the credit.

Some commenters suggested that this uncertainty could be eliminated or reduced by a coordinated operating plan among separate taxpayers. However, section 48 provides a credit only if a taxpayer places in service “energy property” as defined by statute. It does not provide a credit for placing in service a mere component of energy property, regardless of whether it is subject to an operating plan. In addition, taxpayers claim the section 48 credit by

filing Form 3468,

Investment Credit,

with their Federal income tax return. The IRS has no authority to compel taxpayers to coordinate tax credit claims or share tax return information with other taxpayers. Any taxpayer claiming a section 48 credit must satisfy the statutory requirements, as described by Congress, for each type of energy property, and the functional interdependence standard provided in the Proposed Regulations would ensure that the statutory requirements are met.

Second, focusing on the statutory language in section 48(a)(1), which provides that “the energy credit for any taxable year is the energy percentage of the basis of each energy property placed in service during such taxable year,” the definition of the unit of energy property using a functional interdependence standard is consistent with how the term “placed in service” has been interpreted by the courts and developed in various forms of guidance. Proposed § 1.48-9(b)(5) largely incorporates the general rules provided by § 1.46-3(d)(1) for determining when a taxpayer has placed a property in service for the section 48 credit. An energy property is considered “placed in service” in the earlier of the taxable year in which, under the taxpayer's depreciation practice, the depreciation of such energy property begins or the taxable year in which the property is “placed in a condition or state of readiness and availability for a specifically assigned function.”

See

§§ 1.46-3(d)(1) and 1.167(a)-11(e)(1)(i).

To determine the taxable year in which depreciation begins, it is the energy property described in section 48(a)(3)(A) that must be depreciable. See section 48(a)(3)(C). As stated earlier, this energy property cannot be a mere component that would be depreciated in isolation from the rest of the components that would make up a unit of energy property. Treating individual components within a unit of energy property as an energy property would make it practically impossible to determine the taxable year in which the depreciation of components that comprise an energy property begins.

The Tax Court has said that “when an individual component that is designed to operate as a part of a larger system is incapable of contributing to the system in isolation, it is not regarded as placed in service until the entire system reaches a condition of readiness and availability for its specifically assigned function.”

Green Gas Del. Statutory Tr.

v.

Commissioner,

147 T.C. 1, 52 (2016),

aff'd,

903 F.3d 138 (D.C. Cir. 2018). The Tax Court further explained that components “are not to be considered placed in service separately from the system of which they are an essential part.”

Olsen

v.

Commissioner,

T.C. Memo 2021-41, aff'd 52 F.4th 889 (10th Cir. 2022).

See also Sealy Power, Ltd.

v.

Commissioner,

46 F.3d 382, 390 (5th Cir. 1995),

aff'g in part, rev'g in part on other grounds

T.C. Memo. 1992-168;

see Pub. Serv. Co.

v.

United States,

431 F.2d 980, 984 (10th Cir. 1970) (holding that individual components of a power plant could not be considered separately because no component “would serve any useful purpose” on its own). As demonstrated by these rulings, courts have long interpreted the placed in service requirement to apply to all of the functionally interdependent components of a unit of property that must be placed in service collectively.

Lastly, in amending section 48 for taxable years after the enactment of the IRA, Congress did not contradict or displace these concepts, which had already been established in guidance published in the Internal Revenue Bulletin. In Notice 2018-59, the Treasury Department and the IRS clarified what components are considered part of an energy property. Section 7.01(1) of Notice 2018-59 states that an energy property generally includes all components of property that are functionally interdependent (unless such equipment is an addition or modification to an energy property). Further, Notice 2018-59 provides that components of property are functionally interdependent if the placing in service of each component is dependent upon the placing in service of each of the other components to generate electricity. Notice 2018-59 relies upon the rationale provided in Revenue Ruling 94-31, 1994-1 C.B. 16, that functionally interdependent components of property that can be operated and metered together and can begin producing electricity separately from other components of property within a larger energy project will be considered an energy property.

3. Integral Part of an Energy Property

Proposed § 1.48-9(f)(3)(i) would provide that for purposes of the section 48 credit, property owned by a taxpayer is an integral part of an energy property owned by the same taxpayer if it is used directly in the intended function of the energy property as provided by section 48(c) and as described in proposed § 1.48-9(e) and is essential to the completeness of the intended function. Property that is an integral part of an energy property is energy property. A taxpayer may not claim the section 48 credit for any property not owned by the taxpayer that is an integral part of the taxpayer's energy property. Multiple energy properties (whether owned by one or more taxpayers) may include shared property that may be considered an integral part of each energy property so long as the cost basis for the shared property is properly allocated to each energy property. The total cost basis of such shared property divided among the energy properties may not exceed 100 percent of the cost of such shared property. In addition, property that is an integral part of an energy property that is also shared by a qualified facility (as defined in section 45(d)) will not be considered property that is not energy property under proposed § 1.48-9(d). This means that property that is also used by a qualified facility (as defined in section 45(d)) may still be energy property.

Proposed § 1.48-9(f)(3)(ii) would provide that property that is an integral part of energy property includes power conditioning equipment and transfer equipment used to perform the intended function of the energy property as provided by section 48(c) and as described in proposed § 1.48-9(e). Power conditioning equipment includes, but is not limited to, transformers, inverters, and converters, which modify the characteristics of electricity or thermal energy into a form suitable for use or transmission or distribution. Parts related to the functioning or protection of power conditioning equipment are also treated as power conditioning equipment and include, but are not limited to, switches, circuit breakers, arrestors, and hardware and software used to monitor, operate, and protect power conditioning equipment.

Transfer equipment includes equipment that permits the aggregation of energy generated by components of energy properties and equipment that alters voltage to permit transfer to a transmission or distribution line. Transfer equipment does not include transmission or distribution lines. Examples of transfer equipment include, but are not limited to, wires, cables, and combiner boxes that conduct electricity. Parts related to the functioning or protection of transfer equipment are also treated as transfer equipment and may include items such as current transformers used for metering, electrical interrupters (such as circuit breakers, fuses, and other switches), and hardware and software used to monitor, operate, and protect transfer equipment.

Power conditioning equipment and transfer equipment that are integral to an energy property may be integral to another energy property or used by a qualified facility (as defined in section

45(d)), so long as the total cost basis of the integral property is not exceeded for purposes of the section 48 credit claimed with respect to any energy property or qualified facility that share such property.

Proposed § 1.48-9(f)(3)(iii) would provide that roads that are an integral part of an energy property are integral to the activity performed by the energy property such as onsite roads that are used for equipment to operate and maintain the energy property. Roads primarily for access to the site, or roads used primarily for employee or visitor vehicles, are not integral to the activity performed by an energy property.

Proposed § 1.48-9(f)(3)(iv) would provide that fencing is not an integral part of an energy property because it is not integral to the activity performed by the energy property. A commenter disagreed that fencing is not integral and asserted that concerns of national security dictate the fences, along with security systems and monitoring devices, be treated as integral to electricity generation. Fencing is not considered property integral to an energy property because it is not essential to the completeness of the intended function of an energy property, whether electricity generation or another specific function of energy property. This rule originally was provided in Notice 2018-59 and was included in the Proposed Regulations. The proposed rule is adopted without change.

For the various section 48 energy properties, commenters requested confirmation that certain property is an integral part of an energy property. A commenter requested clarification that an HVDC (high-voltage direct current) power system is either a “unit of energy property” or a “functionally interdependent component” of an offshore wind facility. If the HVDC power system is used directly in the intended function of the energy property and is essential to the completeness of the intended function, then the HVDC power system would be an integral part to an energy property, and thus, treated as part of that energy property. However, because the generation or storage of electricity or thermal energy is not dependent upon the placing in service of an HVDC power system, it is not a functionally interdependent component of an energy property and not a separate “unit of energy property.” Further, the Proposed Regulations included an offshore wind example, retained in these final regulations, that illustrates the application of the energy property rules and addresses this commenter's concern.

Another commenter requested that the final regulations clarify that software that operates, monitors, or protects the project applies more broadly than power conditioning and transfer equipment and may be considered property integral to an energy property. The commenter asserted that certain types of software used as a part of energy management systems, battery management systems, and microgrid controllers should be considered property integral to an energy property. This commenter also requested that software that optimizes and automates integral parts also be eligible. Finally, this commenter believed that the final regulations should clarify that a taxpayer who owns an energy property can include software costs in the basis of the energy property to compute the section 48 credit. Another commenter stated that the definition of power conditioning equipment expressly includes software used to “monitor, operate, and protect” such equipment and requested this definition be modestly expanded. As discussed in this part I.B.6. of the Summary of Comments and Explanation of Revisions, software may be integral to different types of energy property, including microgrid controllers. Therefore, software that optimizes and automates may be integral if it meets the integral property rule in § 1.48-9(f)(3). To the extent the commenter is asking whether software costs may be capitalized, that issue is beyond the scope of these regulations. The proposed rules are adopted without change.

In the context of qualified biogas property, commenters requested additional examples of what components may be integral property. Specifically, a commenter asked for clarification that mobile trailers or containers used to transfer biogas are integral to biogas energy property. The final regulations do not adopt these comments, as these regulations are meant to apply to all energy properties and do not provide an exclusive list of components of property that may be included in energy property. The final regulations do provide certain examples of property that is an integral part of qualified biogas property including, but not limited to, a waste feedstock collection system, a landfill gas collection system, and mixing or pumping equipment.

Additionally, a few commenters requested clarification regarding the determination of when construction begins in cases in which two or more energy properties share integral property. The commenters proposed that the beginning of construction on one energy property does not determine when construction begins on another energy property, even if they share property integral to both energy properties. The Treasury Department and the IRS have addressed the beginning of construction rules in several pieces of Internal Revenue Bulletin guidance. The Proposed Regulations do not address these rules and they are beyond the scope of the final regulations.

In the context of solar energy property, a commenter requested that the Treasury Department and the IRS confirm that power conditioning equipment, including transformers, is not considered a component of a unit of energy property; rather, power conditioning equipment is an “integral part” of energy property. This commenter noted that the example included in proposed § 1.48-9(f)(5)(i) says this, but requested that the Treasury Department and the IRS clarify that the language in this example, “[a]ll components of the Property, up to and including the transformer are either functionally interdependent components of the Property or are integral parts of the Property,” means it is the transformer that is the “integral part” and the other solar components that are the functionally interdependent components of the property. This same commenter also requested that gen-tie lines be clarified as integral property. The final regulations, at § 1.48-9(f)(3)(ii), provide that power conditioning and transfer equipment is considered an integral part of an energy property and provide a nonexclusive list of types of property that are considered power conditioning equipment, including transformers, and transfer equipment.

Another commenter requested confirmation that offshore generating assets and components of island-based hydropower facilities qualify for the section 48 credit. This commenter also requested that similar rules and examples as those provided in the Proposed Regulations for offshore wind facilities apply to marine and hydrokinetic energy property. As discussed in more detail in part III.F. of this Summary of Comments and Explanation of Revisions, offshore wind facilities and qualified hydropower facilities are both qualified facilities under section 45(d) for which a taxpayer may make an election to claim the section 48 credit in lieu of the section 45 credit. Whether certain assets are included in an offshore wind facility or qualified hydropower facility as defined

in section 45(d) is beyond the scope of these final regulations.

4. Property Excluded From Energy Property

Proposed § 1.48-9(d)(2) would provide that energy property does not include power purchase agreements, goodwill, going concern value, or renewable energy certificates. A commenter requested additional clarification and examples of the potential bifurcation of tax basis between renewable energy certificates and an associated energy property. A definitive response to this comment would require the Treasury Department and the IRS to conduct a complete factual analysis of the renewable energy certificates and associated energy property, which may include information beyond that which was provided by the commenters. Because more information is needed to provide the clarification requested by the commenters, the requested clarification is not addressed in these final regulations. The final regulations adopt the rule as proposed.

II. Rules Relating to the Increased Credit Amount for Satisfying Certain Prevailing Wage and Apprenticeship Requirements and the Energy Project Rule

Section 48(a)(9) provides for an increased credit amount for energy projects for taxpayers who satisfy certain requirements. Section 48(a)(9)(A)(i) provides a general rule that in the case of any energy project that satisfies the requirements of section 48(a)(9)(B), the amount of the credit determined under section 48(a) (determined after the application of section 48(a)(1) through (8) and (15), and without regard to section 48(a)(9)(A)(i)) is equal to such amount multiplied by 5.

Section 48(a)(9)(A)(ii) provides that for purposes of section 48(a), the term “energy project” means a project consisting of one or more energy properties that are part of a single project.

Section 48(a)(9)(B) provides that a project meets the requirements of section 48(a)(9)(B) if it is one of the following: (i) a project with a maximum net output of less than 1 megawatt of electrical (as measured in alternating current) or thermal energy (One Megawatt Exception); (ii) a project the construction of which begins before the date that is 60 days after the Secretary publishes guidance with respect to the requirements of section 48(a)(10)(A) and (11) (BOC Exception); and (iii) a project that satisfies the requirements of section 48(a)(10)(A) and (11) (PWA requirements).

Section 48(a)(10) provides rules with respect to the prevailing wage requirements (Prevailing Wage Requirements) under section 48, including the special recapture provision under section 48(a)(10)(C). Section 48(a)(10)(B) provides that rules similar to the correction and penalty procedures for a failure to satisfy the Prevailing Wage Requirements under section 45(b)(7)(B) apply, and those rules generally apply prior to a recapture event under section 48(a)(10)(C). Section 48(a)(11) provides that rules similar to the rules of section 45(b)(8) apply with respect to the apprenticeship requirements (Apprenticeship Requirements).

Under the BOC Exception in section 48(a)(9)(B)(ii), taxpayers may claim the amount of the increased credit without satisfying the PWA requirements if construction “begins before the date that is 60 days after the Secretary publishes guidance with respect to the [PWA requirements].” The Treasury Department and the IRS published Notice 2022-61, 2022-52 I.R.B. 560, on November 30, 2022, providing initial guidance with respect to the PWA requirements and starting the 60-day period described in those sections. To qualify for the BOC Exception, a taxpayer must begi

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