[co-author: Dana Proud Newman]

The application cycle for the first round of credits will soon open. Treasury’s additional guidance clarifies what types of facilities may qualify for credits, the submission process and the selection criteria for evaluating whether a project merits a DOE recommendation.

TAKEAWAYS

• The U.S. Department of Treasury and the IRS anticipate allocating at least two rounds of Qualifying Advanced Energy Project Credits under the Program. The first round will open no later than June 30, 2023, with concept papers due no later than July 31, 2023.
• The Program will prioritize certain manufacturing areas, including components associated with clean hydrogen, nuclear technologies, EV components, solar production, wind energy, and sustainable aviation fuels.
• In order to qualify for an allocation of Qualifying Advanced Energy Project Credits the project must satisfy the following: (i) the project may not be placed in service prior to receiving an Allocation Letter of Credits from the IRS, (ii) within two years of the Allocation Letter, the project must receive a Certification Letter from DOE that it has satisfied all requirements set forth in the Allocation Letter to proceed with the project, such as obtaining all necessary permits for construction, and (iii) within two years of the Certification Letter, the project must be placed in service.

On May 31, 2023, the U.S. Department of Treasury (Treasury) and the Internal Revenue Service (IRS) issued Notice 2023-44 (May 31 Notice) providing additional details for applicants seeking Qualifying Advanced Energy Project Credits (Advanced Energy Project Credits or Credits) under section 48C of the Internal Revenue Code (Code). In 2022, the Inflation Reduction Act (IRA) amended section 48C of the Code to establish the Qualifying Advanced Energy Project Program (Program) and provided $10 billion in Credits for qualifying advanced energy projects. The Program is meant to incentivize investment in clean-energy manufacturing and recycling projects, greenhouse gas (GHG) emission reduction projects and critical materials projects.

The May 31 Notice updates, modifies and supersedes the IRS’s initial February 13, 2023, Notice 2023-18 that provided initial guidance about the details of the Program established by the IRA. The May 31 Notice further defines what facilities may qualify for Credits, the process for submitting concept papers and applications and the selection criteria that the U.S. Department of Energy (DOE) will use to recommend applications to the IRS for the award of Credits.

Allocation of Credits

The Treasury and the IRS anticipate providing at least two Advanced Energy Project Credit allocation rounds under the Program, with the first round allocating approximately $4 billion of Credits.

Approximately $1.6 billion of Credits will be reserved for § 48C(e) Energy Communities Census Tracts. § 48C(e) Energy Community Census Tracts are Energy Communities that did not have a project that received a certification and allocation of credits under the § 48C(e) allocation program. While the IRA’s definition of Energy Communities is complex, they include locations with coal mine or coal generating plant closures, or areas that any time after 2009 have had high employment related to fossil fuels and now have unemployment at a rate equal to or higher than the national average for the prior year. The federal government’s website on Energy Communities contains a mapping tool to allow interested parties to identify areas that qualify as Energy Communities. The May 31 Notice also includes a new appendix that lists the § 48C(e) Energy Communities Census Tracts.

Project Requirements

The May 31 Notice provided additional information on what types of facilities may qualify for Credits. A facility will be considered eligible property that qualifies for the Program if it satisfies the following requirements:

• First, the property must be necessary for the production or recycling of property, re-equipping an industrial or manufacturing facility, or re-equipping, expanding or establishing an industrial facility;
• Second, the property must be tangible personal property, or other tangible property (not including a building or its structural components), but only if the property is used as an integral part of the qualified investment credit facility; and
• Third, depreciation (or amortization in lieu of depreciation) of the property must be allowable.

Notably, facilities that qualify for the Advanced Energy Project Credit may not simultaneously benefit from the Advanced Manufacturing Production Credits under section 45X of the Code. Tangible property qualifies for the 45X Advanced Manufacturing Production Credits if it comprises an independent functioning production unit that produces one or more system components for: solar energy, wind energy, inverters, qualifying battery, and any certain critical materials. Not all projects may receive Credits, so those projects which do not receive Credits may still be eligible to benefit from section 45X of the Code.

For example, in 2024, Taxpayer owns and operates a manufacturing site that contains production Unit A, which manufactures photovoltaic wafers, and production Unit B, which manufactures photovoltaic cells. Both units are arranged in serial fashion and both function independently and produce eligible components. Taxpayer may claim Unit A as eligible property for the Advanced Energy Project Credit (assuming they are selected by the DOE and allocated credits by the IRS) but would be precluded from qualifying for the 45X Advanced Manufacturing Production Credit. However, Taxpayer’s Unit B is tangible property that comprises an independently functioning production unit that produces eligible components. Thus, Unit B is eligible to receive the 45X Advanced Manufacturing Production Credit because it is not eligible property that is part of a facility that received the Advanced Energy Project Credit.

Categories of Qualifying Projects

Projects may qualify for Advanced Energy Project Credits if they fall into the following categories:

• Clean Energy Manufacturing and Recycling: Projects that re-equip, expand or establish an industrial or manufacturing facility for the production or recycling of specified advanced energy property. Specified advanced energy property includes property designed to be used to produce energy from the sun, water, wind, geothermal or other renewable resources, fuel cells, microturbines or energy storage systems and components, electric grid modernization equipment, property designed to capture, remove, use or sequester carbon oxide emissions, equipment designed to refine, electrolyze or blend any fuel, chemical or product which is renewable or low-carbon and low-emission (including certain types of hydrogen and renewable transportation fuel), property designed to produce energy conservation technologies, electric, hybrid and fuel cell vehicles, and other advanced energy property designed to reduce greenhouse gases, examples of which include specialized components and equipment for nuclear power reactors or their fuels and equipment used to reduce the emissions of industrial facilities, such as heat and process emissions.
• Greenhouse Gas Emission Reduction: Projects that re-equip an industrial or manufacturing facility, including within energy-intensive manufacturing sectors, such as cement, iron and steel, aluminum, chemicals and other sectors, with equipment designated to reduce GHG emissions by at least 20 percent through installation of low-carbon or zero-carbon process heat systems, carbon capture, transport, utilization and storage systems, or energy efficiency and reduction in waste from industrial processes.
• Critical Materials: Projects that re-equip, expand or establish an industrial facility for the processing, refining or recycling of critical materials defined as either any non-fuel mineral, element, substance or material that the Secretary of Energy determines to have a high risk of supply chain disruptions and serves as an essential function in one or more energy technologies. For purposes of round 1, a list of critical materials can be located here and here.

Two-Stage Review Process

In Stage 1 of the review process, an applicant must first submit a concept paper to the DOE. Concept papers are not the application but must be submitted for an applicant to be eligible to apply. The DOE will carry out an initial review to determine that eligibility requirements have been met, the required information has been submitted, the proposed project is technically valid, and all other requirements are satisfied. The DOE will also conduct a technical review based on the four technical review criteria discussed below and may consider program policy factors to determine the final portfolio of recommendations. The DOE will then either encourage applicants to continue or discourage applicants from continuing the process. All applicants who submit concept papers may still go on to submit a full application, but a letter of discouragement indicates the DOE’s view that the project is unlikely to receive a recommendation that it be allocated Credits.

In Stage 2, applicants may then submit full applications. The DOE will carry out an initial review to determine that eligibility requirements have been met, the required information has been submitted, the proposed project is technically valid and all other requirements are satisfied. The qualifying advanced energy project category, the specified advanced energy property and the scope of the overall project described in the application must be consistent with the applicant’s concept paper submitted during Stage 1. The DOE will then perform a technical review based on the four criteria discussed below to develop scores for ranking applications, may conduct a due diligence review and may also consider program policy factors to determine a final set of recommendations. Finally, the DOE will transmit to the IRS its final recommendations for allocations.

Technical Review Criteria

For both the concept paper Stage 1 and the §48C(e) application Stage 2, the DOE will perform a technical review process based on four criteria:

• Commercial Viability: Applicants must state the Qualifying Project schedule and time from certification to completion, based on readiness to proceed with the proposed project and reasonableness of the project timeframe, the extent to which risk management issues and mitigation strategies are identified and addressed, the management team’s track record of success in areas relevant to the project, and the corporate health of the applicant.
• Greenhouse Gas Emissions Impacts: Applicants must state their products’ impact on avoidance or reduction in anthropogenic emissions of GHGs, and demonstrate the extent to which the efficiency, lifetime, recyclability, or other characteristics of the facility’s products exceed those of incumbents or competitors.
• Strengthening U.S. Supply Chains and Domestic Manufacturing for a Net-Zero Economy: Applicants must demonstrate the extent to which the proposed project addresses current and anticipated supply chain vulnerabilities and would increase domestic production capacity of clean energy products, in line with the long-term strategy of the United States to achieve net-zero emissions.
• Workforce and Community Engagement: Applicants must demonstrate the number of domestic jobs created during completion of the project and during operations of the facility after it is placed in service, including jobs within energy communities (if applicable) attained by locals or individuals previously employed by the local or regional energy industry. Applicants must also demonstrate the extent to which the application includes specific and high-quality actions to support energy communities, including transition opportunities for workers in the coal, other energy and automotive sectors, and the extent to which the proposed project accounts for its environmental impact on the surrounding community by having clear plans to avoid or reduce local air pollution, land contamination and/or water contamination.

The DOE’s technical review will be used to develop scores for ranking applications and determine the merits of each project. The IRS will allocate credits to projects based on the DOE’s ranking of applications. The IRS will assign allocations from the top of the DOE’s ranking downward until all available funds for the round are exhausted. The IRS will make all round 1 allocation decisions by March 31, 2024.

Priority Areas for Consideration

When the DOE evaluates the Strengthening U.S. Supply Chains and Domestic Manufacturing and Net-Zero Economy criterion, the DOE will take into consideration whether the project addresses the following energy supply chain and manufacturing priority areas:

• Clean Hydrogen: electrolyzers, fuel cells and associated components (including gas diffusion layers, bipolar plates and power electronics)
• Nuclear Energy: specialized components and equipment for nuclear power reactors or their fuels (including fabrication of fuels and manufacturing of equipment for conversion, enrichment and deconversion), for both existing reactors and new reactor deployments
• Electric Grid: transformers, materials (including electrical steel, amorphous alloy), power electronics and other grid components and equipment (including MVDC/HVDC converter station components and switchgears)
• Electric Heat Pumps: air-source or ground-source heat pump components and infrastructure
• Electric Vehicles: power electronics (including semiconductors, modules and circuits for EV motor traction drives, on-board EV chargers, DC/DC converters and EV charging stations), permanent magnets and battery components for use in electric vehicle motors*
• Solar Energy: polysilicon, wafer production facilities, ingot and wafer production tools, and solar glass production facilities*
• Sustainable Aviation Fuels: equipment needed for low-carbon aviation fuel production (including feedstock handling equipment and pretreatment reactors)
• Wind Energy: component production facilities and specialized steel production, particularly for offshore wind, such as monopile-grade steel and towers; recycling of wind components, particularly blades*

The DOE identified these priority areas based on analytical criteria, including an assessment of current anticipated supply chain gaps in areas eligible under the Program.

* Note that the production of some of these products under the respective categories may be eligible for Advanced Manufacturing Project Credits, precluding a taxpayer from receiving Advanced Energy Project Credits.

Critical Placed in Service Dates

• Otherwise eligible property will not be eligible for an award of Credits under the Program if the property has been placed in service prior to receiving an Allocation Letter from the IRS awarding an allocation of Credits.
• Within two years of receiving an Allocation Letter from the IRS, the taxpayer must notify the DOE that is has satisfied all of the certification requirements required for the project—e,g. it has obtained all permits for construction, and the DOE will notify the IRS, which will issue the taxpayer a Certification Letter for the project.
• Within two years of receiving the Certification Letter, the taxpayer must notify the DOE and the IRS that the project has been placed in service and is then eligible for the Credits.

Next Steps

The following table provides the key dates concerning the Program:

Given that the deadline to submit concept papers to the DOE is July 31, potential applicants should consider beginning the process of submitting materials. 

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