On December 4, 2024, the Department of the Treasury finalized new rules governing the Section 48 Investment Tax Credit ("ITC"). The ITC applies to a broad range of clean energy projects, including biogas projects, which were added to the ITC by the Inflation Reduction Act ("IRA"). This post focuses on the ITC rules for biogas projects; it does not cover any other type of energy project under the ITC. It was unclear from Treasury's proposed rules, issued in November 2023, whether certain renewable natural gas ("RNG") projects would qualify. Among the concerns were (1) whether the equipment that upgrades biogas to RNG was eligible and (2) whether proposed ownership requirements would exclude certain RNG projects. The final rules largely resolve those issues, making it clearer for certain RNG projects to qualify for the ITC.
Key Takeaways
- The final rules provide that RNG upgrading equipment is biogas "cleaning and conditioning" equipment that is creditable as "qualified biogas property" under the ITC.
- The final rules permit owners of "cleaning and conditioning" equipment (including upgrading equipment) to claim the ITC, even if they don't also own related biogas production equipment, such as an anaerobic digester or a landfill gas collection system.
- The ITC applies to biogas projects that begin construction before January 1, 2025. The ITC for biogas projects is then replaced by the Section 48E ITC, which generally applies to carbon-neutral electricity generation projects and certain storage projects but appears to exclude many biogas projects that don't generate electricity from eligibility.
ITC Basics
The ITC offers a significant tax credit—up to 30 percent of qualified development costs, provided certain requirements are met, such as prevailing wage and apprenticeship requirements. The percentage increases if other requirements are met, such as those for "domestic content" (10 percent bonus) or for developing projects in "energy communities" (another 10 percent bonus). The IRA's transferability rules made it easier for developers to sell credits to third-party investors and use the proceeds to finance their projects. Developers can also monetize the credits via tax equity transactions.
RNG Issues Under the ITC
RNG projects take biogas from landfills, agricultural waste, or other sources and upgrade it until it is interchangeable with fossil natural gas in terms of methane content (typically between 96 and 98 percent methane by volume). That upgraded gas—RNG—is then injected into gas distribution systems for use as low-carbon fuel.
Treasury's proposed rules initially excluded RNG upgrading equipment from the ITC. Treasury later issued a correction that allowed RNG equipment to qualify if it was deemed "integral" to an underlying biogas project. Yet other proposed rules regarding facility ownership complicated whether certain RNG projects would qualify, even under Treasury's correction.
Developers alerted Treasury to these issues in comments submitted both before and after Treasury's correction. Yet Treasury did not act on those comments until it issued the final rules.
How the Final Rules Resolve Those Issues
The final rules revise the proposed rules in several ways intended to resolve developers' concerns.
1. RNG Upgrading Equipment
The ITC applies to "qualified biogas property." The ITC statute defines "qualified biogas property" as a system that collects or concentrates biomass-derived gas to at least 52 percent methane by volume for sale or productive use and not for disposal by flaring. The ITC statute also explicitly includes gas "cleaning and conditioning" equipment that is part of the system.
The proposed rules distinguished RNG upgrading equipment (i.e., equipment that concentrates gas to methane levels suitable for pipeline injection) from other "cleaning and conditioning" equipment necessary to bring gas to methane levels of at least 52 percent. The final rules eliminate that distinction and clarify that RNG upgrading equipment is "cleaning and conditioning" equipment to which the ITC applies:
The preamble to the final rules elaborates further:
2. Ownership
The final rules also clarify the ownership requirements for claiming the ITC for biogas projects. Under the proposed rules, it wasn't clear how the ITC applied when a developer owned the gas cleaning and conditioning equipment (including the RNG upgrading equipment) but not the equipment that collected the gas for cleaning, conditioning, and upgrading.
The lack of clarity was of particular concern for landfill RNG projects. Those projects are developed next to landfills that, in most cases, have already installed gas collection systems to collect and flare gas per environmental regulations—i.e., the RNG developers own their RNG equipment while the landfill retains ownership of the gas collection equipment. In those circumstances, the proposed rules suggested that the RNG developers could be excluded from the credit, because RNG upgrading equipment qualified only if was considered "integral" to the underlying biogas property, but owners of just the "integral" equipment could not claim the credit. They had to own the gas collection equipment as well.
The final rules clarify the ownership requirements. Importantly, they do not alter the general rules regarding ownership. It is still the case that owners of "integral" property cannot claim the ITC unless they own the underlying energy property as well. However, for qualified biogas property, the final rules redefine which components are considered integral. Under the final rules, gas cleaning and conditioning (including upgrading) equipment is qualified biogas property. Property that is integral now "includes, but is not limited to, a waste feedstock collection system, a landfill gas collection system and mixing or pumping equipment."
The preamble explains the implications of this revision:
In other words, the final rules appear to provide that a taxpayer who owns just the cleaning and conditioning equipment owns qualified biogas property that can be eligible for the ITC. The taxpayer does not need to own the gas collection system or a gas production system as well. A different taxpayer who owns the gas production system, as in the digester example above, could also claim the credit, provided the digester produces biogas at 52 percent methane or greater, per the ITC's definition of "qualified biogas property." However, if the digester produces biogas below 52 percent methane by volume, it cannot independently qualify for the ITC. It may qualify only if it is considered "integral" to the cleaning and conditioning system. In that case, the same taxpayer must own the cleaning and conditioning system and the digester to claim the ITC for both.
This approach appears to apply to landfill projects as well. Under the final rules, it would appear no longer to matter that the landfill owns the gas collection equipment, since the RNG developer's upgrading equipment can independently qualify for the ITC. The preamble appears to confirm this. It recites many concerns raised regarding ownership and landfill gas projects and concludes:
Section 48 ITC's Upcoming Expiration
The Section 48 ITC expires at the end of the year. The Section 48E ITC will replace it. Importantly for biogas projects, the Section 48E ITC appears limited primarily to projects that generate electricity. Because many biogas and RNG projects produce low-carbon transportation or other fuels, they would generally be ineligible under Section 48E after the Section 48 ITC expires. To qualify for the Section 48 ITC, projects must begin construction by the end of 2024, which is fast approaching.
Effects of the Incoming Administration
It is unclear whether and to what extent the incoming administration will target the final ITC rules for repeal or modification. Treasury, under a Trump administration, would need to propose and finalize new rules to repeal or modify the final ITC rules. This would require another notice-and-comment process, which could take time. Republicans in the incoming House and Senate could vote to rescind the final rules under the Congressional Review Act. But it's unclear whether Republicans would have enough votes given their thin majorities.
The ITC has existed for decades and has enjoyed a measure of bipartisan support. As such, the ITC rules may not be high on the list for rollbacks compared to other energy incentives. However, at this point, there is no way to know how the incoming administration might proceed. We'll keep a close eye on any further legislative and regulatory developments.
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