On November 17, 2023, the U.S. Department of the Treasury issued a Notice of Proposed Rulemaking (the “NPRM”) with respect to Proposed Regulations under section 48 of the Internal Revenue Code of 1986 (the “Code”). The NPRM addresses the Investment Tax Credit (“ITC”) framework, as amended under the Inflation Reduction Act (the “IRA”). This blog post discusses the guidance provided with respect to Qualified Biogas Property, including rules that would (i) deem gas upgrading equipment to not be considered Qualified Biogas Property (and thus ineligible for the ITC) and (ii) for purposes of the one megawatt exception to the prevailing wage and apprenticeship requirements, allow taxpayers to convert mmBTU gas production into a megawatt equivalent.
Definition of Qualified Biogas Property
Section 48 of the Code was amended by the IRA to include Qualified Biogas Property as Energy Property for purposes of the ITC. The Code defines Qualified Biogas Property as property comprising a system which (i) converts biogas into a gas (which meets a methane requirement) and (ii) captures such gas for sale or productive use (and not for disposal via combustion). Additionally, the Code provides that Qualified Biogas Property includes any property which is part of a system which cleans or conditions such gas. The NPRM provides that Proposed Regulations would adopt the statutory definition of Qualified Biogas Property and provide additional detail as to the requirements under the statutory definition.
Under the NPRM, the Proposed Regulations would provide specific examples of property that would or would not be considered Qualified Biogas Property. Examples of Qualified Biogas Property would include: a waste feedstock collection system, a landfill gas collection system, mixing or pumping equipment, and an anaerobic digester. Specifically excluded from Qualified Biogas Property would be “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.” The NPRM provides that gas upgrading equipment would not be considered Qualified Biogas Property because upgrading equipment does not satisfy the “functionally interdependent” requirement, discussed below. However, given the significant costs associated with gas upgrading equipment, we expect that industry leaders will advocate for the inclusion of gas upgrading equipment in the definition of Qualified Biogas Property. Keep in mind that the above examples are not a comprehensive list, but are intended to provide guidance as to the types of property that would or would not be considered Qualified Biogas Property under the Proposed Regulations.
Units of Energy Property – Functionally Interdependent Requirement
The Proposed Regulations would provide that Energy Property (including Qualified Biogas Property) includes certain “units of energy property,” which is defined as components of property “owned by the taxpayer and operated together and that can operate apart from other energy properties within a larger energy project.” Units of Energy Property must be “functionally interdependent.” For Qualified Biogas Property, the Proposed Regulations would provide that 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) of the Code.” As discussed above, gas upgrading equipment would not be considered to satisfy the functionally interdependent test. The NPRM provides that such equipment is not functionally interdependent with the Qualified Biogas Property that converts biomass into a gas and captures such gas for sale or productive use. Under the NPRM, the other listed units of Energy Property above would be deemed to satisfy the functionally interdependent test.
Integral Part Property
The Proposed Regulations would provide that “integral part property” is treated as Energy Property. “Integral part property” would be defined as property that is owned by the same taxpayer if it is (i) used directly in the intended function of the Energy Property and (ii) essential to the completeness of the intended function. Additionally, property shared among multiple Energy Properties may be considered an integral part of each Energy Property so long as the cost basis for the shared property is properly allocated.
Timeline for Measuring Methane Requirements
As discussed above, the Code imposes a methane requirement for property to be deemed Qualified Biogas Property. Qualified Biogas Property must convert biomass into a gas which (a) consists of not less than 52 percent methane by volume or (b) is concentrated by such system into a gas which consists of not less than 52 percent methane. Under the NPRM, the Proposed Regulations would provide that such requirement 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 would be the point at which a taxpayer must generally 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.
One-Megawatt Exception to Prevailing Wage and Apprenticeship Requirements
The NPRM provides guidance as to the one-megawatt exception to the prevailing wage and apprenticeship requirements. As background, the Code provides that an energy project qualifies for the 5x credit multiplier if (i) the project has a maximum net output of less than 1 megawatt of electricity or thermal energy, (ii) the project began construction before January 29, 2023, or (iii) the project satisfies the prevailing wage and apprenticeship requirements. With respect to the one-megawatt option, the NPRM states that Proposed Regulations would provide an energy conversion formula for Qualified Biogas Property: “3.4 mmBtu/hour can be used as equivalent of the One-Megawatt Exception.” The Proposed Regulation would also explain how taxpayers may convert the maximum net output of 3.4 mmBtu/hour into an equivalent maximum net volume flow in scf per hour. Otherwise, the Proposed Regulation would provide that if the heat content of the gas is known, taxpayers may calculate their own equivalent volumetric flow.
Requests for Comments: Disposal via Combustion, Cleaning or Conditioning Gas
As discussed above, the Code provides that to be considered Qualified Biogas Property, the property must not capture gas “for disposal via combustion.” One commenter noted that properties which produce electricity from gas using a combustion process may flare waste or tail gas, including during commissioning or maintenance periods. To ensure that such properties would not violate the combustion limitation, the commenter recommended a de minimis exception, which would permit a small amount of combustion. The NPRM requests additional comments on whether such an exception is necessary and what should be considered de minimis for this purpose.
The Code also provides that qualified biogas property includes “any property which is part of such system which cleans or conditions such gas.” The NPRM requests comments regarding what types of components may be included within the definition of “cleaning and conditioning property.”
For more information, please contact Husch Blackwell’s Jacob Stephens.