Renewable Energy Advocates Assess Effectiveness of Energy Credit Regs

January 22, 2024

Douglas W. O'Donnell
Deputy Commissioner for Services and Enforcement
CC:PA: LPD:PR (REG-132569-17)
Room 5203
Internal Revenue Service
P.O. Box 760
Ben Franklin Station
Washington, DC 20044

Re: Definition of Energy Property and Rules Applicable to the Energy Credit, Notice of Proposed Rulemaking, Public Hearing, and Partial Withdrawal of Notice of Proposed Rulemaking, 88 Fed. Reg. 82,188 (Nov. 22, 2023)

Dear Mr. O'Donnell:

The Coalition for Renewable Natural Gas (RNG Coalition) represents the renewable natural gas (RNG) industry. RNG is derived from biogas that has been captured from organic waste streams — including agricultural wastes, municipal wastewater, and municipal solid waste in landfills — and cleaned and conditioned to achieve quality standards necessary to blend with or substitute for geologic natural gas. RNG is a high-BTU fuel that can be used in the same infrastructure and any application that uses geologic natural gas. Importantly, RNG projects capture and utilize methane — a highly potent greenhouse gas (GHG) — that would otherwise have been emitted into the atmosphere. RNG Coalition is a non-profit association of companies and organizations dedicated to the advancement of RNG as a clean, green, alternative, and domestic energy and fuel resource. Our membership includes companies throughout the value chain of waste feedstock conversion to sustainable end-use applications.

RNG Coalition has previously submitted comments on the implementation of the modifications to the Energy Investment Tax Credit (ITC) under Section 48 of the Internal Revenue Code enacted by the Inflation Reduction Act of 2022 (IRA), including submitting a preliminary set of comments on the proposed rule referenced above on December 21, 2023.¹ The IRA marks “the most significant action Congress has taken on clean energy and climate change in the nation's history.”² The Proposed Rule — Definition of Energy Property and Rules Applicable to the Energy Credit — must be revised in the final rule to ensure the opportunities for GHG emissions reductions, especially methane, in the IRA are realized.

RNG Coalition appreciates the opportunity to submit these comments on the Proposed Rule. A summary of its comments is provided below.

• The Proposed Rule would improperly exclude “gas upgrading equipment” from being considered qualified biogas property. This proposed exclusion is inconsistent with the statutory definition and the inclusion of cleaning and conditioning equipment in Section 48. “Gas upgrading equipment” — i.e., “cleaning and conditioning property” — is equipment used to clean gas by removing toxins and corrosive substances and to condition gas by removing non-productive substances, e.g., carbon dioxide, oxygen, and nitrogen, so that the resulting product can be productively used or sold. The language excluding gas upgrading equipment from the definition in proposed Section 1.48-9(e)(11)(i) should be removed, and the final rule should clarify that “gas upgrading equipment” is qualified biogas property.

• Proposed Section 1.48-9(e)(11)(ii) should be revised to clarify when the methane content should be measured. The statute references a gas that is “not less than 52 percent methane by volume” that is intended “for sale or productive use, and not for disposal via combustion.” This means that the methane content should be measured at the point when the gas is ready for sale or applicable productive use. As such, the final rule should clarify that the methane content is measured at the end of the cleaning and conditioning process.

• The final rule should eliminate or modify the concept of functional interdependence and application of the 80/20 Rule with respect to qualified biogas property. Strict application of such policies undermine Section 48's intent to incentivize capital expenditures to put biogas into productive use rather than have methane released into the atmosphere. The final rule also should recognize that qualified biogas property may involve separate ownership and remove any artificial limits on biogas project development found in the Proposed Rule. In particular, RNG projects, which Congress sought to incentivize, often involve new installations on existing waste operations (e.g., functional landfill gas collection system, municipal wastewater digester). Due to the capital investments needed to manage methane emissions and decarbonize the waste sector, these projects often involve separate owners. To address these concerns, proposed Section 1.48-9(f) and 1.48-14 should be withdrawn or clarified with respect to qualified biogas property to:

  • Provide that the 80/20 Rule does not apply to capital improvements, or if applicable, is limited to the individual units being put into operation by the claiming taxpayer and does not exclude new or expanded projects that are added to existing operations; and

  • Confirm that separate ownership of the biogas collection system and the conversion system is permitted, regardless of whether the conversion system is treated as functionally interdependent or integral.

RNG Coalition's more detailed comments on the Proposed Rule follow.

I. RENEWABLE NATURAL GAS MUST BE A KEY COMPONENT OF THIS COUNTRY'S EFFORTS TO REDUCE METHANE EMISSIONS.

RNG Coalition is concerned that the Proposed Rule reflects a misunderstanding of biogas projects and how processing to RNG is necessary for biogas to be sold or placed into productive use, as contemplated by Congress. RNG is a term typically “used to describe biogas that has been upgraded for use in place of fossil natural gas.”³ RNG is derived from biogas that “comes from a variety of sources, including municipal solid waste landfills, digesters at water resource recovery facilities (wastewater treatment plants), livestock farms, food production facilities and organic waste management operations.”⁴ As EPA has explained:

Raw biogas has a methane content between 45 and 65 percent, depending on the source of the feedstock, and must go through a series of steps to be converted into RNG. Treatment includes removing moisture, carbon dioxide (CO2) and trace level contaminants (including siloxanes, volatile organic compounds, or VOCs, and hydrogen sulfide), as well as reducing the nitrogen and oxygen content. Once upgraded, the gas has a methane content of 90 percent or greater. Typically, RNG injected into a natural gas pipeline has a methane content between 96 and 98 percent.⁵

Because biogas is derived from organic wastes, the constituents of the biogas vary based on the waste stream. The contents of the waste are difficult to control, particularly for municipal waste landfills and wastewater treatment plants. The methane levels in biogas may also fluctuate even for the same waste stream. This makes raw biogas less than an ideal energy source.

Biogas can be managed through anaerobic digesters and landfills. However, it can also be produced in unmanaged manmade systems like manure lagoons, and natural systems like wetlands. This raw biogas, even if it has 52 percent or higher methane content, has limited use due to the contaminants that are present. The biogas is typically disposed of through on-site combustion to create process heat, generate electricity, or flared to the atmosphere. Biogas cannot be transported via pipelines, which is the most common and efficient way to transport natural gas, because pipelines require the biogas to be cleaned and conditioned to meet their specifications. Meeting these specifications is necessary to get the gas to market.

To allow for the sale or productive use of the biogas, EPA has identified the “[t]ypical steps to convert raw biogas to RNG,” including the required cleaning and conditioning of the biogas, that can be divided into three main steps of treatment:

• Primary: basic moisture and particulate removal;

• Secondary: additional moisture removal, contaminant removal and compression;

• Advanced: CO2, O2, N2 and VOC removal and further compression.⁶

Primary treatment largely occurs to destroy biogas in a combustion flare, although this biogas also can be combusted for on-site use, such as process energy for leachate evaporators, boilers, and kilns.⁷ “[S]econdary treatments are used to produce medium-Btu gas for direct thermal applications such as boilers or for electricity generation applications such as engines and turbines.”⁸ While raw biogas that undergoes the primary and secondary treatment stages can produce a medium-Btu gas, that gas has a heating value that is “less than that of fossil natural gas (typically about half).”⁹ This medium-Btu gas would also not meet pipeline quality specifications, limiting the potential markets for this gas. As such, even when not combusted for disposal, the medium-BTU gas has limited applications and is typically used on-site or locally, presenting important but restricted emissions abatement and environmental benefits.

The level and types of treatment needed to put the biogas into productive use depends on numerous factors, including, but not limited to, the source of the biogas, the type of flow and contaminants that may be present in the biogas, the size and location of the source of the biogas that may impact the economics of the project, and whether there are interconnections to the electricity grid and/or pipeline access. Because of the numerous benefits, EPA has urged RNG projects where feasible.¹⁰ “The advanced treatment stage produces RNG, with a heating value similar to fossil natural gas.”¹¹ Advanced treatment requires substantial capital investment: “Total capital costs for smaller landfill projects are in the range of $5 million to $25 million, and upwards of $100 million for larger projects, including agricultural and wastewater projects.”¹² “As a substitute for natural gas, RNG has many end uses: in thermal applications, to generate electricity, for vehicle fuel or as a bio-product feedstock.”¹³ It can be used locally or can be injected into natural gas transmission or distribution pipelines.¹⁴ EPA also has estimated that RNG projects provide more economic benefits to local communities.¹⁵ RNG projects can support environmental justice through these economic benefits in addition to the environmental benefits stemming from RNG as a waste management tool, reducing emissions, odors, and other environmental impacts that may stem from management of organic wastes.¹⁶ “Fully realizing the market potential of biogas systems will take significant investment by livestock producers, municipalities, food producers, the private waste sector, and project developers.”¹⁷ In expanding the ITC to include qualified biogas property, the IRA sought to support these different types of projects (i.e., systems) that put biogas into productive use; that is, RNG projects.

II. THE PROPOSED RULE MISINTERPRETS AND MISAPPLIES THE STATUTORY AUTHORIZATION FOR CLEANING AND CONDITIONING EQUIPMENT TO BE ELIGIBLE FOR THE ITC.

A key provision in the IRA was the addition of “qualified biogas property” to the list of property eligible for a Section 48 ITC. “Qualified biogas property” is defined as property comprising a system which:

Importantly, Congress made clear that the term “qualified biogas property” includes “any property which is part of such system which cleans or conditions such gas.”¹⁹ This is a broad definition.²⁰

The Proposed Rule, however, would limit this definition, against Congressional intent. The Proposed Rule would essentially finalize the statutory definition, but would also add the following:

For example, qualified biogas property includes, but is not limited to, a waste feedstock collection system, a landfill gas collection system, mixing or pumping equipment, and an anaerobic digester. 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.²¹

We believe this proposed exclusion misunderstands the cleaning and conditioning process required for biogas to be sold or made available for productive use and misapplies the statute. For the reasons discussed further below, this statement regarding “gas upgrading equipment” in the Proposed Rule must be removed in the final rule and can be replaced with clarifying language such as: Equipment used to remove toxins or contaminants from raw biogas or concentrate or condition the gas into the appropriate mixture for sale or productive use through removal of other gases such as carbon dioxide, nitrogen, or oxygen is cleaning and conditioning equipment which is qualified biogas property.

A. The Proposed Rule's Treatment of “Upgrading Equipment” Could Render the ITC for Qualified Biogas Property Ineffectual and Potentially Meaningless.

The Proposed Rule requests comments regarding the components that should be included as cleaning and conditioning property. But, based on the apparent exclusion of “upgrading” equipment, which is cleaning and conditioning equipment, it is unclear what equipment would be included under the proposed definition. In the best possible light, the proposed exclusion of gas upgrading equipment would substantially limit the potential scope of the ITC for qualified biogas property as to render it meaningless.

Before biogas can be used in an energy conversion process, “it must be treated to remove condensate, particulates, and other impurities.”²² Cleaning and conditioning equipment is equipment that removes carbon dioxide, nitrogen, oxygen, water in a gaseous form, and other contaminants from raw biogas so that it can be sold or put to a productive use without disposal by combustion. EPA has referred to the processing of biogas to RNG as “cleaning” or “gas conditioning,” which are terms often used interchangeably with “upgrading.”²³ Indeed, “upgrading” is largely an informal industry term that refers to the cleaning and conditioning process. The plain text of the statute is what should apply not reference to industry jargon, which, at a minimum, only causes confusion in the marketplace.

The examples provided in the Proposed Rule for “qualified biogas property” appear to address only the first element of the definition in the statute. The proposed regulation states: “For example, qualified biogas property includes, but is not limited to, a waste feedstock collection system, a landfill gas collection system, mixing or pumping equipment, and an anaerobic digester.”²⁴ But, these properties would, at best, only comprise a system which “converts biomass into a gas which . . . consists of not less than 52 percent methane by volume.” This is raw biogas, and, as explained above, more is needed to turn that biogas into a gas that can be sold or made into a productive use. Even if the raw biogas could be used for energy on-site,²⁵ this biogas would be disposed of via combustion.²⁶ Congress, however, excluded from the ITC biogas that is disposed of (i.e., gotten rid of or dealt with conclusively)²⁷ through combustion. Rather, the biogas typically must undergo a treatment process to be sold and put into productive use, which includes upgrading (i.e., cleaning and conditioning).

Moreover, not all raw biogas consists of at least 52 percent methane, and it is unclear if primary treatment or secondary treatment alone will result in the biogas achieving at least 52 percent methane in those cases.²⁸ Regardless, the Proposed Rule would appear to treat the 52-percent-threshold as a floor and a ceiling, rather than ensuring eligibility for any gas that is at least 52 percent methane. But, biogas that achieves only 52 percent methane, sometimes referred to as medium-BTU biogas, cannot be sold or put to any productive use other than through combustion, or by taking additional steps to clean and condition the gas. Thus, by excluding “upgrading equipment,” two parts of the statute are ignored. First, that the biogas produced by qualified biogas property achieve “not less than” 52 percent methane, and second, that the methane produced be suitable for “sale” or “productive use.” Since the statute concerns a system that achieves “not less than 52 percent methane . . . for sale or productive use, and not for disposal via combustion,” any equipment required to cause the biogas to be saleable or usable must be ITC eligible. Where the statute expressly includes cleaning and conditioning equipment, this includes “upgrading equipment.”

Thus, in response to the request for comments, there likely would be virtually no “cleaning and conditioning” equipment that would qualify for the ITC based on the Proposed Rule's improper exclusion of “gas upgrading equipment.” As further explained below, the Proposed Rule appears to ignore the plain text of the statute and misapplies a functionally interdependent test to impermissibly narrow (rather than expand) eligibility for the ITC. The errors created by the misinterpretation of the statute and misapplication of the functionally interdependent test are further exacerbated by the Proposed Rule's point of measurement, which would be only at the point of production of the biogas, not the gas that is being sold or placed into productive use. As further discussed below, the point of measurement must also be revised to measure the methane content after the cleaning and conditioning of the biogas, because, only then, is it available for sale or available to be put into productive use other than disposal through combustion.

B. Based on the Plain Text of the Statute, RNG is Eligible for the ITC as “Qualified Biogas Property.”

Under the statute, “qualified biogas property” includes property that is (a) comprising a system which (b) converts biomass into a gas which (I) consists of not less than 52 percent methane by volume, or (II) is concentrated by such system into a gas which consists of not less than 52 percent methane, and (c) captures such gas for sale or productive use, and not for disposal via combustion.

The key part of this statutory definition that the Proposed Rule appears to overlook is the requirement that the property “captures such gas for sale or productive use, and not for disposal via combustion.” Where the Proposed Rule would appear to exclude “gas upgrading equipment,” it is the RNG process that renders the gas capable of being for sale or productive use. As noted above, primary and secondary treatment may be needed for flaring or disposal by combustion, which would not be eligible for the ITC by statute. On the other hand, the broad nature of the definition of qualified biogas property makes clear that RNG, which requires advanced treatment that is only constructed for purpose of selling or putting the gas into productive use, is also eligible for the ITC. While there may be variations in the methane levels of biogas before entering the gas upgrading equipment, including some biogas streams that may already be above 52%, the higher concentration of methane in RNG is required to be fungible with natural gas and to make the biogas available for use in a variety of uses, including in end uses that may be difficult to decarbonize. This advanced cleaning and conditioning treatment is also required for RNG to be distributed via pipeline to the best markets. RNG is, in fact, the most productive use of the biogas, although that is not required. The system need only capture the gas “for sale or productive use.”

Legislative history supports a broad reading of qualified biogas property, as it makes clear that Congress sought a broad range of productive uses of the biogas. Legislation seeking to extend the ITC to biogas projects has been introduced since 2010.²⁹ These bills recognized that “Biogas systems will save Federal, State, and local taxpayers money by converting waste into useful products, such as fuel, fertilizer, thermal heat, feedstock for hydrogen fuel cells, and renewable chemicals.”³⁰ This includes a broad range of uses of high-BTU gas that requires cleaning and conditioning of the biogas to RNG. Revising the reference to use as a fuel in prior versions of the legislation to the broader phrasing of capturing the gas “for sale or productive use” further illustrates the intent to establish a broader definition.

The other prongs of the definition also make clear that Congress sought to include “gas upgrading equipment” under the ITC. First, “qualified biogas property” includes property comprising a “system.” Although not defined in the statute, the plain meaning of “system” is “a regularly interacting or interdependent group of items forming a unified whole.”³¹ As noted above, projects seeking to turn biogas from organic wastes into a productive use can take many forms with different structures. For example, an RNG project developer could install digesters at a farm or farms, collect and send that biogas to a separate facility to undergo cleaning and conditioning to result in RNG that can then be sold or used as transportation fuel. This is a “system” that was constructed that is part of a whole to turn the biogas into a fuel for sale. All the components of that system could be considered energy property. More likely, RNG projects can be developed on expanded or existing operations that generate wastes for which biogas may be produced naturally through decomposition and enter the environment. These operations may already collect the biogas, e.g., for flaring or disposal by combustion. But, an RNG project developer could build a project that takes that biogas and converts it into RNG for sale or a productive use, which is also a “system” that upgrades the biogas to RNG. Flexibility in defining a “system” also recognizes that these projects often involve separate ownership of different components. For example, a municipally owned landfill may be installing a collection system but may not have the capital or funding necessary to install cleaning and conditioning equipment or the resources for operating and maintaining such facilities. In passing the IRA, Congress intended to support projects that would turn this biogas, which is largely comprised of methane — a potent greenhouse gas, into a productive use, rather than simply be released into the environment, flared, or disposed of through combustion.

Second, the system must (1) convert biomass into a gas which consists of not less than 52 percent methane by volume OR (2) concentrate the gas into one which consists of not less than 52 percent methane. The systems that may comprise an RNG project, as explained above, can meet either of these prongs. Under the first prong, biogas is converted to RNG. Convert means “to alter the physical or chemical nature or properties of especially in manufacturing.”³² “Biomass” means “any organic material other than — (A) oil and natural gas (or any product thereof), and (B) coal (including lignite) or any product thereof.”³³ Organic means “of, relating to, or containing carbon compounds.”³⁴ Material is defined as “relating to, derived from, or consisting of matter.”³⁵ Gas is merely a state of matter, and biogas then can constitute “biomass” as “any” organic material. By the plain text, qualified biogas property includes conversion of biogas (or even medium-BTU gas) to RNG,³⁶ which is a gas that consists of “not less than 52 percent methane.”

Under the second prong, the RNG cleaning and conditioning process clearly involves a gas that has been “concentrated” “into a gas which consists of not less than 52 percent methane.” Concentrated is defined as “rich in respect to a particular or essential element: made less dilute or diffuse.”³⁷ It cannot be disputed that the RNG process concentrates the biogas (and even medium-BTU gas) from 45 to 65 percent methane to closer to 90 percent or greater methane.³⁸

Finally, if the language in Section 48(c)(7)(A) were not clear enough, Congress put all doubt aside by enacting Section 48(c)(7)(B). Section 48(c)(7)(B) provides that “qualified biogas property” includes any property which is part of such system which cleans or conditions such gas. As noted above, the term “any” is expansive, which, again, indicates that Congress sought to cover a wide range of RNG projects, regardless of source or the structure of the project. “Cleans” means “to make clean: such as . . . to rid of dirt, impurities, or extraneous matter.”³⁹ “Conditions” means “to put into a proper state for work or use.”⁴⁰ As noted above, EPA has used the terms cleaning, conditioning, and upgrading interchangeably. Conditioning is also a term that has been used in the natural gas industry, where the gas must be conditioned before it can be sold for use as “natural gas.”⁴¹ This is similar to raw biogas that must be conditioned (i.e., upgraded) to ensure it is in the proper state (e.g., impurities removed) to be sold or used. Potential different terms of art does not take away from the clear intent of Congress to include equipment that makes the biogas available to be sold or used productively to be eligible for the ITC.

Here, “gas upgrading equipment” cleans and conditions the biogas to rid it of impurities and extraneous matter to put it into a proper state for use as high-BTU gas.⁴² The Proposed Rule acknowledges that upgrading equipment “condition[s] biogas” to be of pipeline quality.⁴³ What the Proposed Rule appears to miss is that the conditioning of the biogas to pipeline quality is precisely to make it interchangeable with natural gas; that is, for the gas to be marketable as “natural gas” available for productive use in any “natural gas” applications. In other words, property comprising a system is the equipment necessary to achieve the requisite methane content and to capture such gas for sale or productive use — i.e., RNG. Replacing fossil-based natural gas with RNG is what achieves the needed methane reductions to address climate change, which was one of the key purposes of the clean energy credits provided under the IRA.

The statute, then, gives investors in qualified biogas property flexibility in identifying the scope of the system for purposes of obtaining a credit. Not only does the Proposed Rule eliminate this flexibility, but it also largely eliminates the ability for any cleaning and conditioning equipment to qualify for the ITC at all. This must be corrected in the final rule.

C. The Proposed Rule is Improperly Using the “Functional Interdependent” Test to Restrict Eligibility for the Qualified Biogas Property ITC.

Even though the plain text of the statute would include equipment required to upgrade biogas to RNG as qualified biogas property, as discussed above, the Proposed Rule takes the position that gas upgrading equipment is not included in the definition of qualified biogas property. According to the Proposed Rule, this is because “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.”⁴⁴ It goes on to state 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.”⁴⁵ Apparently claiming that upgrading equipment is not “cleaning and conditioning equipment [that] is part of the necessary process to convert biomass into gas that is not less than 52 percent methane and capture gas for sale or productive use,” the Proposed Rule then asks for comments on 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).⁴⁶ As discussed above, the Proposed Rule would appear to exclude most cleaning and conditioning equipment, except possibly some medium-BTU projects. We believe this indicates a misunderstanding of what is “upgrading equipment.”

The Proposed Rule defines “functionally interdependent” as “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.”⁴⁷ Typically used for defining a “qualified facility” for purposes of a production tax credit. This test was developed in a different context to determine the scope of personal tangible property, such as an airplane.⁴⁸

Nonetheless, while this test has been used in an investment tax credit context, it has typically been used in an expansive way. The examples provided in the Proposed Rule regarding prior use of a functional interdependent test under Section 48 relate to different types of “property” than “qualified biogas property.” IRS Notice 2018-59,⁴⁹ for example, relates to equipment that uses solar energy, finding energy property is generally comprised of all components of property necessary to generate electricity up to and including the inverter (e.g., PV panels (or other arrangements of solar cells), fiber-optics, fuel cells, turbines, boilers, mounting equipment, support structures, tracking equipment, monitoring equipment, transformers (used in electrical generation that step up the voltage to less than 69 kilovolts) and other power conditioning equipment, and inverters).⁵⁰ It was also used to distinguish one electricity producing “energy property” from “other components of property within a larger energy project,” finding “[f]unctionally-interdependent components of property that can be operated and metered together and can begin producing electricity separately... will be considered an energy property.”⁵¹ The Proposed Rule further discussed the difficulty in defining components of energy property without being limiting or constraining of future technologies and that the “function-oriented approach” would “avoid limiting future energy technologies.”⁵² The problem is that this “functionally interdependent” test as the Proposed Rule applies to qualified biogas property is that it limits and constrains current technologies from receiving the tax credit.

As discussed above, RNG projects fall squarely within the plain text of the definition of qualified biogas property. For RNG projects being constructed on existing sites for the management of wastes, there is no need for a “functional interdependent” test for purposes of determining whether the upgrading equipment constitutes part of the qualified biogas property,⁵³ it is the qualified biogas property. The Proposed Rule does not explain why RNG derived from biogas, which converts or concentrates the biogas, is not also “a gas which consists of not less than 52 percent methane.” Instead of being limiting, as defined in the Proposed Rule, the definition of “qualified biogas property” recognizes the different types of biogas streams and the different types of biogas to energy/productive use projects and intended to provide the ITC to such systems.⁵⁴ Further, the functional interdependent test ignores that Congress said that cleaning and conditioning equipment is included in the definition of qualified biogas property. This indicates that Congress did not seek to end ITC eligibility at the digester or landfill collection system, as the Proposed Rule's application of the functional interdependent test would do.

The problem may be with how the Proposed Rule defines the “function” of the qualified biogas property. The Proposed Rule appears to take the position that the cleaning and conditioning process of converting biogas to RNG is simply to allow it to be transported by pipeline. This is incorrect. Conditioning the biogas to pipeline quality makes it marketable for a variety of uses (i.e., all natural gas applications).⁵⁵ The agencies recognized this in the proposed rule regarding the Section 45V credit for production of clean hydrogen, which refers to RNG as “biogas that has been upgraded to be equivalent in nature to fossil natural gas.”⁵⁶ Indeed, in that proposal, the agencies appear to acknowledge that for biogas to be used as a feedstock for hydrogen production, such cleaning and conditioning is required.⁵⁷ The Proposed Rule does not provide any explanation why the fact that the RNG may be injected into a pipeline makes a difference with respect to the ITC. RNG (i.e., biogas that has been cleaned and conditioned) need not be injected into a pipeline, but it must be cleaned and conditioned to meet the needs of the market into which it is being sold. Ensuring the RNG meets pipeline quality specifications, nonetheless, allows RNG to be distributed via pipelines (unlike biogas), as pipeline operators require that those specifications be met to ensure proper operation of their pipeline and that the needs of their customers are being met.

Even if a “functional interdependent” assessment may be appropriate to define the scope of qualified biogas property for a particular property for which a taxpayer is seeking ITC eligibility, it should not be used to exclude projects from being eligible for the ITC. For example, a project that is constructing digesters at several dairy farms, a collection point for the biogas, and an RNG facility to clean and condition that biogas could constitute a “qualified biogas property.” To determine all the relevant equipment that falls within that property, an assessment of property that is integral to that particular project could help define the scope of the property eligible for the ITC. In such cases, notwithstanding the Proposed Rule's attempt to limit the base unit of qualified biogas property, RNG projects and affiliated equipment would meet that test. Because cleaning and conditioning equipment is necessary to produce biogas of at least 52% methane that can be sold or put to a productive use without combustion, the equipment that facilitates this process is “functionally interdependent” with the balance of the qualified biogas property. Thus, projects that involve both the collection of the biogas and the cleaning and conditioning of the biogas would easily meet this test. But, the Proposed Rule would appear to disallow the cleaning and conditioning component of even this type of project. Moreover, an analysis of what equipment is functionally interdependent in a given case may vary depending on the type of energy property involved and, in particular, whether a taxpayer is placing into service major components of a larger “system” without placing in service other components (such as where other components already exist or are being placed into service by another taxpayer).

This disallowance of “upgrading equipment” is also inconsistent with treatment of other energy property, such as offshore wind projects. For “wind energy property,” current regulations list power conditioning equipment as part of the wind energy property.⁵⁸ The Proposed Rule similarly would include “power conditioning equipment . . . which modify the characteristics of electricity or thermal energy into a form suitable for use or transmission or distribution,” but as an “integral” part of the offshore wind project.⁵⁹ The function of this power conditioning equipment is the same as upgrading equipment for biogas, each serving to take an otherwise limited-use product to a marketable, transportable commodity. While we have concerns that such an approach could impact projects with separate ownership,⁶⁰ which should remain allowed under the ITC, the wholesale exclusion of upgrading equipment as not functionally interdependent with “qualified biogas property” is wholly inconsistent with this approach.

Similarly, the Proposed Rule's use of a functional interdependent test to exclude “gas upgrading equipment” does not provide a “technology-neutral way to consider what is included,” which the Proposed Rule also referenced as a reason to apply the test to defining energy property.⁶¹ Although we question whether any equipment would be considered “cleaning and conditioning” under the Proposed Rule's exclusion, the functional interdependent test, at best, would appear to limit “cleaning and conditioning” to the removal of certain impurities such as siloxanes, VOCs, and H2S from biogas, while using the term “upgrading” for removal of other impurities, carbon dioxide, nitrogen, and oxygen gases. While certain existing technologies remove only the first type of impurities, other technologies simultaneously remove both the first type and the second type in a single piece of equipment.⁶² Each technology has strengths and weaknesses that must be evaluated and balanced on a case-by-case basis by the project owner/developer for each potential RNG facility to select the technology best suited for the site. However, the Proposed Rule's differentiation of “cleaning and conditioning” from “upgrading” will encourage project owners to select technologies based on the artificial distinction rather than what is best suited to the site, and will suppress the development and usage of even more efficient technologies that both “clean and condition” and “upgrade” the biogas.

D. Contrary to the Statute, the Proposed Rule Would Unduly Limit the Qualified Biogas Property ITC by Ignoring the Different Ownership Structure of these Projects.

Under the Proposed Rule, the functional interdependent test in the context of qualified biogas property would appear to draw a line between owners of different components of the biogas collection and cleaning and conditioning process, which would, again, limit eligibility for the ITC.⁶³ This is beyond the agencies' authority, as it seems to be using the concept of ownership to limit ITC eligibility. But, based on the statutory definition of qualified biogas property, it should not matter who owns different components of potentially a larger, overall system, even if it involves functionally interdependent components (or integral parts). Section 48 permits the ITC to be claimed by the owner of energy property when the original use of that energy property began with such owner. As such, functionally interdependent components that are still energy property may qualify for the ITC even when separately owned.

The ITC is principally intended to incentivize capital expenditures on property that is used to produce a specific type of renewable energy in a specified way. In so doing, Section 48, on its face, permits the ITC to be claimed by an owner of energy property when the original use of that energy property began with such owner. This allows energy property that may be separately owned to still qualify for the ITC, so long as it meets the eligibility requirements (discussed in Section II.B. above). This flexibility is particularly important for RNG projects, because it may be impractical (if not impossible) to cause one taxpayer to own all components of a larger system of ITC eligible property. This is because organic waste can be collected and stored in a variety of ways, resulting in cleaning and conditioning projects often being owned by a separate entity. Requiring all integral parts to be treated as one “system” is not found in the statutory text and could have an unnecessary chilling effect on the industry.

Additionally, individual items of energy property may qualify for the ITC, even when placed into service after other related energy property is placed into service.⁶⁴ For example, a landfill may already have a collection system in place, which results in flaring of the biogas. The ITC for qualified biogas property sought to allow an investor or developer to install equipment necessary to clean and condition that biogas for sale as RNG. Rather than flaring the biogas (and the methane and other pollutants in the gas), the RNG project would turn that biogas into an energy source, avoiding methane emissions and reducing air pollution.

Regardless of the scope of the qualified biogas property, as discussed above, allowing the ITC on different components that may be under separate ownership is consistent with treatment of such property elsewhere.⁶⁵ For example, in the Frequently Asked Questions and Answers (“1603 Program FAQs”) document for the 1603 Program (Payments for Specified Energy Property in Lieu of Tax Credits),⁶⁶ the Treasury Department appears to recognize that the same location may contain more than one party that is eligible for the ITC. There, it was asked if manufacturers of specified energy property are eligible applicants. The Treasury Department responded that “Payments are only available to entities that place specified energy property into service. An entity that manufacturers specified energy property but does not own the property at the time it is placed in service is not eligible for payment. If a manufacturer continues to own the property once it is placed in service (for example, a manufacturer who leases rather than sells its property), it may be eligible.”⁶⁷ The 1603 Program FAQs also recognized that owners of different components of a facility are each eligible for payments, provided, however, that separate applications are submitted.⁶⁸

This guidance indicates that, even if the components are deemed “integral,” this should not necessarily preclude ITC eligibility in the case of separate owners. There would be no risk of double counting as the Proposed Rule would typically allow a party to be eligible for the Section 48 ITC “to the extent of the party's fractional ownership interest.”⁶⁹ Projects developed by separate entities, however, should not be penalized simply because of a different ownership structure. If they are, it should be clear that any tax credit under Section 48 for related components would not impact the ability of the second owner to obtain another tax credit for which the taxpayer may be eligible. The Proposed Rule fails to adequately address these issues, including providing no explanation as to why the agencies believe the Proposed Rule best effectuates the ITC for biogas qualified property. The final rule should, at a minimum, confirm that separate ownership of the biogas collection system and the conversion system is permitted, regardless of whether the conversion system is treated as functionally interdependent or integral.

E. The Final Regulations Must Revise the Point of Measurement for Determining the Methane Content to Determinate Eligibility for the Qualified Biogas Equipment ITC.

The apparent misunderstanding of the biogas conversion and cleaning and conditioning process appears to also manifest itself in the Proposed Rule's methane content requirement in proposed Section 1.48-9(e)(11)(ii). The Proposed Rule would provide that the methane content requirement for qualified biogas property “is measured at the point at which gas exits the biogas production system, which may include an anerobic digester, landfill gas collection system, or thermal gasification equipment.”⁷⁰ As with the Proposed Rule's misreading of the statute in excluding upgrading equipment, this point of measurement ignores the majority of the definition of “qualified biogas property.”

Under the Proposed Rule, the gas must reach the required 52 percent minimum methane content at the time at which it exits the biogas production system. Based on proposed Section 1.48-9(e)(11)(i), this point appears to be before the gas enters the cleaning and conditioning equipment. By way of explanation, the proposed regulation states that this “is 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.”⁷¹ This again appears to misunderstand how the biogas production process works.

We do not believe that it is at the point of biogas production or a determination of the methane content of the biogas that determines “whether it will convert the biogas to fuel for sale or use it directly to generate heat or to fuel an electricity generation unit.” Because of the contaminants present, raw biogas typically cannot be used for these uses at any point. The decision, then, is based on a variety of investment factors by the biogas producer or a developer that seeks to utilize the biogas for electricity or to further upgrade the biogas for sale as fuel (or other uses). These are the investments that make the biogas into a gas that is capable for sale or for productive use and, therefore, the systems for which the ITC was established. For example, a landfill collection system alone may be needed under state or federal regulations to flare or dispose of the gas via combustion, but the ITC is triggered if that landfill gas is then turned into a medium-BTU or high-BTU gas.⁷²

Stopping at the collection or digester to determine the “functionally interdependent” parts of that system for ITC eligibility makes little sense and essentially reads the inclusion of cleaning and conditioning equipment out of the statute. At the point of measurement in the Proposed Rule, there would be little room to even allow for any treatment of the biogas at all, aside from, potentially, scrubbers or minimal removal of moisture or trace contaminants, depending on how the project is setup. This minimal treatment is typically required just to flare or dispose of the gas via combustion. This methane content requirement, then, would seem to be predicated on the erroneous and simplistic assumption that raw biogas will in the ordinary course satisfy the 52 percent floor. Contrary to this misunderstanding, the methane content of raw biogas (i.e., prior to even rudimentary cleaning and conditioning) is variable both across biomass feedstock types and during the course of plant operations. In particular, biogas collected at landfills is often below 50 percent.

To better effectuate the qualified biogas property ITC, the methane content should be measured at the end of the cleaning and conditioning process. In other words, it should be measured at 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. For RNG, this threshold would easily be met, as it is cleaned and conditioned to achieve about 90 percent or higher methane content.

F. The Proposed Rule Cannot Limit Eligibility for Credits Beyond the Prohibitions Placed by Congress.

The Proposed Rule recognizes that “Section 48 and the existing regulations thereunder are silent regarding the eligibility of components of energy property for multiple credits.”⁷³ Proposed Section 1.48-14(c) would provide that “the basis of energy property may be eligible for calculating both the section 48 credit and another Federal income tax credit, subject to the limitation provided in paragraph (c)(2) of this section.”⁷⁴ Paragraph (c)(2) provides that a “taxpayer that owns energy property that is eligible for both the section 48 credit and another Federal income tax credit is eligible for the section 48 credit only to the extent the other Federal income tax credit was not claimed with respect to the taxpayer's eligible basis in the energy property.”⁷⁵ RNG cleaning and conditioning equipment, however, requires substantial capital and each tax credit provided by Congress has its own purpose. Unless Congress expressly prohibits eligibility for another tax credit, the agencies lack authority to do so here.⁷⁶

III. THE FINAL RULE MUST CLARIFY THAT THE 80/20 RULE DOES NOT LIMIT RNG PROJECTS' ELIGIBILITY FOR THE ITC.

The Proposed Rule would generally apply the “80/20 Rule” to the ITC. The 80/20 Rule stems from guidance regarding the eligibility of retrofitted equipment added to qualified facilities and energy property.⁷⁷ Citing Notice 2016-31, the Proposed Rule notes that “a qualified facility may qualify as originally placed in service even though it contains some used property, provided the fair market value of the used property is not more than 20 percent of the qualified facility's total value (that is, the cost of the new property plus the value of the used property)” — the “80/20 Rule.”⁷⁸ It also references Notice 2018-59, which addressed the application of the 80/20 Rule to retrofitted energy property for purposes of the applying the beginning of construction rules to the section 48 credit.⁷⁹ For purposes of the 80/20 Rule, the cost of the new energy property includes all properly capitalized costs of the new energy property.⁸⁰ Because RNG projects typically are added to existing operations (e.g., active landfills) and require a significant capital investment upfront, the importance of adapting the 80/20 Rule for particular types of clean energy facilities is particularly important for RNG.⁸¹ As discussed above, cleaning and conditioning equipment, which includes “gas upgrading equipment,” meets the plain text of the statutory definition for qualified biogas property. Proposed Section 1.48-14(a) provides for the continued application of the 80/20 Rule to energy property under the ITC, which is applied separately to each unit of energy property that is part of an energy project. As we believe the final rule must allow gas upgrading equipment to be eligible for the ITC, RNG Coalition also requests clarifications regarding the application of the 80/20 Rule with respect to such qualified biogas property.

Because organic wastes are produced irrespective of RNG projects, they are often constructed at locations that may already have operations and are managing the waste that is generated or collected in the case of landfills and wastewater treatment plants. These operations were not established to produce energy, but to manage waste. Due to the life of these operations and the need for return on investment, these projects also typically have a long life. In other words, these are likely not “energy property” as contemplated by Section 48 unless additional treatment equipment is installed. This is essentially adding a new business to existing operations.

For example, the application of the 80/20 Rule is potentially problematic for RNG projects located at pre-existing landfills. The inclusion of landfill gas collection assets as part of the qualified biogas property makes it difficult to know how to apply this rule and may jeopardize the RNG facility's qualification for the credit. This is despite the fact that Congress expressly sought to allow cleaning and conditioning equipment to receive the credit. In addition, large landfills can have more than one energy project on-site (e.g., one or more biogas-to-electricity and RNG project).⁸² These energy projects involve separate areas of the landfill, separate biogas collection systems, and are separately metered.

For the ITC, the credit already requires original use of property, which has historically been interpreted by reference to existing regulations distinguishing between new and used Section 38 property. For example, EPA has estimated 487 municipal solid waste landfills provide landfill gas to one or more energy projects currently in operation, for a total of 532 projects, as of July 2023.⁸³ EPA also estimates 463 additional “candidate” landfills that could cost-effectively have their methane turned into an energy resource.⁸⁴ While the RNG project should be deemed a system in and of itself, adding a new RNG project, which would create a new high-BTU gas stream that has a variety of uses, to these existing sites should not necessarily be considered “retrofitting” current operations. If, after December 31, 2022, these projects add equipment used to clean and condition the gas to achieve the requisite methane content and to prepare the fuel for sale or productive use, the RNG system should qualify as originally placed in service after December 31, 2022. The 80/20 Rule should not create false barriers to qualification because the proposed regulations still would expressly permit the ITC only for applicable new property.

As RNG Coalition previously explained, for purposes of the ITC for qualified biogas property, a facility should qualify as placed in service for purposes of Section 48 and be eligible for the ITC even if a portion of the entire related “system” is already in place. Under the Proposed Rule, however, it would appear that, if an ITC is claimed on an energy project, the 80/20 Rule would be applied to the entire project rather than to each component separately. This conflicts with the historical understanding of the 80/20 Rule as it applies to ITC property, which is based on each component as the unit of energy property.⁸⁵ This is also inconsistent with the existing Section 48 regulations, which allow ITC for capital improvements without regard to the 80/20 Rule.⁸⁶ Further, even a significant upgrade to a project (e.g., expanding its capacity) may not meet the 80/20 Rule unless the retained original components associated with the base project have a fair market value of not more than 20 percent of the expanded project. Subjecting new-use RNG projects to the “80/20 Rule” creates an unwarranted regulatory hurdle to ITC qualification that is not supported by the statutory language and will disincentivize the construction of environmentally beneficial and technologically advanced projects that provide for material emission reduction and other environmental benefits. The final rule should make clear that any application of the 80/20 Rule does not apply to the entire project (even if functionally interdependent). If deemed applicable, it should be limited to the individual units being put into operation by the claiming taxpayer and should not exclude new or expanded projects that are added to existing operations.

IV. THE FINAL RULE SHOULD REVISE THE CONVERSION FACTOR FOR DETERMINING THE ONE-MEGAWATT EXCEPTION TO THE PREVAILING WAGE AND APPRENTICESHIP REQUIREMENTS FOR QUALIFIED BIOGAS PROPERTY.

The Proposed Rule also addresses the prevailing wage and apprenticeship requirements. Section 48(a)(9) provides that the prevailing wage and apprenticeship requirements are satisfied for entitlement to the 5X multiplier under Section 48 if the project has “a maximum net output of less than 1 megawatt of electrical (as measured in alternating current) or thermal energy.” Proposed Section 1.48-13(e) clarifies how to determine the nameplate capacity for purposes of the one-megawatt exception. For qualified biogas property, 3.4 mmBtu/hour can be used as equivalent to the One-Megawatt Exception. Taxpayers may convert the maximum net output of 3.4 mmBtu/hour into an equivalent maximum net volume flow in scf per hour using the appropriate high heat value conversion factors found in the EPA GHGRR at table C-1 to subpart C of part 98 (40 C.F.R. part 98). Otherwise, taxpayers may calculate their own equivalent volumetric flow if the heat content of the gas is known.

We believe that this conversion factor for qualified biogas property is theoretical and not based in practical applications. For example, any biogas plant producing onsite power is typically no better than 10 mmBtu/hr = 1 MW. A plant of this size would be very small and likely face economic constraints even with the ITC. As such, we believe the proposed conversion factor should be reconsidered and increased from the 3.4 mmBtu/hr provided in the proposal.

* * *

As previously explained, it is critical to ensure that implementation of the qualified biogas property ITC is consistent with the statute enacted by Congress and signed into law by President Biden and fulfills Congressional intent: To maximize the use and commercial deployment of biogas from landfills, U.S. farms, and other organic waste sites. The Proposed Rule largely renders the ITC for qualified biogas property meaningless, making it significantly less valuable because the ITC will not be available for most capital expenditure that is typically made related to biogas production equipment. The RNG industry has, in the aggregate, planned multi-billion-dollar investments in 2024 and beyond which will offer significant methane abatement potential, as well as economic and other environmental benefits to geographically diverse rural and urban communities. These investments are at risk if the proposed regulations are not revised. A recent analysis showed that the proposed exclusion of gas upgrading equipment would put over $6 billion of capital dollars at risk for dairy projects alone across the top producing states and would have the greatest impact on projects in PA, MN, NY, and WI.⁸⁷ We again urge the Treasury Department to revise the Proposed Rule in accordance with the above recommendations and finalize the rules as soon as possible to avoid further delay or potential cancellation of industry investments.

RNG Coalition appreciates the opportunity to provide these comments. Please do not hesitate to contact us if you have any questions.

Respectfully submitted,

Geoffrey Dietz
Director, Federal Government Affairs
Coalition for Renewable Natural Gas
Sacramento, CA