48E and 45Y Tax Credits: Are C&G Facilities at Risk of Losing Eligibility?

Earlier this week, we shared an analysis of the new technology-neutral clean energy tax credits, 48E and 45Y. In this follow-up, we delve deeper into the significant impact these IRA updates have on combustion and gasification (C&G) facilities that use biogas, biomass, or renewable natural gas (RNG). While the IRA introduces broad, inclusive tax credits, these C&G facilities—previously qualified under specific technology-based provisions—now face new, more stringent criteria to prove net greenhouse gas emissions reductions.

Facilities using combustion or gasification technologies are categorized as “C&G Facilities” under the proposed regulations and will face significant challenges in meeting the stringent zero-emissions requirements. This also extends to technologies that rely indirectly on combustion and gasification, such as hydrogen produced from fossil or biogenic sources or even hydrogen produced through electrolysis if the process is powered by a combustion-fueled electric grid.

LCA Emissions Breakdown: The Challenge of Defining Inclusions and Exclusions

For both C&G Facilities and Non-C&G Facilities, any greenhouse gas emissions directly resulting from the “fundamental transformation” of energy are taken into account. This assessment considers “all input and output energy carriers and chemical reactions or mechanical processes taking place” when the facility produces electricity.

For C&G Facilities, however, the regulations also require that a National Laboratory conduct a lifecycle analysis (LCA) to determine whether the facility produces net greenhouse gas emissions. This analysis compares the facility's emissions to a baseline scenario in which the investment and production tax credits are not available for that type of facility, the facility was never constructed and the fuel that the C&G Facility is combusting is used for something else - an “alternative fate.”

One of the many uncertainties in the new regulations is how the IRS will determine the alternative fate of emissions. The regulations provide few specifics, stating that the alternative fate must be based on “informed assumptions” and will be determined by “expert analysis, literature review, and historical practice.” The IRS is requesting comments on how to apply the concept to LCAs involving methane and woody biomass. In addition, the IRS has specifically requested public input on several key issues that will need clarification before a workable methodology for these LCAs can be determined: (1) the treatment of RNG and fugitive methane emissions; (2) the appropriate spatial scales and time horizons for analysis; (3) how to distinguish between and allocate emissions to co-products, byproducts, and waste products of technology; (4) how to attribute emissions to heat produced by facilities using combined heat and power (CHP) systems; (5) how to establish and maintain LCA baselines; and (6) a wide range of other concerns related to LCA modeling, especially the global emissions impact of increased feedstock use or facility types.

Further adding to the uncertainty, the IRS is exploring whether and how to credit "book and claim" systems and their associated environmental attributes, like Renewable Energy Certificates (RECs), in calculating net emissions. This issue was also a major focus in the recently released hydrogen regulations.

The IRS provides a few parameters around how this analysis for C&G Facilities will be conducted.  

The regulations specify that the LCAs will include:

• Emissions starting with feedstock production and ending with generation of electricity.

• Avoided emissions (as an offset) based on the alternative fate of a feedstock or fuel, if not used by a facility for the production of fuel or electricity. 
  For example, if the alternative fate of forest underbrush, if not burned for biomass by a facility, would be to be left on the forest floor to decay, this could result in the facility being credited with avoided emissions, since the decay can result in the release of methane, a greenhouse gas 28 times more potent than the carbon dioxide produced by the burning of the fuel. The IRS also noted, however, that it intends to release special rules that facilities using biogas, RNG and fugitive methane will have to meet to claim avoided emissions benefits. One of these requirements is expected to be “first productive use”, namely that the fuel in question is not being diverted from some other productive use towards the production of electricity; these facilities will also be expected to generate and retire environmental attribute certificates to verify their electricity generation. If this requirement is not met, the gas will receive an emissions value consistent with standard natural gas, and will not qualify for the tax credit.

• Both direct and indirect emissions, with a broad view of “indirect” emissions. For example not only are emissions attributable to all stages of fuel and feedstock production, distribution, and delivery; but also increased emissions that may result from the increased use of the technology due to the availability of the tax credits are also potentially included, as well as emissions resulting from changes in commodity prices and increased production, generation or extraction of the feedstock.  

• Indirect emissions from land use and land use change as well as induced emissions associated with the increased use of the feedstock for energy production.

The LCA will exclude:

• Emissions from construction, maintenance, associated facility infrastructure, and distribution/transmission (similar exemptions exist for Non-C&G Facilities);

• Carbon sequestered from the atmosphere during the production of electricity (although precise regulations as to how this can be verified, and consequences if sequestered carbon does escape, are to be forthcoming); but carbon offsets “unrelated” to the purchase of electricity will not be taken into account.

How Individual Facility Ratings Will Be Determined

The IRS will publish an annual table, listing annually of types of facilities and technologies that meet the zero net greenhouse gas emission requirement and are therefore eligible for the technology-neutral tax credits. Facilities included on the list as of the first day of the taxable year in which they are placed in service can claim the credit. Additionally, storage is automatically eligible for the investment credit under Section 48E, and certain combined heat and power facilities qualify for a production credit under Section 45Y.

Facilities not on the annual table can apply for a provisional emissions rating from the DOE, or use the LCA methodology (when it is published by Treasury) to calculate their own emissions score.  Also, a facility’s removal from the annual table does not automatically trigger recapture of an investment tax credit. However, there is a reporting requirement (to be further detailed in future regulations) that mandates that facilities emitting more than 10 grams of CO2e per kWh of electricity produced will be subject to recapture during the usual five-year period. This will be on the usual sliding scale from full recapture of the credit if this occurs in the first year after it is earned, to recapture of 20% of the credit in the fifth year.

Facilities are also required to demonstrate that they will produce zero-emissions electricity for ten years to qualify for the investment tax credit. These can include co-location with a fuel source, specialization of the facility’s equipment to only produce zero-emissions electricity, or ten year contracts for fuel or carbon sequestration.

What This Might Mean For Developers

Given the number of upcoming rules and modeling determinations referenced but not yet detailed in the regulations for C&G Facilities, as well as the complexity already present in the proposed regulations, many biomass, biogas, and RNG developers are seeking to begin construction of their projects by December 31, 2024, to avoid the new technology-neutral framework. Some producers intend to push for an exemption for certain C&G Facilities until the unresolved issues in the regulations are clearly addressed. This approach is also hard to object to, given the limited time until the changeover takes place and the significant amount of rule-making still pending.

Ultimately, whether biopower is truly “green” has long been a source of controversy. 

For example, the Congressional Research Service looked into the issue of whether biopower was “carbon neutral” as recently as 2016, concluding that the answer is essentially “it depends.” Proponents of biopower argue that it is renewable, since the carbon dioxide released from burning biomass feedstocks, like forests, is reabsorbed by the feedstock during its growth phase, leading to no net increase in atmospheric CO2. Additionally, biogas sources, such as methane from agricultural processes or decaying forest matter, are considered better burned into CO2 than left to release methane, a more potent greenhouse gas. 

However, scientists have challenged these assumptions, particularly regarding the timeframes in which biopower becomes net neutral. For example, tree growth is a much slower process than burning, so increased biomass use could result in a near-term increase in carbon dioxide, potentially undermining targets for 2030 and 2050. Public commentary on the regulations expresses concerns that RECs and similar instruments could mask the true emissions impact of facilities. There are also concerns that facilities initially commissioned for carbon-neutral biogas could be converted to fossil fuel use after the five-year recapture period, in addition to concerns about induced emissions and the diversion of clean biomass to electricity production.

What this tells us is that the resolution of the open questions in the regulations about modeling the impact of C&G Facilities, and whether they ultimately qualify for the technology-neutral tax credits, is likely to be contested and, as a result, difficult to predict. However, based on what is currently proposed in the regulations, we can make some educated guesses. In particular:

• Processes that utilize biomass or biogas derived as byproducts from existing commercial activities, such as fugitive methane captured from agriculture or thinning of forest matter that would otherwise decay, are likely to fare better. This is particularly true if electricity generation is the primary use of the feedstock and if the alternative fate of the feedstock - such as decay on the forest floor - would otherwise result in methane release into the atmosphere. These processes are more likely to be credited with avoided emissions due to a clearly established alternative fate and a limited scope for facility expansion in response to the tax incentive, given their reliance on existing commercial processes.

• Conversely, processes that are (1) driven primarily by electricity demand, such as using trees as feedstock, that as a result could significantly scale up due to the tax credit, (2) involve the use of fossil fuels at any stage, or (3) have potential adverse effects like deforestation, are likely to face greater scrutiny. These processes might fail to meet the LCA requirements or need substantial carbon sequestration to qualify. They may be particularly sensitive to modeling assumptions; for instance, the time frame of a study could determine if a biomass project converting harvested forests into pelletized wood for burning is considered carbon neutral, given that regrowing trees to replace the feedstock can take decades to sequester an equivalent amount of CO2.

• The distinction between qualifying and non-qualifying C&G Facilities is also likely to shift over time, in particular, if there is a change in administration. The sheer complexity of the regulations will allow for results to be pushed in one way or another due to political pressures. 

C&G facilities, once qualified under technology-specific provisions, must now rigorously demonstrate their ability to reduce net greenhouse gas emissions to remain eligible for these updated credits. For C&G facilities, this means reevaluating their processes and exploring innovative solutions to meet the stringent requirements; and there is a possibility that the credit will not be available for certain technologies going forward. However, despite the associated costs, the shift in focus from technology to emissions underscores the growing importance of environmental accountability in the clean energy sector. 

To learn more about how Ever.green can help or to discuss guidance on the credits, reach out to our team at team@ever.green.

Important notice: Ever.green and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Furthermore, Ever.green (i) relies on information provided by developers, third parties and generally recognized public sources without having independently verified the same; (ii) does not assume responsibility for the accuracy or completeness of the information, including information received from any third party; and (iii) does not make an appraisal of any tax credits or renewable energy certificates.