Renewable natural gas facilities are eligible for new investment tax credits (ITCs) and production tax credits (PTCs) and constitute a growing share of the overall clean energy landscape.
RNG is a clean alternative to fossil fuels for transportation, industrial, and home heating uses, and benefits from a wide range of incentives at the state and federal levels, including transferable tax credits.
Transaction process and commercial terms for transferable credit deals from RNG facilities have been standardized over the course of 2024, improving marketability and transparency for these tax credits.
Renewable natural gas (RNG) is one of several clean energy technologies that are newly eligible for transferable tax credits under the Inflation Reduction Act of 2022 (IRA).
RNG, or biogas, is pipeline-quality methane gas that has been derived from organic materials, such as agricultural waste, landfills, wastewater treatment plants, and other biomass sources, which can replenish over time. RNG projects help to reduce emissions from harder-to-decarbonize sectors such as transportation and industry.
These projects represent a rapidly growing segment of the clean energy economy. Project developers have become increasingly sophisticated regarding tax credit transferability, and buyers can benefit from a relatively robust supply of RNG project tax credits, typically selling at attractive prices and with full-wrap insurance policies to support them.
Natural gas is the most commonly consumed fuel in the United States. The most abundant source of natural gas is geologic gas — a fossil fuel that must be extracted from geologic formations. However, alternative means of producing pipeline-quality gas (i.e. a gas stream made up mostly of methane) through biological processes is emerging as a cleaner substitute for fossil gas. Gas produced through these alternative methods is broadly referred to as “renewable natural gas” or “RNG.”
The emissions profile of renewable natural gas versus natural gas comes down to the differences in their respective production processes. Both gasses have similar emissions profiles when they are consumed.
However, the production of RNG typically involves redirecting methane emissions which would otherwise be released into the atmosphere. Fossil gas production involves extracting natural gas, processing it, and transporting it, with inevitable methane emissions from leakage, venting, and transport.
As a consequence, RNG emissions are netted against the benefit of avoiding methane emissions. Fossil gas emissions include combustion emissions plus the greenhouse gas impact of production and processing.
There are several common production pathways for RNG:
Due to its similarity with pipeline natural gas, RNG can be used in the same applications as fossil gas. Those applications include:
RNG is considered a sustainable and environmentally friendly alternative to fossil gas because the production pathways involve capturing methane that would otherwise be released into the atmosphere from organic waste decomposition.
The two renewable natural gas tax credits that can be produced are Investment Tax Credits and Production Tax Credits.
RNG projects, including anaerobic digestion facilities and landfill gas facilities, are entitled to generate tax credits under Section 48 investment tax credits of the Internal Revenue Code through December 31, 2024.
The ITC value is worth 30% of a project’s qualified expenditures, for projects that satisfy the IRS’s prevailing wage and apprenticeship (PWA) requirements. The IRS has published guidance (including a technical correction expanding the availability of the tax credit for certain facilities), which provides clear visibility into project eligibility in most cases.
Beginning in 2025, the existing Section 48 ITC will be replaced by a tech-neutral ITC available only to projects generating zero-emission electricity. Most RNG facilities currently serve the transportation sector, where fuels typically retail for higher prices and where they can access other economic incentives.
Facilities can continue to qualify for the legacy ITC even if they enter service in 2025 or later years. Projects that can demonstrate that they started construction (typically defined as incurring 5% of the facility’s construction cost) by the end of 2024 will continue to be eligible for the legacy ITC through a safe harbor for several years.
Crux has observed that a relatively large share of RNG facilities are able to qualify for the domestic content adder (DC). According to the data reported in our Mid-year Market Intelligence Report, approximately 50% of the RNG facilities reported eligibility for the DC bonus. The bonus is worth 10% of a project’s qualified construction costs (raising the total ITC to 40%) for projects meeting PWA requirements.
There are several key differences between RNG facilities and more traditional ITC-eligible facilities, such as solar projects, when selling tax credits. Differences include pricing and insurance, due diligence, and ITC basis calculations.
Pricing
Crux has typically observed that tax credit pricing for RNG facilities is somewhat below the average pricing for ITCs more broadly. Renewable natural gas ITC deals tend to be smaller on average than solar ITC deals ($40 million versus $60 million, respectively), which can contribute to lower pricing.
However, even controlling for deal size, RNG credits tend to price at a slight discount — typically pricing at a discount of 1-2 cents relative to the ITC market overall.
RNG ITC Market Pricing Curve and Overall ITC Pricing Curve, 2024
Renewable natural gas tax credit deals are also more likely to be insured than solar deals or other ITCs. 90% of RNG ITC transactions reported insurance in 1H2024, compared with 68% of all ITC transactions. Insurance can be an important tool for indemnifying tax credit buyers against certain risks.
Due diligence
As with most ITC-eligible projects, due diligence for renewable natural gas tax credits centers upon determining the total eligible project costs. This information is typically substantiated with a cost segregation report and evaluated by a legal advisor familiar with IRS guidance regarding eligible costs for RNG facilities.
The due diligence process will also consider the risk of recapture through a different lens for RNG facilities versus solar facilities. While weather is the most significant factor for solar project recapture (particularly hail) and is entirely outside the project’s control, RNG facilities typically have a more sophisticated operating profile.
RNG facilities typically include several components, from feedstock management and intake to anaerobic digestion, to upgrading equipment and gas pipelines. Ensuring that a facility has adequate feedstock access throughout the recapture period and that equipment components are likely to operate properly are important points of verification for tax credit due diligence.
In research for Crux’s Due Diligence and Risk Mitigation report, advisors shared that they will more commonly review engineering information for RNG facilities (such as an independent engineer’s report) to validate that the facility is likely to operate smoothly and consistently throughout the five-year recapture period. Advisors also will validate that a facility has access to sufficient feedstock (if the feedstock is not on site) for the recapture period, if not longer.
ITC basis calculations
Tax credits from renewable natural gas facilities are beginning to be transacted more regularly in the market, and these transactions differ most often in two ways from solar ITC transactions.
First, as noted above, it is more common for RNG facilities to claim the domestic content adder bonus (DC bonus) than it is for solar projects: 50% of RNG facilities, compared with 8% of solar facilities, that sold credits in the first half of 2024. The DC bonus increases the ITC percentage from 30% to 40% and is available for any project that can meet the IRS’s requirements for manufactured products and components and US-sourced steel and iron.
RNG facilities must source 100% of structural steel and iron from US producers and meet the 40% domestic sourcing requirement for manufactured products and components. The most significant manufactured component of an RNG facility is commonly the anaerobic digester, with domestic manufacturing of these products being readily available. RNG facilities' simpler design and a ready supply of US-manufactured components make the DC bonus relatively easier to achieve.
Another key difference between RNG facilities and traditional solar facilities comes down to the calculation of the ITC basis. It is relatively common for solar facilities to calculate their ITC off of fair market value, usually substantiated with a third-party investment (such as a tax equity investment), which can be 20% or greater than the project’s construction cost.
RNG facilities typically do not have a step-up in the ITC basis to FMV and instead most commonly calculate the ITC value off of construction costs. Construction costs can be easier for buyers/advisors to diligence and typically would not require an appraisal to substantiate.
Beginning in 2025, RNG producers who serve the transportation sector will be eligible for the 45Z clean fuels production tax credit (PTC). The IRS published initial guidance for 45Z in June 2024.
In order to be eligible to sell 45Z credits, a facility must have a signed registration letter from the IRS dated on or before January 1, 2025 (in order to claim the credit when it is first available) and must produce clean transportation fuels or sustainable aviation fuels (SAF). The credit amount for the 45Z PTC is $1.00 per gallon for non-aviation fuel and $1.75 per gallon for SAF, for facilities meeting PWA requirements.
The clean fuel PTC is equal to the applicable credit amount per gallon multiplied by the fuel’s carbon dioxide emissions factor for emissions rates below a certain threshold. Emissions factors are published annually by the IRS and are generally derived from the GREET model.
GREET, which stands for Greenhouse Gases, Regulated Emissions, and Energy Use in Technologies, is a model that ranks lifecycle emissions rates for a wide range of fuel production pathways.
The IRS has indicated that it will publish a new 45Z-specific version of the GREET model. Like most PTCs, the fuels must be sold to a third party to become eligible for the tax credit.
The 45Z has yet to begin to transact in meaningful quantities, given the newness of the credit and the fact that the market for 2025 credits remains relatively thin. However, PTCs tend to be simple to diligence and the 45Z PTC likely will be no different.
PTC buyers tend to purchase credits on a quarterly, biannual, or annual basis in arrears based on actual production. Like with other PTCs, fuel production can be metered and monitored, and thus face similar straightforward diligence as wind PTCs.
The calculation of the PTC value may differ somewhat depending on the fuel’s production process. However, once that process has been determined, it is unlikely to change. The use of the standard 45Z GREET model to calculate the PTC value should also eliminate some guesswork for advisors validating the PTC calculation for a given project.
Once 45Z PTCs begin to transact, more can be determined regarding the relative attractiveness, pricing, and liquidity of these credits. First transactions will likely begin to move once the 45Z-GREET model has been released, likely later this year, and once facilities have registered with the IRS (though some facilities are already registered for the purpose of receiving other tax credits).
Importantly, and unlike other technologies that are alternatively eligible for PTCs and ITCs, RNG facilities that claim the ITC may also claim 45Z tax credits for the fuels that they produce.
RNG facilities are relatively new beneficiaries of federal clean energy tax credits, but buyers are becoming more familiar with these facilities and the market for these credits is increasingly liquid and dynamic. There are a number of ITCs available from RNG facilities that entered (or will enter) service in 2024.
Beginning in 2025, a large volume of 45Z clean fuel PTCs will likely be available from these facilities as well. These credits have unique advantages for tax credit buyers.
Renewable natural gas credits made up nearly 10% of the overall market in 2023. Year-to-date, RNG ITCs have made up approximately 4% of deals that have closed, according to Crux’s research. The second half of 2024 may well exceed the first half in total deal volume, and hundreds of millions of dollars of ITCs from RNG projects will make up an increasingly large portion of the market.
Looking forward to 2025, Crux anticipates a liquid market emerging for 45Z tax credits. Like the 45X PTC, Crux expects market interest to accelerate once comprehensive regulatory guidance has been published and the market acclimates to the new credits.
Buyers who are looking ahead to the next year and interested in engaging with the widest range of counterparties may want to consider the 45Z credits Crux has listed for 2025.
For more information on the RNG credits, both ITCs and PTCs, available for purchase on Crux, get in touch with us today.
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