Biogas | Hydrogen, North America

Applying for USA’s energy tax credit but haven’t started construction?

Planning to take advantage of the USA’s current energy tax credit regime for your biogas or clean hydrogen project but haven’t started construction?

Here is what you need to know

The Inflation Reduction Act of 2022 introduced new tax credits for clean electricity projects, namely the Clean Electricity Investment Credit ITC (section 48) and the Clean Electricity Production Credit PTC (section 45). However, this credit regime expires at the end of this year, so developers must understand the consequences of delaying construction and what can be done in 2024 to qualify.

What is changing in 2025

After December 31, 2024, construction projects will be required to meet the new credit regime of section 48E, clean energy investment tax credits, and section 45Y. The new regime focuses on the amount of greenhouse gas emissions produced rather than the type of energy production technology. It is technology-neutral and emphasizes the output of the process. This change allows developers to explore new technologies but may also necessitate complex lifecycle analysis to establish a greenhouse gas emissions rate that is not greater than zero. These studies can be costly, time-consuming, and subject to changing regulatory requirements each year.

Under the Clean Electricity Investment Credit (ITC) under section 48, a 6% base credit is available for a range of clean electricity projects, such as biogas and clean hydrogen. However, some projects may no longer qualify for the updated 48E credit, have credit limitations, or require more extensive GHG measurement and reporting.

Additionally, effective December 31, 2024, the required amount of domestic content for projects seeking direct payment of their IRA credits under section 6417 will change. Projects failing to meet these requirements will experience a reduction in credits. Starting in 2025, only 85% of the credit will be available for projects not meeting domestic content specifications.

If construction begins in 2026 without meeting these requirements, no credit will be available. While exemptions may apply to smaller projects, securing these exemptions can be a challenging process.

The credit of an additional 10%, on top of the baseline, for project owners can be substantial. To meet the domestic content requirements, a project must be sourced domestically

100% of structural steel and iron
A minimum of 40% of the total cost of manufactured products used in the project if it commences in 2024. This requirement will increase by 5% annually, so by 2026, 55% of domestic content will be mandatory.

What can you do to begin construction?

There are two ways to begin construction according to the IRA in notice 2022-61

Physical Work Test

The work must be significant, but there is no fixed minimum amount of work, monetary threshold, or percentage threshold required to satisfy the Physical Work Test.

For biogas and clean hydrogen production, on-site work such as installing piling and compacting soil would be included, but site clearing is not. Any work on design, planning, permitting, environmental, engineering tests, or removing old equipment does not count as physical work.

5% safe harbor test

Even if you haven’t started construction, if you have spent 5% of the total project costs by December 31, 2024, the project is considered to have begun under the 5% safe harbor test. Under this test, there are no physical construction requirements. The qualifying costs of depreciable assets and other incurred costs, including preliminary activities, can be included towards the 5%. Project developers should consult with tax advisors specializing in ITC credits to determine which accrual methods and costs will be accepted, as well as the delivery and invoicing requirements, before placing orders.

How can we help?

Do you have a biogas or hydrogen project in the planning stages but haven’t started construction? Ivys has biogas upgrading systems and hydrogen purification systems that are ready to be delivered quickly.