Back to All
After the Inflation Reduction Act (IRA) was enacted in August 2022, the Biden Administration raced to implement the law, ensuring taxpayers had the certainty needed to build and modernize projects. Since then, the IRA has created once-in-a-generation opportunities for water power, providing millions of dollars for industry as it continues to drive growth across the sector.
National Hydropower Association (NHA) analyzed the following sections to determine the potential benefits for industry:
- Section 45Y Production Tax Credit / 48E Investment Tax Credit final rule (also known as the “tech-neutral” rule)
- Section 48 Investment Tax Credit final rule
- Elective Pay final rules
- Domestic content sub-regulatory guidance
By developing a better understanding of how these rules impact industry, water power owners and developers will be able to decide how to incorporate the incentives into their capital spending planning and reap the benefits of the IRA.
TECH-NEUTRAL RULE & SECTION 48 FINAL RULE
The energy tax paradigm is shifting from technology-specific incentives (like wind and solar tax credits) to a technology-neutral approach for projects starting after December 31, 2024. To qualify as technology-neutral, projects must produce zero emissions during operation. Water power technologies meet this requirement as non-combustion and gasification (non-C&G) technologies, marking an important win for the industry.
Another key development is the clarification of tax credit eligibility under Section 48. For projects starting before January 1, 2025, and carried forward to the tech-neutral rule, the scope of eligible property and the application of the 80/20 Rule were defined. This rule allows repowered facilities to qualify as “new” if 80% or more of the facility consists of upgraded components. This clarification, long advocated by NHA, ensures asset owners can confidently modernize existing facilities while accessing tax credits.
For an example of the 80/20 Rule in action, if a water power organization replaces key components like turbines, pumps, motors, and generators and the fair market value of the new equipment is 80% or more of the unit’s value, then it can qualify for the credits. This ensures the retrofitted facility is treated as newly placed in service, allowing the owner to claim credits based on the cost of the upgrades. This incentivizes modernizing hydropower infrastructure with efficient technologies while adhering to the 80/20 rule, which is critical for industry growth and sustainability.
In addition, NHA worked to ensure that incremental capacity additions at existing water power facilities could fully claim credits on their qualified investments.
In the proposed rule for the tech-neutral credits, there were two provisions which called into question the value of the credit for incremental capacity. Yet, NHA was able to convince the Biden Administration to find alternative ways to demonstrate incremental capacity, as opposed to nameplate capacity, while successfully lobbying the Biden Administration to remove provisions which would have prorated the Investment Tax Credit (ITC) basis by the incremental increase in capacity.
Asset owners should be aware, however, that there are nuances regarding what investments at existing facilities could be eligible. The final rules included limitations via a provision called the “excluded costs rule.” This means that in order to be eligible for credits via adding incremental capacity will require either replacing equipment or adding additional capacity. For example, Pacific Gas & Electric (PG&E) is investigating how to incorporate the ITC into the uprate of Helms Pumped Storage Project in California. PG&E has indicated that it will leverage the ITC to lower the revenue requirement and pass along savings to PG&E ratepayers.
Ultimately, hydropower was listed in the final rule 95 times, pumped storage was listed five times, and marine/hydrokinetic technologies were referenced once. The only other renewable to be mentioned more in the Tech Neutral Final Rule was solar. This means that hydropower was discussed more than nuclear, wind, batteries, and geothermal, demonstrating the Biden Administration’s intentionality in ensuring water power could maximize its usage of the tech-neutral credits.
Pacific Gas and Electric’s Helms Pumped Storage Project powerhouse, located near Fresno, California.
ELECTIVE PAY
The Inflation Reduction Act introduced two major ways for the U.S. water power industry to monetize the tax incentives:
• Transferability (under Section 6417)
• Elective pay (under Section 6418)
Transferability allows taxpayers to sell their tax credits for cash while elective pay allows “applicable entities” to claim the credits in the form of a rebate-like payment after the facility is placed in service. Additionally, elective pay allows for a significant portion of the water power industry to become eligible for tax credits – historically, the tax credits were only eligible for entities that filed a tax return; now, applicable entities are defined as publicly-owned companies and the Tennessee Valley Authority.
While the rules may appear to be complex, they are workable. NHA’s understanding of said rules has been enhanced by shared insights from our member companies, as they have had success claiming incentives through elective pay since the IRA was enacted.
They key to understanding how to benefit from elective pay is tied to following:
• The mechanics of how it’s claimed (e.g., when and how to file pre-filing registration information)
• When money is disbursed (i.e., after the project is placed in service)
• How to incorporate certain restricted funding mechanisms into the qualified investment basis of the project (i.e., the “no excess benefit” rule)
• Other compliance requirements
DOMESTIC CONTENT
Domestic content is the requirement that all steel and iron products are to be manufactured in the United States; additionally, a certain percentage of manufactured products must be manufactured in the United States. The IRA allows for private entities to claim a bonus credit should they follow domestic content requirements. Under elective pay, applicable entities face increasingly stringent domestic content requirements before becoming eligible to claim the credits. NHA notes, however, that under Notice 2024-84 that applicable entities can claim all of the credit so long as they provide an attestation for which the construction commences before the later of January 1, 2027, or the issuance of further guidance, the Treasury Department and the IRS will treat the attestation as establishing that one or both statutory exceptions (increased cost and non-availability exceptions) to the application of the statutory elective payment phaseouts are met.
Unfortunately, NHA is of the opinion that additional clarity is needed, and our concerns can be reduced down to three key areas:
1) The current guidance requires manufacturers to provide direct labor and the material cost of each component to taxpayers (customers of the manufacturer/supplier) to ensure that the minimum threshold for manufactured products is met. Generally, this information could be business sensitive.
2) It is unclear whether onsite manufacturing costs are allowed to be included in the calculation.
3) Lack of information regarding the level of component when calculation occurs
NHA believes items “1” and “3” can be solved by the incorporation of an exclusive and exhaustive list of components, containing percentages for each component manufactured in the United States. While this list has been provided for certain renewable technologies, like onshore wind, utility scale solar, and batteries, hydropower remains without a comparable list.
Through our advocacy work, NHA continues to pursue these changes as the Trump Administration fills out its personnel. Achieving greater clarity is incredibly important for NHA, as we want the water power industry to maximize the IRA’s incentives.
