The Inflation Reduction Act (IRA) of 2022 makes the single largest investment in climate and energy in American history, enabling the United States to tackle the climate crisis, secure its position as a world leader in clean energy manufacturing, advance environmental justice, and put it on a pathway to achieve the Biden administration’s climate goals, including a net-zero-emissions economy by 2050. Together with the Bipartisan Infrastructure Law, these transformative accomplishments will help the United States reach President Biden’s goal of reducing greenhouse gas emissions by 50% to 52% in 2030 relative to 2005 levels.   

water falling down a waterfall
The Inflation Reduction Act (IRA) of 2022 makes the single largest investment in climate and energy in American history.
Photo by Water Power Technologies Office

The federal tax credits outlined below provide a significant opportunity for hydropower, pumped storage hydropower, and marine energy projects. Visit IRS.gov for more information about IRA guidance and implementation. Guidance continues to be updated regularly, so please check back frequently and subscribe to the monthly Water Wire newsletter, and the bimonthly Hydro Headlines and Water Column newsletters for more information.

Disclaimer: This U.S. Department of Energy (DOE) Water Power Technologies Office (WPTO) page provides an overview of the federal investment and production tax credits. It does not constitute professional tax advice or other professional financial guidance and may change based on additional guidance from the Treasury Department 

 

Internal Revenue Code Section 

Name

Summary

45

Production Tax Credit (PTC)

$5.50/megawatt-hour + additional credit of $22.00/megawatt-hour if labor standards are met* for specific renewable technologies. Available for projects beginning construction before 2025. 

45Y

Clean Electricity PTC

Similar value as 45 PTC credit, for zero- or negative-emitting technologies. Phases out when power sector emissions reach 25% of 2022 levels. Available for projects placed in service in 2025 and later.  

48

Investment Tax Credit (ITC)

6% credit + additional credit of 24% if labor standards are met* for specific energy and storage technologies. Available for projects beginning construction before 2025.  

48E

Clean Electricity ITC

6% credit + additional 24% if labor standards are met* for zero- or negative-emitting technologies and energy storage technologies. Phases out when power sector emissions reach 25% of 2022 levels. Available for projects placed in service in 2025 and later.*   

Cross-cutting Provisions

Prevailing Wage and Apprenticeship Standards*

To receive the enhanced tax credit, projects must meet prevailing wage and apprenticeship requirements for construction, alteration, or repair. 

Energy Community Bonus

10% increase in the PTC or up to 10 percentage points increase in the ITC if projects are located in an “energy community.” 

Domestic Content Bonus

10% increase in the PTC or up to 10 percentage points increase in the ITC if domestic content requirements are met. 

Elective Pay (sometimes known as direct pay) and Transferability

Tax-exempt entities, states and political subdivisions thereof, the Tennessee Valley Authority, Indian tribal governments, Alaska Native Corporations, and rural electric co-ops can make an election to treat the credit as a payment against tax and potentially get a refund.

Taxpayers ineligible for elective pay can elect to transfer credits to other taxpayers. 

Production tax credits (PTCs) allow a taxpayer to reduce its tax liability based on the amount of electricity it generates. The IRA extended the renewable electricity PTC (§45 PTC) for facilities that begin construction before 2025. Hydropower is now eligible for the full PTC value, and the eligibility threshold has been reduced from 150 kilowatts (kW) to 25 kW. Eligible technologies include hydropower (and pressurized conduits) and marine and hydrokinetic projects but do not include pumped storage hydropower.  

This technology-specific PTC ends in 2024 and is replaced by a new technology-neutral PTC (§45Y) starting in 2025. Hydropower and marine energy facilities that generate electricity, are placed in service in 2025 or later, and have a zero or net-negative lifecycle emissions rate may qualify for the clean electricity PTC. A final technology eligibility determination will be published by the IRS. Credits are available until the four-year phase out is triggered in the later of 2032 ​or the year that power-sector emissions are 25% of 2022 levels.

The current base PTC value is $5.50/megawatt-hour (MWh) and the enhanced value is $27.50/MWh for projects meeting the prevailing wage and apprenticeship requirements or for those less than 1 megawatt (MW). The credit is inflation adjusted and available for the first 10 years of electricity production. In addition, projects can increase the credit value by 10% for meeting domestic content requirements and by 10% for projects located in energy communities (defined as brownfield sites or fossil fuel communities). The base incentive for the clean electricity PTC varies based on a project’s size, location, and construction practices, as summarized in Table 1. 

Table 1. Current Production Tax Credit Structure

Project Size 

Base Incentive 

Energy Community Bonus 

Domestic Content Bonus 

Total Possible 

< 1 MW 

$27.50/MWh 

$2.75/MWh 

$2.75/MWh 

$33.00/MWh 

> 1 MW 

$5.50/MWh 

$0.55/MWh 

$0.55/MWh 

$6.6/MWh 

> 1 MW that meets prevailing wage and apprenticeship requirements 

$27.50/MWh 

$2.75/MWh 

$2.75/MWh 

$33.00/MWh 

Investment tax credits (ITCs) allow a taxpayer to reduce its tax liability based on a certain percentage of eligible investment costs. The IRA extended the energy ITC (§48 ITC) for facilities installing certain energy or electricity equipment and that begin construction before 2025. Eligible water power technologies include hydropower (and pressurized conduits), pumped storage with a 5 kilowatt-hour or greater capacity, and marine and hydrokinetic projects.

This technology-specific ITC ends in 2024 for most technologies and is replaced by the new technology-neutral clean electricity ITC (§48E), which begins in 2025. The clean electricity ITC is available to commercial taxpayers installing a new clean electricity or energy storage facility or expanding an existing facility. However, taxpayers must choose between a PTC (§45Y) and an ITC (§48E). To qualify, a project must be used for the generation of electricity, be placed in service in 2025 or later, and have a zero or net-negative lifecycle emissions rate.

A final technology eligibility determination regarding eligible water power technologies will be published by the IRS. Credits are available until the four-year phase out is triggered in the later of 2032 ​or the year that power-sector emissions are 25% of 2022 levels.

The base credit value is 6% and the enhanced value is 30% for projects meeting prevailing wage and apprenticeship requirements or for those less than 1 MW.  In addition, projects can receive bonus credits of up to 10 percentage points for meeting domestic content requirements and up to 10 percentage points for projects located in energy communities. The base incentive for the clean electricity ITC varies based on a project’s size, location, and construction practices, as summarized in Table 2.

Table 2. Clean Electricity Investment Tax Structure
Project Size Base Incentive Energy Community Bonus Domestic Bonus Content Total Possible

< 1 MW

30% 10% 10% 50%

> 1 MW

6% 2% 2% 10%

> 1 MW that meets prevailing wage and apprenticeship requirements

30% 10% 10% 50%

Taxpayers must ensure that certain wage and apprenticeship requirements are satisfied during the construction of the facility to receive the enhanced value of the ITC and PTC. Laborers and mechanics must be paid not less than prevailing wages for the job classification and locality, as determined by the Department of Labor. In addition, any taxpayer, contractor, or subcontractor who employs four or more individuals on an eligible facility must use at least one or more qualified apprentices​. For facilities that begin construction in 2023, qualified apprentices must perform 12.5% of total labor hours​.

These requirements apply to construction, alteration, or repair work done on an eligible facility to receive the enhanced tax credit. However, for the PTC and ITC, facilities with a maximum net output of less than 1 MW are exempt from these requirements. For projects greater than 1 MW, the requirements apply to each year the PTC is claimed​, and the requirements apply for a five-year period after a project is placed in service if claiming the ITC.​

For both the PTC and ITC, the structure of the credits in IRA incentivizes investment in disadvantaged communities and ensures that new jobs are good-paying ones. A project or facility can earn bonus credits if it meets certain domestic content requirements and/or is in an energy community. 

Domestic Content

The Domestic Content Bonus Credit applies a 10% (PTC) or up to 10 percentage point (ITC) bonus for meeting domestic manufacturing requirements for steel, iron, or manufactured products. A project meets the requirements if any steel or iron or manufactured product that is a component of the facility was produced in the United States. Guidance on this bonus credit is not yet available. IRS will publish guidance on the IRA website when available.

Energy Communities

The Energy Communities Bonus Credit allows for increased credit amounts if a project is in an energy community. There are three categories of energy communities:  

  1. Brownfield: A property that has, or potentially has, a hazardous substance, pollutant, or contaminant that may complicate the expansion, redevelopment, or reuse of the site. 

  2. Statistical area: Certain metropolitan statistical areas and non-metropolitan statistical areas with significant fossil fuel employment or fossil fuel tax revenue, or an unemployment rate above the national average.   

  3. Coal closure: Census tracts (and directly adjoining census tracts) where a coal mine closed after 1999 or where a coal-fired electric generating unit was retired after 2009.  

If projects are located in an energy community, the bonus credit amount is 10% for the PTC and 10 percentage points for the ITC.

 

IRA extends many of the law’s clean energy tax incentives to entities that generally do not benefit from income tax credits, such as state, local, and Tribal governments, political subdivisions, rural electric cooperatives, and tax-exempt entities. These entities can elect to receive the ITC and PTC in the form of elective payments.

For other taxpayers, certain tax credits may be transferred (in whole or in part) to an unrelated party in exchange for cash.

For projects that begin construction in 2024 or later, projects taking elective payment must comply with domestic content requirements or their tax credit will be reduced. An exception from the domestic content requirements may be available for elective payment projects if complying with the domestic content provisions would increase the total cost of construction of the facility by more than 25% or if the relevant steel, iron, or manufactured products are not produced in the United States in sufficient and reasonably available quantities or satisfactory quality.

Guidance on elective pay and transferability is not yet available. IRS will publish guidance on the IRA website when available.

Hydrogen Production Tax Credit 

The Hydrogen PTC (§45V) creates a new 10-year incentive for clean hydrogen production that varies in value with the lifecycle greenhouse gas emissions rate associated with the hydrogen production. Eligible projects include those that begin construction by 2033 and retrofit of facilities. Guidance on the hydrogen PTC is not yet available. IRS will publish guidance on the IRA website when available.

Advanced Energy Project Credit 

IRA provides an additional $10 billion of allocated credits under §48C for qualifying advanced energy projects, $4 billion of which must go to projects in census tracts (and directly adjoining census tracts) where a coal mine closed after 1999 or where a coal-fired electric generating unit was retired after 2009 and in which no project received a §48C credit allocation in prior years. Hydropower or marine energy-producing projects or energy storage projects may be eligible for the credit. The base credit value is 6% of the qualified investments in qualified advanced energy projects of the taxpayer and the enhanced value is 30% for projects meeting prevailing wage and apprenticeship requirements. Learn more about §48C in this summary of initial guidance from the Treasury Department.