Inflation Reduction Act Tax Credit Opportunities for Hydropower and Marine Energy

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 Tax Credit Structure 

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. On December 4, 2024, the Department of the Treasury and the Internal Revenue Service issued final rules for the ITC and clarified the definitions of property eligible for the credit, including co-located energy storage technologies.
 

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.

On, January 7, 2025, the Department of the Treasury and the Internal Revenue Service issued final rules that confirm eligibility for hydropower and marine and hydrokinetic technologies. 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 

Clean Electricity Low-Income Communities Bonus Credit Program

On January 8, 2025, the Department of the Treasury and Internal Revenue Service released final rules and procedural guidance to expand clean energy investment and lower costs in low-income communities and on Indian Lands. The low-income communities bonus credit provides a 10 or 20 percentage point bonus on top of the 30% 48E investment tax credit (assuming prevailing wage and apprenticeship requirements are met). Hydropower and marine and hydrokinetic technologies are eligible, if they have a maximum net output of less than 5 megawatts. The program will allocate bonuses to 1.8 gigawatts of clean electricity generation serving low-income communities each year from 2025 through at least 2032. DOE will continue to partner with IRS to administer the program, and for the 2025 Program Year, the application period opens on January 16, 2025 and closes on August 1, 2025.  

• 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.​

  On June 18, 2024, the Department of the Treasury and the Internal Revenue Service issued final regulations on the prevailing wage and apprenticeship requirements related to increased credit or deduction amounts for certain clean energy incentives, enacted as a part of the IRA.

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 available on the IRS website.

For more information on the major products and components of hydropower or pumped storage systems, see the nonexhaustive taxonomy of hydropower and pumped storage hydropower facilities.

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. Guidance on this bonus credit is available on the IRS website. 

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 is available on the elective pay and transferability page on the IRS website and DOE’s Office of Policy.

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.