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APPA Seeks Guidance on Direct Pay Domestic Content Rules 

The American Public Power Association is urging the Treasury Department and the Internal Revenue Service to provide timely guidance on domestic content requirements for purposes of qualifying for elective payment of energy tax credits.

The Treasury Department plans to release guidance this month related to domestic content requirements for projects seeking direct payment, which is also referred to as elective payment.

Projects eligible for energy tax credits and for which the owners will be seeking direct payment face increasingly stiff penalties for failing to meet domestic content requirements.

Specifically, failing to meet these requirements will reduce credit payments by 10 percent for projects construction of which begins in 2024; by 15 percent for projects construction of which begins in 2025; and by 100 percent for projects construction of which begins after 2025. 

However, Treasury and the IRS have yet to release guidance explaining how to meet these requirements, or how to qualify for three waivers also included in the statute.

APPA in its Dec. 14 letter said it was writing with respect to the domestic-content phase out of elective-payment elections under section 6417.

“Specifically, we urgently request guidance on the application of these rules for applicable entities seeking to begin construction in 2024 or later of projects qualifying for the section 45 production tax credit and section 48 investments tax credit where elective payment is expected to play a significant role in the project’s financing,” APPA said.


The Inflation Reduction Act of 2022 amended the Tax Code to provide for elective payment of 12 energy-related tax credits.

However, to qualify for elective payment of the section 45 credit for electricity produced from certain renewable resources and the section 48 energy investment credit, construction of related facilities must meet domestic-content requirements.

The penalty for failing to meet these requirements is:

  • A 10 percent reduction of any applicable credit for projects the construction of which begins in calendar year 2024;
  • A 15 percent reduction of any applicable credit for projects the construction of which begins in calendar year 2025; and
  • A 100 percent reduction of any applicable credit for projects the construction of which begins after calendar year 2025.

APPA noted that unlike the related rules for the domestic-content bonus credit, a facility is excepted from these elective payment reduction requirements for purposes of qualifying for elective payment:

  • The facility has a maximum net output of less than one megawatt;
  • The inclusion of steel, iron, or manufactured products that are produced in the United States increases the overall cost of construction of qualified facilities by more than 25 percent, or
  • The relevant steel, iron, or manufactured products are not produced in United States in sufficient and reasonably available quantities or of a satisfactory quality.

Need for Guidance

APPA has commented previously on the need for clarifying rules to implement these requirements in a manner that is clear, simple, reliable, and timely.

However, to date, Treasury and the IRS have not provided guidance with respect to the domestic-content requirements for purposes of qualifying for elective payment of energy tax credits nor guidance pertaining to the three exceptions cited in the letter.

While Treasury and the IRS have released an advanced notice of proposed rulemaking related to domestic content, that notice specifically states that it pertains to domestic-content requirements for purposes of qualifying for certain bonus credits, APPA said.

“Moreover, the proposed regulations pertaining to elective payments under section 6417, are silent with respect to the reduction for failure to meet the domestic-content requirements,” APPA said.

The absence of guidance, especially with respect to the exceptions for cost increases and availability of domestic products, is increasingly affecting the launch of new projects in the public power sector, it noted.

“Smaller scale projects can be a year or more in development and a year or more in construction, and larger utility scale projects can be several years in development and several years in construction,” APPA said.

“Moreover, the project financing of even smaller scale projects requires certainty on the front end. With elective payment providing such an opportunity to offset a significant portion of the capital costs the lack of clarity and certainty in how to apply the elective-payment rules is badly delaying many projects being considered for development by APPA members to benefit communities across the country that will also advance the country toward meeting President Biden’s climate goals.”

 As a result, public power utilities seeking to begin construction of a project in 2024 or later face stiff and increasing penalties for failing to meet standards for which critical implementing guidance has not been published.

“Accordingly, projects that public power utilities may be considering now face at least a 15 percent penalty since most will not be in a position to commence construction in 2024, and the longer this guidance is delayed, the risk grows that some projects will potentially qualify for no credit at all,” APPA said.

Idling public power utility project development will have repercussions for years to come, APPA went on to say.

“The absence of this critical guidance will also affect tax-exempt rural electric cooperatives, which collectively with public power utilities serve roughly 28 percent of the nation’s retail electric customers. It will also affect other state and local entities, and other tax-exempt entities, seeking to make energy investments for their own institutional use.”

All these results “run contrary to the goal of the Code’s elective payment regime, which is to allow entities of all types to take advantage of energy-related tax credits,” the trade group argued.

“Given these urgent circumstances, we strongly encourage Treasury and IRS to move immediately to provide the clarity needed to allow project development to proceed.”

With the start of 2024 just around the corner, “we urge you to delay the implementation of the 10-percent reduction. Additionally, please consider granting broad waivers to technologies where domestic content is clearly not available in sufficient quantity or quality to meet those requirements, including critical components for solar photovoltaic and thermal power generation, wind, geothermal, storage, and biogas facilities.”

Overall, APPA said that Treasury and IRS must provide domestic-content rules for elective payment that provides upfront certainty for project development.

“The alternative is untenable: requiring those public sector and tax-exempt entities seeking elective payment to wait until the project is placed in service to either certify that they have met the requirements or qualify for one or more of the three exceptions,” APPA argued.

Schumer Letter

Meanwhile, in a December 11 letter to Treasury Secretary Janet Yellen, Senate Majority Leader Charles Schumer (D-NY) called direct payment a “critical part” of the Inflation Reduction Act and warned that “without clear Treasury Department guidance clarifying the domestic content rules, especially related to the timing of payments and waiver process, the organizations whom we intended to benefit from these provisions will be unable to take full advantage thereof.”

Referring specifically to the lack of guidance relating to domestic content waivers, Schumer wrote, “Many public power utilities need to plan investments years in advance. … The uncertainty as to whether a potential waiver will be granted or exceptions will apply has the potential to prevent these organizations from using the direct pay provisions, and, therefore, investing in clean energy projects.”

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