Elective Pay Tax Credits Issue Brief (PDF)

Summary

Elective pay tax credits have bipartisan support and ensure that tax-based, federal energy incentives are available to all electric utilities.
Without elective payment, local communities pay for projects through power purchase agreements (PPAs), but banks and large corporations get the tax benefits instead.
Rules implementing elective payment tax credits must be simple and efficient to maximize locally owned energy production by public power utilities—nearly 1,600 of which serve rural communities.
Domestic content rules threaten to block local ownership and control of energy production.
Congress should preserve elective payment and should push Treasury to ensure that simple, fair, and clear guidance implementing new foreign entity of concern provisions are available as quickly as possible.

Background

Since the mid-1900s, Congress has routinely sought to incentivize energy investments and energy production. This has been done through direct federal grants, subsidized loans, and loan guarantees, but the most significant and consistent incentives have been provided through the federal tax code. Since the 1970s, Congress has increasingly used federal tax incentives to encourage certain forms of energy investments in the United States. In more recent years, Congress has expanded and extended such incentives to promote non-emitting energy resources and reduce emissions from existing resources to address climate change. Today, tax policy is energy policy, with federal tax credits incentivizing investments in wind, solar, biogas, combined heat and cycle, hydropower, geothermal, energy storage, and nuclear power.

These energy tax credits are not intended to provide generalized relief from an owners’ tax liability, but to encourage energy investments by reducing financial costs. However, until elective payment was enacted as part of the Inflation Reduction Act (IRA), tax-exempt entities could not directly benefit from tax credits for a facility that they owned. This included public power utilities and rural electric cooperatives that serve nearly 30 percent of U.S. retail customers, or about 100 million Americans. Instead, these tax-exempt, locally controlled utilities largely indirectly benefited from such credits by entering long-term PPAs with taxable entities that could claim these credits. Such contracts can be expensive and deny the purchaser the benefit of direct ownership and control. Additionally, only a portion of the value of the tax credit was passed on to the purchaser. A Joint Committee on Taxation analysis shows that companies with over $1 billion in sales received more than 90 percent of the value of energy tax credits from 2018 through 2019 and about half of the value went specifically to banks and insurers offering tax equity to project developers.1 

As a result, in the last decade, there has been increasing bipartisan awareness that comprehensive energy tax policy must allow all utilities to access federal incentives, including those delivered through the tax code.2 Thus, while the IRA was the result of a partisan process, support for elective payment is bipartisan.

Elective payment allows public power utilities and rural electric cooperatives to monetize energy tax credits for facilities they own. In effect, the owner, in lieu of an energy tax credit, is deemed to have made a tax payment equal to the amount of the tax credit and therefore qualifies for a tax refund.

  • Tax credits eligible for elective payment include:
  • Energy investment tax credits (ITCs);
  • Energy production tax credits (PTCs);
  • The carbon capture and sequestration credit;
  • The alternative fuel vehicle refueling property credit;
  • The existing nuclear tax credit;
  • The clean hydrogen production tax credit;
  • The commercial electric vehicle tax credit; and
  • The clean fuel production credit.

H.R. 1, the One Big Beautiful Bill Act of 2025, which was signed into law on July 4, accelerates the phaseout of these credits. For example, most wind and solar projects need to be placed in service before 2028 to receive a tax credit, and the ITC and PTC for nuclear, hydropower, geothermal and other technologies begin to phase out for projects construction of which begins after 2032. However, elective pay means public power utilities can take advantage of these credits while they are still available.

In addition, H.R.1 creates new rules to preclude a foreign entity of concern (FEOC) from benefiting from an energy tax credit. Compliance with these new rules is expected to be quite challenging, but implementation is of particular concern to public power in that an entity must prove that no more than 15 percent of its debt is owned by certain foreign entities. It is unlikely that a public power utility would substantively fail such a test, but it may be challenging to identify owners of publicly held debt and then prove that they are not a specified foreign entity. These rules take effect for projects construction of which begins after 2025.

These new FEOC rules come in addition to domestic content requirements for elective payment. Generally, meeting the domestic content requirements provides a bonus tax credit to any project owner—including taxable and tax-exempt entities. However, failing to meet this standard penalizes only tax-exempt owners by denying them access to elective payment of the tax credit. APPA believes this unequal treatment was unintended by lawmakers in drafting the IRA, but the wording of the statute is clear and cannot be changed except by further action of Congress.

To meet the domestic content requirements, 100 percent of the structural steel and iron, and roughly half of the manufactured products used in the facility must be made in the U.S. There are no exceptions to these requirements for qualifying for the domestic content bonus, but there are exceptions for purposes of claiming elective payment, including where:

  • Meeting the domestic content requirements would increase project costs by more than 25 percent; or
  • Meeting the domestic content requirements requires domestically manufactured products that are not available in sufficient quantity or quality; or
  • The project is less than one megawatt in capacity.

Transferability

In addition to PPAs and elective payments, some energy-related tax credits can be monetized by a public power utility by transferring the credit. This includes credits for carbon capture and sequestration and advanced nuclear facilities. As noted above, tax credit transferability for public power utilities and rural electric cooperatives enjoys broad bipartisan support and has been suggested in the past as a more comprehensive means by which to allow these entities to monetize energy tax credits.

Congressional Action

On June 16, 2025, the Senate Finance Committee released the tax title to H.R. 1, the One Big Beautiful Bill Act of 2025, budget reconciliation legislation. Unlike the House-passed version of H.R. 1, which made no mention of elective payment, the Finance Committee draft proposed repealing the statutory exceptions to the domestic content requirement for elective payment. A full-scale effort by APPA, its public power utility members, and allied stakeholders ensued to strike the provision from the bill. Thanks to the work of champions in the Senate, including Sen. Lisa Murkowski (R-AK) and Tom Tillis (R-NC), the provision was removed from the bill before it was signed into law by President Donald Trump.

APPA strongly supports retaining the elective payment mechanism, applauds public power champions in the House and Senate who have helped defend it, and encourages Congress to ensure that domestic content requirements are workable.

APPA Contact 

John Godfrey, Senior Government Relations Director, 202-467-2929 / jgodfrey@publicpower.org

  1. Robert Harvey, Joint Committee on Taxation, Memorandum, Tentative Energy Credits by Industry (March 31, 2023); Robert Harvey, Joint Committee on Taxation, Memorandum, Distribution Data (March 31, 2023).
  2. See, for example, the Energy Sector Innovation Credit Act (H.R. 4720 / S. 2475) which would have allowed for tax credit transferability by public power and rural electric cooperatives introduced in the 117th Congress by Reps. Tom Reed (R-NY) and Jimmy Panetta (D-CA) and five other Republicans and Democrats in the House and Senators Mike Crapo (R-ID) and Sheldon Whitehouse (D-RI) and four other Republicans and Democrats in the Senate. More recently, see for example, Maintaining and Enhancing Hydroelectricity and River Restoration Act of 2021 ( H.R. 6653 / S. 2994) that would allow elective payment of the proposed tax credits by public power and rural electric cooperative utilities introduced in the 118th Congress by Reps. Adrian Smith (R-NE) and Suzan DelBene (D-WA) and four other Republicans and Democrats in the House and by Senators Maria Cantwell (D-WA) and Lisa Murkowski (R-AK) and five other Democrats and Republicans in the Senate.