Elective Pay Tax Credits

Elective Pay Tax Credits Issue Brief (PDF)

Summary

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 power, 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 in July 2025, 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 created new rules to preclude a foreign entity of concern (FEOC) from benefiting from the ITC, PTC, existing nuclear tax credit, and carbon capture and sequestration tax credit. Compliance with these new rules is expected to be quite challenging, but implementation is of particular concern to public power utilities 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 taxable years beginning after the date of enactment. So, for public power utilities operating on a calendar year basis, it is January 1, 2026.

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.

With the first tax-filing season completed, APPA has been generally pleased with implementation of elective payment but remains concerned about the domestic content requirements. Our concerns are twofold—because domestically manufactured products for many types of energy projects are simply not available to meet these requirements and because otherwise qualifying elective payment projects may be overwhelmed by procedures outlined in draft guidance. A “safe harbor” provision does allow owners to calculate whether a project meets domestic content requirements on a much simpler basis and without requiring proprietary supplier information. However, this safe harbor is currently limited to onshore wind, solar, and battery storage projects, meaning that those wishing to claim elective payment for other technologies, such as fuel cells, biogas, waste heat, geothermal, and hydropower, must rely on the unrealistic underlying regime.

Additionally, there is no guidance at all relating to the three waivers (discussed above) to domestic content requirements for elective payment. Under temporary guidance, an entity can “attest” that it has made a good faith determination that it has met the requirements for one of the waivers. This is intended to remain in effect for projects construction of which begins before January 1, 2027, or before new guidance is issued—whichever is later. However, the guidance also could be revoked at any time undermining the business certainty needed to proceed with project development.

Transferability

In addition to PPAs and elective payments, some energy-related tax credits can be monetized by a public power utility by transferring them. 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 Senators 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, the Maintaining and Enhancing Hydroelectricity and River Restoration Act of 2021 (H.R. 6653 / S. 2994), which 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.