As you consider ownership and financing options for a renewable energy project, direct pay (also referred to as elective pay) may influence your financial model — particularly as you assess the economics of an on-site solar or storage project or understand the market for an off-site power purchase agreement.
Direct pay is most relevant when a city or tax-exempt partner:
- Intends to directly own a renewable energy infrastructure project
- Is evaluating alternatives to third-party ownership structures (e.g., PPAs)
- Operates in a regulated electricity market where third-party procurement options are limited
Historically, many local governments relied on third-party ownership arrangements to benefit from the Investment Tax Credit (ITC) and the Production Tax Credit, which resulted in many third-party deals. Under current federal law, certain credits may instead be claimed directly by eligible tax-exempt entities, depending on project structure and compliance.
Because statutory requirements and IRS guidance evolve, cities should confirm eligibility and filing procedures when structuring projects.
Key Features of Direct Pay
- Direct pay is noncompetitive and not subject to funding caps, but eligibility is determined by statute and compliance requirements.
- Credits are generally received after a project is placed in service and claimed through the annual tax filing process.
- Pre-filing registration with the U.S. Treasury is required before claiming eligible credits. Registration confirms receipt of an application but does not guarantee eligibility.
Timelines, filing procedures, and compliance documentation requirements may change through federal guidance. Be sure to confirm the eligible technologies and credits before assuming direct pay applies to your project or plans.
Tax Credits That May Be Eligible for Direct Pay
Most Relevant to Municipal Renewable Projects
- Clean Electricity Investment Credit (replaced the Clean Energy Investment Tax Credit)
Potentially Relevant Depending on Project Type
- Hydrogen and clean fuel production credits
- Carbon capture and sequestration credits
- Advanced energy and manufacturing credits
More details on the Clean Electricity Investment Credit and Clean Electricity Production Credit, which are technology-neutral and apply to qualified energy facilities and energy storage technologies are available at the links above. For a full list of direct pay–eligible tax credits and relevant Internal Revenue Code sections, refer to current IRS guidance. Not all tax credits are eligible for direct pay, and eligibility may depend on project type, ownership structure, labor compliance, and other statutory conditions.
Note: After December 31, 2027, solar and wind energy projects will not be eligible to receive the investment credits. Local governments would most likely consider technologies like geothermal heating and cooling or energy storage-related technologies (including but not limited to battery storage) after 2027.
Domestic Content and Supply Chain Considerations
Certain energy infrastructure projects may qualify for higher tax credit values if domestic content requirements are met. Projects that do not meet these requirements may receive a reduced credit value.
Eligibility for some credits may also depend on supply chain sourcing rules and foreign entity restrictions under current federal guidance.
Because thresholds, compliance standards, and enforcement rules may evolve, cities should consult current IRS guidance and project finance advisors when structuring projects.
Note: Direct pay is authorized under current federal law for specific credits and timeframes. However, statutory provisions, administrative guidance, and eligibility requirements may change. Cities should verify current rules, especially when projects involve long development timelines.
This information is provided for planning purposes and should not be considered legal or tax advice.