Incremental hydropower tax incentives

Upgrading existing hydroelectric facilities to improve their efficiency or capacity can be cost-effective.  Not only will the plant produce more electricity more efficiently, but the upgrades may qualify the facility for a tax incentive designed to spur the development of new renewable electricity generation.  For example, installing inflatable flashboards or high-efficiency turbine runners could qualify a project for an energy production tax credit of 1.1¢/kWh. 

As part of the sweeping Energy Policy Act of 2005, Congress amended section 45 of the Internal Revenue Code to expand the renewable electricity production tax credit (or PTC) to incremental production gains from efficiency improvements or capacity additions to existing hydroelectric facilities.  Eligible improvements must be placed in service after August 8, 2005, and before January 1, 2014. 

To qualify incremental hydroelectric generation for the tax credit, the project owner applies to the Federal Energy Regulatory Commission under section 1301(c).  The Commission is required to certify the “historic average annual hydropower production” and the “percentage of average annual hydropower production at the facility attributable to the efficiency improvements or additions of capacity” placed in service during that time period.  The applicant is then able to take the production tax credit for the incremental amount of electric energy produced as a result of the upgrades.

While a credit of 1.1¢/kWh may seem small, hydroelectric projects typically produce relatively large amounts of electric energy at a relatively low operating cost.  Depending on the energy market, at times the tax credit may be worth half as much as the value of the underlying energy.  Also, in this context, the tax credit is only available for the incremental generation produced above the historic baseline; thus allowing incremental hydropower production to qualify for the PTC arguably rewards investment in upgrades.

At the same time, the continued availability of the tax credit for any kind of renewable electricity is in doubt.  Under current law, most renewable resources must be placed in service by the end of 2013 to qualify for the production tax credit.  Wind energy projects must be placed in service by the end of 2012.  Congress is considering whether to renew the tax credit, as it has done a number of times since it was first enacted in 1992.   According to a Congressional Budget Office report released this month, tax credits for renewable energy sources cost the government $1.4 billion in fiscal year 2011.

Inflatable flashboards at hydro dams

Dam owners are increasingly enhancing their revenue by using inflatable flashboards to optimize their hydroelectric production.  This new technology offers dam owners and operators increased safety and increased hydroelectric generation, as well as opening the door to tax credits and other incentives.

Flashboards have traditionally been a palisade of wooden boards inserted into the top of a dam's crest.  Flashboards increase a dam's capacity to hold water.  They are typically used seasonally in temperate climates, and are removed before winter.  Flooding or even high water can wash flashboards away, impairing the dam's ability to hold water until they can be replaced.  Replacing flashboards can entail danger to personnel, and it might be a long time before water levels recede enough to allow safe reinstallation.  In the meantime, a dam's ability to safely store water can be reduced.


Inflatable flashboards allow operators to increase or decrease the effective height of the flashboard system remotely.  The ability to quickly and safely restore pond elevation after a high flow event translates into increased electricity generation.  For example, inflatable flashboards at the Deer Rips - Androscoggin 3 Hydroelectric Project on the Androscoggin River in Lewiston and Auburn, Maine, have been calculated as likely to increase electric generation by 4.56% compared to a historical baseline.

This incremental hydropower generation can be valuable to the dam owner.  Not only does it allow the facility to produce more electricity, but it may also qualify the project for federal and state tax incentives.  For example, Section 45 of the Internal Revenue Code provides a renewable energy tax credit to owners or operators of qualified renewable electric generation facilities.  That credit was extended to the incremental production gains from efficiency improvements or capacity additions developed between 2005 and 2013.  Developers can ask the Federal Energy Regulatory Commission to certify a historic baseline of power produced at existing dams, as well as the incremental increase in hydropower production due to qualifying investments.  Once FERC has issued this certification, dam owners can provide that to the Internal Revenue Service to receive the tax credit.