Section 242 hydroelectric incentive program funding

For the first time, the U.S. Department of Energy has funding for its Section 242 hydroelectric incentive program.  The program, arising from Section 242 of the Energy Policy Act of 2005,  provides incentive payments for adding new turbines or other hydroelectric generating devices to existing sites. The Department is accepting applications for the incentive payments through February 1, 2016.

In 2005, as part of the Energy Policy Act of 2005, Congress created the Section 242 hydroelectric incentive program to support the expansion of hydropower energy development at existing dams and impoundments.  Section 242 establishes an incentive for qualified hydroelectric facilities, defined as "a turbine or other generating device owned or solely operated by a non-Federal entity which generates hydroelectric energy for sale and which is added to an existing dam or conduit."  The incentive is set at up to 1.8 cents per kilowatt-hour of net electric energy generated and sold by a qualified hydroelectric facility, indexed for inflation (about 2.3 cents per kilowatt-hour today) up to a maximum of $750,000 per year, for a specified 10-year period.

To get this money, an owner or operator must apply for the incentive payments.  An application for an incentive payment for electric energy generated and sold in a calendar year must be filed during the applications period defined by the Department of Energy in the Federal Register.  But according to the Energy Department's final guidance for the Section 242 program, "DOE will accept applications and make payments to qualified hydroelectric facilities in years when appropriations are available for this purpose."  Until recently, no such appropriations were available.

In Congressional appropriations for Federal fiscal year 2015, the Department of Energy received funds to support this hydroelectric incentive program for the first time. As shown in the conference report to the law that made appropriations for Fiscal Year 2015, Congress appropriated $3,960,000 for conventional hydropower under section 242 of EPAct 2005.

With funding now available, the Energy Department is only accepting applications from owners and authorized operators of qualified hydroelectric facilities for hydroelectricity generated and sold in calendar year 2014. Applications for this round of Section 242 funding are due by February 1, 2016.

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.