New 30% Tax Credit Targets Industrial Energy Efficiency: Boosts for Domestic Manufacturing and Energy Communities

If you’re running a business—especially one that uses a lot of power and heat, like a manufacturing plant, a large hospital, or even a university campus—this bill is a big deal. It’s essentially a major tax break for getting smarter about how you use energy.

This legislation amends the Internal Revenue Code to establish a brand-new federal tax credit for businesses that install “qualified combined heat and power system property” (CHP). Starting in 2025, businesses can claim a base credit equal to 10 percent of the cost of placing this property into service. Think of CHP as a system that captures the heat that would normally be wasted when generating electricity and puts it to use, like for heating water or facilities. It’s the definition of energy efficiency, reducing the total fuel needed.

The Efficiency Bonus Stack

While the base credit is 10%, this bill is designed to push businesses toward specific policy goals by offering bonus credits. You can stack two additional 10-percentage-point bonuses, potentially raising the total credit to 30% of the project cost.

First, there’s a domestic content bonus (an extra 10%) if the project meets requirements similar to other clean energy incentives, meaning you have to use components made in the U.S. Second, there’s an energy community bonus (another 10%) if the project is built in an area that has historically relied on fossil fuel production, which aims to bring investment into communities transitioning away from coal or oil.

For a small manufacturer looking to install a $5 million CHP system, a 10% credit is $500,000. If that manufacturer uses American-made components and builds the system in a designated energy community, that credit jumps to $1.5 million. That’s a significant incentive designed to lower operating costs and drive industrial upgrades.

The Fine Print: What Actually Qualifies?

This isn't a free-for-all for any old power system. The bill sets strict technical hurdles to ensure the tax break only goes to truly efficient systems. To qualify, a CHP system must:

1. Be Highly Efficient: It must have an energy efficiency percentage exceeding 60 percent. This is calculated by comparing the total useful energy output (power plus heat) against the energy input (the fuel).
2. Balance the Output: It must produce at least 20% of its total useful energy as thermal heat and at least 20% as electrical or mechanical power. This prevents businesses from claiming the credit for systems that are mostly just generating electricity or mostly just generating heat.

If you're a business that uses biomass (like wood chips or agricultural waste) for at least 90% of your fuel, the 60% efficiency rule is slightly relaxed, though the credit amount is reduced proportionally if you fall short. This special rule acknowledges the unique challenges of biomass systems while still pushing for efficiency.

The Capacity Ceiling: Big Systems Need Not Apply

The bill also includes a hard cap on system size, which is important for large industrial players. If your CHP system has a total capacity exceeding 50 megawatts (or 67,000 horsepower), you are completely disqualified from receiving the credit. For systems between 25 MW and 50 MW, the credit is reduced proportionally.

This capacity limit ensures the credit is targeted at medium-to-large commercial and industrial users—like food processing plants, data centers, and mid-sized factories—rather than massive utility-scale projects. If you’re a major utility or a huge industrial campus needing 60 MW of power, you’re out of luck on this specific tax break.

Finally, the bill clarifies that this new credit cannot be claimed on costs that are already being treated as qualified rehabilitation expenditures under a different tax code section (Section 47). This is standard procedure to prevent double-dipping on federal incentives, but it means businesses will need to be careful when structuring their financing to ensure they maximize their benefits without overlapping.