US Geothermal Tax Credits in 2026: What Is Actually Still Alive After OBBBA For an industry that spent more than a decade building financial models around a stable federal incentive structure, 2026 has been a year of whiplash. The 30% federal geothermal tax credit that developers and homeowners built forecasts around is gone in one form and still alive in another, and even the IRS’s own public guidance has been confusing enough to trigger uncertainty across the market. That confusion is not a minor clerical issue. It is shaping investment decisions, contractor sales pitches, homeowner timelines, and project finance assumptions right now. If you work in geothermal, the key question is no longer whether federal incentives exist, but which incentive applies, to which project type, and under what ownership structure. The law that changed the timeline To understand where things stand in 2026, you have to start with the Inflation Reduction Act of 2022, which created a long runway for clean e...
Rep. Mike Kennedy's Geothermal Royalty Reform Act Advances: A Game-Changer for U.S. Geothermal Expansion
Rep. Mike Kennedy's Geothermal Royalty Reform Act Advances: A Game-Changer for U.S. Geothermal Expansion
Posted on March 6, 2026
As the world races toward reliable, baseload clean energy sources to meet growing electricity demand and decarbonization goals, geothermal power stands out as one of the most promising yet underutilized options. Unlike solar or wind, geothermal provides constant, 24/7 power with minimal land use and near-zero emissions once operational. The United States boasts vast untapped geothermal potential—estimated at hundreds of gigawatts—particularly in the West, where heat from the Earth's crust can be harnessed for electricity generation and direct-use applications like heating.
Yet, development on federal lands, which hold much of this resource, has lagged due to regulatory hurdles, including outdated royalty structures under the Geothermal Steam Act of 1970. On March 5, 2026, the House Natural Resources Committee advanced H.R. 5638, the Geothermal Royalty Reform Act ,sponsored by Rep. Mike Kennedy (R-Utah). This bipartisan-supported bill aims to modernize federal royalty payments for geothermal production, removing penalties that discourage new facilities and unlocking investment in America's geothermal future.
The Problem with Current Geothermal Royalties
Under the existing framework from the Geothermal Steam Act (as amended), royalties for geothermal electricity production on federal leases are calculated as a percentage of gross proceeds from electricity sales—typically ranging from 1% to 2.5% during the first 10 years of a facility's operation, then potentially higher thereafter. The key issue arises on multi-facility leases: royalties have historically been tied to the highest-cost or oldest facility on the lease, meaning newer plants added later face inflated effective rates based on the lease's overall production history rather than their own startup phase.
This "one-size-fits-all" approach penalizes expansion. Developers hesitate to build additional units on producing leases because the royalty burden doesn't reset for new facilities. It discourages incremental development, reinvestment, and scaling up proven sites. In an industry where upfront capital costs are high (drilling, well testing, power plants), this outdated rule adds unnecessary financial risk and slows growth.
Industry voices, including from leading developers like Ormat Technologies, have long called for reform. The current structure effectively treats new additions as if they were mature operations from day one, undermining the incentive for phased development that could maximize resource recovery from existing leases.
Key Provisions of H.R. 5638
The Geothermal Royalty Reform Act directly addresses this by amending the Geothermal Steam Act to require that royalties be calculated based on production from each individual electric generating facility, not aggregated across the lease.
Specific reforms include:
- Facility-specific royalty determination: Each geothermal power plant pays royalties tied to its own time in service. New facilities qualify for the reduced royalty rate (e.g., the current 1-2.5% sliding scale for the first 10 years), even if built on a lease with older units.
- Fair cost distribution: Ensures taxpayers and producers benefit from equitable charging. The government still collects royalties proportional to output, but without artificially inflating rates for expansions.
- Reduction of red tape and unnecessary costs: By clarifying rules and eliminating penalties, the bill lowers barriers to entry for new projects, encouraging more investment.
- Promotion of growth in the sector: Lower effective costs for expansions make geothermal more competitive against other renewables and fossil fuels, supporting job creation, energy security, and innovation (including enhanced geothermal systems or EGS).
Rep. Kennedy emphasized the bill's potential: “Outdated royalty rules have penalized new facilities and stifled the investment needed to unleash this energy source.” Chairman Bruce Westerman (R-Ark.) praised it for providing “much needed clarity for geothermal royalty payments” and advancing reliable energy supply.
The bill's text, introduced in September 2025, was refined through hearings (including a December 2025 subcommittee session) and advanced with support from both sides of the aisle as part of a broader geothermal package.
Broader Context: Momentum for Geothermal in 2026
This markup is part of a surge in geothermal-focused legislation in the 119th Congress. The March 5, 2026, committee action included 16 bills, many targeting geothermal barriers:
- H.R. 301 (GEO Act) — Speeds up DOI reviews of geothermal authorizations.
- H.R. 5576 — Exempts low-impact exploration from full NEPA reviews.
- H.R. 5587 (HEATS Act) — Clarifies permitting for mixed-ownership subsurface resources.
- H.R. 5631 — Creates a Geothermal Ombudsman and task force for permitting efficiency.
These complement earlier efforts, like annual lease sales mandates and categorical exclusions. Together, they aim to streamline permitting, reduce environmental review delays, and make federal lands more accessible for geothermal.
The timing couldn't be better. The Department of Energy recently announced $171.5 million in funding for next-generation geothermal field-scale tests and exploration drilling. While residential geothermal heat pump tax credits face changes (e.g., the 30% ITC under Section 25D phases or adjusts post-2025 for some applications), commercial and utility-scale geothermal retains strong incentives under the Inflation Reduction Act framework, including production and investment tax credits.
Geothermal's advantages—high capacity factors (often >90%), small footprint, and co-location potential with lithium extraction (as seen in Salton Sea projects)—position it as a key player in the energy transition. Reforms like H.R. 5638 could accelerate deployment, particularly in western states like Utah, Nevada, California, and Idaho, where Rep. Kennedy's district exemplifies geothermal promise.
Industry and Economic Impacts
Operators stand to gain significantly. On leases with existing production, adding capacity becomes financially viable without royalty penalties. This encourages "brownfield" development—expanding proven resources—reducing exploration risk and environmental disturbance compared to greenfield sites.
For investors, clearer royalty rules improve project economics, potentially lowering the cost of capital. Geothermal's baseload reliability makes it attractive for grids integrating more intermittent renewables, supporting data centers, manufacturing, and electrification.
Environmentally, faster expansion of geothermal could displace fossil fuel generation, cutting emissions while minimizing water use in closed-loop systems. Community benefits include stable jobs in rural areas and revenue sharing with states and tribes from federal royalties.
Next Steps and Outlook
With committee approval, H.R. 5638 heads toward the full House floor. If passed, it would go to the Senate, where similar bipartisan interest in energy security could propel it forward. In a divided Congress, packaging it with other permitting reforms increases chances.
Rep. Kennedy's bill represents pragmatic policy: fixing a specific, outdated rule to unleash domestic energy without new subsidies or mandates. As America seeks energy independence and clean power, geothermal royalty reform is a low-hanging fruit with high upside.
The advancement of H.R. 5638 signals growing recognition that geothermal deserves equal footing in the clean energy portfolio. For developers, investors, and energy consumers, this could mark the start of accelerated growth in one of the most reliable renewable resources available.
Stay tuned for updates as this bill moves forward—geothermal's moment may finally be arriving.
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