Menengai’s Broken Promise: How Kenya’s Geothermal Model Lost the Steam Thematic image of the Olkaria Geothermal Field Kenya’s Menengai geothermal project was sold as a model of modern public-private partnership. The state would carry the difficult and expensive burden of geothermal exploration and drilling. Private power producers would then build, own and operate power plants. Geothermal Development Company would supply the steam; the independent power producers would convert it into electricity; Kenya Power would buy the output. On paper, the arrangement was elegant. In practice, Menengai has exposed a far more uncomfortable reality: Kenya’s public steam-supply model is not delivering the certainty it promised. Menengai Phase I was designed to produce 105 megawatts from three 35 MW plants. GDC’s own project page says the three plants were awarded to Globeleq Menengai Geothermal, Sosian Menengai Geothermal Power and OrPower Twenty Two under a build-own-operate structure. Yet the ...
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 energy tax policy. Under Section 25D, residential geothermal heat pump installations were set up to receive a 30% federal tax credit with no dollar cap. The original schedule extended that benefit through 2034, and it covered geothermal along with solar, solar thermal, fuel cells, small wind, and battery storage.
That structure mattered because it gave homeowners, installers, and lenders something unusually rare in federal tax policy, predictability. On a $60,000 vertical bore geothermal system, the 30% credit translated into an $18,000 benefit, and that amount applied broadly to equipment, drilling, trenching, and installation labor. In a sector where upfront costs can make or break a project, that was not a small incentive, it was often the difference between a project moving forward or being postponed.
The effect on the market was immediate. Installers expanded crews, manufacturers increased output, and homeowners began planning around a multi-year federal incentive they assumed would still be there when their project was ready. That assumption changed on July 4, 2025, when the One Big Beautiful Bill Act was signed into law. The law terminated the Section 25D residential clean energy credit for any geothermal heat pump system placed in service after December 31, 2025. The result was a dramatic compression of the residential timeline.
Why the IRS caused more confusion
The legal change itself was clear enough. The confusion came from how the IRS presented the information online. In early 2026, the IRS’s Residential Clean Energy Credit page stated that the credit is not available for property placed in service after December 31, 2025, but another section on the same page still referenced a phaseout schedule that did not begin until 2033. That created a direct contradiction on the same government webpage.
For homeowners, contractors, and tax preparers, that contradiction matters because it affects real decisions. A family deciding whether to move forward with a geothermal installation may assume the credit is still available if they read only the older phaseout language. A contractor may repeat that assumption in a proposal or sales brochure. A tax preparer may have to tell a client later that the claimed credit is no longer valid. The legal rule is what governs, not the marketing language, and the legal rule points to the end of the residential credit for systems placed in service after December 31, 2025.
The key practical point is simple. If a geothermal heat pump system was installed and placed in service before the end of 2025, the homeowner can still claim the credit under the old rules, subject to ordinary filing requirements. If the system was placed in service in 2026 or later, Section 25D no longer applies. That is the line that matters.
What died, and what did not
The portion of the law that disappeared is the direct residential credit under Section 25D. That is the credit homeowners used on Form 5695 for geothermal heat pump systems installed at a primary or secondary residence. If the installation was completed after December 31, 2025, the credit is no longer available.
That does not mean geothermal incentives disappeared entirely. It means the direct homeowner path was shut down, while other pathways remained available. The most important of those is commercial ownership, which can still open access to federal tax benefits under a different section of the tax code.
One narrow workaround still exists through third party ownership. In that structure, the homeowner does not own the system directly. Instead, a commercial entity owns the geothermal equipment and leases it to the homeowner. Because the asset belongs to the lessor, the tax benefit is captured on the commercial side rather than under the residential credit that was terminated.
This model is not a perfect substitute for direct ownership. The homeowner does not own the asset, the system does not necessarily increase the home’s appraised value in the same way, and the lease agreement becomes a crucial legal document that must be read carefully. Resale treatment, assignment rights, maintenance obligations, and end of term options all depend on the lease terms. Still, for some homeowners, especially those without enough tax liability to fully use a credit directly, a lease structure can still produce attractive economics if the pricing is competitive.
The commercial side is still alive
The part of the geothermal market that matters most for developers, suppliers, commercial building owners, and project financiers is the commercial and utility scale side. That segment was not eliminated by OBBBA in the same way residential geothermal was. Section 48, the Investment Tax Credit framework for commercial geothermal systems, remains active, and the credit can still reach 30% when the project qualifies for bonus treatment.
The base commercial rate is 6%, but that can increase to 30% if prevailing wage, apprenticeship, domestic content, or energy community conditions are met. In practice, that means the commercial side still has a workable federal incentive structure, even though the homeowner side lost its direct credit.
There is also a technical distinction that matters when modeling geothermal projects. Geothermal heat pump systems are not the same as electricity generating geothermal power plants. Heat pumps move heat for building conditioning, while power plants extract geothermal energy to generate electricity. The tax rules treat those categories differently, which means developers must identify the correct section before assuming a credit applies.
For geothermal electricity projects, the newer Section 48E framework is especially important. It is technology neutral, which means eligibility depends on the project meeting emissions and qualification standards rather than on whether the technology is geothermal, solar, wind, or something else. That matters because future utility scale geothermal growth is likely to be governed more by 48E than by the older residential framework.
How the bonus structure works
The commercial and utility scale system still uses the familiar two tier structure. A project can qualify for a 6% base credit, or it can rise to 30% if it satisfies the increased credit requirements. For many geothermal projects, prevailing wage and apprenticeship compliance is the main path to the higher rate.
There is also an important shortcut. Smaller projects can qualify for the full 30% rate without meeting the labor standards if they stay under the 1 megawatt threshold. That exemption matters because a meaningful number of commercial geothermal HVAC systems fall below that size. For those projects, the size limit can simplify the path to the higher credit without adding the administrative burden of labor compliance.
That does not mean larger projects are shut out. It simply means larger projects must meet the wage and apprenticeship standards if they want the full rate. In other words, the credit is still there, but the compliance path becomes more demanding as projects get larger.
The domestic content bonus can add another layer of value. If a project uses qualifying U.S. made materials, the credit can increase further. The threshold is tightening over time, which makes procurement strategy a real financial issue rather than a minor technical detail. A project that barely qualified in a prior year may fail to qualify if procurement is delayed and the percentage requirement rises.
Energy community bonuses may also apply where the project is located in a qualifying area, including places with fossil fuel employment history or brownfield characteristics. Those bonuses can stack with the base rate and the labor related bonuses. For developers, that means the effective tax value of a geothermal project may be much higher than the nominal base credit if the project is structured carefully.
Why domestic content matters more in 2026
Domestic content has become one of the most important planning variables for 2026 projects. The required share of U.S. sourced components rises over time, which means developers and EPC contractors need to think about sourcing earlier in the project lifecycle. A procurement plan that was acceptable in 2025 may not satisfy the 2026 threshold.
That changes more than just tax paperwork. It influences vendor selection, bidding strategy, contract timing, and the ultimate bankability of the project. A project that counts on the full bonus rate but misses the domestic content threshold may see its economics weaken quickly.
For geothermal developers, this is especially relevant because project supply chains can be specialized. Pumps, piping, heat exchange components, control systems, and drilling related inputs may not all be sourced domestically with equal ease. The earlier a developer addresses the sourcing question, the more likely the project is to stay aligned with the desired tax outcome.
Direct pay and transferability still matter
One of the most useful elements of the IRA era was direct pay, and that feature still matters in the commercial geothermal space. Tax exempt entities, state and local governments, tribal governments, and similar entities can still access the value of eligible credits through direct payment. That means they do not need traditional tax liability to benefit from the incentive.
Transferability also remains important. For profit project owners can often transfer or sell tax credits to another taxpayer with the appetite to use them. That has become a major financing tool because it allows developers to monetize incentives even when they do not have enough tax liability themselves.
For public sector geothermal projects, this makes federal incentives more usable than older tax credits ever were. A university, municipality, or public utility can participate in a project without needing to structure everything around taxable income. That flexibility is one reason geothermal remains financeable even in a shifting policy environment.
The regulatory ground is still moving
Even though the commercial side is still alive, the broader regulatory environment is not entirely settled. Courts have continued to review aspects of the clean energy tax regime, including guidance related to the beginning of construction rules that determine which projects qualify under specific timelines.
That matters because beginning of construction is often the pivot point for determining which rules apply to a project. If guidance on that point changes, project developers may need to revisit assumptions about eligibility, timing, and credit percentage. For large geothermal projects with long development cycles, even small changes in timing rules can affect financing, contracting, and notice to investors.
So while the commercial structure is more stable than the residential one, it is not perfectly fixed. Developers should treat 2026 as a year in which legal and administrative risk remains meaningful, especially for projects that depend on precise timing or stacked credit assumptions.
State incentives still exist
Federal policy is only one layer of the financial picture. State and utility level programs continue to operate independently, and in some places they are becoming more important as federal residential incentives disappear. That means the overall incentive landscape is now much more regional than it used to be.
New York is one example. Its state credit covers 25% of qualified expenditures, with a cap that increased for systems placed in service on or after July 1, 2025. That kind of program can soften the loss of the federal residential credit, especially in markets where geothermal adoption is already relatively strong.
Other states are moving in the opposite direction. Massachusetts, for example, reduced its Mass Save rebate heading into 2026. That creates a patchwork market where the economics of geothermal can change significantly depending on geography. For content, sales, and project strategy, that means state specific research is now essential.
There is also frequent confusion between two different IRA funded rebate programs. HEAR, the Home Electrification and Appliance Rebates program, is a point of sale rebate for qualifying heat pumps. HOMES, the Home Owner Managing Energy Savings program, is performance based and rewards whole home efficiency improvements. Contractors often blur the two together, but they are not the same program and they do not work the same way.
What homeowners need to know
For homeowners, the message is blunt. The direct 30% federal residential credit for geothermal heat pumps ended for systems placed in service after December 31, 2025. If a project was completed in time, the credit may still be claimed on the appropriate return. If the project is being installed in 2026 or later, the direct residential path is closed.
That does not mean homeowners should abandon geothermal altogether. It does mean they need to evaluate the full package much more carefully. State rebates, utility incentives, third party ownership, financing terms, and long term operating costs all matter more now that the direct federal credit is gone.
Homeowners should also be cautious about contractor materials. Some brochures, websites, and sales presentations still refer to the old 2032 or 2034 timelines. Those references can be outdated or simply wrong. Before signing a contract that assumes a federal credit will exist, it is worth confirming the current law and speaking with a tax professional.
What developers need to know
For developers and commercial stakeholders, the situation is better than the residential headlines suggest. The commercial and utility scale geothermal framework is still functioning, and the credit can still be financially significant. Projects under 1 megawatt may have a relatively straightforward path to the full rate, while larger projects can still qualify if they comply with labor and sourcing rules.
The bigger issue is timing. Procurement, construction start dates, labor compliance, and domestic content thresholds now play a much larger role in determining project value. A project that assumes the highest rate but ignores those conditions may end up undercapitalized.
Developers should also stay close to legal and regulatory updates. The policy framework is not static, and the tax treatment of clean energy assets can shift based on new IRS guidance, court decisions, or administrative corrections. In a capital intensive industry like geothermal, those details can change project returns enough to matter.
The practical takeaway
The simplest way to think about geothermal tax credits in 2026 is this. Residential direct ownership under Section 25D is gone for new installations placed in service after December 31, 2025. Commercial and utility scale geothermal incentives remain available through the Section 48 and 48E frameworks, and in many cases they can still reach a useful 30% level when bonus conditions are met.
That means the policy story did not end, it split. Residential homeowners lost the easiest path, while commercial developers still have a workable federal incentive structure. The market now depends on project type, ownership model, sourcing strategy, and state level support much more than it did before OBBBA.
For geothermal companies, marketers, and content creators, the opportunity is to explain that split clearly. A lot of confusion is still circulating in the market, and clear guidance will be valuable precisely because so many older assumptions are no longer correct.
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