IRA Tax Credits Are Crucial for U.S. Geothermal Leadership

The potential of IRA tax credits to materially reduce geothermal costs is reflected in forecasts from the National Renewable Energy Laboratory’s Annual Technology Baseline (ATB) model, widely used for estimating future energy costs. The projected levelized cost of electricity (LCOE) for binary-cycle enhanced geothermal systems (EGS) in 2025 dropped by nearly 85 percent between the 2020 and 2024 ATB versions. The current Advanced Case estimates, which are noted by the DOE for being potentially conservative given recent reductions in cost inputs, place projected LCOE within the range identified by DOE Liftoff targets of $60–70 per megawatt hour for 2030 and close to meeting the DOE Earthshot goal of $45 per megawatt hour for 2035. If tax credits are removed, however, cost improvements would be significantly limited (see Figure 1).

Geothermal’s Shale Playbook: How Tax Credits Sparked U.S. Oil and Gas Leadership

The federal government has a proven track record of using tax credits to cultivate strategic industries. One of the most consequential examples that also bears clear parallels to next-gen geothermal is the rise of the unconventional gas sector. Enacted through the 1980 Crude Oil Windfall Profits Tax Act, the Section 29 production tax credit provided more than $14 billion (in 2024 dollars) in tax relief to unconventional gas producers between 1980 and 2002. Despite its limited fiscal scope, the tax credit had an outsized impact by leveraging public capital to de-risk early investment and crowd in private financing—a model now echoed by the IRA’s tax incentives for geothermal.

The capital influx from Section 29 spurred widespread drilling and data collection, fueling a cycle of learning-by-doing across the industry. The resulting iterative improvements in fracturing technologies, drilling and well completion techniques, subsurface engineering, and resource characterization steadily drove costs down and improved project outcomes—laying the technical and economic foundation for the shale gas revolution that continued well after the credit’s expiration. Crucially, many of these capabilities and innovations developed under Section 29 are transferable and provide a deep foundation of U.S. expertise and infrastructure for next-gen geothermal.

Indexed to inflation and hedged against oil prices, Section 29 provided a predictable financial incentive that encouraged capital deployment into high-risk drilling technologies and operations. The credit’s impact extended across the sector, as small operators without sufficient tax liabilities were still able to access the credit through tax equity partnerships with larger firms. The IRA improves on this model by enabling even greater accessibility: Its transferability and direct pay provisions provide next-gen geothermal developers—most of them smaller, early-stage startups—access to an even wider universe of buyers who can now directly purchase the credits.

Section 29’s enduring legacy lies in its catalytic role in leveraging public capital to accelerate innovation and capacity building in the early stages of a transformative industry. The IRA’s tech-neutral tax credits, strengthened by mechanisms like transferability and direct pay, build on this legacy. By lowering financial barriers and unlocking broader participation, they offer the potential to unlock a new wave of American energy leadership—just as Section 29 did for unconventional gas a generation ago.

The Shale Boom and the Value of Consistent Policy Signals

Importantly, the shale boom did not materialize overnight. There was a lag between the initial provision of tax credits and the broad commercial success of the industry. This latency is not a sign of failure, but rather a consistent feature of what it takes to build strategic industries from the ground up: early public sector support enables knowledge accumulation, infrastructure development, and investor confidence that could pay off at scale later.

This precedent underscores why it is critical—particularly for geothermal—to preserve the IRA’s clean energy tax credits through their intended expiration in 2032. Geothermal projects currently take 4 to 10 years to move from exploration to commercial operation, meaning capacity launched in the next few years may not come online until the early 2030s. Any policy change that accelerates the tax credit phaseout would prevent geothermal projects from leveraging this catalytic public sector funding.

While developers may not be able to immediately monetize these incentives, the certainty that they will be available when projects are ready is itself a powerful driver of investment. Long-term policy stability provides developers, investors, and supply chain partners with the confidence needed to make upfront commitments. Without this certainty, developers may hesitate to move forward, and capital may remain on the sidelines—stalling progress in a sector with enormous strategic value and potential for American leadership.

Sustaining Momentum in the United States’ Moment to Lead

Next-generation geothermal technology has the potential to provide clean firm power at a time when electricity demand is projected to be increasing both in the United States and around the world. The United States currently has a competitive advantage in geothermal innovation, but its ability to leverage these early successes to transform the industry into a global leader hinges on a coherent, strategic approach.

Along with continued support for R&D and demonstration projects, stable, long-term tax incentives are critical to provide the policy certainty that investors and developers need to commit capital today. Cutting off this market signal prematurely would not only disrupt the project pipeline but also risk squandering the strategic momentum behind geothermal.

Policymakers should view the IRA’s tax incentives as an essential bridge—rather than a permanent crutch—to a self-sustaining geothermal industry. These credits are not subsidies for a mature industry; they are strategic investments that reduce costs, scale deployment, and build domestic capacity. Ending them early would undercut U.S. competitiveness in a space where competitors are already rapidly expanding.

Ray Cai is an associate fellow in the Energy Security and Climate Change Program at the Center for Strategic and International Studies in Washington, D.C.