Kentucky Energy Tax Incentives: Sales Tax Exemption, KIERA, and Net Metering

Kentucky’s energy tax incentives are weighted heavily toward businesses and large capital projects. The headline programs are a sales and use tax exemption on manufacturing machinery under KRS 139.480, the Kentucky Incentives for Energy Related Business Act (KIERA) for large energy facilities, and specific property tax treatment for commercial renewable installations. Homeowners get far less at the state level: Kentucky has no state income tax credit for residential solar, so most individuals rely on the federal Residential Clean Energy Credit and, once it launches, a federally funded state rebate program for home efficiency upgrades.

What Homeowners Can Actually Claim

If you’re a Kentucky homeowner thinking about solar panels, a heat pump, or insulation work, start with the federal side. Kentucky does not offer a state income tax credit for residential clean energy, and it does not have a statewide property tax exemption that shields the added value of rooftop solar from assessment. A home solar installation can raise your assessed value and your property tax bill with it. Your county Property Valuation Administrator can tell you how a specific system would be treated locally.

The federal Residential Clean Energy Credit has historically covered 30 percent of qualifying installations, including solar electric panels, solar water heaters, wind turbines, geothermal heat pumps, fuel cells, and battery storage of at least three kilowatt-hours. There is no annual or lifetime dollar cap, except for fuel cell property, which is limited to $500 per half kilowatt.¹ The credit is nonrefundable, so it offsets what you owe in federal tax rather than generating a refund beyond that. Confirm the current percentage and eligible property on IRS.gov before you buy, because the terms can change between tax years.

Kentucky is also standing up a Home Energy Rebates Program funded through the federal Inflation Reduction Act. It is expected to cover whole-home efficiency work such as HVAC and appliance upgrades, insulation, air sealing, and related electrical panel improvements, with rebate size tied to the applicant’s Area Median Income.² You can look up your AMI through HUD using your county and household size.³ The Office of Energy Policy has submitted its plan to the U.S. Department of Energy, and applications are not yet open. Anyone offering to sign you up for these rebates right now is not legitimate.

Sales Tax Exemption on Manufacturing and Energy Equipment

Kentucky charges a six percent sales and use tax, with no additional local sales taxes stacked on top.⁴ KRS 139.480(10) exempts machinery purchased for new and expanded industry from that tax.⁵ For an energy project, this is the main savings lever during construction of a new generation facility or an expansion at an existing plant.

Regulation 103 KAR 30:120 sets four conditions. The item must be machinery, it must be used directly in the manufacturing process, it must be incorporated into a Kentucky plant facility for the first time, and it must not merely replace existing equipment. Replacement machinery can still qualify if it performs a different function, makes a different product, or has greater productive capacity than what it replaces.⁶

How This Applies to Solar

The Department of Revenue addressed solar directly in Technical Advice Memorandum KY-TAM-21-01. When the four conditions are met, the exemption reaches solar panels, mounting systems, trackers, DC system components, inverters, converters, AC system items, meters and regulators used in generation, on-site generation transformers, and the computer systems that control exempt machinery.

It does not reach construction materials for the building itself (lumber, drywall, flooring), meters and regulators used to deliver electricity to the grid, transmission property outside the manufacturing process, security systems, communication equipment, or batteries. Repair and replacement parts are excluded as well, even when the manufacturer requires them as a condition of sale or warranty.⁶

Energy Used in Manufacturing

A separate provision at KRS 139.480(3)(a) exempts energy and energy-producing fuels used in manufacturing, processing, mining, or refining, but only on the portion of energy costs that exceeds three percent of total production costs.⁵ The first three percent stays taxable. For energy-intensive operations such as smelting, chemical processing, or large data centers, the amount above the threshold can be substantial.

KIERA: Incentives for Large Energy Projects

The Kentucky Incentives for Energy Related Business Act (KIERA), codified at KRS Chapter 154.27, is the state’s primary program for large-scale energy development. It covers facilities producing alternative fuels, generating renewable electricity, operating gasification plants, building carbon dioxide pipelines, or running cryptocurrency mining operations.⁷ The investment thresholds put it well out of reach for a homeowner or small installer.

Minimum Investment by Project Type

$100,000,000 for alternative fuel or gasification facilities using oil shale, tar sands, or coal as the primary feedstock
$50,000,000 for carbon dioxide transmission pipelines
$25,000,000 for biomass-based alternative fuel or gasification facilities and energy-efficient alternative fuel facilities
$1,000,000 for renewable energy facilities (solar, wind, hydropower, landfill methane, biomass), natural-gas-fed alternative fuel facilities, and cryptocurrency facilities⁸

What an Approved Project Can Recover

Each KIERA deal is a negotiated agreement. It can include recovery of up to 100 percent of sales and use tax paid on tangible personal property used to construct, retrofit, or upgrade the facility, plus up to 80 percent of severance taxes paid on coal purchases.⁸ The agreement specifies the incentives, the recovery percentages, and the capital investment ceiling eligible for recovery.⁹

An agreement runs from its activation date until the full negotiated amount is recovered or 25 years pass, whichever comes first. Activation must occur within five years of final approval, extendable to seven on request.⁷ Each agreement also sets a target percentage of Kentucky residents in the construction workforce and at the operating facility.⁹

Approval is not payment. The statute makes clear that receiving the incentives depends on filing the required requests and meeting every condition in the agreement and statute. Missing a filing or falling short of a benchmark can forfeit the benefit for that period.⁹

Property Tax on Commercial Renewable Facilities

Once a solar power facility is operational, Kentucky treats the owner as a public service corporation. The Office of Property Valuation assesses the facility as a unit under KRS 136.115 and KRS 136.160, combining real property, tangible personal property, and franchise value into one valuation. Core generation equipment such as panels, mounting systems, trackers, DC components, inverters, converters, transformers, substations, and batteries is classified as manufacturing machinery under KRS 132.020(1)(c) and KRS 132.200(4). AC meters, transmission property, and security equipment fall into a different tangible personal property category at a different rate. Franchise value — the gap between the unit value and the combined assessed value of physical assets — is taxed at a state rate of $0.45 per $100, plus applicable local rates. Agricultural land converted to a solar facility loses its agricultural valuation and shifts to fair cash value.⁶

Net Metering and Net Billing

Not a tax incentive, but a bill-side one that affects whether a small system pencils out. Kentucky split its rules in 2019 under Senate Bill 100. Customers of investor-owned utilities such as Kentucky Utilities and Louisville Gas & Electric fall under net billing: generation and consumption are netted in real time, and excess kilowatt-hours are credited at a utility-specific rate that is typically lower than the retail rate. Credits offset per-kilowatt-hour charges and unused credits roll forward.

Customers of most rural electric cooperatives (other than those served by TVA distribution utilities) still have traditional net metering, with monthly excess rolling over as a kilowatt-hour credit at full retail value. Aggregate net-metered capacity at a cooperative is capped at one percent of its single-hour peak load from the prior year, and individual systems are limited to 45 kilowatts in both frameworks.

The difference matters for payback. Under net billing, exports are worth less, so a system sized tightly to your actual consumption performs better than an oversized one.

How to Claim the Incentives

Sales Tax Exemption: Form 51A111

The exemption on machinery for new and expanded industry is claimed on Form 51A111, “Certificate of Exemption Machinery for New and Expanded Industry.” A manufacturer or production processor can complete it, or a contractor and the manufacturer can complete it jointly. You will need the manufacturer’s name and sales tax permit number, the contractor and vendor names, the plant location, a cost and description of each machinery purchase, and a description of its manufacturing function.¹⁰

Present the completed certificate to the seller at the point of purchase. Keep copies of the certificate, purchase orders, and confirmations for at least four years. If the Department of Revenue later determines a listed item does not qualify, the purchaser must report and pay the tax on the non-exempt items immediately. Contractors cannot use the certificate for construction equipment or consumable supplies.¹⁰

KIERA

KIERA applications go through the Kentucky Cabinet for Economic Development, not the Department of Revenue. Because each agreement is individually negotiated, be prepared with detailed project descriptions, capital investment estimates, projected energy output, workforce plans, and, for alternative fuel or gasification projects, evidence of carbon capture readiness.⁹

Filing and Portal

The Department of Revenue runs the Kentucky Taxpayer Portal at mytaxes.ky.gov for electronic filing and payment of state taxes.¹¹ Current forms are posted on the Department’s Sales and Use Tax page.⁴

1
Internal Revenue Service. Residential Clean Energy Credit
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Kentucky Energy Rebates Program. Kentucky Energy Rebates Program
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Kentucky Energy Rebates Program. FAQs
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Kentucky Department of Revenue. Sales and Use Tax
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Kentucky Legislative Research Commission. Kentucky Code 139.480 – Property Exempt
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Kentucky Department of Revenue. Kentucky Technical Advice Memorandum KY-TAM-21-01
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Kentucky Legislative Research Commission. Kentucky Code 154.27-010 – Definitions for Subchapter
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Kentucky Legislative Research Commission. Kentucky Code 154.27-020 – Short Title, Legislative Findings, Purpose of Subchapter
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Kentucky Legislative Research Commission. Kentucky Code 154.27-040 – Tax Incentive Agreement, Required Provisions
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Kentucky Department of Revenue. Certificate of Exemption Machinery for New and Expanded Industry
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Kentucky Department of Revenue. Kentucky Taxpayer Portal