Sweeping Changes in Renewable Energy Landscape

In a sweeping conclusion to the saga of legislative proposals circling through Washington over the last several weeks, the budget reconciliation legislation known commonly as the “One Big Beautiful Bill Act” (the “Act” or “New Law”) was signed into law on July 4. There is no denying that the Act changes the renewables landscape considerably and has the effect of rolling back and ultimately eliminating incentives relied upon by many in the renewables industry. While it is impossible to predict all of the ripple effects that will come from the Act, proponents of renewable energy are at least comforted by the fact that not only is the final Act less drastic than some of its “harsher” predecessor proposals in its approach to trim back the IRA, but also offers some much-desired certainty regarding what the new energy landscape will look like.

Notwithstanding this, in terms of certainty for wind and solar projects, it may be one step forward and two steps back, as an executive order released on July 7 announced a mandate to the Treasury Department to issue new regulations that would purport to make significant changes to the “beginning of construction” standard. With wind and solar incentives now set to (effectively) sunset for projects that do not begin construction within a year of the Act’s promulgation, developers, lenders, and investors in the renewables space will be anxiously awaiting to see how much further along projects may have to be in order to inspire confidence that ITCs and PTCs will be available.

At a high level, some of the main takeaways from the Act are as follows: 

PTC and ITC under Sections 45Y and 48E

To the extent the credits apply to wind and solar facilities, the Act provides a quick sunset for the technology-neutral ITC and PTC. Specifically, no credits will apply to wind and solar facilities that begin construction more than 12 months after enactment of the Act and which are placed in service after December 31, 2027.

In the case of technologies other than wind and solar, the credits remain and will begin phasing out where construction begins after December 31, 2033. A special rule also revives the PTC and ITC for fuel cell projects in the case of property that begins construction after December 31, 2025. Such projects would enjoy a fixed 30% rate irrespective of greenhouse gas emissions.

As indicated in the chart below, new “foreign entity of concern” (FEOC) requirements generally begin to phase in for projects beginning construction in 2026 or later. 

Advanced Manufacturing Credit under Section 45X

In the case of the advanced manufacturing credit, the Act provides some notable changes for wind energy components and critical minerals. As to wind components, the credits will terminate for components produced and sold after December 31, 2027. For critical minerals, the phase-out of the credits will begin in 2031, with a complete phase-out by 2034. 

New FEOC requirements also apply immediately, becoming more stringent over time, as shown in the chart below. 

Clean Hydrogen Credit under Section 45V

The Act terminates the clean hydrogen PTC under Section 45V for facilities that begin construction after December 31, 2027. 

Foreign Entity of Concern Rules

FEOC rules generally apply across the board to all renewable energy incentives, with various phase-in dates depending on the incentive and technology involved, further outlined in the chart below. 

Transferability Provisions

While previous legislative proposals would have significantly limited the transferability of renewable energy tax credits under Section 6418 of the Code, such limitations were not ultimately adopted, save for a general prohibition on transfers of credits to specified foreign entities (defined below). 

Major Provisions – Comparison Table of New Law versus IRA (Old Law)

Foreign Entity of Concern Definitions

The FEOC Definitions introduce a complex new framework that taxpayers hoping to qualify for renewable energy credits will need to contend with. A summary of some of the highlights is below. These rules do not all apply at once. Depending on the credit and technology involved, the various requirements phase in over time (see chart below), often depending on when the applicable project began construction for tax purposes. Importantly, the Act clarifies that the traditional beginning of construction standard applies for purposes of the FEOC rules. 

• A “prohibited foreign entity” is either (i) a specified foreign entity or (ii) a foreign-influenced entity.
• “Specified foreign entities” include:
  • entities designated as a foreign terrorist organization by the Secretary of State;
  • entities included on the specially designated nationals and blocked persons list maintained by the Treasury Department’s Office of Foreign Assets Control;
  • entities alleged by the Attorney General to have engaged in conduct for which a conviction was obtained under certain laws;
  • entities determined by the Secretary of Commerce, in consultation with the Secretary of Defense and the Director of National Intelligence, to be engaged in unauthorized conduct that is detrimental to U.S national security or foreign policy;
  • Chinese military companies operating in the United States;
  • entities listed under the Uyghur Forced Labor Prevention Act;
  • an entity specified under section 154(b) of the National Defense Authorization Act for Fiscal Year 2024 (Public Law 118–31; 10 U.S.C. note prec. 4651); or
  • certain “foreign controlled entities.”
• For these purposes, “foreign controlled entities” include (i) the government of a covered nation (e.g., China, Russia, Iran, or North Korea), (ii) a citizen or resident of a covered nation without U.S. status as a lawful permanent resident, (iii) an entity incorporated in or organized under the laws of, or having its principal place of business in, a covered nation, or (iv) an entity controlled by any of the above, including subsidiaries, measured by more than 50% ownership of stock in a corporation, profits interests or capital interests in a partnership, or other beneficial interest in the entity.
  • There would be a special exception to the above in the case of publicly traded entities, with two exceptions:
    • Cases where the applicable exchange or market is organized under the laws of a covered nation or the entity has its principal place of business in a covered nation.
    • Cases where one or more specified foreign entities or foreign-controlled entities controls more than 50% of the applicable foreign entity.
• An entity is a “foreign-influenced entity” if:
  • (i) During the taxable year:
    • a specified foreign entity has direct or indirect authority to appoint a board member, executive officer, or similar individual;
    • a single specified foreign entity owns at least 25% of the entity;
    • one or more specified foreign entities own(s) in the aggregate at least 40% of the entity;
    • at least 15% of the entity’s debt is held in the aggregate by one or more specified foreign entities; or
  • (ii) During the prior taxable year, it made a payment to an SFE in order to exercise effective control over:
    • any qualified facility or energy storage technology of the taxpayer; or
    • with respect to any eligible component produced by the TP or related party:
      • the extraction, processing or recycling of any applicable critical mineral; or
      • the production of an eligible component which is not an applicable critical mineral;
  • Note that Section 318 attribution applies for these purposes.
• “Effective control” generally would mean one or more agreements or arrangements which provide one or more contractual counterparties (or related person) of a taxpayer with specific authority over key aspects of the production of eligible components, energy generation, or energy storage which are not included in the measures of control through authority, ownership, or debt held.
• Until FEOC guidance is issued, “effective control” would mean the unrestricted contractual right of a contractual counterparty to make certain major decisions for the taxpayer (including any related party to the taxpayer), such as (i) determine the quantity or timing of production of an eligible component, (ii) determine the amount or timing of activities related to the production of electricity or the storage of electrical energy, (iii) determine which entity may purchase or use the output of a production unit, (iv) determine which entity may purchase or use the output of a qualified facility, (v) restrict access to data critical to production or storage of energy, or to the site of production or any part of a qualified facility or energy storage technology of the taxpayer, to the personnel or agents of such contractual counterparty, or (vi) on an exclusive basis, maintain, repair, or operate any plant or equipment which is necessary to the production of eligible components or electricity.
• There would be an exception for publicly traded entities, except such an entity shall still be deemed to be a foreign-influenced entity if (i) a specified foreign entity has the authority to appoint a covered officer, (ii) a single specified foreign entity owns not less than 25% of the publicly traded entity, (iii) one or more specified foreign entities own in the aggregate not less than 40% of the publicly traded entity, or (iv) debt in excess of 15% of the publicly traded debt of the publicly traded entity has been issued to one or more specified foreign entities.
  • Material Assistance from a Prohibited Foreign Entity looks to a specific material assistance cost ratio (MACR), which, depending on the type of technology, will increase over time until ultimately settling on a fixed percentage. The ratio is generally equal to the quotient of the fraction where the numerator is the total costs attributable to all the manufactured products which are incorporated into the qualified facility minus the total costs attributable to all the manufactured products incorporated that are mined, produced or manufactured by a prohibited foreign entity, and the denominator is total costs.
  • An example of how this works in the context of solar energy components, battery components, and applicable critical minerals is as follows:
    • For solar energy components, a MACR is required that is less than 50% for components sold in 2026, 60% in 2027, 70% in 2028, 80% in 2029 and 85% thereafter.
    • For battery components, a less than 60% MACR is required for components sold in 2026, 65% in 2027, 70% in 2028, 80% in 2029 and 85% thereafter.
    • For applicable critical minerals, a less than 25% MACR is required for components sold in 2030, 30% in 2031, 40% in 2032, and 50% thereafter.

Other notable changes under the Act include:

• Section 48C - upon enactment, allocations revoked for failure to place the project in service within two years from the date of certification would not be restored to the total amount of allocations under the program.
• Section 25E, 30D, 45W electric vehicle credits expire as to vehicles acquired after September 30, 2025.
• EV Credits under Section 30C expire with respect to vehicles placed in service after June 30, 2026.
• Residential credits under Section 25C expire with respect to property placed in service after December 31, 2025.
• Residential credits under Section 25D expire with respect to expenditures made after December 31, 2025.
• Residential credits under 45L expire to homes acquired after June 30, 2026.
• Income from hydrogen storage, carbon capture, advanced nuclear, hydropower, and geothermal energy added to qualifying income of certain publicly traded partnerships.
• New penalty provisions in the case of a substantial understatement of income tax due to claimed energy credits, which would potentially allow a 1% misstatement of the tax liability to trigger a 10% penalty.

New Executive Order Governing Beginning of Construction

On July 7, a new executive order (the “EO”) was issued by the White House providing that “(w)ithin 45 days following enactment of the One Big Beautiful Bill Act, the Secretary of the Treasury shall take all action as the Secretary of the Treasury deems necessary and appropriate to strictly enforce the termination of the clean electricity production and investment tax credits under Sections 45Y and 48E of the Internal Revenue Code for wind and solar facilities. This includes issuing new and revised guidance as the Secretary of the Treasury deems appropriate and consistent with applicable law to ensure that policies concerning the ‘beginning of construction’ are not circumvented, including by preventing the artificial acceleration or manipulation of eligibility and by restricting the use of broad safe harbors unless a substantial portion of a subject facility has been built.”

Comment: The EO specifically targets wind and solar projects utilizing the PTC and ITC under Sections 45Y and 48E of the Code. While the EO does not itself unilaterally change any aspect of existing law, it does suggest that the Treasury Department may be issuing guidance to alter the “beginning of construction” standard. Such changes would presumably make it more difficult for taxpayers to grandfather new or existing projects and could include getting rid of established safe harbors (e.g., the 5% safe harbor or continuity safe harbor) or making changes to the physical work test, in favor of a more stringent standard. 

The change comes as a particular surprise given new Section 7701(a)(51) of the Code, added by the Act, which codifies the traditional industry standard by specifically providing that “beginning of construction” for tax purposes is determined pursuant to rules under IRS Notices 2013-29 and 2018-59 (as well as any subsequently issued guidance clarifying, modifying, or updating either Notice), as in effect on January 1, 2025. While this language technically applies only to the FEOC requirements, a standard that varies depending on the type of project could lead to significant confusion for taxpayers trying to answer questions that don’t fit neatly into existing guidance. Ultimately, it seems that projects, particularly utility scale wind and solar, may be in a rush to advance as much as possible in the next several months.