This blogpost flags changes in the consolidated Senate OBBBA text—as of Saturday June 28, unamended—that we judge are critical to project developers, investors, and state policymakers. Our commentary focuses on the significance of these changes, how they interact, and their likely effects on energy investment. We will update this post as the bill changes and as we learn more about its impacts. (See our previous post, now out of date, here.)

Long story short: It’s not just about cost—the bill text imposes new and perhaps insurmountable uncertainties on project developers and investors, rendering the remaining provisions of the Inflation Reduction Act unusable and creating untenable pressures for clean energy deployment.

This post will cover the changes to / the additions of the following:

• the investment and production tax credits,
• elective pay,
• foreign entity of concern (FEOC) provisions,
• the excise tax,
• changes to the LPO, and
• depreciation.

These changes are all being proposed in an environment of (1) tariff uncertainty, (2) cuts to federal staffing, particularly in the Department of Energy, and (3) a harsh interest rate environment that raises the cost of financing for all projects. As do many peer organizations, we conclude that this bill presents a serious threat not just to clean energy investment, but to grid stability itself.

Investment and production tax credits get worse again

First, the bill text reinstates a “placed-in-service” cutoff for solar and wind energy projects. Any solar and wind projects not placed in service—generating electricity and selling onto the grid—by the end of 2027 are made ineligible for the tax credits, full stop. This cutoff mirrors the original House draft of the bill, except with one year fewer of eligibility (the House draft set the cutoff at the end of 2028).

The bill text detailing the production tax credit adds a new bonus credit option for an “advanced nuclear community.” It also eliminates the strange carveout for a gigawatt-sized solar or wind project.

The bill text detailing the investment tax credit remains similar to the Senate Finance committee’s previous draft, including in its carveout for energy storage. It eliminates credit eligibility for any technology that is not listed in the original investment tax credit language (not the updated tech-neutral language) as written in Internal Revenue Code Section 48. It also eliminates the requirement that fuel cells have to be zero-emissions—potentially qualifying methane-based fuel cell technologies, such as solid oxide fuel cells, for the investment tax credit. 

The reinstatement of the placed-in-service requirement is the most destructive change. It is punitive—developers often have limited control over when their projects are completed and can begin operation, and to arbitrarily impose a total credit phaseout at the end of 2027 without even including phaseout percentages makes this text worse than the House version and the previous Senate version. Only a fraction of solar and wind projects currently under construction would be able to begin operations on time to meet this requirement to access credits—and new projects might stop happening entirely, too. Investors may stop lending against credits that are not guaranteed to be paid out by the IRS contingent on a project’s completion date. And the rollback of the requirement that fuel cells use zero-emissions technology seems like a back-end way to support fossil fuel-based technologies.

(Additionally, transmission assets’ bankability to investors depends on a sustained increase in solar and storage development. If investment in energy projects fall, fewer transmission lines will be profitable, to say nothing of new merchant line development. Investors will be more reluctant to contribute debt or equity financing to transmission projects in an environment where demand for those transmission lines’ capacity is severely constrained by inadequate project development—and the DOE will not be able to co-finance lines that aren’t being built, especially seeing as the Senate text also rescinds funding for the Transmission Facility Financing progra. The supplementary benefits of those lines, such as the easing of local and regional grid congestion, will fail to materialize without a more coherent, holistic policy environment. The kneecapping of clean energy generation assets will have knock-on effects across the energy sector.)

Elective pay safe harbor reinstated

The previous Senate draft text eliminated what’s known as the domestic content safe harbor provision that elective pay-eligible entities can use. The current draft reinstates it.

The Inflation Reduction Act imposed domestic content requirements on public and nonprofit entities as a condition for receiving the direct pay / elective pay equivalents to tax credits; these requirements were more stringent for these public and nonprofit project developers than for their private counterparts, but they came with a carveout allowing these entities to secure a domestic content exemption if the cost of following domestic content rules would substantially raise the cost of the total project. Even with this safe harbor, however, elective pay remained subject to considerable uncertainty—these safe harbors were never institutionalized, leaving developers unsure if they could or should scale up their supply chains. Failing to secure an exception is costly for developers, and proves deadly to elective pay-eligible project developers, which could lose their tax credit entirely depending on when their project is placed in service.

Removing the safe harbor would have made it all but impossible for elective pay-eligible entities to make use of the tax credits. While the current draft reinstates this safe harbor—a welcome development—elective pay itself remains vulnerable to all the new challenges of securing tax credits in the first place, such as the FEOC requirements and excise tax, described below in more detail.

FEOC rules force punitive levels of uncertainty

Where project development is concerned, the foreign entity of concern (FEOC) provisions of the draft text are the most high-stakes aspect of the bill. The NYU Tax Law Center has the best analysis of the FEOC provisions and, building off of their work, the implications are extremely worrying: The bill text confers a new vector of uncertainty upon project developers and potentially kills projects in their cradle—even for energy resources favored by the current administration such as nuclear, geothermal, hydro, and batteries.

The U.S. Treasury has incredible discretion over defining FEOC rules: Not only can it change how developers and investors calculate “material assistance” amounts by targeting inputs and components not previously used in existing FEOC calculations, but it has the ability to target developers’ attempts to circumvent these rules (through, say, stockpiling inputs this year) by changing when a project is determined to have begun construction—also changing its potential credit eligibility.

The vast majority of energy project developers have significant supply chain linkages to Chinese firms due to China’s dominance in the production of clean energy equipment. Many firms also lack granular data on their respective supply chains. The risk of these FEOC provisions is therefore twofold: first, that projects cannot remain qualified for credits given escalating annual FEOC thresholds and, second, that a project which seemingly is qualified for credits under FEOC is suddenly rendered ineligible for those credits due to arbitrary political discretion. The former is already a race against time; the latter represents the loss in millions of dollars in sunk costs, higher capital costs, and serious litigation risks—and likely incentivizes developers to avoid proposing many new projects entirely.

The domestic supply chains for nuclear, geothermal, hydro, and battery technologies are nascent or underdeveloped; developers in all four rely significantly on Chinese-made inputs. While it is possible, if still difficult, for developers to gather data on the origins of their inputs when those inputs are produced and available at scale, this task becomes more challenging when the parts needed for these capital-intensive projects are one-off and not standardized—where a Chinese supplier might be the only one capable of producing them at reasonable cost. Large-scale fixed-capital projects such as geothermal and nuclear power stations are extremely sensitive to even small changes in input prices, material availability, delivery times, and delays of any kind. Indeed, their developers have extremely limited scope to cultivate a domestic supply chain without assistance because they are the only customer base that is building the projects that would use those inputs into existence. If these projects do not materialize due to unfriendly tax credit regulations, the domestic supply chain never materializes.

In such a setting, with such complex and uncertain rules, it would not be surprising if developers chose to forego tax credits altogether, judging that the juice just isn’t worth the squeeze. The generosity of credits may not compensate; stringent requirements are barriers in and of themselves. (This is a potential reason why elective pay currently has limited uptake.) With guidance likely to take at least a year and with every developer rethinking their project pipeline—to say nothing of the credits’ earlier sunset by 2028, for solar and wind projects—uncertainty will overshadow project development at scale.

It’s worth noting that the current draft as well as the Senate Finance committee’s draft both force FEOC rules onto inverters, specifically. Between 2026 and 2029, inverters must become 70 percent domestically produced in order to avoid violating FEOC rules. Targeting inverters specifically is not just an attack against solar energy—it is a threat to the stability of the entire grid: an inverter shortage throttles the deployment of clean energy, prevents two-way electricity flow over transmission lines, and shrugs off the fact that this technology supports key voltage and frequency balancing tasks. In other words, attacking inverters will break the grid for all developers and for the grid itself. So much for reliable energy supply.

The big risk from FEOC is, as before, that the tax credits become a dead letter, both unusable and undesirable. Enacting FEOC means effectively repealing the credits.

The excise tax adds injury to insult

Unexpectedly, the consolidated Senate draft imposes an excise tax on solar and wind energy in line with any project’s noncompliance with the draft’s FEOC provisions. The tax formula is as follows: the capital costs of the project multiplied by the percentage value by which the project’s total material cost from targeted foreign- and foreign-influenced entities exceeds its allowed material cost from those entities, then multiplied by 30 percent for solar or 50 percent for wind. Jesse Jenkins provided rough estimates of this tax as a percentage of a project’s capital expenditure.

This excise tax creates yet another set of FEOC-related uncertainties for firms and developers: Should they even bother trying to limit their tax incidence? Because FEOC rules can be altered at any time against any developer, the excise tax itself might fall unexpectedly onto that developer—raising costs sharply and leading to the needless wastage of pre-development capital. The tax eats into the competitiveness of wind and solar projects and therefore cuts into their customer base. Importantly, this tax applies whether or not a project secures an investment/production tax credit or not. The excise tax may balance out a credit for now but, once those credits expire at the end of 2027, this tax effectively raises the cost of solar and wind energy by 40 percent.

This excise tax also applies to facilities eligible for the 45X advanced manufacturing production credit, designed to spur the creation of a domestic supply chain for inputs into clean energy products. The same critiques apply. There will be no domestic supply chain for these inputs without developers who will buy them; and there will be no developers without policy certainty and a framework like the Inflation Reduction Act.

This environment is not conducive to project development whatsoever. The combination of early tax credit phaseout, tariffs, the FEOC rules, and the excise tax all work to stymie the development of a domestic renewable energy industry. Indeed, they prevent most solar and wind projects from being bankable perhaps at all.

LPO rewrite is clearer but still worrying

The Senate Energy and Natural Resources Committee’s first draft of the reconciliation bill made major changes to the Loan Programs Office, stripping it of all its existing funding and setting up a new “Energy Dominance Financing” program in the breach. We previously wrote about those changes, judging them to be a needless and ineffectual “forced restart” of the LPO. The consolidated Senate draft rewrites this provision to comply with the Byrd Rule—rather than repeal the existing Section 1706 “Energy Infrastructure Reinvestment” authority, the draft only edits its authority and provides it with a new credit subsidy—but our judgment does not substantially change.

The rewritten Section 1706, perhaps predictably, gets rid of community engagement requirements and the requirement that products reduce or sequester greenhouse gas emissions. It also shifts the office’s emphasis toward increasing capacity on and uprating existing brownfield energy project sites—“enable operating energy infrastructure to increase capacity or output”—with greater firm and dispatchable energy resources, particularly through language calling on the LPO to “support or enable the provision of known or forecastable electric supply” to “maintain grid reliability.” This focus on “known or forecastable” energy may be a back-end way to exclude renewable energy projects from LPO financing. It is an open question whether this provision, as written, allows the Loan Programs Office to pursue greenfield project development under this authority; we are pessimistic but will investigate this further. (Section 1703, on the other hand, focuses on greenfield project development—but the Senate proposal would see its authority effectively zeroed out.)

It is possible that this rewrite would preserve the Section 1706 office at the Loan Programs Office. But the bill’s recissions of most of the LPO’s existing appropriations would still severely throttle the office’s capacity for business development and for building a large project pipeline. To be sure, the Senate’s proposal provides $1 billion in credit subsidy to the Loan Programs Office. And there are many smart ways for the LPO to deploy this credit subsidy without actually spending it, such as for the restart of various nuclear plants. But the conservative use of a credit subsidy defeats the point of a credit subsidy in the first place: Section 1706 originally had $250 billion in loan authority and $25 billion in credit subsidy for a reason. Using RMI’s modeling from our previous post, a portfolio of Ba-rated loans supported by $1 billion in credit subsidy could only be as large as about $10 billion. Relative to the country’s energy transition needs, this is nothing.

Depreciation rules look worse

The draft prevents most clean energy projects (as defined by Section 48) from claiming 5-year accelerated depreciation. The previous Senate Finance draft had left some ambiguity about what projects could claim accelerated depreciation and what projects couldn’t—but, here, the text strips eligibility entirely. We wrote about the impacts previously and our judgment remains mostly the same; the text below adapts off what we wrote in our previous post.

Access to this five-year depreciation timeline allowed developers to write off their capital expenditures faster, reducing their tax liabilities at a faster rate and supporting higher rates of return on project development. A faster depreciation schedule also represents more value for developers: more money received upfront is considerably more bankable to investors since it faces a lower discount rate (due to the so-called “time value of money” principle). 

To be sure, most clean energy developers do not have enough tax liability to monetize a tax credit or the amount of capital expenditure they could write off via accelerated depreciation. This is why developers sign tax equity partnerships with banks: They trade their tax credit and depreciation allowances to banks that can immediately monetize those benefits in return for upfront capital for project development. (Because transferability markets cannot monetize depreciation, many developers use both tax equity partnerships and transferability to get the most out of their credits.) 

Removing developers’ access to five-year accelerated depreciation will make tax equity partnerships less valuable to developers and project investors. This will hurt not just renewable energy projects, but clean firm technologies, too, which are incredibly expensive and do not have a tax equity or transferability market for their tax credits. Clean firm project developers would benefit significantly from being able to claim depreciation on those costs on a five-year timeline rather than a ten- or twenty-year timeline. Now they get less upfront tax relief.

We are still studying how the end of five-year MACRS accelerated depreciation schedules for clean energy projects intersects with the return of full expensing / bonus depreciation provisions, discussed above. It is possible that the new full expensing / bonus depreciation provisions might offset the loss of 5-year accelerated depreciation, but the FEOC provisions throw uncertainty into the whole tax equity process. If credits are arbitrarily awarded rather than treated as a statutory entitlement, investors will not treat them as bankable.

Conclusion: This bill decimates the grid

The American grid relies on investment. When loads grow, new resources of various types are required to supply them. Of all energy resources, solar in particular has been a remarkable growth story in the last five years. Solar energy offers all kinds of benefits to the grid. It reduces net load requirements during the day, and provides both a source of capacity to the grid as a whole and for charging storage—the results of which we can now see on the California and Texas grids. (We recommend reading Brian Potter at Construction Physics, here and here). While we deal with long interconnection lead times and costly development on a host of other infrastructure and generation projects (transmission, offshore wind, nuclear, etc.), solar is coming online and supporting our grid in crucial ways. 

Threatening this investment with massive tax increases is a direct threat to grid reliability. We don’t have resource needs just because of the data center boom—we have it from electrification, increased heating and cooling needs, pressures on alternative resources such as gas, and the rising cost of electricity for consumers. 

Creating incentives for underinvestment means the grid, as a technical system, will be less able to respond flexibility and appropriately to new needs. It will be more difficult to incentivize the development of new and necessary energy resources with sufficient lead time. Without a policy ecosystem conducive to project development, the American grid is in danger of load shedding, brownouts and blackouts, and grid failure. Load shedding will increase as a possibility, and with it will come the increased likelihood of blackouts and grid failure. Projects that promise communities growth, jobs, and tax revenue will become a lot more expensive and harder to maintain. And energy costs—the driving force behind clean energy investment in this country for two decades—won’t just grow; they will escape our control entirely. The Senate bill deprives the country of the chance to rapidly reshape the American grid around cheap and plentiful clean energy—an economic, environmental, and health opportunity of epic proportions that policymakers threaten to whiff on, to the whole country’s detriment.

Any mistakes made in this article are our own. Please contact us with omissions or corrections.

CORRECTIONS: A previous version of this post stated that the Senate’s draft text had restored financing to the Transmission Facility Financing program that the ENR Committee had proposed to rescind. This is not true, and we have struck the transmission section of our piece.

Other resources

• Summary on changes to tax credits, FEOC, and the new excise tax from NRDC and the NYU Tax Law Center in the most recent Senate bill [HERE]
• Detail from the Tax Law Center on FEOC (precedes the recent Senate bill) [HERE]
• More from Tax Law Center on the previous Senate draft [HERE]
• Summary of the recent Senate bill from Evergreen [HERE]