Enacted in August 2022, the Inflation Reduction Act (the “IRA”) expanded energy tax credits by increasing credit amounts, broadening eligibility beyond wind and solar, and allowing credits to be developed and sold, as outlined here.
Three years later, the One Big Beautiful Bill Act (the “OBBBA”) has reined in that momentum. While most credits can still be sold, it will become much harder for projects to generate them—especially with the introduction of onerous “foreign entity of concern” (“FEOC”) limitations that now attach to most credit-eligible projects.
In our last update, available here, we covered Trump’s executive order directing Treasury to issue guidance on the FEOC rules and what it means to “begin construction” for purposes of the 12-month safe harbor for wind and solar. This guidance is critical because the OBBBA otherwise terminates the tech-neutral investment tax credit (“ITC”) and production tax credit (“PTC”) for projects that are not placed in service before 2028.
On August 15, Treasury released the much anticipated guidance that tightens the rules on what it means to “begin construction” for this purpose. Developers must show actual physical work of a significant nature, either performed on-site (e.g., foundation excavation, pouring concrete, installing structures) or off-site under a binding written contract (e.g., custom manufacturing of components). Planning and designing, securing financing or ordering equipment do not count as physical work. The work must be continuous, although certain disruptions, such as delays in obtaining permits or natural disasters, are excusable and do not break continuity. Importantly, Treasury clarified that the 5% safe harbor (based on paying at least 5% of total project costs) is eliminated for all wind and most solar projects, meaning most projects must now rely solely on the physical work test.
Although these changes significantly narrow the path forward for wind and solar developers, not all is lost for other renewable energy sources. The ITC and PTC remain available for certain technologies, including combustion and gasification, and the ITC can still be claimed for energy storage (though there is no PTC for energy storage). The advanced manufacturing credit for wind components is available until 2028, which offers some relief to the wind industry.
Other PTC-based credits remain largely unchanged, including credits for carbon sequestration and nuclear power, with the OBBBA adding a new 10% bonus for nuclear facilities in designated areas. The clean fuel production credit was extended from 2027 to 2029, although the OBBBA now requires feedstocks to be produced in the U.S., Mexico or Canada. As always, bonus credits can significantly increase credit amounts. As the market has developed, PTC prices have remained strong because the credits are not subject to recapture, and purchasing streams of PTCs will likely remain appealing to buyers with tax appetites.
And so, there is some good news if developers can navigate the FEOC rules. With guidance expected imminently, the market may grow more comfortable with these limitations.
We will continue to monitor developments and provide updates in Brass Tax as the landscape continues to evolve.
