The Not So Beautiful Big Bill

The draft swiftly phases out EV, hydrogen, and home energy tax incentives. However, on its face, it makes only modest near-term changes to the core business tax credits (ITC, PTC, 45X). These would sunset earlier than under the IRA but would still run through 2031. However, the  proposed legislation has a potentially significant effect on tax credit transfer markets and clean energy development. 

Here are four major areas we’re tracking from the proposed legislation: 

1. Impact to foreign supply chain and Chinese owned domestic manufacturing: The draft’s treatment of Foreign Entities of Concern (FEOCs) will also need clarification—it is potentially very consequential to the majority of projects seeking tax credit qualification. While the intent to shield U.S. tax benefits from certain geopolitical risks is clear, the operational details remain murky. Without thoughtful implementation, these provisions introduce new uncertainty, and have the potential to raise electricity prices.

2. Changes to project planning and investment certainty: The proposed bill switches a project’s credit rate qualification during the phase out of ITCs and PTCs from start of construction to placed-in-service date for each year. Projects no longer can secure their credit rate from when they begin construction, but instead will be rushing to commence operations by a specific calendar year end. This change accelerates the tax credits phase-outs and could have a chilling effect on large, long-cycle projects, and puts at risk many “safe harbor” investments already made to date.

3. A proposed end to transferability: The proposed legislation ends the transferability of credits for projects that start construction more than two years after the legislation is passed (meaning some time in late 2027). This creates a drastic impact to longer term project investments, but still allows a runway for corporations to continue buying transferable tax credits in the near to medium term. The two-year phaseout of transferability signals that this powerful tool—one that significantly expands access to clean energy tax credits—still requires defense.

4. Important for transactions occurring today: There’s no retroactive change to the law. The House Republicans’ proposal accelerates the sunset of the credits but doesn’t affect any already-issued or near-term credits. That means credits from 2025, 2026, and 2027 can still be transacted with confidence.

In many respects, the proposed credit phase-outs echo a familiar set of circumstances: the ITC and PTC have been extended 5 and 12 times since their inception in 2005 and 1992 respectively. Despite recurring policy limbo—and the accompanying stress, lost sleep, and grey hairs—PTC and ITC phaseouts have historically failed to stick, often-times being expanded after their two year lifespans. These credits persist because they work, and because they enjoy bipartisan support. That’s clearer than ever: 38 House Republicans and four Senate Republicans have already gone on record defending the IRA’s clean energy tax credits. 

A key benefit of the IRA is that it has provided significant investment certainty for clean energy developers, manufacturers and investors. It has also brought in many new corporate participants to play a role in building US energy infrastructure. 

The energy industry must act quickly to uphold the incentives and features of the IRA and continue making the case that it enables a broader range of developers to deliver clean, domestic, and cost-effective energy to more Americans. Preserving these features is essential to a secure energy future and competitive American industry.

We hope that in the coming weeks and months legislators push back on this initial stance, and will be working hard to lobby for an improved credit time horizon and credit environment.

Summary of Ways & Means Draft Legislation