‘A sledgehammer disguised as a scalpel’: Republicans’ tax bill takes aim at clean energy incentives and ‘foreign technologies’

The Ways and Means draft proposes an early sunset of the clean energy tax credits and related mechanisms brought in by the previous Biden administration’s Inflation Reduction Act (IRA).

In summary the Ways and Means draft proposes earlier phase-outs and eliminations of tax credits, namely:

• Investment tax credit (48 ITC) reduced to 6% by 2030, eliminated by 2032
• Production Tax Credit (45, 45Y PTC) phased out entirely after 2031
• Advanced Manufacturing tax credit (45X) and Clean Hydrogen (45V) also ending early
• Residential (25D) and Homebuilder (45L) credits end after 2025 (as reported by our colleages at PV Tech)
• Transferability would be eliminated for most tax credits after 2027
• Direct Pay, a mechanism to extend the tax credit benefits to non-tax-paying entities, severely restricted

On the face of it, some of these are relatively minor changes of only one or a few years. However, the draft also changes the qualification requirement for the ITC to when a project is placed in commercial operation, not when it enters construction, as is currently the case.

That effectively accelerates the phase-out by one to three years for a typical utility-scale solar or storage project, i.e. how long it would typically take to get built. So instead of needing to start construction before 2032 to qualify for the last ITCs, you’d need to have your project in full commercial operation.

Peter DeFazio, managing partner at investor and tax equity provider Greenprint Capital, called the draft a “clear shot at the Inflation Reduction Act’s clean energy framework”.

But perhaps more significantly, House Ways and Means has proposed blocking access to incentives for clean energy projects that use components, technology, material assistance, licensing or royalties from ‘prohibited foreign entities’.

It’s not clear if the foreign entity would be a company or a country. The world’s largest lithium-ion manufacturer CATL was recently blacklisted by the US military for its own energy projects for alleged links to the Chinese government, with its installed tech having been disconnected at projects over the past few years.

Additionally, the Committee on Energy and Commerce, in its own draft proposal, has effectively suggested repealing and rescinding all unobligated funds from the Inflation Reduction Act, said Jesse Jenkins, a Princeton professor and advisory board member at numerous clean energy technology firms.

Posting on LinkedIn, Jenkins said: “The House Republican’s budget bill is starting to drop. It extends trillions in tax cuts for the wealthy while effectively crippling US manufacturing & energy industries and raising energy costs. It’s effectively full repeal of the IRA.”

Advisory Clean Energy Associates’ senior policy analyst Christian Roselund, discussing the foreign entity restrictions specifically, replied: “It’s an anti-China poison pill, and I personally find the “material assistance” portion to be the most problematic. Whether industry can navigate it is beside the point. It’s sabotage, introduces needless bureaucratic hurdles and should be resisted.”

Roselund had initially been more sanguine on the proposals, saying they could have been worse and that they were unlikely to deter the large majority of utility-scale solar projects from coming online from 2025-2028.

Energy-Storage.news first reported on the budget reconciliation process taking aim at the Inflation Reduction Act and its clean energy tax credits earlier this year, in discussion with Roselund.

Also focusing on the sourcing restrictions, Rachel McClean, former senior advisor to the US Treasury, said:

“The opening offer from House Ways and Means Republicans is a sledgehammer disguised as a scalpel.”

“While initial reporting has focused on how quickly federal clean energy tax credits could end, the real issue lies in the sourcing restrictions imposed on many of these technologies. They are entirely unworkable.

“Plans for new and existing battery manufacturing facilities and utility-scale solar projects will move overseas just as demand for affordable, reliable domestic energy solutions is surging. Simply put, energy security is national security, and this can’t be achieved by killing the future of American manufacturing and the technologies that come with it.”

Trade body American Clean Power Association (ACPA) said: “The legislation advanced today out of House Ways and Means does not deliver an orderly phase-down of clean energy tax credits. It imposes a sudden policy shift that would raise energy costs, take paychecks away from tens of thousands of American workers, and harm the economies of small towns across the nation.”

The Clean Energy Buyers Association (CEBA) also commented: “The bill proposed today takes critical tax credits off the table that support American energy independence, economic development, and jobs. These credits do not pick winners or losers. Preserving the tax credits will put downward pressure on electricity price inflation, keeping electric bills 8% lower on average for American households and businesses.”

Read the Ways and Means proposals in full here and the Energy and Commerce proposals here.