Decarbonization Whiplash Prompts a Power Sector Recalibration

What happens when a political U-turn suddenly upends years of decarbonization strategy? As the U.S. House of Representatives moves to dismantle key clean energy tax credits, POWER examines how utilities and developers are rethinking timelines, technologies, and financing, while racing to keep the energy transition on track.

On May 22, 2025, the U.S. House of Representatives narrowly—by a 215–214 vote—passed the “One Big Beautiful Bill Act.” While the U.S. Senate is expected to take up the bill in early June—and Republicans aim to have it passed in both chambers by July 4—the bill’s rapid (even if contentious) passage in the House has effectively driven a jolt through the power sector, adding a new element of uncertainty that threatens to upend strategic planning and investment, which has for years been tightly honed on decarbonization.

The bill’s fate in the Senate is highly uncertain, owing to a slim majority and vocal opposition from some Republicans, which suggests a likelihood of significant amendments, especially to its most consequential energy tax credit provisions. Provisions of deep concern in the House bill include the following.

Accelerated Phase-Out of Tech-Neutral Tax Credits. The legislation begins phasing down the Section 45Y clean electricity production credit and the Section 48E investment tax credit in 2029, culminating in full elimination by the end of 2031—a year earlier than under the Inflation Reduction Act (IRA). In a major shift, projects must now be placed in service by these deadlines to qualify, replacing the former “commenced construction” standard. The change risks disqualifying projects already underway but delayed by permitting or interconnection bottlenecks.

Early Termination of the 45V Hydrogen and 45X Advanced Manufacturing Credits. The bill terminates the 45V clean hydrogen credit entirely as of Jan. 1, 2026—seven years earlier than scheduled—and shortens the 45X advanced manufacturing credit phase-out to zero by 2032, with an immediate cutoff for wind components by the end of 2027. The measure could significantly curtail investment in electrolyzers and domestic supply chains for solar and storage technologies.

Stringent Foreign Entity of Concern (FEOC) Rules. The legislation bars access to clean energy tax credits for any project that includes material assistance from, or financial ties to, designated foreign entities, particularly those based in China, Russia, North Korea, or Iran. These rules could apply retroactively in some cases and include indirect ownership, licensing agreements, and service provision thresholds.

Transferability Eliminated for Most Credits After 2027. Starting two years after enactment, developers will no longer be able to transfer tax credits for projects under Section 45Y (clean electricity production), Section 48E (clean electricity investment), Section 45Q (carbon oxide sequestration), Section 45Z (clean fuel production), and Section 45U (zero-emission nuclear power). The measure targets a key IRA reform that helped unlock tax equity for mid-market developers and public power entities, and is expected to tighten project financing and hinder smaller-scale clean energy deployment.

Nuclear Carve-Outs Preserve Eligibility and Transferability. In contrast to cuts elsewhere, the legislation preserves phased credit eligibility for existing and advanced nuclear projects under Section 45U through 2031, with reduced values beginning in 2029. However, like other clean energy credits, transferability for 45U is eliminated for projects that begin construction more than two years after enactment, potentially limiting its financing flexibility in later years.

Clean Vehicle and Energy Efficiency Credits Terminated. The bill terminates a slate of credits by the end of 2025, including the 30D clean vehicle credit, the 45W commercial electric vehicle (EV) credit, and credits supporting residential solar, heat pumps, and energy-efficient construction (25C, 25D, 45L). The changes are expected to affect consumer adoption, municipal fleet planning, and contractor hiring pipelines.

Industry Observers Respond

The immediate market reaction has been severe. “The Reconciliation Bill, as it currently stands, will have a tremendous and damaging impact on future renewable development—at a time that energy needs in the U.S. are projected to increase substantially,” attorneys from law firm Vinson Elkins said in a brief. “The Reconciliation Bill’s far-reaching consequences will affect manufacturers, developers, innovators, financiers, and customers, among many others. Potentially most damaging will be the loss of onshoring opportunities and the loss of jobs that have been created by the now substantial energy transition and renewable workforce.”

Clean energy groups and industry groups alike expressed similar consternation. “By a margin of one vote, the House voted to retreat in our competition with China for manufacturing jobs and to weaken our technology sector in the global race for digital dominance,” said Jason Grumet, CEO of the American Clean Power Association. Ray Long, president of the American Council on Renewable Energy, warned that the bill would “undermine projects that are ready to come online, meet our nation’s growing energy needs, and create jobs.” And even groups like ClearPath Action, which support advanced nuclear and carbon capture, cautioned that the bill, as written, is “insufficient to support energy producers to meet growing demand.”

A New Hurdle for Utilities

The measure throws a new wrench into the power sector, where utilities and power companies have spent the past decade advancing decarbonization strategies (Figure 1). Utility roadmaps cite a mix of drivers: regulatory compliance, financial incentives, risk mitigation, the improving economics of clean technologies, and the imperative to maintain a social license to operate. State mandates and federal policy have played a pivotal role, with public utility commissions and legislators pushing utilities to adopt carbon-reduction targets and cleaner generation portfolios.

Meanwhile, shareholder activism, and the rise of environmental, social, and governance (ESG) frameworks, have made carbon transparency and climate risk management central to utility strategy. Investors now routinely demand emissions disclosures and net-zero alignment, viewing strong ESG performance as a proxy for long-term business resilience and a prerequisite for capital access. Utilities have also responded to customer pressure for cleaner energy, noting that both residential and commercial buyers increasingly reward sustainability commitments and demand accelerated transitions. By early 2025, more than 80 U.S. utilities and their parent companies had announced long-term carbon reduction targets, ranging from achieving 100% renewable energy by 2030 to achieving net-zero greenhouse gas emissions by 2050.

Still, policy uncertainty and abrupt changes to federal incentives have become a significant obstacle for utilities seeking to implement long-term decarbonization strategies, as noted by the heads of several utilities during recent earnings calls. “We tend to look at this from the customer’s perspective,” said Duke Energy President and CEO Harry Sideris. “And really, our overarching objective is to maintain affordability for our customers. And that’s what we’ve framed our advocacy around. The savings our customers receive from these energy credits fall right in line with what the president wants to do, which is delivering on his promise to reduce power bills across the country. As you know, each one of these dollars that we earn in energy tax credits goes back to our customers. The nuclear tax credits are most important to us. Our well-run, low-cost nuclear plants earn over $500 billion of tax credits that go directly to reducing our customers’ bills.”

For now, however, company heads indicated they will push to stay the course on decarbonization. NextEra CEO John Ketchum framed the effort in terms of “energy realism” and “energy pragmatism.” He noted, “Energy realism is about embracing all forms of energy solutions and understanding the demand for electricity in the United States is here now, and it’s not slowing down. Frankly, it’s unlike anything we’ve ever seen since the end of World War II.”

While NextEra continues to push solar and battery storage as the “lowest cost form of power generation,” Ketchum emphasized that these technologies are also uniquely ready to meet near-term needs. “We can build these projects and get new electrons on the grid in 12 to 18 months,” he said, describing them as a “critical bridge” to emerging technologies. While the company sees long-term promise in natural gas and nuclear, Ketchum pointed to several constraints, including a shortage of gas turbines, construction timelines that have doubled, and rising costs due to labor shortages and tariffs. On nuclear, he cautioned, “SMR [small modular reactor] technology is still 10 years away at scale in the best of scenarios and at a much higher price point than gas-fired generation.”

Rethinking the Resource Mix

Even as policy turbulence rattles long-range plans, utilities and developers are pushing ahead with energy technologies that can be scaled rapidly and decarbonize affordably. One reason is urgency: the power sector is bracing for an extraordinary period of load growth, fueled by electrification, artificial intelligence, industrial reshoring, and the data center boom. Another is inertia: Billions in planning and investment have already been committed to clean energy buildouts, and many developers remain bullish on their long-term viability. But as federal tax support enters a phase of deep uncertainty, the spotlight has gradually shifted to which decarbonized technologies are ready (or could become ready) to shoulder the load.

Solar and Battery Storage. Solar and battery storage remain the backbone of new U.S. power sector capacity in 2025, accounting for 81% of the 63 GW of utility-scale generation additions projected by the Energy Information Administration (EIA)—a nearly 30% increase over 2024—led by Texas and California. Battery storage is set for a record 18.2 GW, up 77% from last year. Residential solar costs appear to have stabilized at $3/W, and battery storage costs have decreased to $200–$400/kWh, driven by improvements in manufacturing scale and technology.

However, interconnection queues and permitting remain critical bottlenecks. Developers are reporting average wait times of four to five years as project withdrawals are rising, given climbing grid connection costs. Meanwhile, the policy environment remains volatile. The House-passed reconciliation bill would sunset key IRA tax credits for solar and storage after 2028, and eliminate credit transferability, thereby undermining project finance and threatening projects that rely on global supply chains, especially those with Chinese content. On the flip side, corporate demand remains robust: Amazon, Microsoft, and others are driving record procurement.

Nuclear. Riding on renewed momentum, the nuclear sector is being propelled by interest in advanced reactor projects and surging demand for 24/7 clean power from data centers and industrials. As noted above, the House’s 2025 bill is set to accelerate phaseouts for 45U, 45Y, and 48E credits but generally preserves eligibility for advanced nuclear projects that begin construction before 2029. Still, project financing remains a challenge. The past year, however, has ushered in master limited partnerships for nuclear, which is effectively broadening private capital access.

Fuel supply is now the sector’s biggest constraint. While the Department of Energy (DOE) has announced the distribution of high-assay, low-enriched uranium to five advanced reactor developers, domestic enrichment is limited, and Russian supplies are set to end by 2028.

Carbon Capture, Utilization, and Storage (CCUS). CCUS had gained notable traction over the past year, particularly at natural gas plants, where developers like Calpine and ExxonMobil had advanced large-scale projects aiming to capture up to 2 million metric tons of CO_₂ annually. But on May 30, the Department of Energy abruptly canceled $3.7 billion in federal funding for 24 high-profile projects—including flagship retrofits at Calpine’s Baytown and Sutter Energy Centers (Figure 2), as well as pilot efforts in Kentucky and Wyoming. The move has upended project timelines and thrown future deployment into question, particularly for efforts that relied on federal cost-sharing to secure private investment.

Compounding the setback is the House reconciliation bill’s proposed early repeal of Section 45Q, a key tax credit underpinning carbon capture project economics. While CCUS remains a critical tool for decarbonizing thermal generation, financing structures remain complex, often dependent on a mix of tax incentives, power purchase agreements, and sequestration partnerships. Developers also continue to face delays in securing Class VI injection well permits and CO_₂ transport infrastructure, despite DOE efforts to streamline approvals.

Hydrogen. Several utilities and original equipment manufacturers of gas turbines have piloting hydrogen-to-power and co-firing projects, showcasing a pathway to 100% hydrogen-capable turbines in demonstrations. Several utilities are also testing blending hydrogen with natural gas. However, the outlook for hydrogen in the power sector remains dismal. The DOE’s regional H2Hubs, which had spurred commercial partnerships, especially with data centers and industrials seeking long-term offtake, stand to suffer if Section 45V hydrogen credit provisions are terminated early. Infrastructure also remains a crucial bottleneck: storage and transport networks are lagging, though salt cavern storage and pipeline retrofits are in early stages.

Geothermal. The geothermal sector has marked several essential advances in conventional and enhanced geothermal systems (EGS), given strong DOE support. For now, the DOE’s $4.5 billion roadmap for demonstration projects and new leadership prioritizing geothermal as a dispatchable, 24/7 clean power source remains intact.

Several projects are being spearheaded by utilities and tech companies, including Google and Meta, as well as oil and gas firms, which aim to leverage their drilling expertise. Startups like Fervo (Figure 3) and Sage Geosystems have notably raised record funding. The House bill, however, accelerates credit phase-outs, ends transferability, and introduces foreign content rules, which risk investment and slow pipelines. High upfront costs, lengthy permitting, and interconnection delays remain key hurdles for the sector.

Offshore Wind. While the global offshore wind market is projected to rise from $4.91 billion in 2024 to $6.6 billion in 2025, a federal executive order in January 2025 paused all new leasing in the U.S. and put pending projects under review, casting uncertainty over more than 60 GW of planned capacity. States are stepping up—eight coastal states have introduced more than two dozen bills to strengthen port infrastructure, supply chains, and workforce development, aiming to keep momentum despite federal headwinds.

Supply chain constraints in the sector have grown more acute over the past year. The National Renewable Energy Laboratory (NREL) estimates half of the U.S. offshore wind pipeline is at risk of delay beyond 2030, owing to limited port and vessel infrastructure. At least $22 billion will be needed for domestic manufacturing, ports, and installation capacity, it suggests. Meanwhile, domestically produced components are becoming more cost-competitive, but imports remain necessary.

Virtual Power Plants (VPPs). VPP capacity has reached 33 GW in North America, but it must increase to between 80 GW and 160 GW by 2030 to meet 10% to 20% of the peak load and offset the retirement of thermal plants, according to the DOE. So far, utilities including National Grid and Pacific Gas and Electric (PG&E) are launching VPP programs that aggregate rooftop solar, behind-the-meter batteries, smart thermostats, and EVs that can be deployed in under six months.

The Continued Evolution of Business Models

For now, U.S. clean energy business models are poised for significant transformation in response to mounting policy headwinds and shifting market structures. Historically, many developers, particularly small and mid-market players, relied on straightforward tax credit monetization through transferability, which allowed them to sell credits and avoid complex tax equity partnerships. However, the May 2025 House reconciliation bill, which proposes accelerating the phaseout of key tax credits and eliminating transferability for most non-nuclear projects within two years, could render traditional financing models unworkable, experts suggest.

“These provisions would deter the development of renewable projects in the U.S.,” said Sylvia Leyva Martinez, principal analyst at Wood Mackenzie, in a May 2025 statement. The firm notes that the changes could disproportionately impact mid-market developers and public power entities that lack the tax liability to monetize credits directly and have depended on transferability to secure project financing. As a result, business models may shift toward more adaptive, risk-managed structures, emphasizing direct pay (for eligible public and nonprofit entities), strategic partnerships, and diversified revenue streams to navigate rising policy uncertainty and execution risk.

—Sonal Patel is a POWER senior editor (@sonalcpatel, @POWERmagazine).