Tucked into the House Republicans’ 389-page tax bill released on Monday is a poison pill for U.S. clean energy developers and manufacturers, one that energy and tax policy experts say would essentially repeal the hundreds of billions of dollars of tax credits now flowing to energy projects and solar, battery, and EV factories across the country.
The provision at issue prohibits tax credits for any project associated with “foreign entities of concern,” a category that includes companies and individuals linked to China as well as any “material assistance” from Chinese companies, their subsidiaries, or even non-Chinese companies that happen to have executives who are Chinese citizens. Its scope is so sweeping, and China’s dominance of clean-energy supply chains so vast, that virtually all clean power projects or factories being built today could be implicated.
If passed into law, this piece of the House Ways and Means Committee proposal would undermine investor confidence in financing the buildout of new clean-energy projects and factories, experts say. It could also erode the tax-credit eligibility of solar, wind, battery, geothermal, nuclear, and other zero-carbon energy developments under construction, and the eligibility of factories that are already online and churning out batteries, solar panels, and other clean energy products.
Since the Inflation Reduction Act passed in 2022, firms have invested $321 billion in domestic clean energy projects, per Clean Investment Monitor data released Tuesday. The private sector has pledged to spend another $522 billion. The majority of this money has flown or will flow to GOP-led congressional districts, but the bill introduced by House Republicans would seriously disrupt these economic gains.
“No one anywhere, in any part of the economy, has ever had to understand their supply chains to the degree of specificity that this bill applies to clean energy companies and manufacturers,” said Kristina Costa, a former Biden administration clean energy adviser. “It’s going to grind everything to a standstill.”
The finer points of foreign entities of concern
Costa, who served as deputy for clean energy innovation and implementation under former White House climate adviser John Podesta, knows her tax policy. She played a lead role in managing interagency implementation of the tax credits created by the Inflation Reduction Act.
A handful of those IRA credits already include foreign entity of concern (FEOC) restrictions, she noted, namely those limiting tax credits for EVs with batteries or materials and minerals from Chinese companies or sources. But those restrictions were designed to incentivize EV manufacturers to build up a domestic battery industry, and they applied to a relatively small number of automakers with sophisticated supply chain management capabilities, she said.
Even those narrowly scoped rules were tricky to enforce. “It took us 18 months to do FEOC guidance for this one provision,” she said. “And you’re only talking about one kind of product — a battery that goes into an electric vehicle. It’s not applying to every nut, bolt, and wire.”
The FEOC strictures in Monday’s bill from House Republicans, by contrast, bar tax credits for any project that receives “material assistance“ in the form of “any component, subcomponent, or applicable critical mineral” that is “extracted, processed, recycled, manufactured, or assembled by a prohibited foreign entity.” They also apply to products produced under “any copyright or patent” or “any know-how or trade secret provided by a prohibited foreign entity.”
That could apply to “hundreds of components that go into a clean energy project, or every single thing that goes into a hydropower or geothermal facility,” Costa said. Nor does the bill define its terms, such as “what a component or subcomponent would mean,” she said. “That’s all up to Treasury to define.”
Such guidance would take years to finalize, she said, by which time most of the tax credits in question would be set to expire under the accelerated phaseout structures also proposed in the bill.
Until those definitions come out, “the way the tax code works is that it’s on the taxpayer to substantiate compliance, particularly in the absence of Treasury or IRS guidance,” Costa said. “And they’re not going to know how to comply with this.”
Even if project developers felt they could figure out compliance, they’d have a difficult time convincing a bank to finance a project that lacks certainty about crucial financial incentives.
Ted Lee, a former Biden administration Treasury official who was also deeply involved in implementation of tax credits under the Inflation Reduction Act, agreed with Costa’s assessment.
“This is essentially a backdoor repeal that won’t address our actual national security concerns and supply chain vulnerabilities,” he said. “It’s going to immediately freeze investment,” by creating “an impossible burden of proof, even if taxpayers do their very best to comply.”
For the “tech-neutral” 45Y and 48E tax credits, which are available to all forms of carbon-free energy, the bill’s strict FEOC requirements would go into effect one year after the enactment of the law, Lee said. That would make it difficult for projects not already underway to act fast and claim the credits before the restrictions set in. Most utility-scale energy projects take longer than one year to begin construction.
That risk would be heightened by a proposal in the House Ways and Means bill that would shift the milestones for these projects to be eligible to claim investment tax credits, Lee noted. Today, projects can claim the credit when they begin construction. But under the proposed change, they would have to achieve “placed in service” status — that is, get plugged into the grid and be delivering power.
The time lag between starting construction and being placed in service can stretch into years, putting more projects at risk of missing the deadline to avoid the FEOC rules that would undermine the tax credits they relied on to begin construction in the first place.
