Clean energy tax credits poised to be slashed
The US Senate has now proposed its modifications to the ‘One Big, Beautiful Bill’ that previously passed the House. The proposal would significantly reduce the length, value, and scope of eligibility for many clean energy tax credits under the Inflation Reduction Act (IRA), although it does provide some relief to the industry compared to the House bill.
This effort is part of Congress’s broader initiative to cut any squeezable spending to fund the Trump administration’s signature policies, such as tax cuts, and align with the administration’s strategy to promote the US’s (largely) fossil fuel-based energy dominance. According to the University of Pennsylvania’s Wharton School, the energy and climate provisions of the IRA can cost around $1tr over a 10-year period.
Below are some highlights of the changes to the IRA tax credits proposed by the Senate, as well as their potential impact.
- Solar and wind spared from nightmare timeline requirements, but still face earlier credit sunsets
The Senate proposes that the value of Section 48E investment tax credits (ITCs) and Section 45Y production tax credits (PTCs) for solar and wind projects be reduced to 60% if construction starts in 2026, 20% if in 2027, and 0% starting in 2028. It escaped what would have been a nightmare clause for the renewables industry; the passed House bill suggests that to qualify for tax credits, projects must start construction within 60 days of the law's enactment and start operations before 2029. Yet this new timeline should still put developers on alert, prompting them to brace for material changes in the industry in a few years.
- A win for battery storage and clean firm electricity
The proposed phaseouts for clean electricity ITCs and PTCs only apply to solar and wind; all other pathways would still enjoy the tax credits until 2032. This would benefit battery projects, including those integrated at renewable plants. On top of the Section 48E ITCs, battery developers are also eligible to claim the Section 45X production tax credits, and together would give US-made batteries an advantage this decade in the domestic market against imports from Asia under tariffs (discussed in more detail below). We expect the preservation of these tax credits to encourage solar and wind projects to adopt storage solutions, thereby reducing the challenge of intermittency for the renewable industry.
In addition, nuclear, geothermal, and hydro can also continue to receive tax credits. This, again, reflects the Senate’s willingness to support clean and firm electricity that can meet the US’s growing power demand.
- Farewell to tax credits for electric vehicles (EVs), charging, and hydrogen
As expected, the tax credits for EVs and related infrastructure would be gone within a year. While the elimination of EV tax credits can put a damper on demand, the more profound impact on the US EV industry would come from the retreat of support for the charging infrastructure. Consumers’ driving range anxiety is here to stay, and the pace at which the US EV industry expands is poised to slow down.
And in contrast to what industrial players had hoped, hydrogen tax credits did not escape the fate of being phased out next year. As discussed below, green hydrogen would be hit harder than blue hydrogen, with the latter set to continue cementing its dominance in the US and globally.
- Tax transfer market saved
The IRA’s transferability clause, which allows project developers to directly sell tax credits to other entities without being involved in a tax equity deal, has helped inject more capital into the clean energy industry and facilitate project development. The implementation of tax credit transfers only started in 2023, but already accounts for half of the total $45-50bn tax credit market today. We continue to see transferability as a key enabler for more capital available for clean technologies.
More changes to the IRA have been proposed, which we have summarised in the table below.
Highlights of the Senate's proposed changes to tax credits under the IRA
Now, the Senate will need to formally propose and vote on a bill based on this draft. If cleared, the bill would head to the House for another vote, before it is presented in front of President Donald Trump’s desk to be signed into law. The Republican Party has self-imposed a deadline of 4 July.
The Senate draft suggests a low likelihood of major changes to save more clean energy tax credits. The final modifications would be marginal from what the House has passed, relaxing some rules that are deemed too strict for the solar and wind industry, or giving leeway to other preferred technologies. The Senate’s suggestion to ease some rules that limit material assistance from a foreign entity of concern (mainly referring to China) will also likely go through to ensure a functioning clean energy supply chain. But even these relaxations might face resistance within Congress
Rethinking the economic viability of clean technologies
Since its signing, the IRA has enabled tremendous investment in clean energy, largely by improving project economics with tax credits. Now, with the credits on the chopping block, businesses and investors must take a fresh look at the viability of these technologies and rethink what is needed to keep up the development of the clean energy industry.
Solar and wind
There is still optimism for the solar and onshore wind industries from a cost perspective. An analysis from Bloomberg New Energy Finance (BNEF) shows that without government incentives, only best-in-class solar and wind projects can be cost-competitive with those of combined cycle gas turbines (CCGTs). But another study from Lazard, with which we agree based on our own evaluation, suggests lower levelised cost of electricity (LCOE) ranges for unsubsidised and subsidised solar and onshore wind projects. We also think that the LCOE of CCGT projects can trend higher, in or above the range shown below, in cases where a higher capital cost or lower capacity factor is considered.
This means that more wind and solar projects could be in cost parity with CCGT than shown below.
Levelised cost of electricity in the US
However, the LCOE metric does have its limitations. For example, it does not reflect the renewables’ intermittent nature. When costs to ‘firm’ intermittency – where energy storage, backup power, etc., are considered – renewables can lose their cost competitiveness in certain cases, even with the tax credits. Nevertheless, we do expect those costs to come down as energy storage systems, forecasting models and grid modernisation advance.
A potential earlier sunset of the tax credits for solar and wind, as well as the upward cost pressure from tariffs, points to the increased importance of extracting greater value from other current revenue streams.
The first is through power purchase agreements (PPAs) signed with off-takers. Today, for utility-scale solar projects, the average LCOE based on the BNEF analysis is only slightly higher than average PPA prices in the US today and is forecast to drop below the average PPA price from 2026 onwards. This puts utility-scale solar projects in a good position to maintain profitability without IRA tax credits, while the case for wind projects is more challenging.
Forecast LCOE and PPA prices for solar and wind projects
We see several factors that can improve PPA prices for clean energy projects in the wake of waning tax credits. The first is the premium that corporate off-takers are willing to pay for clean energy that can partially or fully offset their emissions from conventional power sources. Despite changing policy dynamics in the US, many corporates remain committed to sustainability targets, and PPAs continue to be a popular way to manage net-zero targets. In addition, the power demand surge from the rapid development of artificial intelligence will require data centre companies to sign up more PPAs to offset any corresponding increase in GHG emissions.
This means that solar and wind projects can enhance their revenues by finding the customers who are willing to up-pay and, preferably in the long run, to lower emissions from electricity usage.
Second, wind and solar projects can benefit from optimising their production profile through pairing with storage solutions, especially given that the Senate’s proposal preserves the tax credits for batteries until the next decade (discussed below). This can not only firm the power they generate, but also broaden their product offerings to areas such as ancillary services and capacity markets.
In addition to revenues, the economies of scale and manufacturing efficiencies are expected to continue to drive down the cost of renewables, especially for batteries. This, however, may be entirely offset by tariffs and higher costs from procuring domestic content to comply with potential changes to the IRA that are directed against certain foreign countries, the US administration deems adversarial.
Hydrogen
The project economics outlook for blue hydrogen (produced from natural gas with carbon capture and storage, or CCS) is more promising than for green hydrogen (produced from electrolysing water using renewable power). Green hydrogen is the most expensive form of hydrogen, even with the full 45V tax credits, which offer ≤$3/kg of hydrogen produced, depending on the carbon intensity. Blue hydrogen, on the other hand, has a lower baseline production cost of $2.1-$2.5/kg. Moderate tax credits can already make blue hydrogen cost-competitive with grey hydrogen (produced from natural gas without CCS). And although it might not be easy to get, full-scale 45V tax credits can bring the cost down to below zero. Even if 45V tax credits are phased out early, blue hydrogen producers can still receive 45Q carbon capture tax credits through 2032, albeit possibly at a lower level.
