GOP budget plan contains a massive poison pill for clean energy

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 budget proposal faces a long road to becoming legislation. Several Senate Republicans and more than a dozen House Republicans have pushed back on the text as written and signaled changes would be needed to gain their support — including a revision to the foreign entity of concern language. Nearly two dozen House Republicans, many of whom are from districts benefiting heavily from the IRA, sent a letter in March opposing deep cuts to the law’s tax credits.

Still, such a harmful policy idea being introduced in Congress is an unwelcome development for a clean energy industry that’s already dealing with a slowdown thanks to the Trump administration’s chaotic tariff policies and slashing of federal agency spending and staffing.

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 and energy production tax credits, Lee noted. Today, projects can claim the credit and secure financing based on when they begin construction. But under the proposed change, they would have to secure investors based on when they can 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.

“Any project that’s not really close to breaking ground, it’s not going to happen,” Lee said. ​“Virtually all of those projects could get killed.”

A different set of risks faces the 45X tax credit, the cornerstone of the huge surge in domestic factories for solar panels, batteries, critical minerals, and other clean energy materials. The manufacturers receiving this incentive have locked down financing for their facilities under the assumption that they’ll be able to earn the per-unit tax credits provided by 45X for their products for years to come.

But under the House bill’s FEOC restrictions, which Lee said would kick in two years after the law is enacted for 45X, recipients could see their tax credits challenged on the grounds that their operations include some form of restricted ​“material assistance.”

“‘Material assistance’ is a misnomer. This would really require you to look up every level of the supply chain,” Lee said. ​“It’s death by red tape. You will never know for certain if you’re in compliance, so you will never be able to confidently claim the credit, and your investors will never feel comfortable with you claiming the credit, because they can never know if it will be clawed back by the IRS.”

The combined effects will be to choke off investment in new electricity generation capacity that the U.S. desperately needs to meet growing demand for power, while simultaneously undermining efforts to build up a domestic supply chain for industries now dominated by China, said Harry Godfrey, head of the federal investment and manufacturing working group of trade organization Advanced Energy United.

“The industry has shown over the past couple of years that there’s a real dedication to making as much of this content as possible in America, all the way down the supply chain,” he said.

But the FEOC rules in the bill are ​“fundamentally unworkable,” he said. ​“What you will get as a result of this is not just folks who fall out of compliance, but folks who look at it and say, ​‘I don’t want to approach it for the downside risk of unwittingly falling out of compliance, given the complexity of it.’ It just serves to chill investment.”

An economic and climate wrecking ball

The combination of FEOC restrictions, accelerated cutoffs for claiming tax credits, and other changes proposed by the House Ways and Means bill — including ending tax-credit transferability rules that have expanded investment in clean energy — will equate to a full repeal of the Inflation Reduction Act tax credits, according to a Tuesday report from research firm Rhodium Group.

In December, the firm modeled the effect of a full repeal, and the results were stark.

Doing away with the climate law would raise energy costs for American households by as much as 7% in 2035, ​“stifle energy technology innovation,” increase greenhouse gas emissions — and potentially put ​“half a trillion dollars of new manufacturing, industrial, and clean electricity investments across the country at risk,” Rhodium researchers wrote in this week’s report.

In fact, the profound uncertainty introduced by the FEOC restrictions could do more harm than simply putting tax credits out of reach of future projects, said Ben King, an associate director at Rhodium Group. The firm’s December forecasts presumed that already-announced projects set for completion in the next two years or so would get built.

But the FEOC rules are so aggressive they ​“may bring to a screeching halt what’s already been announced,” King said. 

That would not only result in lost investment dollars and jobs but also make it harder for utilities nationwide to meet surging power demand.

Energy industry analysts, energy project developers, and major manufacturers of gas turbines agree that renewables and batteries are the only additional energy projects that will be able to get built over the coming years. Manufacturing capacity for new gas turbines is maxed out with orders from projects that are already on the books.

“For the next five years or so, the only thing you can build that’s not already contracted is wind, solar, and batteries,” King said. ​“Certainly there are places where wind and solar pencil out independent of the tax credit. Even in our modeling, with full repeal, you still see hundreds of gigawatts of wind, solar, and batteries. But that level of growth is neither sufficient for meeting the near-term demand growth we’re seeing on the grid, or for the energy transition that folks still may be thinking about.”

Advanced geothermal and nuclear power plants, which have greater support from the Trump administration and Republicans but which are further out in terms of readiness to be built at large scale, may also be threatened. These zero-carbon energy resources are eligible alongside solar and wind power for the ​“technology-neutral” 45Y and 48E tax credits, which replaced longstanding technology-specific tax credits at the start of this year and which are subject to some of the stricter FEOC restrictions proposed in the tax bill, Lee said.

“Given the difficulty of even building a geothermal plant without using a single Chinese-made part, I feel like FEOC criteria this strict are essentially just repealing the 45Y/48E credits in full,” Seaver Wang, director of climate and energy at The Breakthrough Institute, a think tank that supports nuclear and geothermal power, wrote in a Monday X post.

Jigar Shah, a clean energy investor and former head of the Biden administration’s clean energy Loan Programs Office, weighed in with a Thursday X post that “[t]here are a lot of ways to implement a phase out to maintain affordability, electricity abundance to power AI, and achieve budget savings. None of that nuance is in the House Bill draft.”

The Ways and Means Committee bill is one of a number of legislative proposals being worked out by House committees this week in advance of plans to introduce a budget reconciliation bill this month. Republicans have proposed deep cuts in Medicaid and food assistance programs in order to extend tax cuts that will primarily benefit wealthy individuals and corporations and add trillions of dollars in federal deficits. That makes the tax credits a tempting target since repealing them could reduce federal spending by hundreds of billions of dollars.

“This is of course just the opening salvo for negotiations,” Wang wrote on X. ​“I can already imagine these Foreign Entity of Concern rules will rightly get a lot of pushback. Hard to see how they could even be effectively enforced.”

A clarification was made on May 15, 2025: This story has been updated to reflect that the changes being proposed in the House Ways and Means Committee’s bill would have impacts on both investment tax credits and production tax credits.