3 big questions about the megalaw's impact on renewable energy

E&E News

5 days ago

President Donald Trump's megalaw is expected to stunt growth of wind and solar power, but one of the biggest hits to renewables may be yet to come.
The Treasury Department is preparing guidance for release by mid-August to clarify requirements for wind and solar developers to receive lucrative tax credits, a move that could determine whether thousands of projects get built before the end of the decade or come online at all. The guidance is the result of an executive order after the law's passage focused on slashing federal support for 'green' industries.
'Ending the massive cost of taxpayer handouts to unreliable energy sources is vital to energy dominance,' the order from July 7 says.
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But many questions remain about how far the administration will go to further restrain wind and solar, and whether its plan will spur lawsuits.
Ethan Zindler, a climate counselor at Treasury during the Biden administration and an analyst at BloombergNEF, said he didn't expect the guidance to be long, considering the quick turnaround mandated by Trump's order.
'Writing something really … comprehensive and in-depth and thoughtful in 45 days, strikes me as quite far-fetched,' said Zindler. 'So then the question is … how is the [order] interpreted, and how aggressive is it?'
Trump also risks angering Republicans who may be needed in future close votes in Congress no matter what the guidance says.
On one side are moderates like Alaska Sen. Lisa Murkowski, who said at a congressional hearing this month that the order's directive on renewables 'really guts the effort for a compromise.' Many conservatives, meanwhile, are pressing the president to go further in reducing Inflation Reduction Act credits.
Simultaneously, a flood of new analyses are shedding light on where renewable projects may be headed in the next decade because of the law.
Here are three issues to watch with wind, solar and grid batteries as the administration takes the next steps to implement the One Big Beautiful Bill Act.
The Treasury Department is seen in Washington on Dec. 7, 2024. | Jose Luis Magana/AP
What will Treasury do?
Under the new law, wind and solar projects can qualify for incentives if they are placed in service by the end of 2027 or begin construction before July 4 of next year.
If they make the latter deadline, they have four years to come online — and potentially longer if they show annual progress on projects — under Treasury guidance from 2013. That means many wind and solar projects could continue to receive credits through the end of the decade, a lifeline that could bolster their supply chains for years.
But Treasury's coming framework could change that. Trump's order directed the agency to 'ensure that policies concerning the 'beginning of construction' are not circumvented.' Treasury did not respond to a request for comment.
It's to be determined what that means on paper, but analysts say Treasury could take a range of actions that add to barriers for wind and solar. It could, for example, say in the guidance that projects beginning construction must come online much faster than four years to obtain incentives, hindering developers that need more time to address supply chain or grid connection challenges.
Treasury could redefine entirely what commencing construction means, so it no longer refers to projects that incur 5 percent of project costs or do 'significant' physical work. In the past, developers have met those 2013 Treasury rules by doing things such as ordering equipment for solar trackers.
If the agency increased the 5 percent threshold significantly, developers could have to spend much more money upfront, posing a threat to projects.
'All this is unprecedented,' said David Burton, a partner at the Norton Rose Fulbright law firm.
Any changes to Treasury definitions that would require companies to speed up construction and deployment could be more challenging for wind than solar, although both industries are expected to take a hit from the guidance.
In a research note Thursday, BloombergNEF said onshore wind projects that don't begin construction this year could be delayed until the end of the decade or later. 'Unlike solar, wind developers face long permitting and grid interconnection queue timelines,' the note said. Many solar projects can be built in a year.
The executive order resulted from a promise from Trump to members of the House Freedom Caucus before a final vote that the administration would take further action to crack down on renewable subsidies.
The deal was important 'because it has the White House attention. It's top of mind,' said Tom Pyle, president of the conservative think tank Institute for Energy Research and leader of Trump's 2016 Department of Energy transition team. Pyle, who supports rolling back IRA incentives, said he was 'cautious' about Treasury's guidance, as the agency has to be careful to not go too far in restricting tax credits or else increase the risk of lawsuits.
If there's overreach, 'the courts could say this wasn't the intent' of the law, he said. 'I don't want the perfect to be the enemy of the good.'
According to legal experts, Treasury could run into trouble if the guidance is viewed as 'arbitrary and capricious' under the Administrative Procedure Act, perhaps by seeming to target wind and solar but not other technologies. Kelsey Merrick, director of litigation at the tax law center at New York University, said Treasury also must consider 'the longstanding position of the IRS with respect to beginning of construction.'
But Zindler said there are concerns that Treasury may release a document that is not 'legally defensible,' and that industries may have little recourse to challenge it if so, considering they will be dealing with additional requirements set to kick in in January that restrict companies from using components sourced from China.
'Even if you wanted to challenge it in court, the clock will be ticking quite quickly towards the start of 2026,' he said about the guidance.
The guidance is less relevant for rooftop solar, which is expected to hit a downturn because of a separate tax credit for residential systems being phased out by the end of the year.
Wind turbines operate in Palm Springs, California. | Ashley Landis/AP
Will there be new foreign entity requirements?
Another wild card for renewables is how the Treasury guidance could affect implementation of the law's 'foreign entities of concern' rules, which require industries to verify that a percentage of components in their products are not from China, North Korea, Russia and Iran. For wind and solar, projects beginning construction next year must use 40 percent of their content from non-FEOC countries like the U.S., an amount that ramps up to 60 percent by 2029. Other foreign entity restrictions vary by year and industry.
The language could force companies to set up a tracking system of their components that is costly, according to observers.
'It will require a lot of time setting up the necessary tracing,' said Robbie Orvis, senior director of modeling and analysis at climate policy think tank Energy Innovation. Also, there may be 'instances of projects that would fail the tests even after setting up tracing,' he said.
Under Trump's order, Treasury should take 'prompt action' by mid-August that Treasury Secretary Scott Bessent deems 'appropriate and consistent' with the FEOC language in the law. It's unclear how that will be interpreted, but the agency could take various additional steps to crack down on renewables. Options include adding new administrative requirements for companies or changing the calculation method used to determine what percentage of components come from countries like China, analysts said.
The agency could require developers 'to provide high degrees of disclosure about where they got their equipment from, which is something that is not a good thing for companies trying to protect their own supply chains' competitive information from their rivals,' said Zindler.
Because of the uncertainty, BloombergNEF said that wind and solar projects seeking tax credits essentially need to break ground this year — rather than waiting until next July as technically allowed — to avoid obstacles from FEOC restrictions.
'While in principle it should not be difficult to source 40-45% of the value of a solar or wind plant from companies without strong links to China … the definitions around what proof is required could render the rule burdensome or impossible to meet,' the research note said.
A rush to start construction will force developers 'to take aggressive bets on supply chain deals, grid connection, local permits and locking capital,' it said.
The FEOC language could be particularly difficult for smaller developers that don't have the legal or policy staff to help navigate the rules, said Dan O'Brien, a modeling analyst at Energy Innovation.
'It's the smaller companies that have less assets and capital to spend on that are going to hesitate to … claim any of the credits until it's very clear whether they are allowed to do so,' he said.
Overall, meeting FEOC requirements could be more challenging for solar than wind, which has a more localized supply chain. Grid batteries, which are often tied to renewable projects, are facing more restrictive FEOC rules than other industries and are required to obtain the majority of their components from the U.S. or non-FEOC countries as of next year. The battery industry currently obtains most of its equipment from China.
Solar manufacturing, which has grown exponentially since the climate law, also could see headwinds from the FEOC rules, as many industry components come from Chinese-linked companies in Southeast Asia. Other solar manufacturers say they support stricter FEOC rules to boost domestic production but are unhappy about the law's removal of 'adder' credits for companies that use components made in the U.S.
Grid batteries are facing more restrictive rules on foreign entities of concern than other industries. Pictured is a worker checking battery storage infrastructure at Orsted's Eleven Mile Solar Center lithium-ion battery storage energy facility in Coolidge, Arizona. | Ross D. Franklin/AP
What do forecasts say?
The debate over the order comes as new reports are providing a clearer picture of where renewables may be headed by the end of the decade because of the law. While the analyses differ in their conclusions somewhat, most signal a sharp dropoff in wind and solar growth in the end of the decade, when tax credits phase out and projects already under construction reach completion.
BloombergNEF's forecast, for instance, concludes that new wind, solar and energy storage additions could decline 23 percent through 2030 versus what would have occurred before the law, a drop of about 117 gigawatts of power. The projected plunge is particularly sharp — 50 percent — for wind because of permitting and regulatory obstacles. FTI Consulting similarly reported Friday that 100 GW of planned utility-scale wind and solar projects could be jeopardized because of the law.
Over a 10-year period, research firm Wood Mackenzie estimates, wind and solar project installations could decline roughly 20 percent. 'Permitting bottlenecks threaten to push completion dates outside eligibility windows,' it said in a research note.
And Rhodium Group projects the law would cut new clean power capacity by as much as 59 percent over the next decade.
Trump supporters say the law will fortify the grid and create jobs in areas like nuclear power. The law will 'turbocharge energy production by streamlining operations for maximum efficiency and expanding domestic production capacity,' the White House said in a statement this month. Clean energy advocates disagree, arguing that solar and wind are needed to meet growing electricity demand from artificial intelligence.
It's not all gloom and doom for renewables, though.
'Legacy' projects that were already under construction as of last year are not affected by the law, a timeline that could boost some renewable companies through the end of the decade.
The AI boom is expected to keep demand robust for wind and solar over the long term. 'It's definitely not the death of the industry,' Zindler said.
The midterm elections also could be a factor.
'The long window between now and November 2026 elections gives proponents of expanded renewable energy time to focus opposition to tax credit reversals in states and House districts where seats could be in play and there are strong pro-renewable constituencies,' said Barry Rabe, a professor emeritus of environmental policy at the University of Michigan. He said the midterms offer a test for support for the subsidies.
If electricity prices rise after the law as some models predict, it could be politically challenging for Trump, he said. 'Long before the next election, Trump will own energy prices with an electorate that has anticipated swift price reductions,' said Rabe.
In the meantime, there is expected to be surging growth for renewables this year as developers rush to avoid the FEOC provisions.
'It's going to be a boom of every company when they get their regulatory approval putting shovels in the ground,' said O'Brien.