Will the GOP Save Clean Energy Tax Credits?

President’s view on renewables

President Donald Trump’s view on clean energy is widely known. His “drill, baby, drill” catchphrase and criticism of President Joe Biden’s “Green New Deal” (i.e., the Inflation Reduction Act) started on the campaign trail. He then released executive orders declaring a national energy emergency requiring more domestic oil and gas production — while also halting Biden-era funding for various clean energy initiatives.

Understandably, developers and investors in the renewables sector are re-evaluating their strategies and questioning whether capital should be deployed to fund future projects.

Federal income tax credits have long been essential in encouraging investment in clean energy projects.

Uncertainty around tax credits

Federal income tax credits have long been essential in encouraging investment in clean energy projects. In particular, the investment tax credit (ITC) and production tax credit (PTC) have been critical in attracting investors, allowing them to extract valuable tax incentives from these capital-intensive projects. Without ITCs and PTCs, investment in renewables in the United States would likely be a fraction of what it is currently.

The ITC and PTC were supercharged under the Inflation Reduction Act (IRA), increasing the cash tax benefits these credits offer while also opening up new options for monetizing them through credit transferability and refundability. It’s worth noting that the IRA, which passed in the Senate using the budget reconciliation process, did not have a single vote in favor of the legislation from Republicans.

Uncertainty over ITCs and PTCs is now spreading across the industry as Congress begins work on a tax bill to implement the president’s agenda. While repeal of some IRA-related provisions might seem like a foregone conclusion, a growing number of Republicans in Congress are urging the administration to leave the bulk of the IRA intact given the jobs and economic benefits renewable energy projects bring to their communities.

While repeal of some IRA-related provisions might seem like a foregone conclusion, a growing number of Republican members in Congress are urging the administration to leave the bulk of the IRA intact.

Republican support for the Inflation Reduction Act

Republican-controlled states have been some of the largest producers of renewable electricity in recent years. States such as Texas, Oklahoma, South Dakota, and Iowa have seen substantial investments in clean energy projects, thanks in part to their wide-open landscapes — which are ideal for solar and wind facilities — and their business-friendly climates. These states and many others have strong interests in protecting their clean energy sectors and related tax incentives.

House Republicans started voicing their support for energy tax credits several months ago. Then in March, over 20 House GOP members issued a letter to Jason Smith, Chair of the House Ways and Means Committee, urging that any changes should be done in a “targeted and pragmatic fashion,” while noting:

Countless American companies are utilizing sector-wide energy tax credits — many of which have enjoyed broad support in Congress — to make major investments in domestic energy production and infrastructure for traditional and renewable energy sources alike. Both our constituencies and the energy industry alike remain concerned about disruptive changes to our nation’s energy tax structure.

This was followed by a similar letter to Majority Leader John Thune on April 10 signed by four Republican senators emphasizing the “importance of maintaining a stable and predictable tax framework to promote domestic energy development” and cautioning against the “full-scale repeal of current credits, which could lead to significant disruptions for the American people and weaken our position as a global energy leader.”

With this vocal support from the Republican party, a wholesale repeal of the IRA and clean energy credits might seem doubtful. Republican opposition to the IRA, however, is also being strongly voiced. On May 1, 38 House Republicans in opposition of clean energy incentives issued their own letter to Jason Smith urging the full repeal of the IRA and “its green energy subsidies, which will cost taxpayers approximately $1 trillion over the next decade.”

Indeed, the Congressional Budget Office projected business credits for wind and solar power projects alone will “increase projected deficits from 2026 to 2035 by about $300 billion.” Congress may decide it wants to reallocate a portion of this deficit spending to pay for the cost of Tax Cuts and Jobs Act extender legislation and Trump’s pledges of no taxes on tips, overtime, and Social Security.

The fate of energy credits is a divisive issue amongst Republicans — and with President Trump’s tax agenda hinging on the Senate budget reconciliation process, the stakes are high for the renewables industry.

Which clean energy tax credits may be at risk?

The simple answer is that no one knows at this stage, but commentators believe tax credits for electric vehicles (EV) and EV charging infrastructure could be low-hanging fruit for those who oppose clean energy incentives.

EV-related credits might be particularly vulnerable because many view them as consumer credits, whereas ITCs and PTCs are much more prevalent amongst business investors and developers. What’s more, ITCs and PTCs have been important staples in the tax credit arena for decades, while EV credits are relatively new to the tax code.

Although the letters from Republicans supporting the IRA might not explicitly call out the ITC or PTC, these are the credits at issue when they say “hands off” because ITCs and PTCs are generally the credits generated from the types of large-scale investments for solar, wind, and battery facilities in their districts.

With all these nuances, the potential ways to modify current energy legislation are seemingly endless.

But it’s not as easy as saying ITCs or PTCs stay or go. For starters, there are actually a few different credits commonly referred to as ITCs and PTCs, and each credit type may treat certain projects differently in terms of available benefits.

For example, there’s currently a PTC available for organizations generating electricity from wind. But there’s also a different credit available for organizations manufacturing the components that are incorporated into wind projects. Within each of these separate credits, there are further distinctions drawn between onshore and offshore wind projects where eligibility and the ultimate benefits differ.

The IRA also added a series of “bonus credits” for certain energy projects (aimed at spurring domestic manufacturing, job growth, and economic revitalization) that are embedded within various ITC and PTC provisions — also with their own sets of challenging rules.

To make things even more complex, the IRA fundamentally changed ITCs and PTCs geared toward clean energy generation effective January 1, 2025 with the shift to a so-called technology-neutral statutory framework under Internal Revenue Code Sections 48E and 45Y while also creating new credit phaseout periods and expiration dates.

With all these nuances, the potential ways to modify current energy legislation are seemingly endless: Congress could propose complete repeal of some credits, chip away at bonus credits, accelerate phaseout or expiration dates, eliminate tax credit transferability or elective pay, walk back credit rates, or some combination of all these options.

The complexity and comprehensive nature of the IRA could also mean small-scale changes are the most expedient measures to take, and the only ones that would get widespread Republican support.

How are organizations proceeding?

It’s important to remember how tax legislation generally works. It would likely be unprecedented to strip a project of its ITC or PTC eligibility on a retroactive basis. If changes were to occur to energy credits or the IRA, they would likely be made on a prospective basis. For example, Congress could draft IRA modifications to take effect for projects starting after a designated beginning-of-construction date, placed in service date, contract date, or similar milestone.

Organizations relying on the availability of tax credits for projects that have already begun (or that will begin soon) should feel relatively assured such credits would be available even if changes are made to the underlying legislation.

However, for projects farther out on the horizon, a wait-and-see approach to gain more clarity and certainty as to legislative changes may be a sensible strategy.

How CLA can help with clean energy tax credits

CLA’s renewable energy practice serves clients throughout the full lifecycle of their clean energy projects. From project cash flow modeling to tax credit monetization, our team helps investors, developers, and project owners enhance project returns and operational efficiencies.

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