Watt’s the Deal with the Committee on Ways & Means’ Changes to the IRA?

Watt’s the Deal with the Committee on Ways & Means version of "the one, big, beautiful bill"? Well, let me tell you… It's not that beautiful, but it’s not as bad as it could've been. So let's all take a quick sigh of relief.

While it could've been worse, solar and renewable energy advocates still have some work to do to make the final bill less damaging to solar development.

A Few Reminders

Before I get into what the current bill means for solar, here are a few reminders:

• This is a draft bill. While it'll likely get passed in the House by Memorial Day, it's just a starting point.
• It's been known in the solar industry that the Senate is where the real lobbying and negotiation will go down, so we're likely to see improvements on some key provisions  that we'll need to make this a bit more tolerable.
• Depending on who you talk too, a version of the bill approved by the House and Senate could be on the  President’s desk as soon as July, but more likely August, or even Labor Day.
• This blog focuses on the impacts on utility and community solar, our core business here at Renewable Properties. There's no doubt that the bill has big setbacks for the broader energy transition. There are cuts to residential solar, EV's, and green hydrogen to name a few, but I won’t be addressing those sectors here.

Four Major Changes

There are four major proposals that change key provisions in the IRA as it relates to solar development:

1. ITC phase-out.The bill pushes the current phase-out of the Investment Tax Credit (ITC) up from 2034 to starting in 2029 with a complete sunset in 2032.
2. Placed in service language. The bill would change the start of the ITC phase-out period to “placed in service,” as opposed to construction start. That’s a big hit, as the solar development community typically uses a safe harbor strategy to get a little bit more runway.
3. Foreign Entity of Concern (FEOC) provision. This proposed change is likely the single biggest negative issue in the Bill for renewables.
4. Changes around the transferability of the ITC. Not great, but renewables will survive.

Let’s discuss each of these.

ITC Phase-Out

As proposed, the full 30% investment tax credit will be reduced by 20% per year, starting in 2029 until the complete sunset in 2032. So that means:

• 2029 - 24% (80% x 30% = 24%)
• 2030 - 18% (60% x 30%  = 18%)
• 2031 - 12% (40% x 30% = 12%)

This change would push up the current sunset track in the IRA by 5 years. That’s not ideal, but it’s workable and there's time for an extension with a new administration that will be elected in 2029.

For solar advocates and lobbyists reading this, this proposed change isn't even on my list of items to negotiate away. This is the “gimmie” to get what we really need, which I’ll discuss next.

Placed in Service Language

The existing law regarding the ITC phase-down period is applied to projects starting construction. So, if construction started in 2033, then you’d receive 100% of ITC. If the project started in 2034, you’d receive 75% of the ITC, etc.

The current bill amends this phase-out to tie the phase-out step-down percentages to the year projects are placed in service.

So, if signed into law, projects must be placed in service in 2028 to receive full ITC. Projects placed in service in 2029 would receive a 20% reduction in the ITC.

This acceleration of the schedule is not ideal for larger utility scale developers that could be exposed on Power Purchase Agreements (PPAs) with delivery dates set in those years already and counting on the full 30% ITC when they started construction.

The “start construction” language is something the renewables industry should fight for, and I believe we should get it.

Foreign Entity of Concern (FEOC)

This proposed change is my biggest concern for renewables.  It should be our top priority to get removed or significantly altered, but there are some silver linings for those who are well capitalized and know how to execute.

As proposed, if the solar project is owned by a prohibited “foreign entity,” or if materials are sourced from a prohibited “foreign entity,” the project will be ineligible for the ITC.

There are many nuances in the definitions of “foreign entity” that are too complex to go into here, but "foreign entities" is essentially referring to China. The way the bill is written leaves a lot uncertain, which is never good when dealing with financing parties. Some say that the language as written would require an interpretation that could take the Treasury Department years to complete, putting the industry in limbo until the rule is finalized.

If enacted, this provision would mean that if the solar developer used a single component, subcomponent, or critical mineral from a prohibited foreign entity (China), then that project would be ineligible for the ITC after 2026.

The main concern is that it will be impossible for solar developers to document compliance with this rule. There is some exemption language, but it’s currently narrow.

Our solar advocates need to lobby to make this provision clearer and more reasonable. Our solar supply chains--even the ones manufactured here in the U.S.-- are filled with subcomponents that have some manufacturing in China or a Chinese-owned entity.

The only good news for this provision is it's only applicable to projects that start construction one year after the bill is enacted, so that would be in July or August 2026. That would give solar developers some runway. Since it’s the existing law is based off construction start, you can safe harbor your projects and equipment before the summer 2026 deadline.

ITC Transferability

The current version repeals the transferability of the ITC and would apply to facilities that commence construction two years after enactment, which means July or August or September of 2027.

Repealing transferability isn't ideal, but it’s not mission-critical. The tax equity market has certainly widened on the heels of transferability, so we don't want it to shrink as a result of this bill. But it's not as big of an issue as the FEOC or ITC phase-out being based on Placed in Service versus Construction Start language. Before 2022, the market didn’t have ITC transferability, and we still financed and built a lot of solar projects, and we still will if this stays in the bill.

In short, while this version is not ideal, it could have been worse. In fact, some of us were expecting much worse. Of course, we have some work to do to make these IRA changes reasonable and to ensure America can continue its energy dominance--which doesn’t exist without renewables!

And that’s Watt’s the Deal!