By Andrew Wetzel, CFA, Principal, Managing Director of Sustainable Investments
After many weeks of negotiations and adjustments in the House and Senate, President Trump’s One Big Beautiful Bill (OBBB) has been passed. This legislation is significant in many ways, with some of the broader economic and market considerations covered in our monthly blog. With regard to the clean energy-related provisions of the IRA, the adjustments in the OBBB are big but certainly not beautiful. As written, the bill will likely result in lower levels of clean energy generation growth, weakened domestic supply chains, and over time, higher power prices in the US. For sustainable investors there are a few silver linings on the longer path forward toward decarbonization.
The IRA, passed in 2022, was centered on incentives to create a lower carbon economy in the US through tax credits and low-cost financing. As discussed in our Q3 2022 letter, the IRA put in place long-term incentives to build all forms of clean energy, from wind and solar to geothermal and nuclear; it incentivized the creation and growth of domestic supply chains across critical minerals and all meaningful components required to lead in decarbonization across energy and transportation systems; it created incentives to shift toward electrified transportation. These incentive programs represented the most significant actions toward lower carbon economic growth ever undertaken.
As we noted in our Q3 2023 follow-up, capital investment and job creation after just one year were significant. Growth across the US supported by the IRA continued broadly, though more concentrated in Republican-leaning states with business-friendly policies among other factors. The IRA created a strategic roadmap to build domestic industries that could compete with China in the race to decarbonize and attempt to avoid the worst-case outcomes of climate change. It was an investment in a more sustainable future. Investing in anything new requires an understanding that payback only happens over time as products and industries get to scale and costs come down. With the changes in the final OBBB, achieving scale is now clearly at risk.
There are a number of important changes to the IRA outlined in the latest version of the Senate bill. The most important adjustments in the 1,000+ page bill include:
- Utility-scale solar and wind power projects
- A 12-month window to commence construction to capture a 4-year safe harbor position. This means investing at least 5% of project costs based on existing guidance. Projects meeting these guidelines will have access to investment and production tax credits through the early 2030s, though will have to meet restrictions related to content from Foreign Entities of Concern (FEOC)
- Projects started after the 12-month window must be placed in service (i.e., connected and generating power) by the end of 2027 to capture credits. Otherwise, credits expire on 12/31/27. These projects must also meet FEOC requirements
- Residential solar, other clean-energy, and energy efficiency credits expire at the end of 2025, though solar leases through commercial entities have two additional years of eligibility to capture the investment tax credit
- Residential solar, other clean-energy, and energy efficiency credits expire at the end of 2025, though solar leases through commercial entities have two additional years of eligibility to capture the investment tax credit
- Advanced manufacturing credits supporting supply chain development for solar and battery components run through 2029 and phase down through 2032. Wind credits expire at the end of 2027. Critical minerals credits run through 2033. In all cases, there are more complex and stringent domestic content and FEOC rules as well as stipulations related to vertically integrated manufacturing and sales to unrelated parties
- Electric vehicle credits for consumer purchases and commercial leases end on September 30, 2025. Adding insult to injury to those concerned with decarbonization, there is a provision to eliminate penalties for noncompliance with fuel economy standards for automakers
While the bill has been signed, many uncertainties remain around Treasury and IRS guidance related to safe harboring, FEOC provisions, and other factors. This uncertainty will weigh on large solar and wind development as financing will have to adjust to higher levels of risk. The bill is a clear negative for consumers interested in electric vehicles and home energy efficiency and savings.
From a US power generation perspective, we expect a rush to safe harbor solar and wind projects followed by a deceleration in new project activity. While this provides a window to complete projects, execution risks will be much higher going forward, meaning smaller developers will likely struggle. Relative to prior expectations, growth in new clean energy supply will be lower and power prices will have to rise as ability to capture credits fades after 12 months. This dynamic could not come at a worse time for the sustainable energy industry and for power supply in general.
Power demand in the US is inflecting higher after more than 15 years of flat demand, as noted in our Q2 2024 letter. There are many drivers of this, including reshoring and industrialization in the US as well as automation and efficiency improvements in existing commercial and industrial facilities. While these factors are important, the most significant driver is directly related to America’s lead in technology, Artificial Intelligence (AI) development. Data center development to train and run AI models, that enable increasingly broad use cases, are very energy intensive. A recent update from McKinsey illustrates the inflection in power demand, a trend that is just starting.
Ramping power demand growth is why renewables, in particular solar, wind, and battery storage, are so important in the short-term regardless of climate change considerations. Renewable energy projects can be built in 12-24 months, while it takes 3-5 years to build a new natural gas combined cycle power plant. This is a dynamic the CEOs of the largest utilities have been very vocal about recently. The lead times for natural gas are more structural given the complexity of projects and availability of equipment. Changes to the IRA in the OBBB hinder budding domestic supply chains and introduce new material risks to project development relative to otherwise available equipment and capacity to build infrastructure. This is an active decision to have less new power supply all else equal, potentially disadvantaging the US relative to China in the race to develop AI.
Our Q3 2024 letter covered the insatiable appetite for power of the “hyperscalers” developing AI. As in all commodity markets, when demand growth is not sufficiently met with new supply, the result is higher prices. The hyperscalers have shown that access is more important than cost in this strategic race. Our expectation is that power prices will rise over the next few years, which will incentivize continued renewable energy growth, development of energy storage, and development of other types of new power supply. Consumers should expect rising prices. Investors should expect pockets of opportunity.
From the summary above, it should be clear that production and supply chain activity across electric vehicles, wind, and eventually solar will be under pressure. Growth will slow. Residential solar and other consumer activity will likely move back to become niche markets. Other parts of the broader clean-tech market are in more advantaged positions with more favorable treatment in the OBBB and likely tailwinds from higher power prices.
The final Senate version of the OBBB clearly favors clean baseload and dispatchable energy, including battery storage, geothermal, and nuclear. These three technologies retain access to investment and production tax credits through 2032 before they step down. Manufacturers and developers will have to manage various FEOC rules, domestic content requirements, and fuel restrictions for nuclear. That said, these will be seen as advantaged clean energy technologies with tailwinds relative to other areas. Storage may be the most important near-term given industry development in recent years enabling capacity to deploy.
Higher power prices should also be positive for niche solutions like fuel cells, a technology that regained access to tax credits in the final version, an unexpected positive surprise. More broadly, grid management and energy efficiency technologies and companies will likely see tailwinds as power demand exceeds supply.
While the OBBB represents a step backward on the path to a more sustainable future, economic and market pricing signals will enable some level of continued clean energy growth, and a broader range of solutions may play a larger role in the future.