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The proposed budget could discourage the development of renewable energy projects in the U.S. and cause a setback in domestic manufacturing, says a Wood Mackenzie analyst. The U.S. House Budget Committee has approved the Ways and Means Committees proposed budget reconciliation bill, which phases out the Investment Tax Credit 48E and Production Tax Credit 45Y for clean energy projects several years ahead of schedule, reducing the credit to 80% of the total value in 2029, 60% in 2030, 40% in 2031, and 0% in 2032. Many industry observers believe the proposed bill runs counter to the progress made in advancing clean energy, including job growth and the offshoring of the clean energy manufacturing supply chain. Sylvia Leyva Martínez, principal analyst at Wood Mackenzie, believes the budget will discourage the development of renewable energy projects in the United States. She emphasized that the two main challenges are the timeframe for bringing projects online and restrictions on foreign interest entities. While some technologies would be more affected than others, the early phase-out of tax credits, the elimination of portability, the requirement that projects be placed in service to qualify for tax credits, and stricter foreign entity of interest (FEOC) provisions affect the vast majority of clean energy projects in the U.S., Leyva Martinez said. The proposed budget includes an early elimination of the 48E investment tax credit and the 45Y production tax credit starting in 2029. Any project not placed in service by December 31, 2028, will be eligible for smaller amounts of the credit. The proposed changes would have far-reaching implications for the entire clean energy sector, Leyva Martínez said. Although the bill maintains some elements such as domestic content and community energy aggregators, the overall outlook for the industry appears challenging. The Solar Energy Industries Association (SEIA) estimates that there are currently 167 GW of utility-scale solar power operating in the United States, with another 109 GW under construction or development. According to Wood Mackenzie, the provisions of the proposed legislation could hinder this growth. The residential solar segment added 4,742 MWdc in 2024, a 31% decline compared to 2023 and the lowest year of installed capacity since 2021, according to SEIA. The elimination of the 25D after 2025 will create further challenges for this struggling sector, Wood Mackenzie said. Manufacturing and employment Solar manufacturing has exploded since the passage of the Inflation Reduction Act (IRA) in 2022. SEIA estimates that announced investments in the U.S. since the IRAs passage now total $38.3 billion. Of these announcements, $7.9 billion is operational, $15.8 billion is in active construction, and another $14.6 billion is in manufacturing investments under development. Job creation has also been strong since the passage of the IRA, with these investments expected to create more than 49,250 manufacturing jobs, according to SEIA, which expects that by 2033, the U.S. solar manufacturing workforce could grow to 100,000 workers. Wood Mackenzie believes the extension of the 45X tax until 2031 is positive for manufacturers; however, the end of tax credit transfers would drastically hamper financing for US manufacturers who rely heavily on this mechanism. While the implications of the rules are unclear on how FEOC organizations are defined and treated for purposes of federal tax incentives, Wood Mac believes the FEOC provisions could close the U.S. market to Chinese companies, Overall, the proposed bill presents further downside risks to our forecast and may lead to a downward revision of our base case for the first quarter of 2025, Leyva Martínez said. However, the full implications for facilities and the responses of industry stakeholders remain to be determined. The bill then goes through the House Rules of Procedure and reaches the plenary session. |
