Key Policy Updates Affecting PV Solar and Storage Projects
The recently enacted "One Big Beautiful Bill" (OBBB) has made significant changes to the clean energy tax credits established by the Inflation Reduction Act, especially for the solar and wind industries. Here's a summary of its key impacts on PV solar safe harbor and the 48E ITC.
48E Investment Tax Credit (ITC)
The base rate for the 48E Investment Tax Credit (ITC) is 6% of eligible project costs.
However, this is the starting point, and the real value of the credit for most projects is significantly higher due to bonus credits. The maximum value can reach as high as 70% of the project cost.
To get the full 30% base credit, projects generally must meet Prevailing Wage and Apprenticeship (PWA) requirements. This means paying laborers and mechanics at or above the prevailing wage rates and using a certain percentage of apprentices from registered programs.
In addition to the 30% credit, projects can earn "adders" for meeting certain criteria:
Domestic Content: A 10% bonus credit for using a specified percentage of U.S.-sourced steel, iron, and manufactured products.
Energy Communities: A 10% bonus credit for projects located in designated energy communities (e.g., areas with high unemployment due to the closure of a coal mine or plant).
Low-Income Communities: A 10% to 20% bonus credit for projects that are located in low income communities or benefit low-income households.
Therefore, while the base rate is 6%, the effective rate for a project that meets the PWA standards is 30%, and it can go up from there with additional bonus credits.
The OBBB accelerates the phase-out and introduces stricter deadlines for the 48E ITC for solar and wind projects.
Accelerated Phase-Out: The long-term availability of the 48E ITC has been shortened.
New Deadlines: To remain eligible for the 48E credit, solar projects must begin construction by July 4, 2026.
Stricter Placed-in-Service Date: Projects that begin construction after the July 4, 2026 deadline must be placed in service by December 31, 2027 to qualify for the credit. This is a much shorter timeline than under the previous law.
FEOC Restrictions: Projects that begin construction in 2026 or later cannot receive "material assistance" from Foreign Entities of Concern (FEOCs). This includes restrictions on ownership and the sourcing of components.
Domestic Content: The domestic content requirements have also been updated, with the thresholds for manufactured products increasing over time for projects claiming the bonus credit.
PV Solar Safe Harbor
The OBBB introduces a much narrower and stricter interpretation of the "safe harbor" rules, which are used to determine when a project's construction has "begun."
End of Broad Safe Harbors: The OBBB directs the Treasury to issue new guidance that will "restrict the use of broad safe harbors." This suggests a move away from the traditional 5% test where you simply spend 5% of the project cost.
Focus on Physical Work: The new guidance is expected to prioritize "physical work of a significant nature" on the project site. This means that simply purchasing equipment and having it sit in a warehouse may not be enough to qualify for the credit.
Impact on Existing Projects: Projects that began construction before the OBBB's enactment are largely unaffected by these new rules and can still be eligible for tax credits if they follow the prior "continuous construction" rules, which give them a longer window to be placed in service.
In short, the OBBB has created a much more challenging environment for solar projects. The industry is facing a compressed timeline and stricter rules, making it critical for developers to accelerate their project schedules and ensure full compliance with the new FEOC and safe harbor requirements.
Foreign Entity of Concern (FEOC)
The "Foreign Entity of Concern" (FEOC) rules, a key part of the Inflation Reduction Act (IRA) and the subsequent OBBB are designed to prevent certain foreign entities from receiving U.S. clean energy tax credits and to reduce reliance on specific supply chains.
The rules are complex, but here's a summary of the most recent guidance:
What Is a Foreign Entity of Concern (FEOC)?
A FEOC is a foreign entity that meets any of the following criteria:
A government-controlled entity: This includes a company where the government of a "covered nation" (China, Russia, North Korea, or Iran) holds more than 25% of the voting rights, board seats, or equity interest. This applies to state-owned enterprises (SOEs), both national and local.
A foreign-influenced entity: A new category under the OBBB, this is an entity where a "specified foreign entity" (like a government-controlled one) has certain influence, such as:
The right to directly or indirectly appoint a "covered officer" (CEO, CFO, etc.). o 25% ownership over the entity.
An aggregate ownership of at least 40% alongside other specified foreign entities. o Holding at least 15% of the debt of the entity.
Entities subject to the jurisdiction of a covered nation: This includes companies that are incorporated, headquartered, or perform relevant activities in a covered nation.
Key FEOC Restrictions in Solar and Storage
The FEOC rules place several restrictions on clean energy projects, particularly for the 45Y and 48E tax credits:
Prohibited entities cannot claim credits: If a company is a FEOC itself (a Prohibited Foreign Entity), it cannot claim the tax credits.
Restrictions on material assistance (sourcing): Projects and products will be ineligible for tax credits if they use a certain percentage of manufactured products or components sourced from a FEOC. This "cost ratio" has a threshold that will increase over time.
Licensing agreements: The rules restrict licensing agreements with FEOCs that give them "effective control" over key aspects of a project's production.
Significant payments to a FEOC are banned: There are limits on the amount of money a company can pay to a FEOC for a project to remain eligible for credits.
Timeline and Impact
The FEOC restrictions are taking effect in tax years beginning after July 4, 2025. This has created a sense of urgency in the solar industry as developers and manufacturers are now scrambling to ensure their supply chains and corporate structures are compliant.
The new rules are a significant step toward onshoring clean energy manufacturing and reducing reliance on foreign supply chains, but they also introduce new complexities and compliance challenges for businesses.