Proposed US House budget reconciliation bill poses many challenges to renewable energy industry

Commenting on the draft budget reconciliation bill released by the US House Ways and Means Committee, Sylvia Leyva Martinez, principal analyst for Wood Mackenzie, said: “Many of the elements in the proposed House budget bill would deter the development of renewable projects in the US. While some technologies would be more affected than others, the early phaseout of tax credits, the removal of transferability, the requirement for projects to be placed in service to obtain the tax credits and the more stringent provisions on ‘foreign entities of concern’ (FEOC) affect the vast majority of clean energy projects in the US.”

The bill proposes a phased reduction of the investment tax credit (ITC) and production tax credit (PTC) for solar, wind, and storage projects. The credits would remain at full value for projects in service by 2028, then decrease to 80% in 2029, 60% in 2030, 40% in 2031 and 0% in 2032.

“The proposed changes would have far-reaching implications across the clean energy sector,” said Leyva Martinez. “While the bill maintains some elements like domestic content and energy community adders, the overall outlook for the industry appears challenging.”

Solar: tax credit phaseout and 45D removal pose challenges
According to Wood Mackenzie, Utility-scale solar growth may be hindered by the provisions in the proposed bill. The residential segment faces challenges with the proposed elimination of Section 25D after 2025, affecting cash and loan-financed installations.

Solar manufacturing in the US could also be affected negatively. While the extension of 45X through 2031 is positive for manufacturers, FEOC provisions could effectively close the US market to Chinese companies, and the end of tax credit transfers would dramatically hinder US manufacturers that rely heavily on this mechanism for financing.

“On balance, the proposed bill presents more downside risks to our forecast and may lead to a downward revision of our Q1 2025 Base case,” said Leyva Martinez. “However, the full implications for installations and industry stakeholders' responses are yet to be determined.”

Wind: an already-constrained market is hit by early manufacturing tax credit phaseout
The tax credit phaseout would heavily impact the wind supply chain and project pipeline. Early termination of the wind component credit poses additional challenges to the segment.

“We project a slight increase in wind installations, driven by the rush to qualify for the PTC, similar to the trend observed from 2020 to 2022, where installations averaged 14 GW annually,” said Diego Espinosa, senior research analyst at Wood Mackenzie. “However, the shift in terminology from “start of construction” to “placed in service” is expected to tighten project pipelines, thereby increasing financial risk and uncertainty.”

The current onshore wind project pipeline, expected to come online between 2025 and 2027, totals nearly 11 GW. These projects are likely to face challenges in meeting the eligibility criteria for the ITC and PTC.

“The proposed bill introduces additional stress to our wind outlook,” said Espinosa. “While it encourages a focus on operational readiness and project completion, it also poses challenges for investments and complicates financing.”

Energy Storage: IRA tax credit changes and China tariff uncertainty deliver a one-two punch to US storage
The combination of IRA tax credit restrictions and China tariff uncertainty creates significant headwinds for the energy storage sector. FEOC restrictions could effectively end the ITC for most storage projects starting construction after 2026.

“In the low case presented in Q1, we assumed a tax credit phasedown beginning in 2028, allowing a four-year safe harbor for projects under construction,” said Allison Weis, global head of energy storage for Wood Mackenzie. “The proposed changes will have a greater impact on storage buildout than presented in the low case. With 97% of LFP cathode material coming from China, storage will be shut out of ITC tax credits for projects beginning construction after 2026 despite growing domestic cell manufacturing. Even if those provisions are softened in the coming negotiations with the Senate, storage developers will face hard in-service deadlines in an industry prone to delays, higher costs, and increased risk for lenders.”

Nuclear: investment incentives, revenue streams shortened but other drivers remain
Investment incentives and revenue streams for nuclear would decrease if the proposed bill is passed, but federal support for this technology would continue driving deployments. Existing nuclear plants will be increasingly tied to power market prices.

“New nuclear will need to pivot,” said David Brown, research director for Wood Mackenzie. “Excluding the ITC, the levelized cost for nuclear power increases by around US$40/MWh in 2040. With the ITC facing a sunset, investors and nuclear power developers will need to lean on other initiatives. For existing nuclear, the reconciliation bill does not change our mid-term view. We expect around 96 GW of nuclear power generation in 2035, just 1.5% lower than today.”

Geothermal: mixed signals from Congress
Geothermal is receiving mixed signals from Congress, with some supportive policies offsetting the negative impacts of the bill.

“For geothermal, the budget reconciliation bill accelerates the phase-out of the investment tax credit, ends credit transferability and ends foreign ownership of taxpayer-funded projects,” said Richard Hood, senior research manager at Wood Mackenzie. “A tailwind for geothermal investment has been the technology sector. Geothermal is considered one of the few resources capable of meeting the growing power demand presented by the expansion of data centers, and it does this through clean, 24/7 baseload power.”

Hydrogen: proposed 45V amendment threatens to derail US green hydrogen ambitions
The proposed amendment to terminate the clean hydrogen production tax credit threatens to derail US clean hydrogen ambitions, putting almost all announced green hydrogen capacity at risk.

“If passed, the amendment to eliminate the 45V credit on January 1, 2026, could trigger significant changes in the US project pipeline,” said Hector Areola, principal analyst, Wood Mackenzie. “Developers face a critical decision: either accelerate their projects to meet the new deadline or risk losing the tax credit entirely. The ongoing regulatory uncertainty threatens to stagnate the low-carbon hydrogen industry in the US and could potentially alter the landscape for clean hydrogen globally.”

Wood Mackenzie's analysis reveals that about 0.2 million tonnes per annum (Mtpa) of hydrogen capacity under construction or in advanced development could still benefit from the 45V credit. However, the outlook for projects beyond this stage is less optimistic. Of the 3.4 Mtpa of green hydrogen capacity announced in the US, 95% is at risk, with developers facing difficult choices about whether to accelerate, postpone or cancel their projects.

CCUS: tax credit transferability at risk, but underlying incentives remain
“The biggest winner in the proposed House bill is carbon capture, utilization and storage (CCUS), as the 45Q tax credit remains largely unchanged,” said Rohan Dighe, research analyst at Wood Mackenzie. “While the Ways and Means Committee’s proposal does include two modifications to the 45Q carbon sequestration tax credit, its value and duration – attributes that make it one of the most attractive CCUS incentives in the world – remain intact.”