A Lifeline for Clean Firm Power

The Senate Finance Committee recently released draft text of a budget reconciliation proposal that undertakes major redesigns of federal clean energy, clean vehicle, and advanced manufacturing incentive programs articulated in the Inflation Reduction Act (IRA). This draft text significantly modifies the House “One Big Beautiful Bill” (OBBB) reconciliation proposal, passed on May 22nd.

Designing national energy policy through budget reconciliation is inherently problematic, and there remains significant room for improvement of the bill even within the bounds of Republicans’s political imperatives in this Congress. But the Finance Committee’s proposal represents a major improvement over the House’s OBBB text. The Senate version would extend policy support to nascent energy technologies that would be phased out under the House proposal—including nuclear, geothermal, and power plants with carbon capture—while rationalizing so-called foreign entity of concern (FEOC) provisions to make federal infrastructure and innovation policy more workable.

We at Breakthrough have long argued that federal energy technology subsidies should prioritize innovation and emerging industries. Though crudely, the Senate Finance legislation moves policy in that direction, by phasing out subsidies for the most mature low-carbon industries: solar, wind, and electric vehicles. If passed, the bill could set the stage for further necessary reforms to the nation’s energy and infrastructure policy, including demonstration and commercialization support for nascent industries, an overhaul of environmental siting and permitting regulations, and streamlining of the transmission planning and investment process.

Below, we walk through our analysis of the Senate Finance Committee’s bill text, and offer recommendations for final legislative improvements as the OBBB framework nears the finish line.

Subsidizing Innovation, Not Emissions Reduction

Like the House bill, the Senate bill eliminates the IRA provision under which the technology-neutral electricity tax credits phase out at some point in the far future after power-sector carbon emissions fall below a threshold of 25% of 2022 levels. Instead, the legislation phases out tax credits on a technology-by-technology basis.

By implementing an earlier phaseout of clean electricity credits for solar, onshore wind, and offshore wind, the Senate Finance Proposal achieves an additional $130 billion in fiscal savings over the 2025-2035 period relative to the House version. Only new facilities beginning construction this year will be able to qualify for the full credits, with steeply declining partial credits available for projects commencing construction in 2026 and 2027. Over a ten-year timeframe, the Senate proposal may achieve approximately $639 billion in savings relative to current IRA policies, while the House proposal may represent savings of $509 billion.

Despite an even more austere early cutoff to federal subsidies for wind and solar, the Senate Finance draft improves upon the House bill by maintaining greater investment in emerging clean energy technologies like advanced nuclear, advanced geothermal, energy storage, and carbon capture.

While renewable advocates balk at the earlier phaseout to wind and solar credits, the Senate draft offers some silver lining for the renewables sector compared to the House version. The Senate’s approach preserves the investment tax credits for energy storage facilities that increasingly accompany solar and wind projects in practice—a smart policy strategy that will continue to help increase renewables’ electricity market value proposition while bolstering U.S. grid reliability. A growing fraction of solar projects in particular now use on-site battery storage systems, with over 26% of projects in recent years leveraging battery systems. The energy storage investment tax credit is technology-neutral, and thus also plays a key role in accelerating the commercialization of novel battery, thermal, and other energy storage technologies. The Senate’s draft also makes much-needed improvements to convoluted provisions barring credit eligibility for foreign entities of concern (FEOC) that might have posed extreme bureaucratic compliance difficulties even for taxpayers with negligible links to FEOC.

Ultimately, trading off preserved credit eligibility for emerging energy technologies like advanced nuclear, geothermal, and carbon capture that have yet to achieve commercial scale in exchange for accelerated phaseout of solar and wind tax credits represents a positive revision. The House bill favors a longer off-ramp for solar and wind tax credits but applies the same timing of credit phaseout for clean firm electricity technologies like geothermal and hydropower. Additionally, the House bill requires energy projects to have commenced operation by the applicable year to earn credit eligibility, a burdensome restriction that disproportionately penalizes clean firm technologies with longer construction lead times. As such, the Senate text arguably prioritizes innovative early deployment of clean firm energy sources far better than the House proposal.

Crucially, the Senate version also proposes much-improved FEOC restrictions. The draft text increases limits on individual ownership, total ownership, and debt held by FEOCs, avoiding the risk of unnecessarily excluding companies with nominally low shares of FEOC ownership. This change also mitigates the risk that FEOC entities could disquality U.S. taxpayers from incentives simply by purchasing minimal amounts of stock or debt.

The Senate draft also articulates more sensible restrictions that target the ability of FEOCs to exercise “effective control” over electricity generation or transmission, or the manufacturing of critical minerals and components. In principle this represents a superior approach to the House bill, which sought to crudely bar projects and manufacturers from utilizing even negligible intellectual property or quantities of imported material obtained from FEOC countries. However, these “effective control” provisions still leave considerable room for improvement.

Overall, the Senate proposal turns a set of draconian restrictions widely critiqued by industry and policy stakeholders as “unworkable” into a more reasonable and responsible set of guardrails to control future eligibility for selected tax credits. Still, legal experts have pointed out a number of remaining issues: the difficulty of assessing broad ownership of municipal bonds issued by public utilities, unclear definitions for “manufactured products” and coverage of sourced components used to calculate metrics of FEOC influence, and burdensome obligations for taxpayers to collect information on suppliers’ ownership, debt holdings, and counterparties. Overall, policymakers should prioritize clear and easy-to-follow FEOC rules that avoid adding additional burdensome red tape to energy infrastructure construction. It would be a mistake to obsess over taxpayers’ peripheral FEOC exposure to the point of imposing significant bureaucratic delays on the development of new U.S. energy projects.

If revised further to resolve such issues surrounding definitions and information constraints, the Senate’s more pragmatic approach to FEOC restrictions can better unlock the full long-term value of the clean electricity credits for technologies like nuclear and geothermal, while similarly benefiting domestic manufacturing supported through the Advanced Manufacturing Production Credit, such as new U.S. critical mineral projects and battery gigafactories.

Our recommendations

We would recommend several substantial reforms to the OBBB proposals that, we recognize, are unlikely to materialize in the limited political window before final bill passage. While the Senate Finance draft appropriately rebalances clean electricity subsidies to prioritize innovation, in other sectors it does the opposite, extending subsidies for commercially mature and environmentally harmful biofuels while phasing them out for nascent clean hydrogen technologies. We would recommend the opposite. Likewise, while both the House and Senate versions phase out consumer subsidies for electric vehicles, we would emphasize the strong national interest in strengthening America’s battery and critical minerals supply chains. While the long-term future of American-made EVs was unstable long before OBBB negotiations began, the long-term strategic value of battery manufacturing and critical minerals production—for hybrids and EVs, yes, but also for drones, artificial intelligence, grid-scale storage, and more—remains obvious.

But recognizing the clear political constraints and shrinking negotiation space for reforming IRA policies in the context of a broader budget reconciliation showdown, we offer the following high-leverage legislative changes that come at low cost, zero cost, or even positive savings while producing beneficial impacts for U.S. energy policy and energy innovation.

Allow regulated utilities to opt-out of normalization tax rules

This no-cost proposal would allow regulated state utilities to opt out of normalizing capital costs over the entire period of asset depreciation and instead take the full capital cost upfront, benefiting from the clean electricity investment tax credit immediately at the start of project construction. By reducing the initial capital expenditures and financing costs for capital-intensive baseload energy technologies like advanced nuclear, geothermal, hydropower, and carbon capture, this tax normalization change adds significant market value to the investment tax credit at no additional fiscal costs. Currently, utilities are not able to do this.

We recommend incorporating this tax normalization opt-out option into the reconciliation package. Text for this provision is currently already drafted in the Accelerating Reliable Capacity Act of 2024.

Incorporate simpler and clearer revisions to FEOC restrictions

Congress faces a tradeoff between rigorous prohibitions that ensure that little if any benefits from tax credits flow to FEOC entities, and simpler safeguards that reduce the time and cost burdens of compliance for taxpayers. Policymakers should recognize that onerous restrictions that heavily limit or delay new domestic investments into energy and manufacturing projects will do far more to hurt American strategic competitiveness long-term. A number of improvements can reduce bureaucratic regulatory burdens while maintaining sensible guardrails that restrict FEOC eligibility for tax credits:

• An exemption that excludes publicly-issued municipal bonds from the calculation of the share of debt in the aggregate held by FEOC entities. This resolves the infeasibility of tracking ownership of publicly-traded bonds—a challenge that would otherwise hinder public utilities from securing federal incentives.

• Specific lists and definitions of manufactured products and components included in the cost ratio calculation for assessing the potential degree of “material assistance” sourced from FEOC entities. Considering the types of energy and manufacturing projects that these “material assistance” provisions apply to, Congress should formulate specific and clear lists of which components constitute a priority for avoiding FEOC sourcing. For example, for batteries the cost ratio calculation could be limited to the total costs attributable to contained critical minerals, electrode active materials, and battery cells, with sourcing assessed on a direct supplier basis.

• Limit the scope of the “material assistance” restrictions to Specified Foreign Entities and Foreign-Controlled Entities. This meaningfully reduces the daunting information burden on taxpayers to obtain exhaustive information about the ownership, debt holders, and counterparties of all third-party suppliers in their upstream supply chains.

• Restore more reasonable limits on the statute of limitations and accuracy-related penalty thresholds for errors in determining material assistance from prohibited foreign entities. Additionally or alternatively to the preceding point, we note that the dramatic changes to the statute of limitations and penalty thresholds for taxpayer errors in assessing material assistance impose significant unnecessary risks upon taxpayers seeking to claim electricity production or investment credits or manufacturing credits, and risk discouraging private sector investment in these sectors. Particularly given the significant ambiguity of the material assistance provisions and dependence on subsequent guidance, such added penalization of any errors may severely limit the usefulness of these incentives for industries like geothermal, nuclear, and critical minerals.

Restore stringency on pollution and land consumption safeguards for clean fuel production tax credits and biomass-fired electricity

We would advocate for getting rid of federal subsidies for biofuels and biomass-fired electricity entirely. These subsidies support clearly commercialized technologies and possess no innovation policy basis.

Barring full repeal of these provisions, we recommend striking Section 70512(e), which modifies 45Y and 48E. This provision would require the Treasury Secretary to draw from specific scientific literature that would skew the process of identifying certain combustion technologies as zero-emission, thereby qualifying additional technologies for subsidies without rigorous scientific basis. Doing so would end-run the robust process underway at the National Renewable Energy Laboratory (NREL) to make those determinations based on sound evidence-based assessments. We think Congress should respect the NREL process, which will yield more research-based and durable conclusions.

Concerning 45Z for clean transportation fuels, we recommend against proceeding with the changes reflected in Section 70521(b)-(c). These provisions make changes to lifecycle emissions calculations that would undermine land consumption safeguards embedded in the U.S. government’s historic approach to biofuels. The provisions would likely accelerate deforestation and increase agricultural land use, undermining key benefits of the credit. Also, the elimination of negative emissions rates would compromise the technology neutrality of 45Z. These changes would likely preserve incumbent, established biofuel feedstocks and production pathways at the expense of any innovation that 45Z might drive. We believe other provisions in this section should suffice to protect domestic interests without foregoing essential environmental protections.

Restore a longer timeline for critical mineral Advanced Manufacturing Production Credits

The Senate text commits a major strategic mistake by phasing out production tax credits for domestically-produced critical minerals between 2031-2033. Previously, the 45X production tax credit contained no phaseout provision for critical minerals production. The critical minerals sector faces uniquely long lead times that require a longer credit eligibility period in order for production tax credits to generate adequate market investment and project development.

Even a highly-ambitious effort to establish new domestic critical mineral projects would likely only see an initial wave of projects commencing production in the early 2030s, by which time they would only be eligible for a handful of years’ of partial tax credit eligibility for critical materials produced. This does not constitute a market incentive sufficient to drive growth in a domestic minerals sector at a level remotely commensurate with U.S. strategic needs. We would recommend that credit phaseout for domestic critical minerals production commence after the year 2039.

Where to Go From Technology Favoritism

In its departure from a crude blanket phaseout of tax credits starting several years from now, the Senate is, in a sense, returning to the “picking winners and losers” approach that skeptics of federal energy subsidies have long criticized. Those criticisms were not without merit; indeed, wind and solar’s success arguably came at the expense of industries like nuclear energy, which for decades shared neither the federal deployment subsidies, state-level mandates, or favorable market design conditions that renewables enjoyed. But the “technology-neutral” approach adopted under the IRA also misaligned federal subsidies with the discrete needs of respective technology industries.

Solar and wind energy both now enjoy established commercial markets nationwide and will continue to be built in larger quantities should these technologies achieve additional cost improvements over time. More important than subsidies for wind and solar today are energy storage and permitting and interconnection reform, while subsidies and other commercialization supports remain important for the nuclear and geothermal sectors. By phasing out subsidies for mature intermittent technologies like wind and solar, while extending them for less mature “clean firm” technologies like enhanced geothermal and advanced nuclear, the Senate’s OBBB proposal takes a more strategic (and less expensive) approach to subsidizing energy technology innovation. For other technologies like hydropower and large light-water nuclear reactors, federal policy can intervene to end a long period of stagnant development and policy-imposed penalties, and rejuvenate these industries for powerful new growth in the 21st century.

Energy systems, as a general rule, rely on a diverse portfolio of assets to optimize for lower costs and high reliability of service. As such, refocusing federal energy subsidies on clean, firm technologies and energy storage will actually benefit all energy technologies collectively. Synchronous generators provide the stability and flexibility that in turn enable greater development of variable renewable generation. Meanwhile, firm baseload generation can catalyze both old and new energy-intensive, high-utilization industrial infrastructure, from data centers to electric arc furnaces to semiconductor-grade polysilicon fabs. The policy rationale is clear: clean, firm energy is an excellent target for public sector support.

But just as firm energy technologies languished for years without federal support while wind and solar received generous tax credits, policymakers should keep in mind that technology favoritism is ultimately an imperfect proxy for innovation policy that has no hard and fast rules. Variable renewable technologies can still be highly innovative, and if future breakthroughs in highly-efficient perovskite solar cells or floating offshore wind offer opportunities that could strengthen America’s energy landscape then a future Congress should absolutely target energy spending accordingly. For now however, if Congress must pick, clean, firm energy is the sensible choice.