Welcome to Crux Connects, Crux’s interview series with energy finance experts. Early on Thursday, the US House of Representatives passed the One Big Beautiful Bill Act on a party-line vote. The legislation passed with several last-minute modifications, including tighter restrictions on certain clean energy and manufacturing tax credits.
The legislation now moves to the Senate, which is expected to craft their own version following the Memorial Day recess.
In this episode, Sam Kamyans joins Crux Policy & Research Strategist Katie Bays to discuss the House bill. Sam is a partner in the Tax Practice Group at Kirkland & Ellis, where he specializes in tax-driven transactions for the financing and acquisition of energy projects.
We will continue to keep our partners informed throughout the remainder of this legislative process, including through regular client memos and webinars. If you are interested in gaining access to these insights, get in touch to join the Crux platform.
Lightly edited for clarity.
Katie Bays: Sam, thank you so much for joining us today.
Sam Kamyans: Thank you. Katie.
KB: We saw our first glimpse of this bill from the House Ways and Means Committee just 10 days ago, and a lot has happened since then, even in the last 24 hours. Can you help us recap the journey that this bill has taken from Ways and Means to the floor vote today? And then where do we go from here?
SK: Last week, the bill was introduced and had what, at the time, seemed like enough support on the House side to make its way through a vote so that it could go up to the Senate. The initial bill that was introduced pared back some of the energy tax credits under the Inflation Reduction Act (IRA). Specifically, they focused on pulling forward the dates on which the credits would expire and providing to taxpayers three to four years of runway of the credits slowly phasing down, enabling credits to be available until the end of 2031. Those were focused on the energy production side, so think your wind, solar, batteries.
The bill also curtailed, while also extending, certain other credits. For example, on the advanced manufacturing side, the bill proposed taking away the final year of the §45X advanced manufacturing credit, which would have been a 25% year phasedown. The bill extended the clean fuels tax credit, which was slated to expire at the end of 2027 by extending it through the end of 2031, and the bill made modifications to the carbon capture and sequestration credits.
One feature that the bill proposed was to curtail transferability for pretty much all of the credits — for example, carbon capture was slated to no longer be eligible for transferability if they started construction after the end of 2027, and clean fuels and advanced manufacturing were going to lose their ability to transfer as of 2028. So there was some curtailment of transferability while there was some extension of other credits. There's quite a bit of nuance in these, but I'm just trying to keep it high level for the moment.
And then we fast-forward to some of the revisions that were made just in the past day. Several members within the House had voiced concerns about the size of the deficit and the lack of meaningful curtailment of some of the energy credits. An amendment was introduced during this week and curtailed the credits even further. So, for example, they pulled forward the clean energy tax credits for renewable power generation to essentially expire all of the credits at the end of 2028 for projects that haven't been placed in service by that time. On the front end, they also propose to require taxpayers to begin construction on these assets very shortly after this bill would be enacted.
One area that neither last week's proposal nor the proposed legislation that made its way out of the House today had any impact on were direct-pay provisions; those have been left alone. So for taxpayers that are focused on §45Q or §45X, they still have access to those ways to monetize their tax credits. I've left §45V out of the taxpayer eligibility for direct pay because both the last-week version and the this-week version are proposing to do away with the hydrogen credit starting at the end of this year, unless a project has already begun construction.
So where that leaves us now is we have a bill that is proposing to significantly curtail the renewable power generation credits, §45Y and §48E, by imposing a strict placed-in-service date at the end of 2028 and requiring taxpayers to start construction within 60 days after enactment if the bill were to become law. That proposal is now going to make its way over to the Senate. The Senate — I believe they come back on June 2 — are going to look at the bill and consider any revisions that they want to make to that bill. Historically, the Senate has not passed this magnitude of bill without undertaking revisions to it. I think we expect to see revisions to the bill once the Senate comes back, but the direction of those revisions will unfold in the coming weeks and months here.
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KB: Let's dive into some of the key changes between the draft legislation and the final version voted on this morning, and really try to set the stage for the things we need to be paying attention to over the weeks and months. The repeal timeline on this tech-neutral tax credit that replaced the legacy production tax credit (PTC) and investment tax credit (ITC) this year was altered. Can you run through those alterations and explain the proposed legislative text with regards to the construction and the placed-in-service deadline?
SK: Parties in the space are familiar with the start-of-construction rules and the placed-in-service rules. At a high level, the start-of-construction rules are intended to demonstrate that a taxpayer has undertaken either enough physical work with respect to a project or has expended enough money with respect to a project to show that they're serious about bringing a project online. From that vantage point, the rules provide that if a taxpayer spends 5% of the total basis of the energy property on equipment for the project and they bring that project online within four years, then they will be treated as having started construction on the project.
An alternative to that is to begin physical work with respect to a project. That can entail a very wide-ranging, kind of subjective approach as to what it means to start work. Taking wind as an example, historically, parties have gotten comfortable with digging out the holes into which the foundations would be poured for the pylons and the turbines. There are approaches where parties can begin building the internal roads that are necessary to connect the turbines. If we look to some of the equipment that can be manufactured, transformers have always been a popular item that a taxpayer can start building. If they have enough equipment built within a particular year, they're viewed as having started construction. That's a pure tax construct.
What the bill is now coming out and saying is that they want to curtail and pull forward the years into which the credits are available by using two metrics: One is to say you have to start construction on projects that are eligible for these tech-neutral PTCs or ITCs within 60 days after the bill’s enactment. So, for example, if we just put this into the calendar year, suppose the bill is enacted on October 1. That would provide close to the end of the year for taxpayers to be in construction, and so we would see an immediate rush by taxpayers to carry out the strategies that they have had in the past to start construction, whether it's purchasing enough equipment to hit that 5% threshold, or if it's beginning some physical work with respect to significant pieces of equipment or onsite, physical work where the project will be installed.
In the bar, we're kind of used to this, we've seen it before, but the speed at which the bill is intending to cut off the start of construction to be eligible is a new area to navigate. It remains to be seen how many taxpayers will be able to identify strategies to start construction before the end of this year, or before the 60-day period after the bill’s enactment, if it were to be enacted.
KB: There's also the secondary placed-in-service deadline that you touched on, too. So a project, under these rules, would have to hit that start-construction deadline, and then they'd also have to hit a placed-in-service target. How does that differ from the historic safe harbor that the industry has relied upon to ensure that they can, by achieving the construction start, retain their access to the tax credit?
SK: That's a great question, and this is one that is going to really change how participants look to financing their projects. In sum, the bill proposes to cut off ITC or PTC eligibility if a project is not placed in service by the end of 2028. Going back to the start of construction, there's a lot of different options that taxpayers can employ to start construction on a project. Whether it's solar, wind, batteries, carbon capture, there's a whole host of technologies, but in all of those instances, there's really only one thing that has to be done in order for construction to start. That really enables taxpayers to survey the scope of their project, to discuss with vendors and EPC contractors as to what the universe of the possible is.
Going to the other side, where we say that the project has to be placed in service by the end of 2028, now restricts the taxpayer quite a bit further, because instead of having a single box that it has to check to start construction, now it has to make sure that they could check every single box for a project to effectively come online and begin generating electricity or capturing carbon or what have you. And so now taxpayers are in this situation where they need to be in a position that they are completely certain that if they begin work on a project, that all of the work for that project will be done by the end of 2028. Projects that have a long interconnection queue are ones to focus on pretty heavily. If there's a medium-term project out there that won't have its interconnection in time to sequence it with the EPC contractors coming onto the site and receiving all the equipment and having everything placed in service by the end of 2028, then the taxpayer’s at risk of losing the entire credit because one party was unable to satisfy the timing requirements.
This could happen in a multitude of ways that are completely outside of the taxpayer’s control. So, for example, taxpayers can control what their cost is going to be with the EPC by putting some provisions in the contract where they try to cap what the overages might look like. Taxpayers can enter into supply agreements for all of the equipment that they need and have a good sense of what those costs and timelines look like. But at the end of the day, because there are so many parties involved, the delays that could push a project past 2028 are well outside of taxpayers’ control. You can't control for an EPC just not having enough laborers due to a labor shortage. You can't control for delays in shipping if shipping corridors are jammed up.
There's a lot of things that can delay a project and prevent a party from actually getting their project online, placed in service by the end of 2028. This new provision that the bill is proposing really puts taxpayers in a difficult position, particularly as we get into later years, say, late 2026, early 2027. If projects haven't started construction yet, then there's going to be a real heavy focus on their ability to deliver by the end of 2028 and get the tax credit. That’s going to have a cascading effect on the amount of debt they're going to be able to raise to build out these projects. Those are going to be some of the factors that developers look to in the coming years.
KB: When we look at that financing piece that you just touched on, transferability, in our analysis, has certainly played an important role in how projects are raising capital and the kinds of capital access that projects have. Can you walk through some of the impacts to transferability, especially for the tech-neutral tax credits, but also for the wider variety of tax credits that are affected by the legislation?
SK: For the tech-neutral credits, it's fairly straightforward what the impact is. If the bill were enacted with the end of 2028 placed-in-service deadline, then credits can only be transferred that exist. Once 2028 passes, unless there's been an extension of the bill, there will be no more credits for the tech neutral. That provides parties three years of runway to access transferability, so long as they could get their projects timely placed in service.
Shifting gears away from the tech-neutral and going to advanced manufacturing, carbon capture, and the clean fuels credits, those have separate, independent regimes. I'll start with §45X and §45Q. Each one of those are slated to lose their transferability starting in 2028, but in somewhat different ways. Advanced manufacturing is proposed to just cut off starting in 2028, so transferability would be unavailable for any credits that begin as of that period. Carbon capture has a unique provision in that if the project's construction starts approximately within two years after this bill were to be enacted, then transferability is available for the full 12-year credit cycle. If this bill were to be enacted, then what you see on the back end is projects that are unable to start their construction would simply be unable to transfer the credits, although the credits would be available for a few more years, so there’s tax equity possibility.
I kind of lump §45X and §45Q together in the transferability setting because those two, while they have some restrictions on their transferability, one thing that the bill has not done is take away their direct-pay capabilities. There's some solutions remaining for them, but realistically, we have not seen tax equity focused on carbon capture. We haven't seen tax equity focused on advanced manufacturing. For those credits, transferability has been their first port of call, and these changes can have an impact on those. We'll have to wait to see what comes out of the final bill.
And then lastly, for clean fuels, this was one that I think was unexpected for a lot of people, in that the credit itself has been extended through 2031 but transferability goes away beginning in 2028. There was a little bit of a mismatch between the extension that parties had hoped for, but then taking away at least one of the abilities to monetize the credit.
KB: I wanted to double click quickly on one question that we've gotten a lot, which is, if you are generating a strip of PTCs, how does the change from that 2027 to 2028 timeframe, does that affect the PTCs that are being generated from a project that was placed in service at a prior year? So again, the later-dated strip of PTCs from a project placed in service, say, in 2024.
SK: No. Unlike §45X where the statute provides that the incremental generation just loses its ability to transfer starting in 2028, there is nothing in the statute that suggests a project that's already been placed in service loses its access to the transfer market. To build on your example, if the wind facility were placed in service in 2024, although transferability goes away for new wind facilities post 2028, it does not take away the ability for a legacy project to continue transferring the credits that it's entitled to.
KB: When we look at the entire regime of the options that are available to projects to monetize their tax credits, what do you anticipate that this might do for the project finance market? So transferability goes away, basically. What does project finance look like? What are some of those options that are available?
SK: In terms of how tax equity is going to pick and choose projects — if we just stick with tax equity for a minute. The tendency, I suspect, will be for tax equity to go with the projects that are the simplest to diligence, that have the best fact pattern for having timely started construction, and have a viable plan to be placed in service timely to ensure that tax equity gets their tax credits. That landscape is utility-scale solar, is the batteries that are becoming more and more financed, wind farms. Stepping away from the asset class itself, then the focus will be on the track record of that particular sponsor. If you were to “rack and stack” them, you could see the strongest sponsors continuing to have access to tax equity because they have the track record where they can provide more assurances as to both their construction strategy and their ability to place in service timely. And by being able to fit within that timeframe that gives them access to transferability, you would have ongoing tax equity investors that are utilizing these hybrid deals.
I think the challenges we're going to find are in areas that have not matured to the point where they have tax equity investors. For example, clean fuels is relatively new. We've always had the blenders tax credit that was really, effectively, a refund paid over to fuel producers. Now the tax credit regime is one that they are unaccustomed to, so it might take some time for those parties to really access tax equity markets. But in a more selective environment, absent an expansion of need for tax equity participants to get into the market, they're likely to put fuels lower on their list of projects that they would consider. Same with advanced manufacturing; it's just not a mature market yet. And carbon capture itself, that market is starting to develop, but it's not at the place where some of the easier projects, so to speak, like solar, have been getting financed for 20-plus years.
KB: Let's dive into maybe some of the more nuanced aspects of the legislation. One of the potential impacts we've received a lot of questions about is how this proposal treats the residential solar leases. We'd love for you to dig into some of the details there for us.
SK: This was a provision that made its way into the bill in the last day or so. There was no indication, at least to me, that it was under consideration. Effectively, what it's saying is that if a party owns residential projects, and the contractual relationship between the resi project and the homeowner resembles a lease, and if that homeowner were eligible for tax credits for individuals, then the business can no longer take the ITC for the resi assets. In effect, it seems to be a way to go after the solar leasing businesses. Maybe that was impacting the revenue score? It’s just not clear what the impetus was.
But essentially, if there's a company that owns a whole lot of residential systems, if they are unable to show that they have a business model other than a lease to the homeowner, then they're going to be at risk of losing the credits even though they satisfy the ownership and placed-in-service and start-of-construction requirements. This will be one that requires participants to take a close look at how they enter into contracts with the homeowners to ensure that they can comply in a way that isn't taking away the credits.
KB: Another complicated aspect of the bill is how the treatment of foreign entity of concern (FEOC) is structured. There's some aspects of the foreign entity of concern language that appear to be expedited. Can you walk us through this and tell us about some of the specifics and who's most impacted?
SK: At a high level, the FEOC rules are intended to take away tax credits from parties that are viewed as being too intertwined with countries that we've designated as bad actors. Those are currently listed as China, North Korea, Russia, and Iran. I think we can focus on China for this discussion, as they're the prime manufacturers of components that make their way into projects in the US. What these FEOC restrictions are now looking at are two different types of application that phase in in 2026 and then in 2028. I'll bundle them into ownership FEOC and supply chain FEOC.
Under the ownership FEOC, this uses a rule that we've had in the §30D credits for batteries that go into cars. It’s nuanced, but at a very high level, if there's 50% or more ownership, direct or indirect, by a covered country — let's continue going with China — or there are certain types of labor involved, or there is ownership by certain battery manufacturers that are listed on a US list, then that ownership can prevent the entity from being eligible for tax credits. That applies to the tech-neutral, to carbon capture, to manufacturing, to fuels, to everything. It's going to be important for taxpayers to really understand their ownership structure, which can be a little bit challenging when you have private equity that sources LP capital from all over the world. There's going to be this renewed focus on what the ultimate owners are of the equity.
Starting in 2028, these rules expand further such that the ability for, say, a Chinese entity to appoint a certain Chinese official or covered officer into the company can disable the credit. If there is 25% or more of the debt held by a Chinese entity, it can disable the credit. If there are certain payments that are knowingly being made to the Chinese entity, whether it is interest or licensing arrangements or others, that can also impact the credit. So there's this economic dimension to the FEOC rules that taxpayers are going to have to be focused on when they look at their capital structure and their contractual relationships.
One additional FEOC rule that the proposal from last week put forward, and today's proposal has not amended, is looking through the supply chain to understand if a taxpayer has received material assistance from one of these prohibited entities, like China. There's going to be this renewed, very discreet focus on the supply chain to understand what a party is purchasing from China, whether that's incorporated into their project, how material that equipment is that they've purchased that is incorporated into the project. There's anti-abuse-like provisions that look to whether a Chinese entity is building a factory in the US and entering into IP licensing arrangements with that factory that enables the factory to generate credits. Instances like that, where there's, at a very high level, the seeming symbiotic relationship or very intertwined relationship with a Chinese entity, both from a supply chain and an ownership perspective, can disable the credits.
There's going to be a very, very strong focus on the supply chain, where's equipment coming from, what the magnitude of work is that China is doing, and what the magnitude of ownership is coming from those countries into the US, and what impact that's going to have on the credits. So, TBD.
KB: I suppose it goes without saying, but that sounds relatively onerous. There's been a lot of feedback to the extent that this is difficult to comply with. Do you have any perspective on the source of the ambiguity and how this will be sort of worked upon over time?
SK: I think the ambiguity, a lot of it is just purely mechanical, if you think about it. So if you're a sponsor in the US and you have contractors who have subcontractors who have vendors, looking through that entire supply chain to try to comply with these rules can be very challenging in terms of receiving the necessary information to understand what is going on at every point of the supply chain. To achieve this level of compliance, parties that have entered into private credit lending arrangements might have some difficulty looking up the chain to see where the capital has been sourced from. Outside of public capital markets, the information just might not be available. You're kind of in a situation where there's parties that want to comply, and they certainly want to do the right thing, but they just might have considerable difficulties knowing how to find the information and evaluating whether they even can find the information.
KB: If we were to just zoom out, thinking about the broader impact of this bill on project financing, capital markets, do you have a perspective, just based on what we're seeing in the market today, including the rise in bond yields, how this bill might be processed or worked upon by the industry?
SK: If you take a step back and look at bond yields going up, so the cost of capital immediately goes up, which then puts pressure on the viability of these projects. The tax credits become even more important in the capital stack so that the project can be viable. It could cause power prices to go up to have enough money to pay these higher yields. If you tie this back to the difficulties of getting a project online by the end of 2028, as a bank perceives that risk increasing, assuming they can even fund to it, they're going to charge a higher interest rate using a higher base to begin with. So there's a lot of compounding effects from higher bond yields that are going to make their way into the system to really increase the cost of these projects, and it remains to be seen how it's going to filter through the system.
KB: As a closing question, do you have one piece of advice for market participants as they're trying to navigate this dynamic and rapidly changing policy landscape?
SK: I think what sponsors should do is take a very close look at their pipeline to find those low-hanging fruit or projects that they think they can manage under these rules and get them placed online, and renew their focus onto those areas and really dig into and work with your advisors as to how to start construction and come up with the strategy to optimize the financing for those projects. Once there's a plan in place for those, then focus on the medium term, then the long term. But the immediate projects are the ones that will most likely be able to comply with these rules if they're enacted, and that would certainly be a good place to start.
KB: Thank you so much, Sam. We really appreciate your time and look forward to staying in touch with you.
SK: Thank you. Katie.
