Tax Credits for Solar Energy in Doubt
Solar energy no longer needs a helping hand. That’s the message from House Republicans working on a draft reconciliation bill that will shift U.S. energy and climate policy. The Ways and Means Committee and Energy and Commerce Committee have proposed wide-ranging cuts to clean energy tax credits, including many central policies of the Inflation Reduction Act (IRA). While these proposals will evolve in the coming weeks, they raise a critical question. Is solar energy mature and competitive enough to thrive without investment incentives, or will removing support jeopardize capacity additions needed to meet growing demand?
Crafting a reconciliation bill—legislation with budget implications that can pass Congress with a simple majority rather a filibuster-proof supermajority in the Senate—is a complicated business. Key committees in the House of Representatives approved various portions in mark-up sessions and the House Budget Committee has narrowly approved the full bill, but it must still be reviewed by the Rules Committee and approved by a full vote. Speaker Mike Johnson wants to push the bill through the House of Representatives by Memorial Day, but some House Republicans object to cutting clean energy tax credits, while others want deeper federal spending reductions. And the bill must later move to the Senate, where a handful of Republicans have already criticized some of House committee proposals. The entire process could take months, and much will be subject to change.
Despite some dissent from Republican House members, tax credits that benefit solar energy are vulnerable. Committees initially proposed phasing down the technology-neutral 45Y production tax credit (PTC) for renewable energy after 2028 and eliminating it starting in 2032 (currently these tax credits are available through 2032, or when U.S. greenhouse gas emissions from electricity are 25% of 2022 emissions or lower). They proposed similar terms for the 48E investment tax credit (ITC). After pushback from some House Republicans, it now appears the tax credits could end entirely after 2028.
House Committee Proposals Affecting Solar Energy Projects
Aside from the 45Y and 48E tax credit phase-outs, several elements of the House proposals would affect solar energy projects.
“Placed in Service” requirement. The Energy and Commerce Committee and Ways and Means Committee would allow tax credits for projects only when they are “placed in service” rather than when they begin construction—so unexpected delays, permitting snags, or other issues beyond the control of developers could limit the value of their tax credits.
Foreign Entities of Concern. The Ways and Means Committee markup would disqualify any projects that involve “material assistance from a prohibited foreign entity,” which is defined so broadly that it would likely mean projects sourcing any components or critical minerals from China and a handful of other countries. This is a significant exclusion, given China’s extensive presence in clean energy supply chains.
Tax Transferability. The proposals would also eliminate within two years the transferability of tax credits, which allows developers with limited tax liability to sell their credits to others who benefit from them, helping to finance new projects.
Loan Support. Cutting back or eliminating lending activity from U.S. government agencies would deal a blow to some solar energy projects.
How would these changes affect the solar industry? First, it is important to note that solar is thriving. Last year, solar energy in the United States generated 303 terawatt hours (TWh), including utility scale and small scale facilities. Solar is the fastest-growing source of electricity generation, accounting for 61% of utility-scale capacity additions in 2024. The U.S. Energy Information Administration (EIA) estimates that solar energy plus utility-scale battery storage will account for 81% of capacity additions this year. The research group Ember notes that electricity generation from wind and solar combined surpassed coal in the United States for the first time in 2024. At the state level, solar generation is growing fastest in California, Texas, and the Sun Belt states, although supportive policy and declining costs have also driven large capacity increases elsewhere. Texas alone added 12 gigawatts (GW) of solar generation capacity in 2024.
A similar growth story is happening globally. Solar capacity expansions have far exceeded expectations for more than a decade, and China plays an outsized role. In 2024 alone, China added a stunning 277 GW of utility-scale solar capacity.
Partly because of this strong trajectory, critics argue that solar energy no longer requires generous tax benefits. The U.S. Treasury estimates income tax expenditure—defined as revenue losses due to various provisions of federal tax laws—for the energy ITC and PTC at $31 billion for 2024 and $421 billion for the 2025-2034 period, including the pre-IRA baseline and the IRA expansion of these credits. These are the largest line items for energy over that period, followed by the clean vehicle tax credit. The 25D residential clean energy credit, while a powerful tool to encourage rooftop solar adoption, has been criticized for disproportionately benefiting wealthier households. And many argue that investment and production tax credits that subsidize solar create distortions for utilities and ratepayers, by adding more intermittent sources that require dispatchable generation as backup.
Of course, there are countervailing arguments for continued federal support of solar energy. First, utilities are increasingly concerned about satisfying anticipated demand from data centers, so the fastest-growing source of electricity generation has an important role to play. Tech companies are some of the largest investors in grid-scale solar and battery storage projects, partly due to their climate commitments. Second, the ability to quickly add resources to the grid is an important distinguishing feature. Solar projects offer a much shorter installation period than other sources such as natural gas and nuclear. Despite the bright outlook for natural gas demand and the need for firm generation, it now takes up to four years to secure a natural gas turbine, according to some utilities, while construction costs for natural gas-fired plants are rising. Third, tax incentives have helped the solar industry to attract robust investment. One industry association estimates that $145 billion has been invested—rather than merely committed—in solar projects since passage of the IRA in 2022. And finally, policies that discourage resource additions will drive up costs. Rhodium Group estimates that the Ways and Means proposals for the reconciliation bill could increase energy costs for U.S. households by 7% by 2035. The consultancy suggests that in its “mid emissions” scenario under an outright repeal of tax credits, cumulative new clean energy additions to the grid including solar, wind, and other sources from 2025-2035 could drop from 952 GW to 342 GW.
Still, the political winds suggest that policy support for solar is in doubt. With the House looking for substantial reductions in federal outlays as it pares back IRA programs, the scale of potential savings makes solar ITC and PTC tax credits a prime target. Early pushback from House and Senate Republicans suggests that other energy sources such as advanced nuclear, geothermal, and possibly hydrogen are more likely to be protected. If there is an effort to claw back tax support for these earlier-stage energy sources after the House mark-up proposals, it will be harder to secure continued backing for solar.
At this early stage of the reconciliation process, many options are on the table—and furious lobbying is underway. But it is possible that when the dust settles, solar will lose some of the tax credits that have helped support its breakneck growth.
About the Author
Ben Cahill is Director for Energy Markets and Policy at the Center for Energy and Environmental Systems Analysis, University of Texas at Austin.
