Adam Bernardi, Burns & McDonnell’s solar business line director, longs for the halcyon days before the One Big Beautiful Bill (OBBB) made his workflow messier.
“There was a normal course of business,” he recalled. “We would either do an RFP or hear about a project. You’d get selected, and then you just kind of get into the engineering, you buy some stuff, and you’re off and running.”
“Post-OBBB? It’s uncertainty through that process,” Bernardi continued. “We do a little bit of engineering. Oh, wait, let’s stop, because we’ve got to figure out: What does this mean? New tariff comes in. New Twitter war happens. At the individual project level, there have been a lot more ups and downs in terms of what is going to happen, and when it’s going to start.”
This summer’s passage of the budget reconciliation bill, which sunsets tax credits for solar and wind projects much sooner than the Inflation Reduction Act (IRA) intended, has created a mad dash to safe harbor equipment and start construction on as many sites as possible.
Like many of his contemporaries, Luigi Resta, president of utility-scale clean energy developer rPlus Energies, has spent countless hours since the OBBB was signed into law working on strategic response plans. He says his company and others like it now have a much clearer path on how they might survive, thrive, and grow in this environment. But there are a few loose ends.
“What happens with the ultimate direction of FEOC?” Resta asked aloud.
FEOC, or foreign entities of concern, are organizations designated as threats to U.S. national security by an assortment of federal agencies. Recent legislation, including the Infrastructure Investment and Jobs Act (IIJA), the CHIPS and Science Act, the Defense Authorization Act (NDAA), and the Uyghur Sanctions Act, imposes restrictions on companies dealing with potential bad actors, primarily China, limiting their access to tax credits.
In response to growing concern over American reliance on foreign manufacturing, the OBBB similarly limits a “prohibited foreign entity” (PFE) from participating in the supply chain for a facility or product seeking such credits. The rules, however, are anything but straightforward. They include confusing definitions, multi-step ‘tests’ for whether a PFE has formal or effective control of a company, new rules for licensing, exemptions for certain publicly traded entities, and clauses on what constitutes ‘material assistance’ up to a certain threshold.
“The new PFE rules are, essentially, FEOC on steroids,” National Law Review assessed.
And since most renewable energy developers, equipment manufacturers, and procurement folks aren’t tax attorneys, this particular wrinkle of the OBBB has created quite a quagmire- and there isn’t much time to navigate it.
As we approach the end of the year and the corresponding deadline to fully capitalize on withering credits, stakeholders across the energy industry are anxiously awaiting further clarification from the U.S. Department of the Treasury on PFE restrictions, which could ultimately make or break the finances for most projects.
“We know there’s going to be some restrictions out there. We’re hoping that the restrictions are somewhat balanced and that they’re based on percentages and things like that,” offered Matt Dinisco, chief operating officer of independent power producer (IPP) REC Solar.
Dinisco and the majority of his peers who spoke with me at RE+ expect clarification this month, in October. It cannot come soon enough.
How Will the Rules Be Applied?
The new rules apply to the Section 45Q carbon sequestration credit, the Section 45U nuclear credit, and the Section 45Z clean fuels credit, but in a limited scope.
Where things get sticky, perhaps intentionally considering the increasingly illogical anti-renewables slant of the Trump administration, are the specifics surrounding application to the Section 45Y and Section 48E clean electricity credits and the Section 45X advanced manufacturing credits, which prohibit a PFE from qualifying and deny the credit for projects to which it is determined that a PFE provides “material assistance.”
rPlus’s Resta is confident that the FEOC provisions in existence today, which he calls limited and manageable, will remain in effect until December 31.
“On January 1, the increased restrictions come into play, which is going to be problematic,” he ventured.
“The premise and principles behind FEOC make sense. You don’t want to have a foreign entity of concern that has material control of operational parameters of a power plant in our electric system, right? Like, we can all agree to that. We can all agree that having material ownership of a project in a country by a foreign entity, then, has the same impact. Makes tons of sense. Those are easy guidelines to live by and support,” he pontificated.
“Where it gets more challenging is when you have upstream ownership to people removed, who may have some ownership of a company that’s making nuts and bolts. That is the level of concern that we would have. Does it really matter if somebody’s aunt is a member of an LLC with a washer manufacturing facility, which then triggers a 10-year clawback of the tax credits? So that’s the ambiguity part.”
The Trouble with Tracking
Kevin Smith, chief executive officer of massive IPP Arevon, wants Treasury’s upcoming guidance to be as clear as possible, noting uncertainty around changing rules pertaining to foreign entities of concern is nothing new. He fears PFE restrictions could clog up and complicate supply chains, similar to what happened with many imports post-COVID, while border patrol tried to enforce the then-new Uyghur Forced Labor Protection Act (UFLPA).
“Equipment got trapped at the border, whether or not there was a risk,” Smith recollected. “For a period of time, everything was getting stopped at the border as they tried to prove a negative based on tracking of pieces and parts.”
Such granular tracking, Arevon’s CEO contends, is totally impractical.
“This needs to be at the component level,” he recommended when asked about how PFE should work. “When you start getting into sub-components like nuts, bolts, and screws, panel siding, things like that, that’s crazy because we’re not doing a lot of that manufacturing, nor do we probably want to do it in the U.S. So it really needs to be at a higher, component level, because otherwise, aside from whether or not we want to manufacture that in the US, how do you track all of that?”
“That was the issue we got into with the Uyghur Forced Labor Protection Act,” Smith recounted, tapping the table in front of him. “I mean, does this table have a serial number on it? I’m assuming that this is a coating. Underneath is wood, and then somebody coated it. But is it wood? And where did that wood come from? Canada? Minnesota? Someplace else? Can it be tracked? Does it have a serial number? Of course not. Who does that? It’s just not worth it with products like that. So are nuts and bolts going to have serial numbers on each one so you can track whether that bolt came from China?”
Delays and Procurement Problems
If Treasury’s intent is to keep track of sub-components as Arevon’s Smith described, it’s logical to expect project delays, which can compound in a domino effect that seriously impacts a company’s bottom line.
“I tell people we probably never started a solar project on time,” Burns & McDonnell’s Bernardi joked. “Every state is different, every county is different, so there’s always a week to a month fluctuation. Does that maybe turn into six months now? Potentially, and that’s probably the hardest thing. We look at our book of business, right? It’s based on finishing these projects so we can start the next ones. So if everything starts to push to the right, it could impact our ability to take on that next one, because we’re not fully out of the one that we’re currently building.”
Bernardi expects the free market to sort out procurement concerns surrounding some manufacturers. He pointed out a trend of EPCs straying from the Chinese inverter company Sungrow, a once-dominant player in the space.
“What used to be the big five is now kind of narrowing down, because people are getting more nervous. Siemens Gamesa, Power Electronics, SMA, and TMEIC are really what folks are looking at,” he said.
Jon Powers, president of investor, developer, and do-it-all green energy company CleanCapital, told Factor This that his teams are constantly in communication with equipment providers. The consensus he has gleaned from those conversations is that there needs to be a space to firmly understand the rules, since there’s no simple way to go about this.
“There’s no stamp of approval, right? It’s not like ENERGY STAR; there’s no FEOC-compliant stamp right now. So we have to do that analysis ourselves, along with those folks, and then we also turn around and talk to debt providers to show we can address it,” Powers explained.
“There’s going to be significant challenges, for sure. I think we are lucky because working in the distributed generation (DG) space, it’s a state-by-state game with different revenues and different policies, and that makes us work on our ability to do due diligence, as well as communicate that diligence to our other capital providers. So this is just another factor.”
Diligence extends to existing projects, too, at least if you’re out west working on an rPlus Energies endeavor. Resta has his team looking for rogue devices in critical gear like transformers and batteries.
“We are doing a holistic, wholesale view of our equipment,” he confirmed. “We’re not sourcing any equipment out of China anymore, but just as good practice.”
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Table Stakes and Refusing to Play
The stakes are as high as they get. Developers of a suddenly non-FEOC project could not only lose out on tax credits and have to pay them back retroactively, but also incur a substantial penalty on top of that. Lenders aren’t historically comfortable with that sort of uncertainty.
There is another way, of course. A company could decide to eschew the whole tax credit compliance process entirely. You can’t get caught in an eligibility trap if you were never trying to be eligible in the first place! Deciding to take this route is tricky, expensive, and has its own pitfalls; it isn’t the best move for everyone, but depending on how complicated Treasury decides to make things, it would not be unreasonable to see a deep-pocketed hyperscaler, for example, give it a try.
“I would encourage customers to compare the offer that is likely to comply with FEOC versus the risk and the cost of penalty,” suggested Joanna Martin Ziegenfuss, who leads Wärtsilä’s North American storage efforts. “We’ve looked at this. We still have further due diligence, but right now, we’re very clear that we’re not FEOC compliant, but we still believe we have a competitively priced product.”
