Saving Money Without Undercutting Energy Dominance
Analysis of Republicans’ Draft Reconciliation Legislation
By Alex Trembath, Seaver Wang, and Ryan Alimento
The recently released text of the Republicans’ proposed reconciliation legislation would significantly curtail the major tax incentives passed under the Inflation Reduction Act (IRA) in 2022. The so-called “Big Beautiful Bill” would likely, if enacted, cripple nascent energy industries including the advanced nuclear, enhanced geothermal, hydrogen, energy storage, and carbon capture sectors. The legislative text also introduces strict restrictions meant to block tax credit eligibility for Chinese, Russian, and other foreign entities of concern (FEOC) that would make it nearly impossible for U.S. businesses to claim key credits. These cuts would have knock-on effects in heavy industry, critical minerals, artificial intelligence, liquefied natural gas, and other sectors critical to American economic competitiveness which, at least up to this point, are driving the fastest growth of electricity consumption the nation has seen in decades.
This sledgehammer approach to IRA reform would be a significant overcorrection by Republicans. According to Breakthrough’s analysis, more strategic cuts to the tax credits, targeting only the most mature energy industries subsidized under the IRA, could achieve the bulk of the budgetary savings the Big Beautiful Bill would, without kneecapping emerging industries like nuclear, geothermal, and critical minerals. Our updated calculations reaffirm that our proposal would yield on the order of $449 billion in fiscal savings, compared to the JCT’s new estimate of $496B in savings from the Big Beautiful Bill (Figure 1).
Figure 1: Comparison of estimates of 10-year spending projections the Breakthrough Institute’s updated proposal for energy technology tax credit restructuring, the new Big Beautiful Bill reconciliation proposal, and the existing Inflation Reduction Act, grouped by major tax credit categories.
Last month, we proposed stricter limits on federal tax credits for electric vehicles, and region-based phaseouts for technology-neutral clean electricity tax credits—the production tax credit (PTC) and the investment tax credit (ITC)—once a given technology begins contributing 5% or more of a region’s annual electricity generation. Our updated Breakthrough Institute proposal maintains the same policy recommendations as our previous analysis, but incorporates 1) updated estimates of Current Policy spending based on the JCT scoring of additional savings/expenditures associated with the Big Beautiful Bill, 2) inclusion of continuing legacy expenditures from already-built facilities qualifying for older variants of the PTC, and 3) incorporating technologies eligible for the PTC and ITC other than onshore wind and solar photovoltaic.
The vast share of fiscal savings associated with our proposal originate from our regional generation-based threshold for credit phaseout, based on North American Electric Reliability Corporation (NERC) regions. Such a regional threshold approach would quickly make solar photovoltaics and onshore wind, two industries that have benefitted from these subsidies for decades, ineligible for federal electricity subsidies in most of the country.
This would hardly be a death knell for renewables. According to recent analysis published by John Bistline and Asa Watten, as much as 72% of the power-sector investments projected to occur under the IRA—overwhelmingly solar and onshore wind—could move forward with or without the subsidies. This makes sense. Solar and wind are more mature, global industries with affordable modular components, deep supply chains, and growing experienced workforces behind them. Solar and wind deployment will likely continue at market scale, especially if Congress enacts meaningful reforms to federal permitting and interconnection procedures, which have become perhaps the chief constraints on renewable energy investment. Our restructured credit design thus phases out subsidies for wind in solar in regions where they are already successful, while refocusing remaining federal support on regions where investment has lagged.
While subsidies are no longer essential for supporting solar and onshore wind technologies in the United States, the same cannot be said for advanced nuclear reactors, enhanced geothermal power plants, green hydrogen, or natural gas plants with integrated carbon capture. Many of these more nascent technologies only recently became eligible for federal technology subsidies with the enactment of the IRA, and still face daunting regulatory obstacles to demonstration and deployment. First-of-a-kind and other early-stage projects in these sectors rely critically on financing enabled through tax equity markets. An earlier phaseout of clean electricity credits starting in 2029 is far too rapid to properly incentivize development and commercialization of advanced geothermal, advanced nuclear, or carbon capture technologies. Proposed language that limits credit eligibility to plants that commence operation in the applicable year also cripples the credits’ effectiveness as a market incentive, for example by effectively excluding any advanced nuclear projects—none of which are anticipated to enter service by [2029]—from qualifying for the credits.
The scale of these proposed changes to the IRA would likely have a chilling effect on investment that is difficult to predict with confidence. But while the legislation’s impact on mature renewables industries is uncertain, the effect on nuclear, geothermal, and other nascent industries is much more certain devastation. This is a precise misallocation of public support, further advantaging mature energy technologies at the expense of less mature ones. Solar, wind, and electric vehicles are not only long-time beneficiaries of federal deployment subsidies, but of a gauntlet of state and local incentives including renewable portfolio standards and state-level tax credits for EV purchases and leases. Taking a “technology-neutral” approach to clean energy subsidization, and to its repeal, is naive—different technologies require different levels and kinds of public support. Less mature sectors, like the constellation of advanced reactor startups and intricate geothermal exploration operations, need time and resources to demonstrate and deploy technology, achieve technological learning, develop workforces and supply chains, and activate capital markets.
Other proposed tax credit changes exhibit this same flawed understanding by prematurely phasing out the consistent support needed to establish promising emerging technologies. The total and immediate phaseout of the 45V Credit for Production of Clean Hydrogen would place U.S. industry at a severe disadvantage in global efforts to unlock low-cost hydrogen fuel production from water, agricultural wastes, and hydrocarbons. Similarly, phasing out the 45X Advanced Manufacturing Production Credit for critical minerals after 2031 would constitute a major strategic error given the long lead times needed to develop new domestic critical mineral mining and processing operations. A significantly longer 45X tax credit timeframe for critical minerals is required to meaningfully sustain and attract new capital investment in critical minerals. The proposed 45X credit phaseout at the end of 2027 for domestic production of wind energy components also risks unnecessary damage to major U.S. shipbuilders and manufacturers producing wind turbine installation vessels and wind turbine parts, foundations, and moorings, while yielding minimal fiscal savings.
Finally, the proposed reconciliation package introduces onerously restrictive “foreign entity of concern” (FEOC) limitations that may practically prevent even fully U.S.-based businesses from claiming the clean electricity (45Y, 48E) and advanced manufacturing (45X) tax credits in any form whatsoever. Draft language stipulates that receipt of any “material assistance” from a FEOC—with material assistance defined as any component, subcomponent, critical mineral, assembly part made by, or patent or copyright held by a FEOC entity—makes a taxpayer ineligible to claim clean electricity or advanced manufacturing tax credits. These “material assistance” provisions are vaguely defined and contain no de minimis threshold, suggesting that a new geothermal power plant would risk credit ineligibility simply for using aluminum wire trays sourced from a Chinese supplier, or that a new aluminum refinery risks credit ineligibility for installing Chinese instrument panel parts. Given the globalization of supply chains for not only minor but major components of mineral, metal, and electricity generation facilities and equipment, compliance with these FEOC restrictions will prove practically impossible, as will effective enforcement of such minute criteria.
Other FEOC rules pose similarly worrying obstacles. “Material assistance” also includes “any design of such property which is based on any copyright or patent held by a prohibited foreign entity or any know-how or trade secret provided by a prohibited foreign entity.” Overall, this provision would bar beneficial intellectual property transfer to the United States, mistakenly identifying IP transfer as a threat rather than focusing more strategically on foreign ownership or control. The basic language exhibits major flaws, failing to define terms like “know-how” or “trade secret”. Meanwhile, this copyright and patent restriction sets an absurdly high bar for credit eligibility, suggesting that even if a Chinese military scientist defected to the United States and gifted trade secrets to a U.S. rare earth permanent magnet producer, that producer would become ineligible for advanced manufacturing tax credits because some Chinese company would technically still hold the patents for said technology.
Due to prohibitive difficulties involved in both private sector compliance and federal guidance and enforcement, we suggest that the U.S. would benefit from eliminating “material assistance” FEOC restrictions in any revised reconciliation proposal. We would propose that any FEOC provisions added to IRA tax credits simply adopt the FEOC criteria used in the CHIPS Act, which deems businesses to be FEOCs if 25% or more of their “board seats, voting rights, or equity interest” are cumulatively held by a covered nation’s national government, subnational governments, or key senior political figures. We also suggest that a more reasonable phase-in period of two years post-enactment would provide beneficial flexibility for relevant industries to adapt to new FEOC rules. These common-sense improvements eliminate the danger that overly restrictive FEOC criteria will inadvertently render all advanced manufacturing projects and power generation facilities credit-ineligible.
A few other proposed tax credit changes run the risk of misallocating federal support away from critical energy sector priorities and towards largely wasteful and ineffective spending categories. Starting in 2028, the new reconciliation proposal phases out the 45U tax credit meant to correct market imbalances and support existing nuclear power plants at risk of near-term closure. Such a change risks prematurely shutting down some of the nation’s most powerful, reliable, and already-built electricity generation facilities at a time when national electricity demand confronts significant future growth. Meanwhile, the draft proposal seeks to not only maintain but extend the 45Z Clean Fuel Production Credit, which predominantly supports already well-developed biofuels like corn ethanol that produce few environmental benefits and impose higher corn, soy, meat, and dairy prices upon American households. Treasury and JCT estimates project that the 45U credit and 45Z credit would cost a comparable amount—on the order of $20-$30 billion over the budget window. Yet the 45U Zero-Emission Nuclear Power Production Credit clearly aligns far better with America’s near-term strategic and economic priorities.
Reliable and flexible “clean firm” electricity technologies, like advanced nuclear and geothermal, are certainly poised to benefit from the Democrats’ signature climate legislation passed during the Biden Administration. But they are also the subject of significant recent bipartisan legislation, including the ADVANCE Act and the Infrastructure Innovation and Jobs Act. Prematurely gutting federal support for these critical emerging industries would undo much of the bipartisan energy innovation progress achieved in recent years, instead sustaining the zero-sum partisan energy politics that have persisted since the IRA’s passage.
In turning to energy tax credits for opportunities to realize fiscal savings, Republican members of Congress must navigate a difficult balance between realizing budgetary priorities and restructuring incentives that hold the potential to supercharge U.S. energy technology competitiveness for the next two decades. As intensifying global competition in strategic sectors like artificial intelligence and critical metals has made abundantly clear in recent months, the world power that masters a future industrial and economic landscape built upon affordable, abundant energy stands to reap rich rewards. This new budget reconciliation proposal risks hindering American efforts to achieve future energy system mastery, without delivering substantively more fiscal savings than alternative proposals that strategically concentrate federal policy efforts on the innovative technologies and sectors that will benefit the most from support.
Federal financial support is the rule, not the exception, in energy technology innovation. Combined cycle gas turbines, shale fracking technologies, and conventional nuclear reactors, lithium-ion batteries, solar photovoltaics, and wind turbines all relied substantially on various forms of federal support in their nascency, including temporary tax credits for commercial deployment. Policymakers would likewise do well to recognize that their counterparts overseas are hardly holding back in prioritizing the commercialization of revolutionary new energy technologies. China currently has over 30 large and small nuclear reactors under construction simultaneously. But the United States can reshape federal policies and rise to meet this challenge—just as it has before.
The recently released legislative text represents the beginning, not the end, of reconciliation negotiations. Already Republicans in the Senate have signalled a desire to revise the reforms to the IRA proposed by their colleagues in the House. As negotiations continue, Republicans should rebalance reforms to prioritize innovation in critical emerging energy industries. Doing so would give both parties some skin in the game of federal energy innovation policy, and establish a bipartisan baseline from which to pursue the financing, permitting, regulatory, and other energy policy reforms that must follow any reconciliation package passed during this Congress.