What Public Agencies Need to Know About Clean Energy Tax Credits After OBBBA

This article is a follow-up to our June briefing on the House version of the One Big Beautiful Bill Act (OBBBA), which outlined proposed clean energy tax credit changes. With the final bill now signed into law, this update summarizes what made it in, what didn’t, and what public agencies

The full text of OBBBA is available here. Our prior alert summarizing the tax highlights of the House version is available here.

A New Era for Clean Energy Tax Credits

The final version of the OBBBA fundamentally alters the framework introduced by the Inflation Reduction Act (IRA), particularly for solar, wind, and other clean energy technologies. While key provisions such as transferability, long-term storage credits, and certain legacy rules remain intact, developers now face compressed timelines, complex sourcing restrictions, and stricter foreign entity rules.

These are not cosmetic tweaks. The bill accelerates placed-in-service deadlines, ends credits for many solar and wind projects after 2027, introduces supply chain sourcing rules, and disqualifies projects with ties to "foreign entities of concern" (FEOCs).

To understand the impact, we’ve broken down the key takeaways most relevant to public agencies and nonprofit developers using Direct Pay and IRA-related credits.

Solar and Wind Credits End Early

One of the most consequential shifts under OBBBA is the compression of tax credit timelines for solar and wind projects. Under the revised Sections 45Y and 48E, projects must now be placed in service by December 31, 2027, unless construction begins before July 4, 2026 (exactly one year from the date of enactment).

This new structure creates two distinct tracks:

• Fast Track: Projects that break ground on or before July 4, 2026 preserve the traditional four-year safe harbor period to complete construction and still qualify for the full credit. For agencies starting construction in early or mid-2026, this means you have until as late as 2030 to place the project in service.

• Deadline Track: Projects that begin construction after July 4, 2026 must be fully placed in service by December 31, 2027, with no grace period or phase-down. Miss that date, and the credits are lost entirely.

This bifurcated timeline heightens the importance of planning and documentation. For agencies relying on Direct Pay, falling into the second track without a solid construction timeline could mean forfeiting the credit altogether.

Further complicating the picture, a July 7, 2025 Executive Order directed Treasury to revisit and tighten the traditional “beginning of construction” safe harbors, including the well-known 5% expenditure test and physical work test from IRS Notice 2013‑29. The White House has signaled that it wants to limit the use of these standards, and Treasury is expected to issue updated guidance within 45 days that requires more substantive progress to qualify as having “begun construction.”

Energy Storage Survives the Cliff

Energy storage—especially standalone storage—is treated more favorably than solar and wind. Projects can continue to claim full credit rates under 48E if they begin construction before January 1, 2034. After that, a phase-down begins:

• 2034: 75% of full credit

• 2035: 50%

• After 2035: 0%

Importantly, the FEOC-related content requirements are more flexible for storage, and Treasury is directed to create tailored material assistance cost ratio schedules (beginning at 55% in 2026 and phasing up to 75% in 2030 and beyond).

Agencies considering battery installations—especially when paired with existing solar—may find this a more durable and practical path forward in the OBBBA era.

FEOC Compliance Is Now a Core Risk

One of the most far-reaching changes in the OBBBA is the introduction of Foreign Entity of Concern (FEOC) rules. These apply to nearly every major clean energy credit: 45Y, 48E, 45X, 45Q, 45U, and 45Z.

There are three main layers of compliance: 

• Material Assistance Ratios: Projects must source increasing percentages of equipment and components from non-FEOC suppliers—starting at 40–55% in 2026 and rising each year.

• Ownership Tests: Credits are disallowed for facilities owned or controlled by entities linked to China, Russia, North Korea, or Iran, or that have significant investment/debt from such parties.

• Effective Control: Contracts with foreign suppliers must not include provisions that give them long-term control rights, extended royalties, or veto power over project decisions.

Projects under construction before the end of 2025 are exempt from the material assistance test, but not from ownership or control restrictions. Starting July 2025, Treasury will issue guidance tightening safe harbor use and construction start definitions.

Expect audits, supplier certifications and real consequences—including 100% recapture of the ITC—if these standards aren’t met.

Direct Pay Is Still Available—But Caution Is Warranted

Despite major restrictions elsewhere, the OBBBA did not eliminate Direct Pay (sometimes referred to as Elective Pay) for applicable entities such as cities, school districts, and special districts.

However, the combination of FEOC compliance and the 10-year recapture rule for ITCs—triggered by any post-placement payment to a prohibited foreign entity—adds real risk. For many, this may tilt the balance toward using the PTC (45Y) rather than the ITC (48E), even when financing and equipment choices would otherwise favor the latter.

Agencies should model both options under the new risk-adjusted framework.

Legacy Section 48/45 Projects Are Grandfathered

Projects that began construction before December 31, 2024, remain eligible for traditional Section 48 and 45 credits and are not subject to the new FEOC regime.

For public agencies with digesters, bioenergy systems, or landfill gas projects in progress, this is critical. These technologies may no longer qualify under the new 48E, but they are still covered under the old 48 rules if construction was timely. This window provides a short-term opportunity for existing project pipelines.

What's Next: Guidance, Compliance, and Strategic Shifts

Looking ahead, developers and agencies must prepare for:

• Construction Start Compliance: New Treasury guidance is expected within 45 days of enactment (by August 18, 2025) defining what it means to “begin construction” under the new rules. The Executive Order suggests traditional 5% safe harbor approaches will be narrowed.

• Supplier Documentation: Projects claiming post-2025 credits must obtain and retain supplier certifications. Expect high scrutiny around battery and solar module sourcing.

• Technology Pivot: Agencies should consider shifting toward geothermal, hydro, storage, and other technologies that receive longer windows under 48E.

  
  

Final Thoughts

While the OBBBA preserves the scaffolding of clean energy incentives, it changes the rules of the game—especially for solar and wind. Public agencies should act swiftly to lock in grandfathered credits, reevaluate planned solar timelines, and reassess risk across all new project structures.

We will continue to track Treasury guidance, supplier certification protocols, and market impacts in the months ahead.

If you have questions about a specific project, timeline, or technology, feel free to reach out.

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This article was authored by Cameron Weist, a principal at Weist Law. The firm serves as general counsel to the California Municipal Public Financing Authority and advisor to public agencies on tax-exempt public finance matters, infrastructure programs, and the evolving regulatory landscape under the IRA and OBBBA.

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