2025 Congressional Budget Reconciliation Act: Turning Point for the U.S. Energy Sector

The U.S. energy sector is at a major inflection point. During July 2025, the U.S. Congress and President enacted sweeping energy legislation, titled “An Act to Provide for Reconciliation Pursuant to Title II of H. Con. Res. 14” (Act), or the One Big Beautiful Bill (OBBB) which became Public Law 119-21 and significantly modifies federal energy incentives. Among other things, the Act accelerates deadlines for key tax credits, tightens rules on foreign involvement, and doubles down on domestic investment, changes poised to reshape the federal landscape in energy projects. Marking a major turning point for the U.S. energy sector, the Act will essentially require project developers, contractors, and investors to adjust their strategies to secure available incentives and remain compliant with federal legislation.

In this MSLLC ThinkTank post, we highlight key aspects of the Act and how it will affect various energy project stakeholders:

• Accelerated Deadlines for Projects: Finalized timelines for Investment Tax Credit (ITC) and Production Tax Credit (PTC) eligibility, with new start-of-construction requirements and Safe Harbor considerations. To secure Federal tax incentives, projects must continue to comply with the IRS’s start-of-construction requirements, either through the 5% Safe Harbor (incurring at least 5% of total project costs before the deadline) or by initiating physical work of a significant nature. Both paths require continuous progress toward completion; however, the Act expands on certain requirements under Sections 45Y and 48E, such as tightening the definition of start of construction and elevating compliance standards. Key deadlines are now in place: wind and solar projects starting construction after July 4, 2026 must be in service by the end of 2027, while battery energy storage systems (BESS) and other technologies have until 2033 to begin construction, with a gradual phase-out of credits in 2034 and 2035 and a full phase-out by 2036. Additionally, the Act eliminates the 10% ITC adder that was previously available after other credits expired.

• Domestic Content Focus & Foreign Entity Restrictions: Incentives to build a domestic supply chain and reduce reliance on Foreign Entities of Concern (FEOC) for components like solar photovoltaic (PV) modules and wind turbine nacelles and adds penalties for non-compliance. A major focus of the Act is reducing reliance on FEOC, especially China. Projects under construction by the end of 2025 are exempt; however, starting in 2026, strict thresholds apply, with a maximum of 60% FEOC content in manufactured products (e.g., solar PV modules, wind turbine nacelles), decreasing to 40% by 2029. Storage technologies face even stricter limits, and significant penalties will apply for miscalculations or non-compliance.

• Maximizing Tax Incentives through Compliance: How prevailing wage and apprenticeship rules, bonus credits (e.g., energy community and domestic content adders), and tax credit transferability can secure federal tax incentives – and what happens if requirements aren’t met.

• Navigating the New Landscape: The implications for federal contractors and how proactive planning (with expert guidance) can turn these changes into opportunities, solidifying domestic reliance in energy projects.

The Act sends a clear signal: build now and build domestic.

Accelerated Timelines for Energy Projects

A centerpiece of the Act is the finalization of ITC and PTC deadlines for energy facilities, especially wind and solar. Under the Inflation Reduction Act of 2022 (IRA), these projects had open-ended support via technology-neutral credits, Section 45Y (PTC) and Section 48E (ITC), phasing out in 2034 or later based on emissions targets. The Act dramatically compresses this schedule. Wind and solar projects must now be placed in service by December 31, 2027, unless they begin construction by a new cutoff date (July 4, 2026) that allows extra time. In practical terms, if a wind or solar project starts construction in 2025 or early 2026, it can still come online as late as 2029–2030 and receive full credits under a safe harbor extension. Projects starting after July 4, 2026, however, face a hard deadline; they will lose ITC/PTC eligibility if not operational by the end of 2027. This is a stark change from prior law, which envisioned credit availability into the mid-2030s (or until national emissions dropped 75%).

Notably, other energy technologies retain a longer timeline. Energy storage projects (e.g., BESS), geothermal, hydropower, and other emerging technologies were also folded into the technology-neutral 45Y/48E credits. For these non-wind/solar projects, the Act generally preserves the original IRA timeline, whereby they can begin construction as late as 2033 and still qualify for credits, followed by a gradual phase-down to 75% credit in 2034, 50% in 2035, and sunset by 2036. In other words, the phase-out of credits for most energy projects remains as initially planned; however, wind and solar projects are singled out for an accelerated phase-out. The result is a compressed development window for wind and solar developers, a call to action to secure federal tax incentives now by fast-tracking projects and locking in eligibility. Additionally, start-of-construction requirements take on heightened importance in this landscape.

The IRS has historically defined when a project has begun construction using two primary methods, along with a continuity requirement to demonstrate ongoing progress, which are particularly relevant for securing PTC and ITC. These two methods for establishing the beginning of construction have been the Physical Work Test (physical work onsite) and the 5% Safe Harbor (incurring 5% of project costs) thresholds.

Given the new deadlines, developers will be relying on these Safe Harbor provisions to qualify projects before the cutoff; however, an accompanying July 7, 2025 Executive Order directs Treasury to crack down on any abuse of the rules so as to prevent projects from inaccurately claiming Safe Harbors thresholds that don’t reflect real progress. Ongoing IRS guidance is expected to tighten these rules, so simply spending 5% of project costs may no longer be enough to guarantee tax credit eligibility. Thus, it seems clear that only substantial construction efforts will count, and projects should carefully plan and document construction start activities in the next year, adding urgency for projects targeting the 2028-2030 completion window.

In summary, Safe Harbor is still available to bridge projects to later placed-in-service dates; however, projects must proceed diligently to withstand stricter scrutiny.

Domestic Content Incentives vs. Foreign Entity Restrictions

Another outcome of the Act is strengthening U.S. manufacturing and supply chains for energy, while curbing involvement of certain foreign players. The Act reinforces domestic manufacturing incentives, supports technology-neutral tax credits, and maintains community bonuses to ensure equitable access to energy benefits.

The Act introduces FEOC rules, which make certain projects ineligible for tax credits if they are owned by, controlled by, or receive significant components or assistance from a “prohibited foreign entity.” These restrictions, primarily aimed at China and certain other nations, are complex and far-reaching. For example, if a solar PV project sources a substantial portion of its PV modules or inverters from an FEOC nation or if a wind project has financing ties to a prohibited foreign entity, such projects could be disqualified from federal tax credits after the new rules take effect. Many of these FEOC provisions kick in for projects beginning construction on or after January 1, 2026, making this a critical deadline for project planning with international supply chains.

The intent is clear: reduce reliance on FEOC nations and pivot to domestic or allied suppliers. To enforce this, the Act sets up a measurement titled “Material Assistance Cost Ratio (MACR),” which is essentially the fraction of project costs free of prohibited foreign content. To qualify for credits, projects will have to meet minimum MACR thresholds, which vary by technology and year, and supplier certifications under penalty of perjury will be required to attest that key components (e.g., PV modules, inverters, battery stacks, wind turbine nacelles) are not made by prohibited entities. If a developer miscalculates or overstates its compliance with these domestic content rules, the consequences are serious: the IRS can impose a 20% penalty for inaccuracies and even claw back credits years later. Suppliers themselves may face penalties for false statements about their products’ origin. In short, there are real penalties for miscalculations or non-compliance; thus, thorough due diligence on supply chain provenance is a must-have for any federally incentivized project.

On the positive side, the Act doesn’t simply restrict foreign content; it actively encourages building out domestic manufacturing. One new provision offers a 100% first-year depreciation deduction for “qualified production property.” Essentially, new U.S.‑based manufacturing plants that produce energy components (built between January 2025 and the end of 2028) can be written off immediately. This tax incentive aims to spur manufacturing of key items such as solar modules, BESS components, and wind turbine components on American soil, thereby bolstering domestic supply. Combined with the existing domestic content adder (an extra 10% ITC bonus for projects using enough U.S.-made materials), these measures create powerful domestic manufacturing incentives. Thus, the Act’s objective is that developers will have robust U.S. sources for most equipment, reducing reliance on overseas suppliers and easing compliance with the new FEOC rules.

Maximizing Tax Credits Through Compliance and Bonuses

The Act is focused on encouraging long-term planning, supporting workforce development through prevailing wage and apprenticeship requirements, keeping tax credit transferability intact, and unlocking liquidity for developers and investors alike. Even as the Act scales back timelines, it retains and emphasizes multiple bonus incentives and requirements to maximize the value of tax credits, provided projects meet certain standards.

Chief among these are the labor provisions from the IRA, whereby to unlock the full credits, projects must adhere to prevailing wage and apprenticeship requirements. This means paying construction and installation workers prevailing wages (typically union-scale rates) and using qualified apprentices for a percentage of labor hours. These rules remain in effect under the new law with only narrow exceptions and multiply the base tax credit five-fold. For example, a project’s ITC could potentially be 30% of project cost instead of 6% if wage and apprentice standards are satisfied. This workforce development provision is intended to ensure that the energy boom translates into high-quality jobs and training opportunities for American workers.

Non-compliance, on the other hand, means a loss of this potential tax credit multiplier and can also result in monetary penalties to offset underpaid wages. Projects should treat these labor standards as fundamental requirements, building them into contracts and project plans from the outset.

Projects can also stack additional bonuses to boost tax credits. The Energy Community bonus credit, for instance, remains available, whereby an extra 10% tax credit for projects located in designated energy communities (areas with historical fossil fuel industry or economic distress) continues to apply. This incentivizes energy investment in communities that are transitioning from coal, oil, or gas derived energy dependence. Similarly, the Domestic Content adder, another 10% bonus for using primarily U.S.-manufactured components, is still in play and now dovetails with the aforementioned FEOC provisions.

As a result, this new policy makes domestic content more valuable than prior, whereby it not only earns a higher credit but also helps ensure a project isn’t disqualified by FEOC restrictions. These ITC adders and PTC bonus credits were left largely intact by the Act, whereby they will phase down on the same schedule as the base credits. Thus, savvy developers can aim for a potential 50% ITC (i.e., 30% base, plus 10% domestic, plus 10% energy community) on qualifying projects, or a higher PTC rate, by meeting these same criteria, a significant incentive to plan projects with location and sourcing in mind.

The Act provides for another provision: the retention of tax credit transferability. The IRA had made credits transferable (sellable) to third parties for cash, which had greatly improving financing flexibility. The Act maintains transferability under IRC §6418, with the only new caveat being that credits cannot be sold to prohibited foreign entities.

This means project sponsors without enough tax liability can still monetize credits by transferring them to domestic buyers, an important tool for raising capital, especially as traditional tax equity markets adjust to the changing credit landscape. Additionally, the direct pay option (which allows certain developers, like non-profits or government entities, to treat credits as refundable) remains available where it applied before. In sum, the Act preserves the mechanisms to secure federal tax incentives value through compliance and financing.

Navigating the New Landscape: A Path Forward for Energy Project Developers & Stakeholders

For the energy project development industry, the Act brings both challenges and opportunities. On one hand, compressed timelines and stricter oversight raise the stakes – energy project developers must move quickly and deliberately to initiate projects by the new deadlines, carefully document construction starts, and vet their supply chains and other key stakeholders. Missteps and delays could mean losing critical tax incentives. On the other hand, the emphasis on domestic manufacturing, labor standards, and technology-neutral eligibility through 2033 potentially creates a fertile environment for innovation and investment in the U.S. energy supply chain. Developers now have a clearer mandate to build with American-made equipment, employ skilled American workers, and focus on communities that stand to benefit most. Those who align their projects with the Act’s intended policy goals will not only maximize project tax incentives but could also contribute to broader national objectives of energy security, job creation, and economic resilience.

Successfully adapting to this rapidly changing landscape will require strategic foresight and possibly new partnerships. Projects planned under past rules may need re-scoping or acceleration. Supply agreements might need renegotiation to source compliant components, and additional training or hiring may be necessary to meet workforce requirements.

It’s a lot to manage, but this is where strong technical and regulatory expertise becomes a game-changer. Engaging advisors who understand the nuances of IRS guidance, tax law, and federal project execution can help contractors navigate the uncertainties. For example, knowing how to correctly and accurately document beginning of construction or calculate FEOC cost ratios can mean the difference between securing a tax credit or seeing it disallowed. Similarly, understanding the requirements of Section 45Y and Section 48E phase-outs can inform which projects to prioritize in the development queue.

Management Solutions is committed to leading in this space. With decades of experience in energy project management and federal program advisory, our team is already helping clients interpret these new rules, repositioning for success, and reducing project risk. We’ve supported mission-critical energy initiatives for agencies like the U.S. Department of Energy, giving us a 360° view of technical, financial, and regulatory demands. Our experts are prepared to assist in de-risking projects, including developing compliant project timelines and Safe Harbor strategies, optimizing use of incentives like energy community bonuses, and ensuring all prevailing wage, apprenticeship, and domestic content conditions are met. By taking a proactive approach, energy project developers can not only comply with the Act’s mandates but also capitalize on its incentives, securing tax credits while strengthening domestic supply chains and workforce.

In conclusion, the Act represents a pivotal shift in U.S. energy policy, one that accelerates the transition on America’s terms. It finalizes when and how key tax credits can be earned, favoring those projects that commence sooner, source domestically, and invest in American labor. By understanding the Act’s key points and aligning projects accordingly, energy project developers can drive successful outcomes for themselves, their investors, and their other stakeholders as well as nation’s energy goals alike.

The road ahead may be shorter and steeper, but with the right strategy and partners and advisors on project risk mitigation, such as Management Solutions, it’s one that promises enduring benefits in a new era of energy leadership.