Avi Salzman

The "Big, Beautiful" Republican tax and spending bill is giving clean-energy companies fits. It ends tax credits early for things such as solar panels and battery factories, takes away support for electric vehicles, and will make wind turbines even harder to install.

But one section of the bill appears to be causing the most headaches of all -- a new set of provisions that takes away tax credits if a project relies on China for any part of its clean-energy-supply chain. That could include components as small as wires or specialized screws, according to people in the industry and tax lawyers. The anti-China rules are "unworkable," said Jim Murphy, CEO of leading renewable developer Invenergy, at a conference held by the American Council on Renewable Energy in New York this week. "They really close the door on any ability to do any broad deployment." Invenergy is privately held, but other major renewable developers like NextEra Energy and AES are publicly traded.

China dominates the supply chain for almost all clean-energy products, from base molecules, such as rare earth minerals and polysilicon, to the finished products. That's been a concern for lawmakers of both parties, with Republicans raising particularly loud alarms. Just this week, Republican Senators Rick Scott and Marsha Blackburn demanded an investigation into an anonymously sourced report that some Chinese solar components had been found to contain communications devices.

Those kinds of worries are why Republicans in the House of Representatives included language in the tax bill to deny credits for any equipment with connections to a "Foreign Entity of Concern," which includes China. Those rules are now being debated in the Senate, and could change in the weeks ahead. Sen. Thom Tillis, a Republican from North Carolina, said that the provisions on China are "void of any understanding of just how these supply chains work," though it's not clear if he'll force any changes.

On its face, the ban on Chinese material would seem to help U.S. clean-energy deployers and manufacturers. The U.S. has been trying to catch up to China in clean energy. The Inflation Reduction Act set aside $370 billion to support that effort. Renewable projects like solar farms can qualify for credits worth 30% or more of the value of the installation, and there are valuable subsidies for products made in domestic factories.

It's starting to work. Today, U.S. factories make enough solar panels to fulfill much of the country's demand for them. But there's a very big hitch. The subcomponents of those panels are still made almost exclusively in China, which has spent more than a decade building up its supply chain. The same thing goes for the cells in batteries that go into electric vehicles and power-storage devices. On its latest earnings call, Tesla said it still relies on Chinese battery cells, though it's trying to shift some manufacturing to the U.S. "We are in the process of commissioning equipment for the local manufacturing of LFP [lithium iron phosphate] battery cells in the U.S.," Chief Financial Officer Vaibhav Taneja said.

Blake Sturcke, co-CEO of renewable developer Encore Renewable Energy, said that his company does not use Chinese solar panels or panels from other countries recently accused of "dumping" excess panels in the U.S. Encore, which is based in Vermont but builds solar projects in several states, uses American-made racks to hold its solar panels. Even still, the company sees no easy way around these rules.

"For the industry, it's impossible to not trip those provisions as the bill is currently drafted," he said.

Some tax lawyers say the section would penalize companies that are trying to do the right thing by buying or building Made in America products. The rules are so broad that they could cause companies run by American citizens to lose out on tax credits because they have relatives from China, said Seth Hanlon, a senior fellow at the Tax Law Center at NYU Law.

"An American manufacturer that is owned by an American citizen that has a grandparent in China, that American manufacturing firm under the House bill is considered the worst kind of entity, a specified foreign entity, " Hanlon said at the conference held by the American Council on Renewable Energy.

Some other tax lawyers disagree on whether the nationality of a person's relatives would be a cause for tax credits to be removed. Heather Cooper, a lawyer at McDermott Will & Emery who works with clean-energy companies, wrote in an email that it probably would only happen in "rare circumstances." Nonetheless, the China rules and other parts of the bill are likely to be "devastating" the industry if they aren't changed, she said.

Write to Avi Salzman at avi.salzman@barrons.com

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June 06, 2025 15:32 ET (19:32 GMT)

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