Energy Tax Credits in 2026: A Tale of Two Markets

The One Big Beautiful Bill Act’s sweeping reforms have reshaped tax planning across much of the U.S. economy, but no sector appears to have been impacted more than the energy industry. By sharply narrowing the eligibility windows for numerous energy tax credits established or expanded under the Inflation Reduction Act and imposing new restrictions involving Foreign Entities of Concern (FEOC), the law has created some “winners” and “losers” in the industry, as well as a fair amount of confusion.

While compressed timelines pile heavy pressure on taxpayers to meet the credits’ complex eligibility criteria on an accelerated schedule, the OBBBA’s most impactful change for U.S. energy tax policy centers on the law’s Prohibited Foreign Entity (PFE) rules, which aim to prevent energy tax credits from indirectly subsidizing foreign adversaries or entities under their influence.

Under these highly technical rules, projects or facilities that are deemed to be directly or indirectly owned or controlled by a PFE — that is, certain FEOCs and entities and individuals deemed to be owned or controlled by China, Russia, Iran, or North Korea^[1]— may be ineligible for several valuable tax credits: technology neutral (sections 45Y and 48E), advanced manufacturing (section 45X), clean fuel production (section 45Z), nuclear (section 45U), and carbon oxide sequestration (section 45Q) credits.

Splitting the Market

The PFE rules have essentially split the energy tax credit market in two. On one side of the market, projects that began construction on or before December 31, 2024, can qualify for legacy production and investment tax credits under sections 45 or 48. These credits are essentially exempted from the PFE rules. Development, construction, and investment on this side remain very strong, with projects regularly costing billions of dollars and/or generating thousands of megawatts.

But on the other side of the market, where projects did not begin construction in time or are otherwise subject to the PFE rules, deals have become much more difficult to finance. This is in large part because the PFE rules introduce new and complicated concepts to the energy credit space (requiring burdensome diligence of, inter alia, ownership structures, supply chains, and financing arrangements), and because the OBBBA grants Treasury significant leeway to issue regulations and anti-abuse rules to enforce the policy goals of FEOC-type restrictions.

An Uncertain Environment

While Treasury and the IRS recently released preliminary guidance on one piece of the PFE rules (material assistance), guidance as to application of PFE rules relating to ownership, debt, and control remain outstanding. As such, taxpayer uncertainty will remain, at least until Treasury and the IRS release detailed guidance on those pieces, if not longer depending on the clarity of future guidance.

In this uncertain environment, some taxpayers whose projects depend on credits subject to the PFE rules (especially those looking for tax credit insurance) have seen their once-promising deals come to a standstill.^[2] But the enormous energy needs of the United States will undoubtedly require forward movement.

Thinking Ahead

For project developers and investors operating on the challenging side of the market, getting into compliance with the PFE rules is an immediate business imperative. But even those lucky enough to be able to avail themselves of legacy credits would be wise to familiarize themselves with the rules and what it takes to comply with them. It won’t be long before the well of projects eligible for legacy credits runs dry, and staying in business will eventually require a pivot to projects that depend on credits subject to the PFE rules.

Even with comprehensive Treasury guidance (which we hope will be forthcoming), navigating these rules will likely never be straightforward, and underestimating their importance creates serious strategic risks. But taxpayers that commit to understanding how the PFE rules work — and how best to comply with them — will be better positioned for long-term success.

Essential Compliance Practices

In our wide-ranging work with dealmakers in this space, we have found that thoughtful, proactive planning can clear a path for projects to advance, despite the many challenges posed by the PFE rules. Every client we advise has unique needs and goals, and no two projects face identical hurdles. But some broad work plans are essential for developers and sponsors navigating this complex compliance regime. The examples below just scratch the surface.

• For each project, develop a plan to help track diligence and compliance with the PFE rules’ various requirements: ownership, debt, effective control, and material assistance. Identify the subject matter experts responsible for overseeing each workstream.
• Analyze your supply chain early and often. Develop standard form representations and supplier certificates, and obtain and maintain them for each project. Determine whether your project can rely on a safe harbor or must meet “direct cost” compliance to avoid material assistance issues. (If the latter, engage a competent consultant.)
• Revisit and revise project documents, as necessary, to eliminate provisions that grant any modicum of control to PFE counterparties (or to counterparties whose PFE status is unknown) and repeat for the next 10 years. Develop standard form savings language and incorporate it into all project documents.
• Where relevant, engage with your investors. Explain the rules and ensure cooperation to confirm that investors are not influenced or controlled by a FEOC. For publicly traded investors, perform Rule 13d-3 searches to determine the beneficial owners of the investors’ securities.
• Work with your treasury team to identify any loans or other lending arrangements that may be implicated and identify lenders. For publicly traded lenders, perform Rule 13d-3 searches to determine the beneficial owners of the lenders’ securities.

If this all seems daunting, that’s because it is (and seemingly was intended to be). But with careful planning, organization, and (with any luck) common sense regulatory guidance, we expect that most taxpayers will be able to establish compliance — and that energy tax credits will continue to encourage energy development in 2026 and beyond.