October 23, 2026 | By: Dorian Hunt Partner – Head of Energy & Renewables Tax

Tax credits have historically been a crucial value driver in renewable energy project development, but tax credits alone will not be enough to get the United States through its near-term energy crunch. However, they can be the start of an all-hands-on-deck effort to transform the country’s energy supply, provided the tax policy is paired with faster grid investment, workable interconnection rules and a realistic approach to the resources needed for reliability.

Demand is Outpacing Supply

The demand is no longer theoretical. The U.S. Energy Information Administration (EIA) reported in its 2026 outlook that electricity consumption, after roughly 15 years of near-flat growth, increased by an average of 2.1% annually over the prior five years and is projected to keep growing through 2050. EIA identifies data-center server demand as a major driver. In a May 2026 analysis, the EIA estimated that servers alone accounted for 7% of commercial-sector electricity consumption in 2025 and could represent 22% to 33% by 2050. Reshoring and electrification add to the same pressure.

The Middle East energy shock has reinforced how quickly fuel disruptions can spread through the broader economy. Even when the power sector does not rely directly on oil, higher fuel, transportation and equipment costs affect the cost of building and operating new capacity. At the same time, reliability risks are increasingly local: concentrated clusters of data centers and advanced manufacturing can overwhelm transmission and generation resources long before national supply appears inadequate.

I admit this sounds dire. The reality may not be a worst-case scenario, but the gap between supply and demand remains larger than tax incentives, in their current form, can close by themselves.

The Grid Has Become the Bottleneck

Tax policy is a tool for governments to create outcomes as much as it is a tool to raise revenue. For decades, federal incentives have focused primarily on generation. Transmission has received comparatively less direct tax support, even though a new power plant is useful only if it can interconnect and deliver electricity where it is needed. The bottleneck now extends to both sides of the meter: generation projects wait in interconnection queues while data centers and other large loads wait for service.

That is why arguably one of the most important recent developments may be regulatory rather than tax driven. On June 18, 2026, the Federal Energy Regulatory Commission issued show-cause orders to all six regional grid operators under its jurisdiction, directing them to justify or reform tariff rules for connecting data centers, manufacturing facilities and other large loads. The orders focus on speed, cost allocation, reliability, co-location and customer protections. They do not build transmission by themselves, but they acknowledge that large-load interconnection is now a national infrastructure problem rather than a series of isolated utility disputes.

Deadlines and Shifting Guidance

Renewable energy projects remain particularly sensitive to policy changes because transactions are often structured around tax benefits as well as power production. When a deadline approaches or guidance changes, developers accelerate procurement and construction to preserve eligibility. That dynamic became especially visible this summer.

The July 4, 2026, beginning-of-construction deadline for wind and solar facilities to avoid a hard placed-in-service deadline of December 31, 2027, has now passed. Under the One Big Beautiful Bill Act (OBBBA), projects that began construction by that date may remain eligible for Sections 45Y and 48E under the longer continuity framework. Storage and many other zero-emission technologies retain a materially longer runway, so the incentive landscape now favors a broader mix of technologies rather than treating all clean generation alike.

The rules governing what it meant to begin construction also changed shortly before the deadline. On June 6, 2026, a federal district court vacated IRS Notice 2025-42, which had eliminated the longstanding 5% safe harbor for most wind and solar facilities. The decision restored the prior two-track framework, under which a taxpayer could rely on either physical work of a significant nature or the 5% safe harbor, although continuity requirements and documentation still matter. That episode illustrates a larger point: tax incentives can accelerate investment, but abrupt shifts in administrative guidance can also redirect procurement and financing decisions in a matter of weeks.

Foreign Entity Rules Add Execution Risk

Foreign-sourcing restrictions add a second layer of execution risk. The OBBBA’s prohibited foreign entity rules can disqualify Sections 45Y and 48E projects that begin construction after 2025 if too much of the cost of the facility or storage technology is attributable to prohibited foreign entities. IRS Notice 2026-15 provides interim material-assistance cost-ratio rules and safe harbors, but it also anticipates further regulations and additional tables. Developers therefore need to treat supplier identity, ownership, effective-control rights, direct production costs and certifications as tax diligence items, not merely procurement details.

The absence of fuller guidance on ownership and effective control is itself having a chilling effect on renewable energy and broader energy-transition project finance. Notice 2026-15 provides an interim framework for material assistance, but significant questions remain about how  statutory ownership, debt, governance and contractual-control tests apply to real-world structures. Those uncertainties are difficult to isolate in a project-finance market built around layered sponsor ownership, tax-equity and credit-transfer arrangements, construction and back-leverage debt, joint ventures, intellectual-property licenses, long-term equipment and service agreements, and reserved consent rights for lenders and investors. Because a mistaken conclusion can jeopardize a tax credit that supports the project’s capital stack, developers, tax-credit buyers, lenders and insurers may respond conservatively by delaying commitments, narrowing eligible counterparties, demanding broader representations and indemnities, or pricing unresolved Foreign Entity of Concern (FEOC) risk into the cost of capital. Clear rules distinguishing ordinary minority-investor protections, lender remedies and commercial operating covenants from disqualifying ownership or effective control would therefore do more than ease compliance: they would help restore the deal certainty needed to finance otherwise viable projects.

Supply Chain Concerns Extend to Grid Security

The administration has now extended the same supply-chain concern beyond tax eligibility and into grid security. Executive Order 14421, issued August 26, 2026, declares a national emergency concerning foreign-produced bulk-power system electric equipment and authorizes the Department of Energy to prohibit or condition transactions involving equipment, components, software, firmware, digital services, maintenance services or remote-access capabilities linked to covered foreign entities when specified national-security risks are present. The order reaches equipment central to both conventional and clean-energy infrastructure, including transformers, grid-connected inverters, battery energy storage systems, generators, turbines and industrial control systems, and directs implementing rules within 120 days. For developers and utilities, the result is a procurement problem that is broader than the prohibited-foreign-entity rules governing tax credits: equipment may satisfy the tax rules yet still require separate diligence concerning country of manufacture, vendor control, embedded software, remote access and replacement risk. That overlap reinforces the need to evaluate tax compliance, cybersecurity, grid reliability and supply-chain resilience as parts of the same investment decision.

The policy objective is understandable. China continues to dominate important portions of the solar supply chain, including polysilicon, wafers, cells and modules. But domestic capacity cannot be expanded instantly. A sourcing rule that tightens faster than alternative supply chains can develop may raise costs or delay projects even when demand for electricity is immediate. The practical challenge is to reduce strategic dependence without creating a near-term shortage of equipment needed to expand the grid.

The incentive regime also continues to evolve in less dramatic ways. IRS Notice 2026-39, released June 10, updated the statistical area and coal closure information used to determine eligibility for the energy-community bonus under Sections 45, 45Y, 48 and 48E. These annual updates matter because a project’s location can materially affect its economics, yet eligibility may depend on changing unemployment data, statistical-area classifications or coal-closure information.

Development Will Continue, but Not Evenly

None of this means clean-energy development will stop. Solar, storage and other modular technologies can still be deployed faster than many large thermal or nuclear projects. But speed is not uniform. Permitting, transformers, interconnection studies, transmission upgrades and deliverability can extend project timelines even where the generating equipment itself is comparatively quick to install. If tax support falls while demand remains high, more of the cost will migrate to power prices, capacity charges, special large-load tariffs or direct customer-funded infrastructure.

There is no silver-bullet solution to the clash between policy and the facts on the ground. Energy production has become a political football, with fossil fuels and renewables alternately favored and attacked. Yet the physical system requires energy, capacity, flexibility, transmission and fuel security at the same time. Treating one resource as a complete substitute for every other resource obscures the engineering and financing constraints that determine whether the lights stay on.

Building a Durable Policy Package

China’s strategy offers one useful lesson, even if it is not a model to copy wholesale: long-term industrial policy can coordinate generation, manufacturing and infrastructure. The United States needs its own version built around domestic strengths, environmental constraints and competitive markets. That means rewarding not only new megawatts, but also the transmission, storage, firm capacity, advanced nuclear, geothermal, carbon management and supply-chain investment needed to make those megawatts reliable.

A durable policy package would connect incentives to outcomes. Federal and state tax credits should be stable enough for capital providers to underwrite. Transmission and interconnection reforms should reward projects that relieve congestion and add deliverability. Large loads should bear appropriately allocated upgrade costs without shifting speculative investments to ordinary ratepayers. Domestic-content and prohibited-foreign-entity rules should be paired with a realistic timetable for building domestic and allied manufacturing capacity.

None of this can happen overnight, but policymakers no longer have the luxury of treating generation, transmission, load growth and tax policy as separate subjects. The post-April developments point toward the same conclusion: the United States needs a portfolio approach and clearer execution rules. Tax credits cannot do all the heavy lifting, but they remain an indispensable part of a broader strategy to build capacity quickly, protect reliability and reduce long-term exposure to fragile supply chains.

Policy uncertainty doesn’t have to mean deal uncertainty. Connect with Dorian and the Leo Berwick team to talk through what these changes mean for your projects and transactions.