The Landscape of Renewable Energy in the United States in an Era of Subsidy Scrutiny

The renewable energy industry in the United States is a unique beast when it comes to policy sensitivity. In recent decades—especially since the 2022 Inflation Reduction Act (IRA)—renewable energy finance has been defined by tax credits. However, in 2025, the “One Big Beautiful Bill” Act (OBBBA) accelerated the phase-out of these subsidies, igniting worry about the future of the U.S. renewables industry and the clean energy transition. Nevertheless, recent months serve as testimony that renewables are far from crumbling, and in fact remain poised to continue growing, despite a potentially thornier landscape.

Tax Credits and the IRA

Tax credits, the primary mechanism for subsidizing renewables in the U.S., are dollar-for-dollar reductions in an entity’s income taxes, rather than direct payments. These incentives take two forms: the investment tax credit (ITC), based on a percentage of the total investment, and the production tax credit (PTC), a dollar amount per kWh of electricity generated.

The IRA extended these tax credits through 2032 or the year electricity emissions fell 75% below 2022 levels. Additionally, it provided bonus credits for meeting certain requirements (e.g., percent of total labor hours performed by qualified apprentices, percent of content attributable to U.S. manufactured products, and siting in an energy community) and included the Section 45X advanced manufacturing tax credit for domestic production of clean energy components.

The impact has been significant, with the IRA spurring around $600 billion in private investment and over 400,000 new jobs in renewable energy. In particular, tax credits have lowered renewables’ levelized cost of energy (LCOE)—the average discounted cost of generation per unit of electricity over a plant’s lifetime—critical for making them cost-competitive with fossil fuels and incentivizing investment in clean energy. However, it’s worth noting that even before the IRA, the LCOE of renewables was projected to decline, due to learning curves and technological progress.

While effective, tax credits created a tremendously complex project financing structure unique to the U.S.: tax equity. In this system, tax equity investors partner with project sponsors, providing capital to fund a project in exchange for tax benefits. Because of its complexity and the expensive transactions it requires, tax equity is limited to a select few large financial institutions. The IRA simplified tax credit monetization by introducing tax credit transferability, allowing businesses to sell credits directly for cash to a third party without forming partnerships, opening the market to significantly more tax credit buyers.

The Impact of the OBBBA

The OBBBA ruptured this landscape by accelerating the phase-out of renewable tax credits, beginning in 2028 and fully discontinuing by 2032. To qualify for credits, solar and wind projects must begin construction before July 2026—with a four-year window to complete construction—or be placed in service before 2028. This set off an industry-wide race to set as many projects as possible into motion to lock in tax credits. However, the OBBBA didn’t slash incentives to the extent that many in the industry feared, and—critically—it preserved tax credit transferability rules.

Simultaneously altering the landscape is the dramatic surge in power demand, largely driven by AI data centers and the shift from fossil fuels to electricity for things such as heating and cars, necessitating vast additions to electricity production capacity. On this front, renewables have an advantage, particularly due to shorter timelines: solar and battery storage can be developed in 12 to 18 months and wind in roughly two years, while a combined-cycle natural gas plant takes three to four years. Furthermore, while the cost of new gas generation has doubled over the last five years, solar, wind, and storage costs have fallen, becoming the cheapest options—even without subsidies. This reality is manifesting in the numbers: renewables are rapidly growing, accounting for around 80% of the power plant capacity planned for the next decade, and technology companies are securing huge gigawatt-scale renewable energy contracts.

Renewables Remain Resilient

Despite the OBBBA presenting a roadblock, evidence suggests that the renewables industry, which has amassed strength as costs fall and (more recently) power demand surges, can step over that roadblock and continue to make strides. Some even argue that cutting out a complex subsidy may simplify investment in renewables, raising the question of whether tax credits are effective mechanisms for driving the clean energy transition. But one thing is certain: renewables are not going away any time soon.

Anya Draves

Research Assistant

Anya Draves is an undergraduate student majoring in physics. She is a research assistant with the Kleinman Center and was a 2025 fall undergraduate fellow.