The new rule may finally force investors to put real skin in the game.
Old hands in the alternative energy business still remember the boom days of the Obama administration, when D.C. beckoned like an old West town that just got the railroad in the midst of a silver strike. Back then you could walk into any backroom saloon in DC, draw your idea for a wind turbine on the back of a cocktail napkin and walk out with a fat subsidy.
Exaggeration? Sure, but maybe by less than you’d think. I’ll explain.
This year’s One Big Beautiful Bill Act (OBBBA) at long last phases out the production tax credit (PTC) and investment tax credit (ITC) subsidies for companies building wind and solar electricity generating projects. And this time, it might actually work.
To be sure, subsidies for new projects are still available during this phaseout, so companies that initiated projects expecting tax subsidies will still receive them. Fair’s fair. To qualify for the PTC or ITC, a project must be in service by December 31, 2027, or “construction” must have commenced by July 4, 2026. But the cocktail napkin days, ushered in by the Obama IRS’s er, generous definition of “construction,” are finally over.
Congress has been trying to phase out subsidies for wind and solar projects since they were first granted in the 1990s. Those attempts always exempted companies that had projects in “construction” by relevant dates. Until the Obama administration, construction was defined by the Physical Work Test, which focuses “on the nature of the work performed, not the amount or cost.” For example, a site excavated for pouring a foundation by the time of the deadline satisfies the physical work test.
But the Obama IRS, ideologically amenable and eager to boost a “green” industry, adopted the Five Percent Safe Harbor test, which allowed a project to qualify for the subsidies if, by the deadline, the project had incurred 5 percent of the total expenses. In other words, earmark a sum of money, wink at the IRS and sneak in before the deadline, even if you aren’t near ready to begin construction. So you didn’t break ground for a couple of years past the deadline? You’re doing Gaia’s work.
This is the cocktail napkin of tax accounting, and it’s a horrible way to steward taxpayer money. Money is fungible. Cement isn’t.
Released August 15, the new IRS guidance under the OBBBA eliminates the Five Percent Safe Harbor test, and only the Physical Work test applies. (The exception being small output solar projects, which likely translates to single house residential solar projects. The administration is not trying to hurt the average citizen in its effort to reign in Big Solar and Big Wind.)
And that is the point of getting serious about ending these subsidies. Renewable energy companies have reaped billions of dollars in subsidies, while American taxpayers are left holding the bag, and the subsidies continue to rise as more projects are created. This is not to mention the special leasing conditions some ocean wind projects got from the Biden administration while it was using those same rules against oil and gas companies.
Furthermore, there are concerns that wind and solar projects would be unsustainable without the subsidies. Unfortunately, Obama-era cocktail napkin tax guidance only validated concerns that investors loved wind (in particular) for its paper benefits more than its ability to economically produce electricity. Alas, we forget the whole purpose of the subsidy!
Fortunately, this latest move is just the latest in the administration’s effort to return to a more grounded approach to intermittent energy, and its driving force, the “climate crisis.”
In February 2025, the Functional Government Initiative reported on the climate spending extravaganza during the Biden Administration. We identified nearly 700 programs that allocate resources to “climate” efforts, with a cumulative budget exceeding $713 billion. Amazingly, this figure doesn’t even include the PTC and ITC.
The second Trump administration is working to reverse what it can of this. But if it can’t recover every gold bar heaved off the Titanic, it is making Washington look a lot less inviting to the climate industry and its Wall Street rent seekers. Overturning the Obama EPA’s CO 2 endangerment finding (another artifact of the green good ole days) is set to derail the gravy train for an army of NGOs, climate change consultants and related manufacturers.
Ending the 5% Safe Haven creates a clear standard to end the intermittent energy subsidy program – without being unfair to companies with projects underway.
Federal funds have fueled the industry for far too long. It is time renewable energy stands on its own merits. If that leaves Washington D.C. saloons a little less crowded with wind and solar speculators, bring on the tumbleweeds!
Roderick Law is the Communications Director of the Functional Government Initiative.
