New China-Related Prohibitions Already Impacting Clean Energy Markets

New restrictions in the One Big Beautiful Bill Act (OBBBA) limiting Chinese involvement in U.S. clean energy projects qualifying for tax credits have the industry scrambling to safe harbor their projects before the bulk of these restrictions take effect at the end of the year. The new rules—intended to prevent so-called "prohibited foreign entities" with ties to China and certain other countries from benefitting from U.S. energy tax incentives—are also reshaping how projects are financed, driving up due diligence costs, and changing how developers contract with equipment and technology suppliers that may have Chinese connections or ties to other covered nations, namely Russia, Iran, and North Korea.

At a recent panel discussion hosted by Davis Wright Tremaine LLP (DWT), industry experts discussed how the law's vague definitions of "effective control" and "material assistance" have created uncertainty across equipment sourcing, software licensing, and long-term service contracts. Jessie Robbins, Senior Vice President and Head of Project Finance at Pine Gate Renewables, made the stakes plain. Without the benefit of additional U.S. Treasury guidance, she cautioned that "if we had to comply with all of these restrictions as of today, it would not be possible to move forward with most forms of financing." As a result, Robbins explained that capital providers and developers are repositioning their project pipelines to avoid financing uncertainty.

Merrill Kramer, Co‑chair of DWT's Energy Infrastructure & Projects practice, emphasized that foreign entity of concern (FEOC) risk extends far beyond Chinese manufacturers. "The rules also capture U.S. and European companies that have Chinese investors, use Chinese IP, or make payments to Chinese‑backed counterparties." Kramer noted that even common contract terms—data‑access rights, maintenance clauses, warranties, and IP limitations—may trigger FEOC concerns until the U.S. Treasury provides clarity.

Financing markets are already reacting. Karin Berry, Managing Director at NT Solar, said the lack of federal guidance has created a pullback by both tax equity investors and tax credit buyers: "Insurance companies aren't touching FEOC risk and tax equity investors don't have visibility into projects, and are hesitating." Berry warned that smaller developers may not survive the increasing demands for supply‑chain transparency, ownership tracing, and indemnity obligations, predicting a wave of consolidation toward larger players with "deep‑pocketed parents."

Pamela Charles, Chair of DWT's Tax practice, described how the OBBBA contains expansive and imprecise terms with potentially devastating consequences for a project planning to qualify for clean energy tax credits. Determining which entities are prohibited foreign entities will require extensive diligence and is a challenging exercise without applicable Treasury Regulations. "Until guidance is issued, we don't know how far up the chain we're going to need to look to make this determination," she noted, underscoring the breadth of diligence required across ownership structures, financing arrangements, and contractual relationships. Charles explained that the consequences of getting this analysis wrong can be severe, because "any role played by a prohibited foreign entity in ownership, financing, management, or the supply chain for the project can be disqualifying." She added that this risk is magnified by the statute's unprecedented 10-year recapture period, which requires heightened scrutiny of long-term contracts, service arrangements, and supply-chain relationships pending further Treasury guidance.

All panelists agreed that the path forward will become more navigable over time, and that the clean energy industry is not going anywhere, particularly with increasing power demands associated with the AI industry. They agreed that workable IRS guidance is welcomed, particularly around the effective control test, safe harbor treatment, 10‑year recapture risk, permissible service/software/data provisions, and how to calculate "material assistance" involving upstream supply chains.

DWT's Energy Infrastructure & Projects team will continue to monitor developments and assist its clients in complying with the new rules governing prohibited foreign influence. If you have questions about how these rules may affect your transactions please contact Merrill Kramer at merrillkramer@dwt.com or Pamela Charles at pamelacharles@dwt.com.