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In July, Republicans in Congress passed their signature domestic policy package, the One Big Beautiful Bill Act (or, H.R. 1). The bill included $4.5 trillion in tax breaks and an array of spending cuts to Medicaid, food assistance, and clean energy programs. Among the most paradigm-shifting aspect of the bill’s energy title is a slate of new so-called “foreign entity restrictions,” which are applied across all remaining energy-related credits, with the most stringent reserved for clean electricity and advanced manufacturing. This Q&A explores these restrictions, which, as currently designed, could end up backfiring, ceding leadership to China by halting investment in the US.
What are the energy-related provisions of H.R. 1?
H.R. 1 phases out tax credits for wind and solar — the fastest growing sources of electricity in the US — at a time when electricity demand is surging to meet AI data centers and manufacturing needs. It also terminates incentives for consumer and commercial clean vehicles, home solar and storage, and consumer energy efficiency measures. On the other hand, the bill retains (modified) credits for grid storage, geothermal, nuclear, and hydro power, energy component manufacturing, critical minerals, clean fuels, and carbon capture. However, the remaining incentives come with a new set of foreign entity restrictions.
What are foreign entity restrictions and how have they traditionally worked?
Foreign entity restrictions limit access to federal funding for companies or organizations seen to be controlled by foreign, adversarial governments — most significantly the Chinese government and its dominant political party. In recent years, both Democrats and Republicans have supported them on a limited set of federal programs. They were first applied as Foreign Entity of Concern (FEOC) limitations to semiconductor and battery incentives across the 2021 infrastructure law, the bipartisan CHIPS Act, and the Inflation Reduction Act. (The authors helped to design and implement them while at the US Department of Energy and White House from 2021 to 2025.) For instance, the Biden-era electric vehicle tax credits, as expanded in the Inflation Reduction Act, used them to encourage automakers to shift battery supply chains out of China — in exchange for a significant reward (the $7,500 credit).
These rules are imperfect: there is no consensus on the factors that determine FEOC status, relevant information is not always publicly available, and it is difficult to strike the right balance of carrot and stick. Still, after months of grueling government procedure, automakers like GM, Ford, and Tesla were responding to a clear policy signal and reshoring battery supply chains. By mid-2024, the US had passed China in battery manufacturing investment for the first time.
What is different about the H.R. 1 restrictions and what do they mean for US energy policy?
The budget reconciliation bill passed earlier this month dramatically expands the scope of foreign entity restrictions, weaving them throughout one of American energy policy’s most significant levers — the tax code. This may sound obscure and wonky — and it is — but it actually represents a radical departure from decades of US energy policy. Since the 1970s oil shock, the US government’s energy strategy has had three major bipartisan pillars: reducing reliance on foreign oil; reducing consumer energy costs; and reducing pollution. These pillars animated the government’s work on energy efficiency, domestic natural gas production, strategic petroleum reserves, vehicle fuel economy standards, and renewable energy development alike. Now, an overriding factor in receiving US policy support is excluding interaction with China, even at the cost of these three longstanding pillars.
Specifically, the new restrictions:
Apply far more broadly, including to virtually all advanced manufacturing and electricity generation tax incentives, as well as to every part of the supply chain, not just the “critical” segments.
Introduce ambiguous, untested terminology and concepts for energy policy like “foreign-influenced entities,” “material assistance,” and debt-based control.
Give the Treasury Secretary wide discretion to determine which supply chain components are relevant and what constitutes too much assistance from Chinese-affiliated entities.
Provide a long recapture period for the IRS to claw back previously issued credits, increasing the risk of financing any project.
Tax experts have called the provisions a “maze” and raised questions about whether they are actually workable or were meant to render clean energy incentives inaccessible. The Trump administration lent credence to this theory with a recent Executive Order pushing the Treasury Department to do everything in its power to restrict credits, including through foreign entity rules. Plus, these foreign entity restrictions were not applied to any fossil fuel subsidies, even as many oil and gas companies rely on Chinese supply chains.
How could the H.R. 1 restrictions be reformed to maximize US energy security?
China established its dominant position by scaling up US-invented technologies, and has leapfrogged US technology in numerous critical sectors, like batteries, while also dominating raw material supply chains. Foreign entity restrictions can directly address this concern by incentivizing firms to shift critical supply chain segments away from China. But global supply chains are complex, intermingled, and sticky. This means policymakers need to think deeply about design if they want to avoid stifling domestic investment from companies that are attempting to onshore production but cannot flip the switch overnight. For instance, many American solar developers are attempting to procure panels with domestic wafers and cells but need to wait as manufacturers make long-term capital investments, bring in know-how from overseas firms, and train workers. As somehaveargued elsewhere, ambiguous, yet blunt foreign entity restrictions that just create barriers to domestic investment may actually benefit the very foreign rivals they were meant to combat.
For foreign entity restrictions to advance US energy security, they must drive decisive industry investment and innovation — not confusion and frustration. The following design reforms could help in this regard:
Target critical elements of supply chains, and leave the rest. It is not in the US’s energy or economic security interest — nor is it feasible — to onshore every nut, bolt, or screw that goes into an energy technology. Foreign entity rules should instead channel industry’s focus and capital towards high value, strategic segments.
Match the carrot to the stick. To shift major capital towards US supply chains,companies must be able to absorb the higher cost of manufacturing compared with China. For instance, without incentives like the $7,500 EV tax credit paired with the 45X credit to support domestic component manufacturing, automakers will have difficulty financially justifying onshoring battery supply chains.
Create a clear path to compliance. Define a limited set of objective metrics and brightline rules for government control, so that companies know how to comply. An endless minefield of rules and subjective criteria will render the entire project useless — companies will throw up their hands and leave their factories overseas.
Learn from foreign companies. If the US hopes to reclaim manufacturing leadership, it will need to acquire foreign knowhow through partnerships, joint ventures, and licenses. Yes, China took American battery IP, but it is now racing ahead with next-level electric vehicle technology that Ford’s CEO has called “an existential threat.” There’s a reason why China just announced a ban on licenses without government approval — it is worried about companies overseas running its playbook in reverse.
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