Reconciliation Part 3: Senate FC 1st Draft Analysis

By David Riester and Paul Hildebrand

Our quick-take quantitative analysis (link) isolating the impacts of H.R.1’s clean energy ITC cuts, and our follow up Q&A style discussion (link) seemed to prove useful for the stakeholder community. We’ve updated and evolved Segue’s analysis to look at the Senate Finance Committee (“SFC”) draft implications, specifically the ITC/PTC expiration schedule. To keep this digestible, our analysis does not capture the additional impacts/constraints arising from the FEOC language, despite our general view that the drafted FEOC language would curtail power deployment in the near and medium term beyond what is forecasted in the analysis below. 

Since the release of the Senate Finance Committee draft on Monday, the energy sector’s prevailing mood has understandably bordered on despair. But before diving into the numbers, we might take a moment to acknowledge that stakeholders concerned with H.R.1’s impacts “asked” for four things… 

…and each of those four things was addressed to some degree. 60 days turned into six months, the FEOC language is brutal but less so, the 45Y and 48E credits have a slight taper (and, importantly, energy storage was spared), and transferability remains in play.   

Several pro-business Republicans fought hard for these gains, presumably at some cost. They probably feel they have done right by the energy sector…or at least the best they could in the circumstances.  Segue (and many other industry players) spent considerable time with dozens of Senators and their staffs, and those experiences confirmed their earnest conviction and appreciation of the urgency of the matter at hand.  So, while many in the power sector are angry – and, in the big scheme of things, we have every right to be – we should be careful not to be thankless or naive.   

The fact remains, however, that – in the aggregate – the improvements to the energy provisions fall short of averting a bloodbath.  It’s a bit like the parable of the rescue rope not reaching the drowning man – a valiant and well-intentioned attempt, but America’s power supply, artificial intelligence sector and CPI won’t be saved by these measures.  

As the following analysis will show, there is still work to do to avert a near- and medium-term national power crisis.  Competing interests and the political landscape render this an unenviable task, but one that simply must be met if America is to avert a 1970’s style economic crisis prompted by power bottlenecks.  

Headline Numbers:  122 GW of canceled power, $211 billion of canceled investment  

Despite the modest improvements in the bill (as compared with H.R.1), we still forecast substantial project cancelations representing 122 GW, and $211 billion of investment in the grid, which translates to almost $3 trillion of digital infrastructure economic activity solely from the SFC draft’s 48E and 45Y provisions. Again, the impacts from the chaos and inefficiency arising from FEOC cancellations would surely exacerbate the damage significantly from there. 

How does the Senate Finance draft compare with H.R.1?    

Taking both changes into account, the near-term impacts from proposed legislation are materially softened: Across 2026, 2027, and 2028, we would expect the SFC bill to cause ~16% attrition (vs. status quo) compared to ~43% for H.R.1. – a difference of ~79 GW of capacity in that 3-year period. Viewed on an absolute basis, in isolation, this is a big deal. 

Estimating how many projects are safe harbored – and at what ITC level – is an inexact science. We are applying our experiences and observations from comparable historical periods, and extrapolating live cost/benefit exercises we are performing on our own portfolios (~250 projects) to predict behavior on the national level. The assumed schedule of “in-play” ITCs is shown below. Of course, more ITCs mean that more projects get built (red dashed line).   

We overlay additional assumptions capturing what these ITC rates mean for attrition rates (taking into consideration transformer and module manufacturing bottlenecks, and how much capacity is in a position to invest in safe harboring maneuvers by the time such investment is necessary). Our previous two papers outline the methodology and the logic behind it. 

The aggregate effect of these changes is a bill that would, if made into law, cause damage that is roughly 60% as damaging to the power sector as the H.R.1 bill. 

The below graphic (modified from our Part 2 whitepaper) offers a narrative outline of how we expect the industry to react in response to both bills:   

The Energy Storage Carveout’s Significance 

Energy storage was carved out of the tax credit repeals entirely, which complicates the analysis. Storage firms up power on the grid, and counts toward added power capacity, but it does not introduce any additional net electricity. So, while the carveout is unquestionably important and positive, America would still face serious power generation shortages as the bill is drafted.   

Energy storage is still “catching up” to solar/wind generation in most parts of the country. Even with no solar and wind capacity additions, energy storage installations would remain useful and economical virtually everywhere, at least for the time being.  However, the demand for storage is correlated with new renewable energy capacity additions – particularly solar plants – so the marginal utility of storage additions decreases with a deceleration of solar and wind capacity additions. 

For our analysis the expected energy storage capacity growth closely tracks the “status quo” expectations, with slightly decreased penetration as the reduction of new solar capacity begins to erode the utility of energy storage later this decade and next.  Big picture, we model a 30% correlation between generation and storage additions. 

The Two-year Taper’s Significance 

As drafted, the Section 45 and 48 tax credits would taper down from 30% for 2025 construction starts, to 18% for 2026 construction starts, and 6% for 2027 construction starts.  In the US market, some projects enjoy expected margins of 12%+ (the lost “revenue” contained in the ITC/PTC reduction), and those might be built – albeit at a much thinner margin – instead of being cancelled (as they would be in the complete absence of any ITC/PTC). However, that universe is extremely small.  Power markets are highly efficient. Electricity is a true commodity, and the market for facilities that generate electricity is, in turn, highly “efficient”. Unit economics rarely contain outsized margins – where those used to exist, market entrants and competitive pricing have flushed out double-digit margins nearly to extinction.  The benefits of 45Y and 48E tax credits have been “priced in” and passed through to power end-users (as lower electricity prices) for years. There are no solar “fat cats” loafing about with loose belts to tighten. 

As such, the vast majority of projects that are currently being developed to a 30% ITC flip from “profitable” to “under water” with an 18% ITC. Here we arrive back at the sequencing problem discussed in our previous paper. Short version: many of these projects will be canceled, because the investment of capital, risk, and time required to find out if cost increases can be “passed through” to the end users is unjustifiable given the (likely minimal) reward if successful.    

By way of example: you’re developing a project with an estimated 8% margin based on the electricity rate you secured through a competitive process with a utility. It’s about halfway through development as 2026 winds down. There’s a critical discretionary permit outstanding, and you’re still awaiting interconnection studies that will confirm your interconnection costs and timeline. Either outstanding development item (the permit or the interconnection studies) could render the project fatally flawed. To start construction in 2026 you have to spend ~$3m. The utility buying the power says they may entertain a PPA rate change but need to navigate regulatory processes and might need to rerun the competitive procurement. They are non-committal and hard to read. Is that a defensible investment of $3m to keep the power plant alive? Reasonable people could disagree here, but as a party that would face that sort of decision for 20-30 assets representing 4-5 GW of near term power, we can assure you the answer would be “no” for at least a few GW of near term power that we own.    

The SFC Bill Still Saddles America With A Power Shortage 

Though an improvement upon the H.R.1 bill, America’s economy, energy independence, inflation, and national security would all suffer from an energy “depression”. While our primary global competitor (China) enjoys the energy abundance that comes with ~200GW annual capacity additions (80%+ from solar, wind, and storage, which they unflinchingly subsidize and support), America will be starved of available power, and experience sharp electricity price increases² 

The following graph illustrates the problem neatly:  

The underlying data³:

Here’s what you’re looking at: 

A cynic may look at this narrative and think “hmm…well things look ok while I’m on the hook…. seems like I can make this a problem for the next gal [wipes hands clean]”.  Not so fast! The problem lies in the reality that the real prize here is a booming data center and artificial intelligence economy, and all the GDP, jobs, personal wealth for politicians, etc. that lie in that sector growing exponentially, which it cannot do without line-of-sight to power. Equinix, STACK, CyrusOne, DRT, and the like don’t pump capital into – and start construction on – data centers for which no viable power plan exists. They already face this problem and pause progress on data centers constantly. This is already a problem America faces that China does not. When the subsectors producing ~85% of the new power in the US have a poison pill jammed down their throats, the pipeline of power will disintegrate, and with it the prospects of digital infrastructure, AI, and cryptocurrency wealth.  China doesn’t care where its electrons come from. That America does may prove to be our downfall in the race for AI supremacy and control of the modern digital economy.  

Moreover, small changes to the supply side of the power market have outsized impacts on electricity prices for regular businesses and households. People who vote. And if you’re watching what’s happening to retail electricity prices in Ohio, Michigan, Pennsylvania, Texas, and many other states, you’d know that those price hikes often arrive as the power shortage approaches, not only when it arrives.  This self-sabotage would come home to roost right away – why grandma’s electricity spiked in 2026 won’t be much of a mystery.  

A Modest Proposal 

We would like to humbly submit a proposal that we think lies at the intersection of what seems 1. Possible, 2. Helpful, 3. Simple.  Slide the schedule one year to the right. So… 

We believe this relatively slight change would have an outsized positive impact relative to costs:   

Where is this higher “leverage” on costs coming from? 

Our proposal would turn a six month window to prepare for the ITC stepdown (30% to 18%) into an eighteen-month window.  Utility-scale energy projects take five to eight years to develop; six months is barely any time at all in our business to respond to a seismic policy shift.  Extending that ITC stepdown window allows for more time for safe harboring mature, investable projects that both developers and their offtakers (utility or corporate) want to succeed at a 30% ITC.  As our Part 2 whitepaper lays out, safe harboring a project to secure 30% ITC is challenging (particularly on a timescale of just a few months) due to: 

More critically, eighteen months gives power markets more time to respond to the market shock.  Current federal policy gives the buyers and sellers of power certainty as to their 48E assumption so long as the power project commences construction within seven and a half years of today.  Buyers and sellers have spent years negotiating agreements founded on the business conditions in place.  The extreme chaos imposed by the ITC/PTC “rug pull” costs the entire economy and all Americans. 

The solution we are proposing is still a very bad outcome for our industry relative to the status quo.   

Rest assured, with a one-year shift to the right, the bill would still deliver on the agenda to meaningfully slash the IRA tax credits and dismantle the “Green New Sham” (the phrase used by the SFC).