FEDERAL AND STATE LEGISLATIVE UPDATE – 8/6/2025

Given all the activity of late, CAI has assembled this brief overview of aspects of the Federal and State regulatory landscape that are most relevant to our current and potential future portfolio companies, notably in the area of renewable energy. We attempt to distill what’s changed and what hasn’t, and how these changes (or lack thereof) relate to our investments.

We plan to update this post regularly, as the details and contours of this legislation are changing on a weekly (if not daily) basis, based on executive orders, congressional activity and state overrides.

On July 4, 2025, President Trump signed the sweeping budget reconciliation bill commonly known as the “One Big Beautiful Bill Act” (the Act, or OBBA). The Act includes the following significant transition provisions and other changes with respect to some energy tax credits:

Accelerates the phase-outs for solar and wind projects under the tech-neutral investment tax credits (ITCs) and production tax credits (PTCs), put in place as part of the Biden Inflation Reduction Act (IRA). This portion of the Act did NOT address the prior form of ITC and PTC, as explained below (and important distinction often lost on the media);

Retains the longer runway for non-wind and solar generation (e.g., storage, hydropower, pumped storage hydropower and geothermal);

Adopts foreign entity of concern (FEOC) rules imposing certain foreign supply chain and ownership restrictions on certain tax credits, including ITCs and PTCs;

Extends the eligibility timeframe for clean fuel production tax credits (45Z Credits) and modifies the 45Z Credit values and computation methodology;

Modifies the advanced manufacturing PTCs (45X Credits) by curtailing wind-component eligibility, and revising rules for integrated producers; and

Eliminates post-2025 tax credits for commercial and residential electric vehicles (with a phase-down depending on volume of cars sold), individual tax credits for residential solar systems and the tax credits for charging stations and energy efficient homes.

As stated above, there are some significant misconceptions around the solar and wind (ITC and PTC) tax credits, and how the recent changes in the Act will impact these key energy sub-sectors:

Tax Credit Structures: Two Vintages

First it is critical to understand that there are two ‘vintages’ of tax credit out there and in use today by solar and wind developers.

Old Section 48 (Pre-IRA): Included ITC and PTC for solar and wind, with credits up to 30% (in some cases 40% of project value). These credits could be sold or used to reduce tax liability but were not tradeable.

New Section 48E: Passed by Democrats under the IRA in 2022 and widely opposed by Republicans, this new vintage of credits expanded the timeline for projects to qualify for credits to 10 years (or more) and added eligibility for storage, energy efficiency, and other clean technologies. Credit amounts increased up to 50% and became refundable or transferable.

OBBA + the July 7th Executive Order: The Republican changes apply ONLY to the newer Section 48E credits but did not change anything in the old Section 48. Projects that started construction under the old rules are not impacted by the Act or the Executive Order, including all of Intersect’s Core and Expansion pipeline.

This distinction is not well understood and serves to provide a meaningful ‘cushion’ for the gigawatts of projects that most large developers advanced under the old rule 48. While this project pipeline is not infinite, CAI believes it is more significant than most outside observers recognize.

Start of Construction (SoC) Rule changes

Start of Construction determines if your project will be eligible for tax credits:

Section 48 (Old Rules): SoC was defined by either initiating physical work of a significant nature or meeting the 5% Safe Harbor (incurring at least 5% of total project cost).

Section 48E (IRA Rules): Extended the completion window up to 10 years, offering greater flexibility, especially for large or complex projects.

OBBA + the July 7th Executive Order: Republicans shortened the qualification window for credits under the new Section 48E (without affecting previously Safe Harbored projects), prompting savvy developers to accelerate Start Construction under the new rules. Those with balance sheets to Safe Harbor more will do so, while others will become targets for buyers like CAI (at a substantial discount to actual value).

IMPORTANT NOTE: This July 7th presidential executive order attached to the OBBA focuses on Start of Construction under the Section 48E credits under the IRA. The Treasury is expected to issue more specific rules on how projects can qualify for SoC in August or September of this year, providing additional clarity to those who have not already Safe Harbored wind and solar projects.

Storage, geothermal and several other technologies are not being reviewed under the Executive Order, which only addresses changes to wind and solar SoC.

The original Section 48 credits have not been mentioned or challenged in any draft legislation or executive action.

There is a real debate taking place in the Senate around what the Treasury should / should not do in its final ruling, expected at the end of August or in September. Watch this space (or call us) for updates as events unfold around this key change.

FEOC (Foreign Entity of Concern) Policy

Historically, direct or indirect ownership by certain individuals and entities incorporated in or with a strong nexus to China, North Korea, Russia or Iran (each, a "covered nation"), jeopardized eligibility for the clean vehicle and advanced microchip tax credits. However, using supply chains with components from a covered nation did not previously impact credit eligibility. The Act introduces new FEOC rules that expand these restrictions and include both ownership and supply chain involvement.

FEOC Ownership Restrictions

For taxable years beginning after July 4, 2025, the Act prohibits any taxpayer that is a “prohibited foreign entity” from claiming most ITCs and PTCs. Prohibited foreign entities include “specified foreign entities” and “foreign-influenced entities.”

A “specified foreign entity” is an FEOC or covered nation described in one of several lists. A “foreign-controlled entity” includes a subnational government body, agency or instrumentality of a covered nation, as well any entity that is 50% or more owned by, or that is organized or has its principal place of business in, a covered nation.

A “foreign-influenced entity” is any entity with respect to which one or more specified foreign entities can do things like appoint directors, executives or equivalent officers; hold an aggregate 40% or more of the equity (or 25% if held by a single specified foreign entity); for publicly traded companies, hold an aggregate 15% or more of the debt; or receive, in the prior taxable year, payments under a contract giving a specified foreign entity (or an entity related thereto) specific authority over “key aspects” of, or intellectual property rights related to, a qualified facility or energy storage technology owned by the entity or an eligible component produced by the entity.

CAI has long believed that the Chinese supply chain would come under increasing pressure, leading to our decision to move away from Chinese modules at Intersect almost five years ago. We have continued to focus on domestic and non-FEOC supply chains for all CAI projects and will continue to do so. This also serves as something of a tariff buffer, as the FEOC rules in renewables tend to mirror the tariff trends.

FEOC Supply Chain Restrictions

Projects that begin construction after 2025 — based on the now-codified solar and wind start-of-construction safe harbors (see above) — will be ineligible for ITCs and PTCs if they receive “material assistance from a prohibited foreign entity.” This restricts eligibility for projects that rely heavily on components sourced from China or other covered nations. A limited transition safe harbor applies to products manufactured under contracts executed before June 16, 2025.

The Act uses a “material assistance cost ratio” to determine if a taxpayer received “material assistance from a prohibited foreign entity.”

Section 899 (Revenge Tax on Foreign Entities)

This provision was ultimately stripped out of the OBBA and would have allowed the U.S. to place a punitive tax on any country that treated the U.S. unfairly, in the eyes of the current administration. Its sweeping scope (potentially targeting countries like Denmark for taxing services such as Netflix) had cast a chilling effect on foreign investment into the U.S. Its removal from the final bill offers added certainty for our foreign LPs and prospects.

We would summarize all of this as follows: In the long and successful history of U.S. renewable development, the level of flexibility offered under the IRA was unprecedented. We are now exiting the “IRA World,” where tax credits for solar and wind effectively had no sunset and faced minimal restrictions on how they could be obtained or traded. Most of the past policy frameworks (beginning with wind PTC in 1992 and the solar ITC in 2006) were more restrictive, not terribly different from the environment we’re returning to under the Act.

While it may seem that the landscape has changed significantly for the worse, driven by tariff uncertainty and volatile political rhetoric, the underlying tax credit programs now in place are not completely unfamiliar territory for those with meaningful experience in renewables. We believe this moment serves as a clear signal to focus on capital formation in support of building projects and scaling platforms.

CAI’s portfolio extends well beyond solar, wind, and storage platforms like Intersect Power, with multiple portfolio companies well positioned under current market and policy dynamics.

Rye Development should benefit from sustained federal support for hydropower, further strengthened by the more restrictive FEOC and tariff regulations targeting lithium-ion battery imports from abroad, particularly from China. Notably, CATL (the world’s largest battery manufacturer, located in China) was cited by as an offender in the most recent policy guidance.

Sentinel is an operating asset that does not participate in the tax credit regime, but should benefit from the expected higher overall power and capacity prices that will be one of the results of the Act.

The CAI water program is expanding, with new investment opportunities largely unaffected by Treasury or tariff policy. Both CWA and Project AquaRecharge are not impacted by the renewable energy tax credit changes.

Meanwhile, our distributed generation investment in 38 Degrees North benefits from state programs supporting renewable deployment for grid stability, an increasingly urgent priority.

Disclaimer:

The opinions and commentary expressed herein are for informational purposes only and do not constitute personalized investment advice or recommendations. The content reflects the author's views on the potential impact of the recent "One Big Beautiful Bill" and related federal and state legislation. These opinions are subject to change and should not be relied upon as a basis for any investment decision.

This communication is not an endorsement or solicitation for any financial products or services. The firm is registered with the SEC, and this commentary is not an official statement of the firm’s investment strategies or recommendations.

Readers are advised to seek their own independent financial, legal, and tax advice before acting on any legislative developments or opinions expressed herein. The firm assumes no responsibility for any losses or damages resulting from the use of or reliance on the information provided.