Energy Credits Changes in the One Big Beautiful Bill

The One Big Beautiful Bill Act (OBBBA), formally known as H.R. 1 in the 119th Congress, represents a significant overhaul of U.S. tax policy, particularly in the realm of energy incentives. Enacted in July 2025, this legislation builds upon and modifies provisions from the Inflation Reduction Act (IRA) of 2022, aiming to recalibrate federal support for energy production and consumption. While the IRA expanded tax credits to accelerate the transition to clean energy, OBBBA introduces phase-out adjustments that prioritize fiscal responsibility, domestic production, and certain baseload energy sources like nuclear and geothermal over intermittent renewables such as wind and solar. These changes are projected to generate substantial revenue—estimated at over $484 billion from 2025 to 2034—by curtailing subsidies deemed inefficient or overly reliant on foreign supply chains.

The specific phase-out adjustments for energy credits address, focusing on the alignment of the geothermal heat pump credit with the clean electricity credit, modifications to biofuels incentives extending to 2031, and enhancements like the nuclear bonus. These provisions reflect a strategic shift toward energy security and economic pragmatism, but they also spark debate over environmental impacts and innovation.

Central to OBBBA’s energy reforms is the alignment of phase-out schedules for select credits, ensuring consistency across related incentives. The geothermal heat pump credit, previously governed under the residential clean energy tax credit (Section 25D) and the energy efficient home improvement credit, undergoes a notable adjustment. Under the IRA, this credit allowed homeowners a 30% rebate on qualified geothermal installations through 2032, with a gradual reduction to 26% in 2033 and 22% in 2034 before expiring. OBBBA aligns this phase-out with the broader clean electricity credit framework (Sections 45Y and 48E), which emphasizes zero-emission technologies. Specifically, the bill sets reductions for geothermal heat pumps beginning in 2029, scaling down to 75% of the base credit in 2029, 50% in 2030, and 25% in 2031, before full termination in 2032. This acceleration addresses concerns over long-term fiscal burdens while maintaining support for geothermal as a reliable baseload source, unlike wind and solar, which face outright termination after 2027.

The clean electricity credit itself, encompassing both production (45Y) and investment (48E) components, serves as the benchmark for this alignment. OBBBA terminates these credits for wind and solar facilities placed in service after December 31, 2027, or those beginning construction more than a year post-enactment. However, for geothermal and other qualifying technologies with greenhouse gas emissions rates not exceeding zero, the phase-out is fixed to start in 2033: 100% availability in 2033, 75% in 2034, 50% in 2035, and zero thereafter. By syncing the geothermal heat pump credit’s reductions to an earlier timeline (2029-2031), the bill creates a transitional buffer, allowing installations that meet domestic content requirements—such as 55% U.S.-sourced materials after 2026—to benefit from incentives while phasing out subsidies more aggressively. This adjustment is expected to save billions by curbing extended payouts, yet it preserves geothermal’s role in residential and commercial energy efficiency, potentially reducing household heating costs by up to 50% in suitable climates.

Beyond geothermal, OBBBA retains and modifies incentives for biofuels, extending their viability amid the broader curtailment of clean energy subsidies. The clean fuel production credit (Section 45Z), which supports low-emission transportation fuels including biofuels derived from biomass, is extended through 2031, surpassing the IRA’s original 2027 sunset. This extension provides a base rate of $0.20 per gallon for general transportation fuels and $0.35 for sustainable aviation fuel, multipliable by five if prevailing wage and apprenticeship standards are met.

However, modifications introduce restrictions: feedstocks must originate from the U.S., Canada, or Mexico, excluding foreign sources to bolster North American energy independence. Lifecycle emissions calculations now omit indirect land use changes, and specific emission rates are mandated for manure-based biofuels. While not a traditional phase-out, the value of credit diminishes post-2029 through a 20% reduction for non-compliant fuels, effectively tapering support by 2031. This approach retains biofuels as a bridge fuel, particularly for aviation and heavy transport where electrification lags, but critics argue it favors agricultural interests over rapid decarbonization.

Complementing these adjustments is the introduction of a nuclear bonus, enhancing incentives for zero-emission nuclear power. Under Section 45U, the zero-emission nuclear power production credit offers 0.3 cents per kilowatt-hour (or 1.5 cents with labor compliance), now augmented by a bonus for projects in “nuclear communities”—areas historically reliant on nuclear facilities. This bonus, potentially adding up to 10% to the base credit, applies without a phase-out timeline, distinguishing nuclear from phased-out renewables. OBBBA also prohibits credits for facilities sourcing fuel from “covered nations” like China or Russia after 2028, unless under pre-2023 contracts.

This retention and enhancement underscore nuclear’s status as a stable, high-capacity clean energy source, capable of providing 24/7 power without the intermittency issues plaguing wind and solar. Proponents highlight its role in grid reliability, especially as demand surges from data centers and electric vehicles, while opponents decry the lack of similar support for emerging renewables.

These phase-out adjustments in OBBBA carry profound implications for the U.S. energy landscape. By accelerating reductions for geothermal heat pumps (2029-2031) and aligning them with clean electricity credits, the bill streamlines incentives, reducing administrative complexity and taxpayer costs. The biofuels extension to 2031, with its domestic focus, supports rural economies and energy security, potentially sustaining jobs in agriculture and refining. The nuclear bonus, meanwhile, signals a pivot toward proven technologies, fostering investment in advanced reactors and community revitalization. Economically, these changes are touted as deficit-reducing, with revenue from repealed credits funding tax cuts elsewhere in the bill.

Environmentally, however, they risk slowing the clean energy transition; early terminations for solar and wind could hinder emissions goals, as these sources accounted for 20% of U.S. electricity in 2024. Moreover, restrictions on foreign entities of concern (FEOCs) aim to mitigate supply chain vulnerabilities but may increase costs for domestic projects reliant on global components.

In conclusion, OBBBA’s phase-out adjustments for energy credits embody a pragmatic recalibration, balancing fiscal prudence with targeted support for reliable clean technologies. The alignment of geothermal phase-outs, biofuels modifications, and nuclear enhancements reflect a policy favoring energy independence and baseload stability over expansive subsidies. As the U.S. navigates climate challenges, these provisions could accelerate innovation in retained sectors while prompting debate on the pace of renewable adoption. Ultimately, their success will hinge on implementation, market responses, and complementary policies like permitting reforms.