FEOC Uncertainty Stifles US Solar Project Finance, Demanding Clarity on Ownership and Control
The U.S. solar and renewable energy sectors are navigating a complex and evolving regulatory environment, with significant friction accumulating in project finance due to lingering uncertainties surrounding Foreign Entity of Concern (FEOC) restrictions. Nearly four years after the passage of the Inflation Reduction Act (IRA), developers continue to grapple with ambiguities, particularly concerning the final guidance on ownership and control, which is now a primary impediment to securing project financing.
Dorian Hunt, partner and co-leader of renewable energy tax services at CohnReznick, highlighted these challenges in a recent episode of the Norton Rose Fulbright Currents project finance podcast. While the IRS and Treasury have provided some clarity on supply chain issues with Notice 2026-15, establishing a safe harbor for raw materials, Hunt pointed out that the market remains exposed regarding the critical aspects of ownership and effective control.
According to Hunt, a thorough examination of all project arrangements throughout its lifecycle is essential to determine whether they might inadvertently limit the availability of crucial federal incentives. This lack of definitive guidance, while not entirely halting development due to robust grid power demands, has introduced substantial friction into the project finance landscape.
A significant bottleneck has emerged within the tax credit insurance sector. Financial carriers, typically willing to provide comprehensive policies to cover downside tax risks, are now hesitant to bind coverage for FEOC limitations pending the release of finalized guidance. As securing tax credit insurance is often a prerequisite for closing project financing, this standstill is directly impeding deal progression.
The ongoing ambiguity is also prompting a reassessment of credit selection strategies. The risk of open-ended credit recapture under the Investment Tax Credit (ITC), where a retroactive compliance violation could nullify substantial upfront credits, is discouraging developers from opting for this mechanism. Consequently, for technologies where economic viability permits, developers are increasingly considering the Production Tax Credit (PTC). Although the PTC necessitates a 10-year delivery schedule, it offers insulation from a single point of upfront recapture.
Beyond geopolitical considerations, the internal mechanics of related-party tax equity transfers are facing heightened scrutiny. A common practice in ITC transactions involves transferring an asset from a development company to an operating company to achieve a legitimate step-up in basis to fair market value. Given the related-party nature of these transactions, establishing a clear narrative of economic substance is paramount.
To mitigate audit risks, Hunt stresses that the justification and business purpose for such transactions must extend “above and beyond the obvious desire to have more tax incentives in the mix.” In practice, this necessitates structuring capitalization policies that actively avoid circular cash flows. Hunt cautioned developers against arrangements where “money is going left pocket, right pocket, same day, same guy.” Instead, he recommends utilizing tools such as market-rate shareholder loans or notes payable with bona fide repayment terms to ensure the development company operates as a distinct, standalone business.
This defensive positioning is further reinforced by broader corporate tax litigation trends. Advisors are closely monitoring adjacent, non-renewable tax cases, such as the recent ruling in Liberty Global, which could provide federal taxing authorities with a new avenue to challenge historical related-party structures and circular cash mechanics across the renewable energy sector.
The broader transferability market under Code Section 6418, however, remains robust, although pricing has moderated from its initial peaks. Analysts interpret this as a natural stabilization in a maturing market rather than a decline, particularly as initial anxieties regarding the potential repeal of transferability rules have subsided. Furthermore, corporate tax appetites have been somewhat tempered by strong research and development expensing provisions and expanded bonus depreciation opportunities elsewhere in the market, contributing to a normalization of supply and demand dynamics.
Concurrently, developer interest is shifting towards technologies that have remained unaffected by recent legislative adjustments. Transactions are accelerating in areas such as Section 45Z sustainable fuels, 45Q carbon capture, and advanced manufacturing under 45X.
Ultimately, the prevailing sentiment across the project finance landscape is one of cautious optimism. The industry has demonstrated its capacity to deploy capital effectively even amidst volatile conditions. However, a significant acceleration in transactional activity remains contingent upon the Treasury Department’s issuance of definitive rules governing these critical aspects of renewable energy project finance.
