Powering data centers after the OBBBA: Energy tax credits, compliance risks, and new opportunities
The rapid expansion of the U.S. data center industry, with its massive need for electricity, coincided with significant changes in federal energy tax law and policy, with the enactment of the Inflation Reduction Act (IRA) in 2022, followed by the One Big Beautiful Bill Act(OBBBA), on July 4, 2025. While perhaps coincidental, the convergence of these two events has created both complexities and opportunities for energy developers and others powering the data center and AI revolution. For data center developers, understanding these tax shifts is now critical to securing predictable power at an affordable price and managing rising development timelines.
The upcoming one-year anniversary of the OBBBA provides an opportunity to step back and briefly survey the current landscape:
- Solar and wind are still on the table: Solar and wind developers worked to begin construction on projects by July 4, 2026, due to the OBBBA’s termination of the Federal investment tax credit (ITC) and production tax credit (PTC). Projects beginning after that date must be brought online before 2028 in order to claim the credit, while those beginning construction before will have a longer lead time of generally four years. For data center developers relying on these projects for green power purchase agreements, this timeline compression means any offsite power delays after July 4, 2026, could directly jeopardize project availability—or drive substantial energy price increases to address lost ITC and PTC value. The start of construction is generally established by onsite or offsite physical work. However, a recent district court case Oregon Environmental Council v. IRS, effectively restored the “5% Safe Harbor” as an additional pathway to start construction; as of this writing, it is uncertain whether the government will appeal. Thus, developers continue to have multiple pathways to preserve credit eligibility as they advance projects toward deployment, which provides data center developers much needed liquidity and a schedule buffer for co-located or offsite generation.
- The ITC and PTC remain available for other technologies: As enacted by the IRA, the new “tech neutral” ITC and PTC remain available for zero greenhouse gas emitting technologies other than wind and solar. This includes battery storage, geothermal, and nuclear technologies used to power data centers and other industries. Because data centers require continuous, 24/7 baseload power—which wind and solar cannot provide alone—these re-emerging technologies are becoming integral parts of the data center campus design resiliency strategy. Moreover, for AI data centers operating behind the meter, the rapid fluctuations in power demand driven by the operation of the AI algorithms require not just continuous baseload but also rapid demand-response that battery systems can provide to deal with spikes and dips in demand.
For some technologies, however, such as zero-greenhouse-gas combustion and gasification, the practical availability of the credits remains uncertain because the U.S. Department of the Treasury (Treasury) has not yet provided a workable pathway for demonstrating the required emissions rate. Developers contemplating these onsite emission-free generation methods should proceed with caution until regulatory clarity is issued.
The new ITC and PTC follow a structure under which the credit amount can be increased by satisfying prevailing wage and apprenticeship requirements and by qualifying for certain bonus credits tied to project location and domestic content. While this structure, enacted by the IRA, is now familiar to the industry, it does increase transaction and compliance costs.
- The prohibited foreign entity (PFE) rules remain a challenge: These rules, often referred to as foreign entity of concern (FEOC), were enacted by the OBBBA. They apply to a number of energy credits, including the ITC, PTC, and the advanced manufacturing production credit. At a high level, they require developers to analyze both their ownership and their supply chains to derisk from adversary countries, including China.
As developers continue building energy projects to feed data center power demands, these rules remain a challenge, again increasing transaction and compliance costs. A number of questions remain, including how to analyze debt issuance, how to properly diligence indirect ownership, and what “material products” and “material product components” are subject to the PFE analysis, especially for technologies, such as geothermal and nuclear, that don’t have safe harbor tables. For data center developers strategizing next-generation sourcing (like small modular nuclear reactors), these unresolved supply chain definitions pose a real expansion risk. As the need for additional power continues to grow, stakeholders across the energy and data center sectors will be watching closely for additional Treasury guidance on these issues.
