Aside from extending the 2017 tax reforms, the most important policy success in the One Big Beautiful Bill Act (OBBBA) that is now headed to President Trump’s desk is the new law’s energy policy. Coupled with tax cuts and regulatory reform, the megabill’s support for abundant, reliable, and affordable energy will spur investment, mitigate inflation, and accelerate economic growth and job creation, particularly to the benefit of lower income Americans.
By allowing companies to deduct the full amount of capital investments upfront rather than writing them off over several years, the new tax bill paves the way for more factories, data centers, defense and satellite labs, warehouses, logistic hubs, telecom and medical infrastructure. These R&D investments will only increase demand for reliable base load power. A base load generator, like a nuclear reactor, produces a consistent amount of power while in operation. Its output is not variable with the weather.
Simply put, energy is the platform that modern industry (and life) is built on. The ability for Americans to afford basic necessities from modern medical care to air conditioning, home heating, gas-powered transit, and household staples depends on an abundance of affordable, reliable energy. So does America’s ability to win the global artificial intelligence (AI) race, which will be critical in the 21st century. McKinsey forecasts that global demand for data centers could triple by 2030, with AI responsible for 70% of the demand.
Although the eleventh-hour carveout giving wind and solar producers a one-year runway to initiate subsidized projects is a disappointment, the new tax and spending law takes important steps to meet the rising energy demands from advanced manufacturing, chip fabs, robotics, and data centers. First and foremost, the bill protects grid reliability by setting an end date for subsidies for wind and solar power, turning the page on the “all of the above” sleight of hand that provided cover for energy malinvestment. If allowed to expire on the extended timeline set in the Inflation Reduction Act (IRA), the wind, solar, and electric vehicle (EV) handouts would have cost taxpayers as much as $3 trillion by 2050. And yet, this massive giveaway undermined the reliability of the grid by reducing revenues for and investment in base load power generation.
Once they collect subsidies, wind and solar providers can still make money even if they charge less than their production costs. In California, the wholesale price of electricity has become negative for a greater share of the day since the passage of the IRA. What this means is that the American people are paying for solar power that Californians do not demand.
Meanwhile, reliable base load generators—hydro, nuclear, coal and geothermal—face falling revenues despite providing immense value to the grid by reducing volatility. This leads to a shortage of abundant, reliable forms of energy, which, in turn, creates an affordability crisis for families, particularly during severe weather events. Winter Storm Uri, the February 2021 freeze that left millions of Texans without power, is estimated to have cost the state’s ratepayers over 37 billion dollars. Households were hit with bills as high as $7,000.
The bill also removes barriers for oil and gas exploration on public lands. The increased output and lower royalty rates on domestic production will bolster economic growth, lower prices at the pump, and reduce home electricity costs, which disproportionately affects Americans who earn lower incomes.
In a win for consumer choice, the megabill phases out EV subsidies, which, when combined with mandates that pushed Americans to purchase these vehicles, could have been one of the most expensive parts of the IRA. It also defunds enforcement of the anachronistic Corporate Average Fuel Economy (CAFE) standards, a regulatory shift that is expected to save automakers billions of dollars and consumers up to $1,620 per vehicle, according to industry groups. Together, the EV phase out and the CAFE pullback are clear wins for lower income Americans, who benefit most from lower car prices.
By the same token, OBBBA continues to invest in nuclear, geothermal, and batteries. Although an equal opportunity policy toward energy is ideal—where the government sets a regulatory environment that allows the various sources of energy to compete freely against each other in the marketplace—greater investment in nuclear, geothermal, and batteries will at least help to reduce the risk of further reliability crises that were exacerbated by the subsidies in the IRA and state-level regulations that gave explicit preference to wind and solar.
Pro-growth tax policies, a common-sense regulatory climate, and reliable energy are critical foundations for American prosperity. The new tax bill makes progress in each of these areas. While the tax and regulatory reforms may have the largest impact in the near term, the megabill’s energy reset may be even more consequential over the long haul. It nixes hundreds of billions of dollars in future subsidies that would have padded the balance sheets of Big Solar and Big Wind and averts a grid meltdown. For Americans on the bottom half of the ladder, that’s no small victory.
Michael Toth and Grant Dever are fellows at the Foundation for Research on Equal Opportunity (FREOPP).
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