Reconciliation Bill Leaves Many Policy Gaps for States to Address

To help public agencies make the most of these tax credits, several practical guides from Evergreen, S2 Strategies, Lawyers for Good Government, Deloitte, and RMI highlight best practices that states might adopt to help secure federal incentives swiftly.

Modeling suggests that repeal of the ITC and PTC for wind and solar, which represented over 80 percent of new grid capacity in 2024, could increase household energy prices between 5 percent and 10 percent nationally, depending on the time frame, while specific states may see substantially higher increases. Rates may rise as much as 30 percent in some states, while adding as much as $500 per year to household utility costs (PDF). Notably, much of that modeled increase is due to weakened energy investment being unable to keep pace with projected data center demand. States have a variety of tools at their disposal to control rising energy costs for different classes of ratepayers, particularly in the emerging field of data center regulation.

As states balance inevitably rising energy costs with skyrocketing demand, which is increasingly driven by data centers, they should look to first-mover jurisdictions preventing data centers from passing increased grid costs on to ratepayers (see 2025 bills including Oregon’s HB 3546, Georgia’s SB 34, Idaho’s H 395, Virginia’s HB 2084, Montana’s HJ 46, and New Jersey’s A.5466). These states are working to make the source of the load growth pay the real cost of added system capacity, particularly at a time when that capacity is becoming increasingly costly.

This could include requiring 100 percent renewable energy procurement by targeted dates or prohibiting incentives for fossil fuel power purchase agreements (see: New York S.6394). States could also provide tax credits to data centers that use carbon-free energy and use batteries, instead of diesel fuel, as a backup power source (see: California SB58).

Since the reconciliation bill specifically targets wind and solar incentives, while allowing batteries, nuclear, carbon capture, and other technologies to receive credits through 2034 (pending FEOC compliance), states with technology-neutral renewable energy policies should consider adopting specific wind and solar carve-outs. A separate tier of renewable energy certificates (RECs) for these technologies might present the necessary incentive to support continued market development.

A growing number of states have enacted siting legislation, including New York, California, Minnesota, and Michigan (Pennsylvania is also currently considering a proposed RESET board from Governor Shapiro), with the goal of streamlining a centralized state permitting process for renewables, batteries, and transmission that can preempt overburdensome local procedures. Other emerging siting approaches include agencies proactively identifying Build Ready sites, including at brownfields (see examples from New York and Massachusetts), or utilizing existing rights of way, such as highways, to expedite the siting of transmission.

Cuts to federal credits have been projected to cause grid reliability issues, as more than half of new energy capacity over the next ten years may now be terminated. States have a variety of tools to ensure that PUCs are empowered to proactively consider grid reliability issues in the face of rising demand, clean energy targets, and uncertain capacity.

States can update PUC statutory mandates to allow them to consider clean energy goals, align Integrated Resource Planning processes with energy transition projections, embrace innovative ways of managing power demand, like virtual power plants, and study the impacts of load growth on energy capacity and transmission constraints. Ultimately, state regulators and policymakers have broad authority over their electric capacity and load growth — now it is all the more urgent that they exercise it.

While states cannot preempt the federal government from issuing leases for oil and gas extraction on federal lands, they can increase the costs of extraction, while helping fill state coffers. States can impose higher severance taxes to compensate for decreased federal royalty rates, and can then use that money to fund clean energy.

To be clear, states can impose these taxes in addition to whatever the federal lease terms are. CBPP and the Tax Policy Center have put forward leading resources on this subject. States can also, of course, increase royalty rates for fossil fuel production on state lands, and the resulting revenue can be allocated to clean energy and climate initiatives.

A number of states already offer electric vehicle and charger rebates, and models exist to replicate these incentives either through state rebates or tax credits.

State regulators, particularly at the Public Service Commission, have an indispensable role in leveraging utility regulation to ensure the thoughtful buildout of statewide electric vehicle charging networks, which may be a bigger hurdle to EV adoption than the up-front cost of the vehicles.

State governments can lead the way by setting ambitious public EV fleet and bus procurement targets.

Where states cannot directly require private vehicle fleets to electrify, they can nevertheless control permitting for centers of fleet traffic, like warehouses, through indirect source review. This may provide an opportunity to require lower-emission fleets.

The long-term affordability of EVs can be significantly impacted by EV charging rates. Several jurisdictions are ensuring that EV charging rates do not unfairly punish EVs, while fewer states have yet tackled how EVs can be used as a grid asset. Requiring bidirectional charging capabilities or rate design can improve the economics of both EV ownership and grid reliability.

Green banks can help support financing clean transportation and related infrastructure. A state or city can set up a green bank to directly fund and provide financing products for electric vehicle initiatives.

Federal law permits states to flex funding allocated through certain programs funded by the Federal-Aid Highway Program to projects including electric vehicle charging infrastructure, sidewalks, protected bike lanes, and public transportation. Funds could also be transferred to build out public electric vehicle charging infrastructure on state rights-of-way as well as electric bus charging networks.

While states are preempted from regulating what comes out of the tailpipe, they can regulate what goes into the gas tank. States looking to reduce the greenhouse gas intensity of automotive fuels, even as fleetwide fuel economy backslides, may look at Clean Fuels or Low Carbon Fuel Standards. While the history of Clean Fuels Standards is flawed, there are emerging tools and best practices to help states design programs that work.

As the federal government walks back this and several other initiatives aimed at advancing environmental justice, states must fill the gap. Administratively, they can achieve this by defining and mapping EJ communities, and forming governmental EJ staff positions and advisory bodies to center their voices.

From the perspective of replacing lost funding, they can adopt EJ Community Investment Requirements, which require a certain percentage of funds and/or benefits from state climate and clean energy investments to be allocated to EJ communities.

States are not preempted from directly regulating oil and gas production facilities to eliminate the flaring of methane and minimize leaks from processes, equipment, and pipelines, as well as mandating emissions reporting and regular monitoring. Several states are already leading the way.

Dozens of examples of states supporting heat pumps or geothermal energy exist including utility rebates, personal tax credits, property tax incentives, loan programs, and other means.

Where the federal government can only offer incentives for efficient buildings, states can actually require them, whether by:

• Setting building performance standards
• Phasing out gas appliances
• Requiring LEED certification
• Tightening building codes
• Adopting Clean Heat Standard
• Increasing the ambition of Energy Efficiency Resource Standards