The shale revolution unleashed a new era of U.S. energy independence—but there’s a catch. At the bottom of every fracking rig is a specialized drill bit composed of so-called “superhard materials” composed of tungsten and synthetic diamonds, the majority of which come from China. Amid the escalating tech trade war, the Chinese Ministry of Commerce recently began adding these products on their licensing restriction list, illustrating Beijing’s perceived leverage in this supply chain. Even so, the U.S. oil and gas industry continues to benefit from generous tax breaks that keep shale production profitable.
The reality is, U.S. supply chains remain deeply entangled with China, even in fossil fuel sectors traditionally viewed as secure. Policymakers may talk of “de-risking,” but full decoupling isn’t just distant, it’s implausible in the near term. And yet, Washington is now poised to impose a far more draconian rulebook on the rest of the energy sector, including conservative favorites such as nuclear and geothermal, that could choke domestic innovation, onshoring, and the power needed for the artificial intelligence (AI) era.
Among the Day One executive orders issued by the Trump administration was a proclamation to “unleash America’s affordable and reliable energy.” This so-called energy dominance agenda is by no means controversial—it reflects widely shared bipartisan objectives to reduce prices and to meet the enormous energy demand from strategic sectors.
But the version of the budget reconciliation bill (also known as the “One Big Beautiful Bill”) just passed by the Senate—now back with the House— threatens to undermine that very agenda. While the Senate bill improves on the House-passed version by slowing the phaseout of key clean energy deployment and manufacturing credits, it also introduces a sweeping set of new foreign sourcing restrictions.
These restrictions replace the Biden administration-era Inflation Reduction Act’s more targeted “foreign entity of concern” standard with a far more complex framework of ownership, licensing, and materials tests. Under these proposed new rules, even a fully U.S.-owned project could be disqualified for relying on equipment or services with indirect ties to listed countries.
That would also stifle the growth of renewables at a time when electricity demand and prices are both surging, driven in part by the rapid expansion of AI and data centers. Data centers alone could consume up to 12 percent of the nation’s electricity by 2028, a significant increase from 4.4 percent in 2023.
To meet this surge, the fastest and most cost-effective solutions lie in clean energy sources. In 2024, wind, solar, and battery storage comprised 94 percent of new capacity additions in the United States; battery storage’s share of those additions doubled from 2022 to 2024. The most market-driven U.S. grid, Texas, added 42 gigawatts of solar, wind, and batteries between 2021 and 2024—driven by economics, not policy. While natural gas remains part of the energy mix, its deployment is hampered by turbine backlogs. Take it from the CEO of NextEra, the country’s largest private utility: The United States needs renewables, or it risks a “real power shortage problem.”
The Inflation Reduction Act’s clean energy incentives do more than just make it cheaper to build new projects at record speed—they’re also fueling a renaissance in U.S. manufacturing. With a domestic content bonus layered on deployment tax credits and a separate manufacturing credit for clean energy components, the law has helped shift supply chains away from China and supported the build-out of U.S. industry.
The United States is now on track to meet more than half of its solar module demand through domestic production and beginning to build an industrial base for the manufacturing of grid-scale storage. That progress is now under threat. Stringent foreign entity provisions would certainly preclude U.S.-made batteries or solar panels that included inputs from China or even Chinese-adjacent companies.
Republicans are right to want to reduce dependence on Chinese-controlled supply chains given China’s dominance across key inputs, including critical minerals and components of clean energy technologies. The Carnegie Endowment for International Peace convened a bipartisan “U.S. Foreign Policy for Clean Energy” task force last year to assess this challenge. Among the group’s findings was the fact that the United States must balance the task of “onshoring” and “friendshoring” clean energy supply chains. Onshoring is required where the United States “has existing economic strengths” (the most important being an industrial base and valuable intellectual property) or “critical national security interests in the technology.” And friendshoring is needed where the United States “simply cannot produce the material (for example, many critical minerals) or when creating competitive economic advantages would be onerous (such as where the United States lacks the tacit knowledge or cost-effective industrial base to compete).”
Rather than building on the Inflation Reduction Act’s incentives to onshore and friendshore clean energy, Republican in the House and Senate are charting a path that would undermine both goals. The first of the Inflation Reduction Act’s supply chain restrictions from a “foreign entity of concern” (FEOC) was applied to the electric vehicle (EV) tax credit. Both the House and the Senate versions of the reconciliation bill seek to zero out that tax credit, but the EV tax credit and its FEOC restriction were succeeding in reorienting battery and critical mineral supply chains. The FEOC definition covers entities listed on U.S. government restricted lists or designated by the energy secretary, and it also includes any entity that is “owned by, controlled by, or subject to the jurisdiction of” one of four countries: China, Russia, North Korea, or Iran. Even those three clauses required substantial work for the U.S. Energy Department to publish guidance clarifying what the quantitative and qualitative thresholds would be.
In lieu of the FEOC standard, the Senate text introduces a far more complex set of restrictions on energy tax credits, creating new classifications such as “foreign-influenced entity” as well as a “material-assistance cost ratio” test. These overlapping tests would bar a project from qualifying for the tax credits unless it can show that neither it nor any supplier—even several tiers removed—is owned or influenced by a foreign-influenced entity, for instance, and also that it meets increasingly strict sourcing thresholds, including for inputs like manufacturing equipment. The New York University Tax Law Center has warned that project owners would have to trace not only their suppliers’ owners, but also their lenders and other counterparties, which would turn routine supply chain diligence into a sweeping forensic exercise.
On top of that, the Senate bill imposes punitive restrictions on licensing agreements, disqualifying tax credit eligibility if a project relies on intellectual property (IP) licensed from a prohibited foreign entity even if that IP is essential to onshoring production. As the Bipartisan Policy Center notes, “responsible technology licensing agreements, even from certain FEOCs, are still needed to ensure we can manufacture certain technologies here in the United States and to avoid ceding the entire industry to countries like China.”
If the goal of the energy provisions in the reconciliation bill is to create investment certainty, then this labyrinth of new requirements would do anything but that. The reality is that every energy supply chain today—including oil and gas—is global. The same holds for the components and machinery used in battery, wind, and solar production—as well as the fuel that goes into nuclear reactors and the turbines used in geothermal systems.
For example, even though geothermal turbines are produced in Italy, Turkey, and Israel in addition to China, specialized components of those products could likely be fabricated in China. These dependencies can’t be eliminated overnight, but they can be reduced with deliberate strategy and clear incentives. The United States made a decades-long bet on hydrocarbon dominance, subsidizing the industry with tax preferences such as the intangible drilling cost deduction. A serious energy dominance strategy today demands the same long-term—and simple—commitment to clean technologies.
Republicans in Congress shouldn’t try to reinvent the wheel. The FEOC standard in the Inflation Reduction Act, while not perfect, provides a clearer and more administrable way to safeguard national security without grinding clean energy progress to a halt. If the Trump administration’s “energy dominance” mantra is to mean anything in an era of surging electricity demand, then Congress should refine the existing framework rather than replace it with a maze of red tape. Much is at stake: not only the United States’ clean energy transition, but also its ability to project industrial strength, lower energy costs, and compete in a world where energy dominance will increasingly be defined by who can most quickly scale and deploy the next generation of technologies.
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