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In a letter addressed to Senator Chuck Grassley, Chairman of the Senate Committee on Finance, Treasury indicates its intention to revise the rules governing the deadline for construction of wind and solar projects to qualify for the production tax credit (PTC) and investment tax credit (ITC). The expected revised guidance would provide much needed relief to projects struggling with construction delays due to the COVID-19 pandemic.
Pursuant to current rules, consistent with several IRS notices, in order to qualify for either the PTC or ITC, wind and solar developers need to “begin construction” by a specific date, either by beginning “physical work of a significant nature” or by paying or incurring capital expenditures of at least 5 percent of the total cost of the project.
Once construction has begun, developers must further satisfy an additional “continuity” requirement by making continuous efforts to complete the project (in the case of the five percent safe harbor) or by maintaining a continuous program of construction until the completion of the project (in the case of the physical work test).
The “continuity” requirement is deemed satisfied if the project is placed in service by the end of the year that is four years following the beginning of the construction date (the “continuity safe harbor”). Projects that fail to meet the continuity safe harbor are tested under a facts and circumstances analysis, which is a vague and uncertain test and usually raises concerns with investors and lenders.
Therefore, wind projects that began construction in 2016 are required to be completed by the end of 2020 to benefit from the continuity safe harbor. As such, 2020 was already expected to be an extremely busy year for wind turbine manufacturers and others in the supply chain. The COVID-19 pandemic and its resulting factory closures, “shelter-in-place” orders and general disruptions in supply and delivery of equipment, caused additional delays in construction timeframes. Hence, multiple wind developers, investors and lenders have genuine concerns that some projects might not meet the end-of-2020 construction deadline and as such would fail to meet the continuity safe harbor. Such failure could affect the project’s ability to be financed and to qualify for the relevant tax credits.
To address the industry’s concerns that such construction delays would lead to the loss of numerous projects, billions of dollars in investments and thousands of jobs, the American Wind Energy Association (AWEA), together with the Solar Energy Industries Association (SEIA), sent a letter to Congress describing the expected impact of the COVID-19 crisis on these industries and calling for urgent legislative changes.
On April 23, 2020, Senator Chuck Grassley, Chairman of the Senate Committee on Finance, together with a bipartisan group of Senators, raised similar concerns about the ongoing COVID-19 crisis and its impact on the renewables industry, in a letter to the Secretary of the Treasury. The Senators urged the Treasury Department to extend the continuity safe harbor from a four-year period to five years for projects that began construction in 2016 and 2017. Such an extension would allow these projects to meet the revised continuity safe harbor and qualify for the tax credits as long as they are placed in service by the end of 2021 and 2022, respectively. In the letter, the Senators provide that such change “would address the unforeseen interruptions developers are experiencing due to COVID-19 and provide the certainty businesses need to move forward with existing projects.”
In response, Treasury sent a letter to Grassley on May 7, 2020, stating that it “plans to modify the relevant rules in the near future.”
This concise, three-sentence letter, although not providing sufficient details on how Treasury intends to modify the current rules, is definitely a positive development for the industry.
The industry has generally applauded the Treasury response. The American Council on Renewable Energy stated that such suggested changes to the current guidance would be “immensely helpful” to the industry in coping with current conditions. AWEA and SEIA also applauded the indication of such expected changes and acknowledged this positive development. SEIA further indicated that "[w]hile its unclear how narrow or broad the relief action is, a very generous interpretation of the forthcoming guidance could provide an upside to solar projects by extending the safe-harbor period to 2024.”
It remains to be seen how broad Treasury’s modification to the current guidance will be. However, it is clear that if, as anticipated, such modification will be in the form of extending the continuity safe harbor period, it will be a welcoming development to renewable projects, which currently are struggling with the impact of COVID-19, and as such would lead to additional projects being financed and contribute to the continued growth of the industry.
In addition, although it is very supportive and appreciative of such potential changes, the renewables industry will continue to pursue legislative changes and extensions to the actual phase-out period of the PTC and ITC.
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