Renewable Energy Projects Left Unassisted by Recent Legislation May Face Critical Timing Constraints in Qualifying for Production Tax and Investment Tax Credits
Renewable energy projects that benefit from renewable energy tax credit financing, primarily production tax credits ("PTCs") or investment tax credits ("ITCs"), have always been vulnerable to construction related timing delays. This sensitivity is largely owing to strict rules that cause the value of the PTCs or ITCs for which a project may qualify to depend on the year in which project construction begins (and is completed). Given the current COVID-19 pandemic and the reality that neither the April 24 COVID-19 relief bill (Paycheck Protection Program and Health Care Enhancement Act, Pub. L. No. 116-139, 134 Stat. 620 (2020)) nor the March 27 CARES Act (Coronavirus Aid, Relief, and Economic Security (CARES) Act, Pub. L. No. 116-136, 134 Stat. 281 (2020)) provided targeted programs to address the many specific concerns of investors and other stakeholders in these projects, the question remains as to what effect the current COVID-19 pandemic may have on solar and wind projects that are currently under construction and are financed with tax equity or otherwise dependent on the PTC or ITC for their economic viability.
Recent anecdotal evidence is mixed, but patterns seem to have emerged. Although there is no doubt that COVID-19 continues to cause uncertainty in the market generally, as of this writing, tax equity financed project developers seem to be reporting only small on-the-ground delays, mostly due to slowdowns in the delivery of materials and parts from overseas and difficulty providing housing to workers traveling to and staying at job sites. Further up the supply chain, however, materials and equipment suppliers (such as wind turbine blade manufacturers) are dampening this year's financial expectations, reducing manufacturing operations, and adopting strategies to increase liquidity to ensure their long-term viability. Over time, it is likely that these slowdowns will result in project delays. In addition, trade associations and legislators are taking sometimes inconsistent approaches to these issues in the market.
Both the ITC and PTC require that a project be placed in service within four years from the date that construction begins on a project or that work on the project is "continuous." Because the continuity test is based on an ill-defined facts-and-circumstances analysis, most project participants seek to meet the four-year "continuity safe harbor" test.
Thus, projects that started construction in 2016 and are due to be placed in service in 2020 face an immediate risk from delays in construction or delivery of final materials and equipment due to COVID-19-related supply chain disruptions. Wind projects that are nearly complete, and into which large investments have already been made, are likely to be particularly negatively impacted. Although IRS guidance does allow for certain "excusable disruptions" outside of a developer's control (e.g., natural disasters and permitting delays), these are not applicable to the four-year safe harbor. However, the Treasury Department has indicated in a March 7, 2020, letter sent to the Senate that it is considering modifying the current rules in the near future, presumably including extending the four-year rule to a five-year rule.
A similar issue arises with respect to construction start dates. Current law provides that a solar project that started construction in 2019 would be eligible for the maximum investment tax credit percentage of 30%, decreasing in 2020 to 26%, and with additional decreases in later years. Thus, many sponsors attempted to start construction of their project in 2019 via equipment purchases. A special rule provides that equipment reasonably expected to be delivered within 3½ months of a purchase date counts as purchased as of the original purchase date. Project sponsors that did not receive their equipment within 3½ months of a late 2019 purchase date due to the pandemic may take the position that the pandemic was not reasonably expected. By contrast, sponsors purchasing equipment in late 2020 and intending to take possession within 3½ months will be hard pressed to successfully argue that COVID-19 delays could or should not have been foreseen.
The lack of targeted programs and guidance to address these and other issues has placed stress on all stakeholders in the renewable energy tax equity industry and the ESG finance market. Although opinions differ on the magnitude of problems and the best (if any) policy solutions to address them, the fact remains that absent some sort of relief, these projects will have to be completed within their originally intended time frames, regardless of the long-term effects of the COVID-19 pandemic, to avoid significant negative impacts. The recent letter from Treasury to the Senate offers cause for optimism that these issues may be addressed through Treasury rule-making.
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