The “Family and Business Tax Cut Certainty Act of 2012” – the so-called tax extenders – was reported by the Senate Finance Committee on August 2, 2012, and was included in the American Taxpayer Relief Act of 2012 (“ATRA”) signed into law in January 2013. Among other things, the legislation extended and modified the Section 45 renewable electricity Production Tax Credit (“PTC”) and the Section 48 Investment Tax Credit (“ITC”) in lieu of the PTC for one year through December 31, 2013. It also replaced the traditional “placed in service” requirement for all Section 45 renewable energy facilities with a rule that allows all facilities that begin construction before January 1, 2014, to qualify for the PTC (or ITC in lieu of the PTC).
Notably, ATRA did not encompass solar energy property in this policy change. Thus, under current law, renewable energy facilities eligible for the Section 48 ITC (solar, microturbines, fuel cells, small wind, thermal and combined heat and power) must be placed in service (i.e., the facility must be complete and capable of generating power substantially equal to its nameplate capacity) before the statutory expiration of the incentive.
More recently, the Senate Finance Committee, on April 3, 2014, reported out a new tax extenders bill - the “Expiring Provisions Improvement, Reform and Efficiency (EXPIRE) Act" of 2014. This bill would extend the Section 45 renewable electricity PTC and the Section 48 ITC in lieu of the PTC for two years through December 31, 2015. It would also continue to allow all Section 45 renewable energy facilities that begin construction before January 1, 2016 to qualify for the PTC (or ITC in lieu of the PTC).
The commence construction modification provided for in the EXPIRE Act should apply to all Section 45 and 48 clean energy incentives, regardless of technology. This revision will provide consistent tax policy treatment across clean energy technologies and, in the case of solar, drive the installation of an additional 4,000 megawatts (MW) of capacity.
The committee report for the tax extenders bill reported by the Senate Finance Committee noted the following:
“The Committee also believes that certain renewable power projects do not move forward because developers and investors are concerned that those projects cannot be completed before the renewable electricity production credit expires. The Committee intends to reduce this uncertainty by replacing the placed in service expiration date with an expiration date based on when construction begins on a particular project.”
Commence Construction Change Should Apply to Sec. 48 Solar Technology
As the committee report correctly notes, replacing the placed in service requirement with a commence construction standard will add greater policy certainty and enhance the effectiveness of clean energy tax incentives. Applying the same standard to solar energy property under Section 48 will provide a consistent policy structure for all clean energy tax incentives, not just those that rely on the PTC.
Commence Construction Standard is Appropriate for All Clean Energy Technologies
Clean energy projects often require multi-year development timelines. This is especially true for utility-scale solar projects, which must navigate significant and time-consuming financing, siting and permitting issues and take three to four years to complete. Compared to a rigid placed-in-service date, a commence construction standard provides added certainty and flexibility that will allow more clean energy projects to move forward during the statutory duration of an existing clean energy tax incentive. This furthers the underlying objective of the incentives – the deployment of clean energy projects and the expanded use of renewable energy.
Failure to provide a similar commence construction rule for solar projects covered by the Section 48 ITC will place solar developers at a competitive disadvantage vis-à-vis other renewable energy projects covered by the PTC. Large solar projects will compete in 2014 and beyond directly against wind and other renewable energy technologies for renewable energy solicitations in states with renewable portfolio requirements. Unless the commence construction modification is also applied to solar projects, bids by PTC-eligible projects in response to state renewable energy solicitations will be more competitive based solely on the certainty that they can qualify for the PTC (or ITC in lieu of the PTC) merely by beginning construction, whereas solar projects must be placed in service in order to qualify for the ITC.
Commence Construction Standard Protects Integrity of Clean Energy Tax Incentives
The Treasury Department has demonstrated that a commence construction standard can be administered in a manner that protects taxpayers while achieving the underlying policy goal of deploying clean energy technology. The commence construction standard does not replace the requirement that a project be placed in service before it becomes eligible for an incentive under Section 45 or Section 48. Instead, prior to the statutory lapse of an incentive, work on the project would have to start, consistent progress on the project would have to be demonstrated, and the project would ultimately have to begin producing energy before becoming eligible for tax incentives provided under Section 45 or Section 48.
Commence Construction Language Applied Beyond Scope of 2011 and 2012 Extenders
The ATRA applied the commence construction modification to all of the clean energy tax incentives in Section 45, including those that are scheduled to expire at the end of 2013. Applying the commence construction change to Section 48 clean energy incentives is sound policy that will enhance the underlying effectiveness of these valuable components of a national renewable energy policy.
Revised Standard will Drive New Project Deployment and Job Creation
Analysis of the dozen largest solar projects expected to be online by 2016 reveals the median time from the early steps of development to commencement of construction is just over three years, and the median time from development to commercial operation is nearly six years. A commence construction standard for Section 48 clean energy incentives will therefore ease timing pressures on developers by about two years and encourage additional installations and job creation.
Collectively, these projects account for over 3,000 MW of installed capacity, and development patterns in 2012 and 2013 suggest a significant number of additional residential and commercial solar projects would be completed in the two years following 2016. In total, a commence construction standard would conservatively yield an additional 4,000 MW of electric generating capacity in 2017 and 2018 in the United States – enough to power 676,000 average households. This significant increase in installed capacity would support tens of thousands of additional jobs over this two-year period.