Coronavirus: Effect on US wind and solar projects
Coronavirus has led some equipment suppliers who rely on Chinese factories to send force majeure notices that deliveries will be delayed.
This causes two complications.
Some renewable energy developers paid at year end 2019 for equipment to be delivered within 3 ½ months after payment, hoping to count the payment toward a 5% test for starting construction. Solar projects had to be under construction for tax purposes by the end of 2019 to qualify for an investment tax credit at the full 30% rate.
One way to start construction is to “incur” at least 5% of the project cost before the deadline. Costs are not normally incurred until equipment or services are delivered, with the exception that a payment at year end counts if equipment is “reasonably expected” to be delivered within 3 ½ months after payment. This 3 ½-month rule is a “method of accounting.” Some developers need IRS permission to use it.
Some tax equity investors have been requiring actual delivery within the 3 ½ months. However, IRS regulations require only that delivery or title passage was “reasonably expected” when the payment was made.
Delays could also cause problems for wind developers whose projects must be completed by the end of 2020 to qualify for tax credits. Tax credits for wind projects have been gradually phasing out since 2016. Projects on which construction started in 2016 qualify for tax credits at the full rate, but it is not enough to have started construction in time: most projects must then be completed within four years after the year construction started to qualify for any tax credits.
There are two ways to start construction. One is under the 5% test. The other is by starting “physical work of a significant nature” at the project site or at a factory on equipment for the project.
Projects on which work started under the 5% test can get more time by proving “continuous efforts” have been made to advance the project since the year construction started. A delay caused by coronavirus is an excusable disruption that can explain a gap if there was otherwise a continuous effort.
Most projects that started construction based on physical work will be out of luck.
Both Bank of America and JPMorgan are still assessing whether they will finance 2016 projects that slip into 2021. They accounted in 2019 for roughly half the tax equity market.
Developers who receive force majeure notices should acknowledge receipt, but reserve the right to object once they learn more facts. They should remind the vendor that the delivery deadline was important to qualify for tax credits and tell it that they expect its help to provide whatever written evidence the US tax equity market and the Internal Revenue Service require for the developer to be allowed more time to receive the equipment or complete the project.
Tax equity volume is expected to reach $15 billion in 2020, up from $12 to $13 billion in 2019.
Developers should get deals done as early in 2020 as possible. Cranes, contractors, permission to tie up local roads, tax equity teams at banks, appraisers and other consultants and utility personnel needed for interconnection will be in increasingly short supply as the year wears on. Wood Mackenzie expects more than 15,000 megawatts of new and repowered wind projects to be installed this year, but says 9,000 megawatts are at risk of spillover due to bottlenecks.