The IRS has issued two notices that are beneficial to the wind industry. The first, which applies to all wind projects (including those in their first ten years of operations) increases the production tax credit (“PTC”) for inflation from $24 a megawatt hour (“MWh”) to $25 a MWh. The second provides projects that have been delayed by certain Department of Defense (“DoD”) national security considerations with an extension on their four year “start of construction” continuity safe harbor.
PTC Inflation Adjustment Notice
On June 5, the IRS released a notice increasing the PTC to reflect inflation from $24 a MWh to $25 a MWh for wind, closed-loop biomass, geothermal projects. These inflation adjustments occur approximately every two years in one dollar per MWh increments and are statutorily required. The last adjustment was on April 11, 2017.
The PTC is available for a project’s first ten years of a qualified project’s power sales. Therefore, the adjustment applies to qualified 2019 power sales from new projects and also to 2019 power sales from projects placed service during the preceding ten years.
Unfortunately for owners of open-loop biomass, small irrigation power, landfill gas, trash, qualified hydropower, and marine and hydrokinetic facilities the PTC for energy sold from those projects after application of a rounding convention remains at $12 per MWh. Those projects also did not benefit from an inflation adjustment in 2017.
For a wind project that “starts construction” in 2019 and manages to have energy sales in 2019, the PTC under the extension/phaseout enacted by Congress in December of 2015 would be only 40% of the $25 per MWh (i.e., $10 per MWh). However, the developers of most wind projects that will be placed in service in the near term took steps to meet the IRS’s guidance as to what was required to “start construction” prior to 2017 in order to qualify for the full PTC (i.e., 100 per or $25 per MWh, with this inflation adjustment).
The 30 percent investment tax credit (“ITC”) for solar does not have a comparable inflation adjustment as it is computed using the project’s tax basis, rather than its energy sales. Further, the owner of a wind project that elects the ITC, in lieu of the PTC, does not benefit from the inflation adjustment. Conventional wisdom is that offshore wind projects, due to their greater relative costs, will elect the ITC.
DoD Start of Construction of Delays: Notice 2019-43
The IRS released Notice 2019-43 clarifying Notice 2016-31, which clarified Notice 2013-60 and Notice 2013-29. Notice 2013-29 provided that a project upon “starting construction” to qualify for a certain level of tax credit must pursue a continuous program of work until it is completed. In response to industry concerns about the vagueness of this “continuity” requirement in Notice 2013-29, the IRS issued Notice 2013-60 which provides projects with a four year safe harbor to be complete and avoid the continuity requirement.
Notice 2016-31 provided that certain excusable delays were permitted under the four years safe harbor provided for in Notice 2013-60. Such delays included delays in obtaining permits and delays at the written request of governmental entities. Although, Notice 2016-31 sanctions the excusable delays, it was unclear as to the relief projects that suffered such delays were entitled to.
Notice 2019-43 addresses a narrow fact pattern in which a wind project has received a transmission permit and then is informed by the DoD that national security concerns merit a different transmission path. The notice makes it clear that the DoD concerns can be merely DOD proposing an alternative route in the interest of national security, rather than a legal requirement to use an alternative route. The project then needs time to obtain permits for the new transmission path, which cause its construction period to exceed the four year safe harbor. Notice 2019-43 holds that the safe harbor deadline (i.e., December 31, 2020 for a wind project to be entitled to a full PTC of $25 per MWh) to be placed in service is “tolled” (i.e., extended) by the time required to obtain the permits for the alternative transmission line.
The clarification in Notice 2019-43 was necessary because the fact pattern fell between the cracks of two excusable delays sanctioned by Notice 2016-31. The first delay that did not quite apply is “delays at the written request of a federal, state, local, or Indian tribal government regarding matters of public safety, security, or similar concerns” because DoD’s request was for a different route, rather than for a pause in the work. The second delay that did not quite apply is “delays in obtaining permits or licenses from federal, state, local, or Indian tribal governments” because the project had a permit for its original transmission route, which DoD was only recommended not using.
The IRS in Notice 2016-31 acknowledged that it was not addressing every potential excusable delays by noting that the specified delays were “a non-exclusive list of construction disruptions that will not be considered as indicating that a taxpayer has failed to maintain a continuous program”. Given the national security considerations, the IRS appears to have felt that the fact pattern in Notice 2019-43 was sympathetic enough to expressly address it, rather than instructing the aggrieved taxpayers to reach their own conclusion based on the published list being “non-exclusive.”
Notice 2019-43 provides that the maximum extension for the permitting delays is the lesser of the actual delay and four additional years (i.e., December 31, 2024 for a wind project to qualify for the full PTC). So for instance, if the permitting delay is five years, the additional time granted is only four years (i.e., December 31, 2024 for a wind project to qualify for the full PTC).
Implications for Other Excusable Delays
The holding of Notice 2019-43 would suggest that other excusable delays (e.g., the presence of endangered species) would result in the four year period being extended day-for-day up to the delay caused by the excusable event, but that the delay could not result in additional period of more than four years. However, Notice 2019-43 does not expressly address other excusable delays.
Inapplicability to Solar Projects due to Different Statutory Deadline
Notice 2019-43 does little for solar projects because section 48(a)(6)(B) provides that for a solar project to qualify for more than a ten percent ITC that the project must be in service by the end of 2023, while wind projects are not subject to a comparable statutory placed in service deadline. Further, section 48(a)(6)(A) provides that for solar projects to qualify for a full 30 percent ITC they must “start construction” in 2019. Accordingly, the four year continuity safe harbor provided to solar by Notice 2018-59, which parallels the wind safe harbor, ends on the same date as the statutory placed in service deadline for solar. Therefore, the lack of a statutory placed in service deadline for wind means the IRS can afford wind projects leniency for certain delays as it did in Notice 2019-43, but it is not statutorily permitted to provide comparable leniency for delays suffered by solar projects.