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IRS extends construction window for renewable energy tax credits

The IRSextended the window of time that certain renewable energy facilities, most notablywind power facilities, have to complete construction in order to qualify for taxcredits that have been critical to the growth of renewables in recent years, accordingto guidance released by the IRS on May 5.

The expansionof the "safe harbor" provision from two years to four years and otherelements of the new guidance could ease some pressure on wind energy developerswho are racing to receive the production tax credit and make it easier for theirprojects to get financing.

"That'sa huge win for the industry because the two-year period was pretty tight,"said Jeffrey Davis, an attorney with Mayer Brown and co-head of the firm's RenewableEnergy group. "In many cases it takes just a year to get permitted, and tobe ready to physically break ground. Now you don't have to rush and try to get constructiondone within that remaining year."

The longer safe harbor period also applies to facilities thatelect to take an investment tax credit in lieu of the production tax credit, hesaid.

In December 2015, Congress extended the production tax creditto apply to wind facilities that began construction before Jan. 1, 2020, but alsoinstituted a phase-out under which the value of the credit would drop to 80% forprojects that began construction in 2017, 60% for projects that began constructionin 2018 and 40% for projects that began construction in 2019. Previously,wind developers only had to meet the deadline of the end of 2014, and they weregiven two years to satisfy the safe harbor provision and be eligible for the taxcredit.

But wind developers face four deadlines: the end of 2016 to getthe full value of the credit, and the ends of the next three years to get the reducedvalue. "Instead of having a safe harbor tied to a single date, we need to havea safe harbor that can relate to any of those four dates," Davis said.The clock for the four-year safe harbor starts running at the end of year in whichconstruction starts.

In addition to lengthening the safe harbor to four years, theguidance also provides some new rules on what constitutes a "project"for the purposes of starting construction to get the tax credit. The rules makeit easier for a facility that has multiple power purchase agreements or severalcontractors to be considered as just one project as long as it is operated as asingle project, Davis said. "Previously that type of project would have flunkedseveral of the eight factors identified to define a single project, which mighthave made your lenders or tax equity investors nervous."

The American Wind Energy Association has pointed to the tax creditas one reason for the growth of wind energy installations in recent years, whichled to a record for the highest annual amount of electricity generated by wind beingset in 2015, according to a recent AWEA report.

"We appreciate the IRS getting this guidance out now socompanies have certainty about the rules, which are generally consistent with priorguidance, and can finalize business decisions and investments for this year andbeyond," AWEA Vice President, Federal Regulatory Affairs Tom Vinson said.

The U.S. Department of Energy's National Renewable Energy Laboratoryhas found that extendingrenewable tax credits such as the production tax credit and the investment tax creditcould substantially increase solar and wind capacity over the next several years.