The COVID-19 pandemic has disrupted strategies for ensuring that solar and wind projects will satisfy the “beginning of construction” requirements for purposes of the ITC and PTC, with respect to both the procurement of equipment and the placing in service of projects.
Delays in Safe Harbor Equipment Procurement
To qualify for the 30% ITC, solar projects had to begin construction in 2019. The ITC is phased down to 26% for projects on which construction begins in 2020.
Many developers seeking to begin construction for ITC purposes procured project equipment with the goal of incurring at least 5% of the projects’ costs before 2020 and, thereby, satisfying the Five Percent Safe Harbor under Notice 2018-59. Certain of these developers have utilized the so-called “3.5 month rule” to satisfy the economic performance requirement for incurring costs for income tax purposes. Under the 3.5 month rule, a taxpayer may treat services or property as provided to the taxpayer (and, therefore, economic performance as having occurred) as the taxpayer makes payment to the supplier, if the taxpayer reasonably expects the property to be provided within 3.5 months after its payment.
The severity of the COVID-19 pandemic and consequential supply chain disruption generally was unexpected as of December 31, 2019, the last date that payments qualifying for the 3.5 month rule in 2019 could be made. Accordingly, developers likely are to take the position that they “reasonably expected” the property to be provided to them within 3.5 months if the delivery delays were caused solely by the COVID-19 pandemic. A careful review of the applicable facts and circumstances is necessary to support such claims. Furthermore, developers also may wish to take steps to ensure that economic performance occurs within 3.5 months of the applicable payments, such as accelerating the title transfer provisions of supply agreements (assuming a title transfer is the purchaser’s default method of economic performance).
Delays in Placing Projects in Service
The ITC and the PTC both require that a taxpayer make continuous progress toward completion once construction has begun (the “Continuity Requirement”). Whether the Continuity Requirement is satisfied depends on the relevant facts and circumstances. However, there is a safe harbor (the “Continuity Safe Harbor”) pursuant to which the Continuity Requirement is deemed to be satisfied if a taxpayer places a facility in service by the end of a calendar year that is no more than four calendar years after the calendar year during which construction of the facility began.
To qualify for the full PTC, wind projects had to begin construction before 2017. Accordingly, for wind projects that began construction in 2016, the deadline to satisfy the four-year Continuity Safe Harbor is December 31, 2020. If COVID-19 were to result in delays that cause a project to be placed in service after December 31, 2020, the Continuity Safe Harbor would not be satisfied, and whether the Continuity Requirement would be satisfied would be based upon all of the facts and circumstances.
Even for projects with good documentation that the Continuity Requirement is satisfied, buyers and tax equity investors may require specific indemnities, credit support, tax insurance, or other risk mitigation mechanisms.
The COVID-19 pandemic also raises general issues with respect to disruptions in the renewable energy supply chain and the application of force majeure provisions in engineering, procurement, and construction agreements and offtake contracts, which we have addressed in a related post.