During the recession, President Obama passed legislation that increased the Investment Tax Credit (ITC) on certain technologies, such as solar photovoltaic systems, from 10% to 30%. However, the eligible ITC on such technologies will revert back to 10% on of December 31, 2016. As this 2016 sunset date draws closer, the renewable energy industry is beginning to plan for the impending change. The general thinking behind this sunset date is that by 2016 the renewable energy industry will be established enough that it can continue to function without the current level of government assistance.
While the industry would of course love an extension of the 30% ITC, they are expecting and preparing for its sunset date. Perhaps a more reasonable expectation is not an extension but rather a provision that would revise the requirements for projects that could still be included in the 30% ITC. The current standard for a project to be eligible for the 30% ITC is that is needs to be “placed in service” by December 31, 2016. Placed in service generally means that not only is construction complete, but that the project has achieved interconnection with the power grid. Precedent for an easing of the “placed in service” requirement was utilized in the case of the Production Tax Credit (PTC) which is a tax credit for the production of renewable energy. After the PTC expired in 2013, Congress retroactively passed an extension for projects that were ‘under construction’ by 2014.
In 2014 Governors, Dean Heller (R-NV) and Michael Bennet (D-CO) introduced a Bipartisan bill proposing changing the “placed in service” requirement for ITC generating projects to “beginning of construction” in order for tax credit eligibility at the 30% level to continue. Given that the “placed in service” requirement means that a project must be complete and capable of generating power before the December 31st, 2016 deadline, if the bill passes and is approved, it will mean that many more renewable energy projects that are underway but have not yet reached the ‘placed in service’ point will be tax credit eligible. This would serve as an incentive for many renewable energy developers to break ground on slated projects prior to the expected expiration date.
The “beginning of construction” or an equivalent designation means that a project has reached a certain defined point, such as having achieved a designated percentage of spending, or that construction activities have begun, and so forth. Understandably, there needs to be a lot of thought placed into this definition, and a clear and precise definition of “beginning of construction” will be very helpful to those of us in the industry, but certainly such relief would be welcomed, and would serve to stabilize the investor market for ITC in the near future.