Wind PTC: End the 4-Year Development Window (IRS guidance reversible) [Part II]

“The IRS expanded the two-year development window to four years [from two years to give] … developers countless ways in which to secure the full PTC and never experience the phased-down PTC in the years 2017, 2018, and 2019.”

“One of the first actions by the new administration should be to withdraw and revise IRS notice 2016-31 and change the ‘Continuity Safe Harbor’ to a 2-year period. In addition, we recommend that the controversial elements of the IRS’s ‘start construction’ rules be subject to public review under the Administrative Procedures Act. Lastly, the Congress should … repeal tax credits for wind energy facilities and eliminate Section 45 of the internal revenue code of 1986.”

This essay is the second in a series aimed at exposing abuses by the Obama administration in its effort to force wind power on the public. Here we examine the rules governing the wind production tax credit (the PTC)—in particular, the IRS guidance for PTC eligibility— and changes the new Trump administration might consider.

In the period from 2009 to 2015, Congress voted four separate times to expand and extend the PTC, the subsidy most frequently credited with incentivizing wind generation in the United States.

With passage of the 2012 American Taxpayer Relief Act (ATRA), big wind won a critical concession from Congress with the introduction of the “start construction” provision. [1] With this change, wind projects need only “start construction” before the expiration date in order to claim the PTC, rather than having to be placed in service by that date. Responsibility fell to the IRS to define how it would apply the “start construction” provision.

Under initial guidance notices released by the Service, developers could show they started construction by beginning physical work of a significant nature [2] by the deadline, or, in the alternative, by incurring at least 5 percent of the facility’s total cost. In either case, developers were also required to show “continuous progress” towards project completion, in order to ensure projects were not delayed for indefinite periods and still maintain their PTC eligibility.

In a clarifying notice issued months after ATRA passed, the IRS stated it would not closely scrutinize development schedules or monetary outlays to confirm the continuous-progress test, so long as projects were placed in-service within two years of the PTC’s expiring. The two-year clock was based on industry assurances that two years was sufficient to get a project built and online.

But with enactment of PATH (Protecting Americans from Tax Hikes Act of 2015), and the PTC phase-out, the IRS expanded the two-year development window to four years. With this rule change, developers who began construction by the end of 2016, now have four years to complete their projects before the IRS asks for details on whether development advanced in a continuous way. Working within a four-year clock gave developers countless ways in which to secure the full PTC and never experience the phased-down PTC in the years 2017, 2018, and 2019.

The race was on for big wind to get as many megawatts started in 2016 as possible. Industry reports now estimate that between 30,000 and 70,000 MW of safe-harbored wind turbines were secured by the end of 2016. If placed in-service before the end of 2020, they will be eligible for the full PTC despite the phase-down.

The Budget report released by the Joint Committee on Taxation (JCT) last month showed that wind-related credits will balloon to nearly $6 billion per year in 2020, a ten-fold increase from 2008. The IRS guidance went well beyond a mere interpretation of the statute, yet the change was never subject to the Administrative Procedures Act (APA) or any type of budget scoring.

One of the first actions by the new administration should be to withdraw and revise IRS notice 2016-31 and change the “Continuity Safe Harbor” to a 2-year period. In addition, we recommend that the controversial elements of the IRS’s “start construction” rules be subject to public review under the Administrative Procedures Act.

Lastly, the Congress should act to refile and enact Amendment #3209 to Energy Policy Modernization Act of 2016 (S.2012) sponsored by Sen Lankford (R-OK) in the 114^th Congress (2015–2016). Senator Lankford’s bill repeals tax credits for wind energy facilities and eliminates Section 45 of the internal revenue code of 1986.

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[1] “Start construction” was first introduced with Section 1603 grants under ARRA. However, ARRA imposed an in-service date. The “start construction” provision was also applied to the Investment Tax Credit (ITC) relied on by the wind industry.

[2] Both on-site and off-site work (performed either by the developer or by another person under a binding written contract).