From CFACT
By David Wojick
The big, beautiful new tax law creates a not-so pretty loophole that untold billions of dollars’ worth of renewable projects are going to try to squeeze through. Anytime you screw with the market, you get screwy results, and this is titanic screwing. Watching it could be great fun.
The specifics are simple enough. The massive federal subsidies for wind and solar will end soon, with one big exception. Any project that can get under construction in less than a year from now and come online by 2030 still gets all the goodies.
Given that the queue of proposed wind and solar projects tops a trillion dollars, there will be many billions worth that try to make the short-term construction deadline. That many of these likely will fail makes it especially interesting. It is a prescription for financial chaos.
Of course the huge immediate question is, what does it take to be under construction? The subsidies are in the form of investment and production tax credits so the IRS makes the rules. Happily, a similar but much smaller version of this issue occurred in 2013.
The IRS has a little rule book titled “Beginning of Construction for Purposes of the Renewable Electricity Production Tax Credit and Energy Investment Tax Credit” here:
The rules are only for wind projects, but the application to solar looks simple, at least for big projects. Rooftop solar might be much more complicated and something to watch.
The simplest way to do it is called a “safe harbor” by the IRS. The developer just has to invest 5% of the project cost up front in actual development and then add “continuously” to that over time.
The 5% need not include any site development, so this works for projects that do not yet have a site which might be a lot of them. The developer just has to fund binding contracts for the stuff that will go into the site once actual construction begins.
Where this gets tricky is that the wind and solar components production capacity probably does not exist to supply all the stuff needed for everybody to meet the 5% requirement in less than a year from now. This could create a seller’s market with prices quickly rising to what the highest bidders will pay. There could be a lot of losers.
It is possible that promissory contracts to make the stuff will eventually be okay. as long as they are funded and binding. But then, the second requirement of continuous development becomes a problem. Development with what?
So a mad scramble to try and quickly spend a lot of money in less than a year seems likely. Whether it can be done remains to be seen.
It is also worth noting that in the long run renewables may not live or die in this scramble. The idea that renewables require subsidies may be incorrect to a considerable degree. This is because most states have energy transition mandates that, in effect, require buying more and more renewables output.
To begin with, 28 states have “renewable portfolio standards” that specifically require ever-increasing use of renewables. Others, like Virginia, have net-zero emission reduction laws that, for practical purposes, have the same result.
But how this works out without massive federal subsidies remains to be seen. Tax credit subsidies are invisible, never showing up on someone’s bill. Absent these subsidies, the cost of the mandates hits the ratepayers in a highly visible way.
Increasing electricity rates are already becoming a political issue. The long-term effect of ending the subsidies well might be ending the mandates once their true cost becomes clear.
It looks like the U.S. renewables industry is going to be scrambling financially. This is certain for the next twelve months and maybe long after that. Watching the mad scramble could be both enlightening and entertaining.
Stay tuned to CFACT as this show unfolds.
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