For The Solar Sector, Fiscal Cliff Negotiations Left A Bit To Be Desired


President Barack Obama has signed into law the American Taxpayer Relief Act of 2012 (H.R.8), a compromise tax deal approved by Congress earlier this week in order to avert the so-called fiscal cliff in the U.S. The legislation provided immediate relief to the wind industry, which saw a last-minute extension of its vital production tax credit (PTC) following an anxious pre-expiration stretch that has already led to industry layoffs.Â

But for the solar sector, on the other hand, the impacts of the legislation are mixed. Although the deal brought some welcome news, uncertainty still looms as the new Congress seeks to avoid triggering sequestration by its new deadline of March 1.

Solar projects currently utilize a 30% investment tax credit (ITC) scheduled to remain in effect through the end of 2016. The solar ITC remained unaltered by the fiscal-cliff deal.

The wind PTC and other non-solar renewable energy incentives received a favorable language change allowing projects to take advantage of tax credits as long as they ‘commence construction’ by the deadline, rather than needing to be ‘placed in service’ in order to be eligible.

Why was solar excluded, despite lobbying by the Solar Energy Industries Association (SEIA) and other stakeholders? Mark Regante, a partner in the New York office of Milbank, Tweed, Hadley & McCloy and a member of the firm's tax group, says the way the current tax incentives are structured may have played a role.

‘The provisions that describe the credit for solar are in a different section from the provisions that describe the other renewables,’ he explains.

Given that the solar ITC was not in immediate danger of expiration, legislators may have simply taken a ‘triage’ approach when developing the legislation, adds David Burton, a partner at Akin Gump Strauss Hauer & Feld LLP.

‘When you're dealing with the atmosphere around a fiscal cliff, it's hard to get the attention of legislators when your problem doesn't arise until 2016,’ he says. ‘Solar has a long runway, which is great for the industry.’

Both Burton and Regante suspect that when the ITC's expiration does draw near, the solar sector may find itself in the same perilous situation the wind industry faced this year. Politics can change in a few years, but Congress' historical tendencies suggest that this essential incentive will be brought to the brink.

Sequestration ahead?
A more immediate concern for all involved, however, is sequestration, which – among other ramifications – could have major damaging effects on grants from the U.S. Department of Treasury's Section 1603 program.

If Congress cannot reach a workable long-term agreement by March 1 and sequestration goes into effect, existing 1603 grants could see cuts – although neither the Treasury nor the Office of Management and Budget (OMB) has provided clarity on which solar projects would be affected.

‘When anyone asks the OMB or Treasury about sequestration, what they tell you is that they do not expect sequestration to occur and that they are unwilling to answer any questions about it,’ says Burton.

One question that is top-of-mind for many solar developers is the project cutoff date for sequestration: Will delineation be based on the date the Treasury grant is paid, the date the application is filed or the date the project is placed in service?

Furthermore, OMB had previously indicated that cash-grant haircuts would be 7.6%, but the tax-revenue changes put in place as a result of H.R.8 could change the numbers, Regante adds.

‘Because there's no appropriation or maximum amount for the grant program, we all presume the likely application is to reduce each grant by 7.6 percent, but that's speculation at this point,’ he says.

Finally, H.R.8 extends 50% bonus depreciation through the end of this year. ‘That will help get solar facilities that are completed this year financed,’ predicts Regante, describing bonus depreciation as useful for any capital-intensive business.

Burton, however, cautions that the incentive can be a double-edged sword for solar projects.

‘It's good for projects that can find tax equity investors to monetize it,’ he explains. ‘But it also means companies can shelter their tax base by depreciating their own plant and equipment. So, someone wanting to get into tax equity might not because they can claim bonus depreciation [instead].’

In addition, regulators sometimes force utilities to claim bonus depreciation, which can limit their tax base and make them unable to claim other tax credits, he adds.

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