Solar

1603: Hope is Not a Business Plan

If you’re one of the many solar developer who’s just hoping the 1603 Cash Grant will be extended, we have some news for you: hope is not a business plan.

As a financier for small-scale clean energy developers, we work with some of the top tax law and accounting firms in the industry – and many of these experts agree there are practical steps solar developers may be able to take right now to extend the Grant even if Congress doesn’t. However, there is still a good deal of uncertainty about how exactly to interpret Treasury guidelines, and Treasury itself is regularly reviewing and updating their guidance.

What is clear is that the 1603 program has a Safe Harbor provision allowing projects to qualify for the grant if they begin construction by December 31, 2011. There are two tests for meeting the “Begun Construction” requirement. The first is to begin “physical work of a significant nature” on say a large wind or solar farm for example. The second, which is more relevant to the community-scale, distributed generation developers we work with, is to “ pay or incur” more than 5% of the project’s total cost of construction by Dec 31, 2011.

Many experts interpret this to mean solar developers could continue to qualify for the grant if they pre-invest in equipment before the end of the year. If this proves correct, it could be an insurance policy for developers who don’t have access to tax equity or the ability to monetize the tax credit. 

However, this is a very complex program, and there is disagreement among top experts in field — as well as Treasury and the IRS officials themselves — about how exactly to interpret the details. Opinions on when and how to take delivery; accounting methods on applying the 3½-month rule; and whether project location must be determined in advance of filing a “Placed in Service” application, are constantly shifting according to our sources in close contact with Treasury.

What is certain, is that this is an important program that could make a significant difference to the industry, and it’s worth paying close attention to. At virtually every conference we’ve been to this year, experts have put the chances of the 1603 Cash Grant being extended at slim at best. And they’ve also said that if the grant does expire, it’s going to put thousands of people out of work.

And that is where the hope comes in. We are all hopeful that the solar market continues to grow and thrive next year, whatever Congress decides this December. But this lack of certainty continues to be a major challenge for the clean energy industry overall. It’s very difficult to build lasting business models when the policies change every few years and even the top experts can’t agree on how to interpret the policies that are in place.

So it’s no wonder people are relying on hope. But it’s important to be practical as well. If the grant does expire, then companies with the capital and expertise to structure a Safe Harbor could be at a significant competitive advantage in the market next year.

If you’re one of the many solar developers that could potentially benefit from this program, you may want to consider a strategy that goes beyond hope this holiday season. If there’s even a chance that the Safe Harbor could work for you, you might want to roll up your sleeves, stay close to the Treasury website, and put your accountants and tax attorneys on speed dial. Because you have a lot of work to do between now and December 31.