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United States

PTC clarification "could unlock 3GW" in US

UNITED STATES: The US Internal Revenue Service (IRS) has clarified rules about how wind projects qualify for federal tax incentives, a move that could help break a financing logjam and allow thousands of megawatts of stalled projects to progress.

Developers had to start construction by the end of last year to receive the $0.023/kWh production tax credit, either by spending 5% of total project costs or actually starting physical work on the project. But uncertainty about how much actual work had to be done left investors unwilling to commit to projects that may not be eligible to collect the PTC.

The industry sought clarification from the IRS about the level of physical work required after the agency provided examples earlier this year, including one in which excavation had started on 10 out of 50 turbine foundations. This suggested to some that the IRS was setting the bar quite high.

The IRS allayed those concerns in its latest guidance when it stated: "Assuming the work performed is of a significant nature, there is no fixed minimum amount of work or monetary or percentage threshold required to satisfy the physical work test."

It also drew attention to several other examples of the type of work it would count as meeting its requirement.

"Will this be enough to reopen the tax equity market for developers who relied on the physical work test? That is its call to make," says Keith Martin, a partner in the law firm Chadbourne & Parke LLP.

"Some may want to hear more from IRS or Treasury officials about what is intended before financing projects that involve something as minimal as just digging one hole at a site without doing anything more to build out the rest of the foundation, but the words suggest even that is okay."

In a research note, Make Consulting said the new guidance could unlock an estimated 3GW conditional order backlog for US wind projects. But it also warned the limited construction window left in 2014 could cause 1.4GW of projects to shift into 2015, creating "execution risk" for their proponents. Projects receiving the PTC need to come online by the end of 2015 in order to avoid IRS scrutiny.

The uncertainty has also hit turbine manufactures, with GE revealing during its Q2 results call in July that it was sitting on orders for 400-500 turbines awaiting the go-ahead from developers.

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