IRS Issues Clarification Regarding "Binding Written Contract" in its "Start of Construction" Guidance for PTC or ITC Energy Credits

As we originally noted, the IRS guidance issued April 15 regarding the "start of construction" requirement for energy projects to qualify for PTC or ITC contained a "big surprise" regarding its definition of a binding contract. Unlike previous incentive programs, the guidance provided that contracts that limit damages to a specified amount, such as by use of a liquidated damages provision, would not be treated as “binding”. Only binding written contracts for work performed on behalf of the taxpayer are taken into account for purposes of satisfying the test for significant physical work.

Following questions about the definition, the IRS has now issued an updated version (PDF) of its Notice 2013-29.

Section 4, Physical Work, paragraph 4.03(1), originally read: “(1) Binding written contract. A contract is binding only if it is enforceable under local law against the taxpayer or a predecessor and does not limit damages to a specified amount (for example, by use of a liquidated damages provision).”

The revised Notice incorporates by reference the same 5% liquidated damages threshold that was used in the previous bonus depreciation regulations by adding the following text: “… For this purpose, a contractual provision that limits damages to an amount equal to at least five percent of the total contract price will not be treated as limiting damages to a specified amount. For additional guidance regarding the definition of a binding contract, see § 1.168(k)-1(b)(4)(ii)(A)-(D).”

If you have questions regarding the guidance's revised binding contract definition or any other issue regarding the PTC, the ITC or related matters, please contact one of the Stoel Rives attorneys listed below.

Chris Heuer at (503) 294-9206 or
Greg Jenner at (202) 398-1795 or
Adam Kobos at (503) 294-9246 or
Carl Lewis at (206) 386-7688 or
Kevin Pearson at (503) 294-9622 or

#PTC Extension: Scarcity of Utility-Scale PPAs a Big Challenge for Wind Energy in 2013

In the wake of the extension of the production tax credit, my colleague Ed Einowski has analyzed a key challenge – the relative scarcity of available utility-scale power purchase agreement RFPs. Having a PUC-approved PPA in place is generally a prerequisite for securing financing for utility-scale wind projects. Here’s what he has to say:

The extension of the production tax credit (PTC) allows the wind energy industry to move forward with projects in 2013. But the last few years – especially 2012 – have seen relatively few utility-scale wind power purchase agreements executed. Without the assured revenue source of a power purchase agreement (PPA), wind projects will generally find third-party financing – whether debt, tax equity or cash equity – unavailable. And few developers – even those with the financial resources to do so – will likely be willing to risk proceeding with project construction in the absence of a financeable PPA. As a consequence, for most developers the PTC extension presents the immediate challenge of securing a financeable PPA to enable the PTCs to be secured. Given the time it generally takes to negotiate and finalize a utility-scale wind PPA as well as pursue other key items such as turbine supply agreements and engineering, procurement and construction contracts, it will be necessary to move expeditiously.

For a more detailed discussion of the issues involved, read the full article.

Economists Weigh in on the PTC Extension

Against the backdrop of election year politics and consideration of extension or elimination of the Production Tax Credits (PTCs), the Congressional Research Service (CRS) issued a report last week entitled, “U.S. Renewable Electricity: How Does the Production Tax Credit (PTC) Impact Wind Markets?” This report examines the possibility of an extension of the PTC, and the potential impacts such an extension (either long- or short-term) would have on the U.S. wind market. Not surprisingly, the conclusions are mixed and layered with uncertainty.

The report trumpets that 2012 will be a record year for the wind industry. Due in large part due to the pending expiration of the PTC, the U.S. wind sector deployed 10-12 GW of wind power this year—an unprecedented amount. However, all indications are that the expiration of the PTC will cause a severe market downturn in 2013 and beyond. No wonder the wind industry has been pushing Congress so hard for an extension. But does an extension make good economic sense?

According to CRS: Maybe. By its lights, a one year extension of the PTC will stimulate short term economic and employment activity, but due to long project development lead times, it may already be too late for a one year extension to have any effect on 2013 projects. Also, near-term projects may reduce future project demand by filling up the Renewable Portfolio Standards (RPS) mandates in the various states that have RPS. Alternatively, a permanent PTC extension may actually reduce the urgency of wind project development activity, which could delay the desired economic benefit. Under this scenario, the report predicts a much lower activity level, peaking at only 4GW per year in 2030. But, the report also recognizes that the price of wind power, and its competitiveness with other forms of electricity may be the real drivers rather than the PTC. Significant factors affecting the wind market include modest projected growth rates for U.S. electricity demand (particularly when compared with China), and low natural gas prices, both of which will have a negative effect on wind development as utilities opt for lowest cost resources.

The CRS report concludes that allowing the PTC to expire could potentially result in a stronger and more robust, although potentially smaller, wind industry that can “directly compete” with all sources of power generation. However, the entire industry is threatened without increased levels of state RPS requirements and continued low natural gas prices.

As all industry observers know, we have been through this cycle before – three times actually. The PTC expired in 2000, 2002 and 2004 and market activity dropped precipitously all of those years. The difference is that the wind industry in 2012 is much bigger and there is much more at stake. In 2011, the wind industry reported that the 407 U.S. facilities manufacturing wind energy equipment supported approximately 30,000 jobs. Another difference is that global competition is now much more intense, raising the possibility that market share lost will not be easily regained in the future.

As this graph shows, regardless of the PTC, the wind energy equipment manufacturing sector will likely continue to be significantly oversupplied.

Decreased U.S. demand for wind equipment, combined with certain local-content requirements and the high cost of exporting large wind turbine equipment, will make it difficult for U.S. manufacturers to compete in the global wind market, and undoubtedly force some U.S. facilities to shut down. In the meantime, the report determines that “[w]ind turbine price declines would contribute to new wind projects becoming more economically competitive with other sources of electricity generation on an unsubsidized basis.” Translation: the oversupply of wind turbines could lower the cost of wind power to at or below grid parity in some places.

The likelihood of an extension of the PTC could ride on the outcome of the Presidential race. President Obama supports an extension of the PTC to support the wind energy industry and the jobs it produces. Governor Romney is opposed to an extension, which may embolden like-minded members of Congress if he is elected. On the other hand, recognizing the strong support for extension among some in Congress, opponents of the PTC could view a Romney win as allowing them to concede a one-year extension. They could defer elimination until 2013 as part of a broader tax reform effort as well as preventing a fight over extension in 2012 from standing in the way of fixing the "Fiscal Cliff." The bottom line is that any debate on the PTC during a lame duck session will be tangled up with broader economic and political issues, and will only be settled as part of a resolution of those broader issues.

Only the Strong Survive: the post PTC Wind Market

My colleague Ed Einowski didn’t mince words in a recent article published by The Sindal Report. If the federal production tax credit (PTC) is allowed to expire at the end of this year, there will be a dramatic drop-off in wind installation starting in 2013. And these diminished opportunities will add up to significant changes for the industry. Among Ed’s predictions for a post PTC environment:

  • Well-capitalized developers will be best suited to survive
  • ‘Develop and flip’ will no longer be a viable strategy
  • Growing focus on adding value to the end customer
  • Developers will need to deal with transmission issues, and
  • Traditional project financing will be the new financing paradigm

You can view an extended summary of Ed’s remarks on our firm’s website. It’s well worth the read.

Projects & Money 2011

As we approach the beginning of a new year, financing options for energy projects (both conventional and renewable) under the current economic conditions continue to be a challenge and a focal point for the energy industry.  In order to gear up for financing opportunities in 2011,  I, along with my colleagues Marcus Wood, Graham Noyes and Adam Kobos, will be heading to the Big Easy for Projects & Money 2011.  Stoel Rives is proud to be a Gold Sponsor at this engaging conference, where Capital Providers, Project Developers and other dealmakers in the financing community will gather together to share information, discuss deal leads and capitalize on new market opportunities.

Projects & Money incorporates its comprehensive market updates with networking opportunities, introductions to new project developments, and interactive multimedia components. Presentations from industry professionals provide an inside look at some of the most ground-breaking deals of 2010, examine the trends they reveal, and provide a better understanding of what it takes to make deals happen.

Stoel Rives attorney Graham Noyes will present "DOE's Loan Guarantee Program: Crucial Financing Mechanism or a Costly Distraction?" on Tuesday, January 11, at 1:30 p.m. during the Pre-Summit Briefing.

On Wednesday, January 12, Partner Marcus Wood will moderate the discussion panel, "Transmission Outlook," at 2:15 p.m. during Track II: Project Sector Outlooks.

Hope to see you there!

To learn more about the conference or to register online, please visit:

Projects & Money
When: January 11-13, 2011
Where: Harrah's New Orleans – New Orleans, LA

Optimizing Tax Benefits in Financing Renewable Energy Projects

Federal tax benefits, such as the Section 1603 Grant, investment tax credits and production tax credits, continue to be an important driver in financing renewable energy projects.  Several of my colleagues will be discussing these tax benefits and other incentives related to project financing in a webinar hosted by Infocast on Wednesday, March 31, 2010 at 1:00 p.m. Eastern.  Here is full description of the topics that will be discussed, the speakers and a link to the Infocast website for registration:

The section 1603 grant program created by the American Recovery and Reinvestment Act of 2009 recently entered its second year. Section 1603 has transformed the renewable energy industry from one in the doldrums to an industry revitalized. But what does the future hold for section 1603 and will recent legislative efforts to limit the grant program create a new uncertainty in renewable energy financing?

Unfortunately, section 1603 is set to expire at the end of 2010, except for projects that have commenced construction. Recently, the prospects for extending section 1603 were dimmed when Senator Charles E. Schumer (N.Y.), and three other Democratic senators, sponsored a bill that would place limitations on receipt of the grant. Developers, lenders, investors and their counsel all need to know whether and how they can fit under section 1603 and, if they can, how to optimize their deal structures, including the interface between the section 1603 grant and the Department of Energy Loan Guarantee Programs and any related NEPA compliance issues. Those who, for whatever reason, cannot qualify for section 1603 need to understand what comes next: PTCs, ITCs, or maybe some variation on 1603, and how those transactions should be designed.

Please join Infocast and Stoel Rives for a 90-minute webinar and panel discussion on project financing of renewable energy projects to maximize the benefit of tax and other incentives that may be available. Stoel Rives is a Chambers-rated leader in renewable energy law.


Edward Einowski, Partner, STOEL RIVES LLP


Erica Egan, Senior Vice President, Corporate Finance, HELABA

Gregory Jenner, Partner, STOEL RIVES LLP

Kevin Pearson, Partner, STOEL RIVES LLP

Gary Barnum, Partner, STOEL RIVES LLP


Treasury Issues Guidance on Applications for Grants in Lieu of the ITC and the PTC


The American Recovery and Reinvestment Act of 2009 (ARRA), which was enacted in February, permits an applicant to receive a grant from Treasury in lieu of claiming investment tax credits (ITCs) or production tax credits (PTCs).

Today the U.S. Treasury Department issued much-anticipated guidance concerning applications to receive cash grants in lieu of claiming income tax credits for certain renewable energy projects. Although the guidance includes a sample application form, the U.S. Treasury has stated that it will not accept applications until August 1.

Read the full analysis on this guidance including grant details, eligibility and the application process at

If you have questions about today's Treasury Department guidance and grants in lieu of ITCs or PTCs, contact:

Chris Heuer at
Greg Jenner at
Carl Lewis at
Kevin Pearson at
Adam Kobos at

On the Senate Side, Alternatives to the House's Proposed Renewable Energy Incentives

On Friday, January 23, the Chairman of the Senate Finance Committee released his version of the economic stimulus bill.  Like its House counterpart (H.R. 598), the proposal by Chairman Max Baucus ("Chairman’s Mark") is called the American Recovery and Reinvestment Tax Act of 2009.  The Chairman’s Mark is scheduled to be considered in the Finance Committee on Tuesday, January 27.

As with H.R. 598, the Chairman's Mark would extend the production tax credit ("PTC") sunset date, permit taxpayers to elect to claim the investment tax credit ("ITC") in lieu of the PTC for certain projects, and extend bonus depreciation through 2009.  Importantly, however, the Chairman’s Mark does not include the provision in the House bill that would enable taxpayers to receive cash grants in lieu of the ITC for certain projects.  Without this grant provision, questions have been raised as to whether the Chairman's proposal would accomplish the legislative purpose of promoting investment in renewable energy development.  Other provisions of note in the Chairman's Mark are modifications to the general business credit and a new 30% credit for investment in certain property used in a "qualified advanced energy manufacturing project."

Click here for a detailed summary of the Chairman's Mark.  To view our recent Energy Law Alert on the House bill, click here.