“Beginning Construction” Requirements for Section 1603 Cash Grants for Renewable Energy Projects

The federal Section 1603 Treasury Grant Program has provided a major incentive for the development of renewable energy projects in recent years by allowing owners of such projects to receive a cash grant in lieu of federal tax credits for specified energy property. The U.S. Department of the Treasury reports that it has paid out $8.5 billion to approximately 18,000 Section 1603 grant applicants to date.The program was originally set to expire last year, but it was extended so that projects that will be placed in service by the end of 2011 are eligible for the grant. Additionally, projects that have begun construction by the end of 2011 and will be placed in service by 2012 (wind), 2013 (most other renewables), or 2016 (solar), can take advantage of the program. With the “begin construction” date fast approaching, it is important for renewable energy developers to understand how to ensure that they will be eligible for Section 1603 grants. Some of the important factors needed to meet the Treasury Department’s requirements for beginning construction are summarized here.There are two separate and independent ways that an applicant for a Section 1603 grant can establish the beginning of construction:Physical work of a significant nature, or5% “safe harbor” of costs paid or incurredThe physical work of a significant nature method of establishing that construction has begun has the following constraints/limitations: The physical work must take place on “energy property”â€"this means the property that is integral to the production of energy.Transmission equipment does NOT count as energy property.Generally, the Treasury Department will include all interconnection equipment, including the step-up transformer, as energy propertyEverything on the transmission side of the step-up transformer will be considered transmission equipment, not specified energy property.Most road building will not count as “energy property,” but each project is scrutinized on an individual basis and some roads could qualify as energy property. The physical work must be part of a “continuous program of construction” and Treasury puts particular emphasis on continuity.Unplanned work stoppage that is out of the control of the owner/contractor is acceptable.The Treasury Department’s examination will be on what kind of work continuity is expected for a project of its type, in the location where the project is being builtâ€"winter or other weather-related work stoppages can be acceptable. The work includes work done by a contractor, as long as it is done pursuant to a binding written contract, legally enforceable under state law, with damages not less than 5% of the total contract.It is important that the contract is in place before work is commenced.The physical work of a significant nature method also has the following flexibility: There is no minimum amount of work that must be complete by the end of 2012; the work can be very minimal because the emphasis is on the continuity of the work.The work need not take place at the project site; indeed, no site need even be identified for the project under this approach. The 5% Safe Harbor method of establishing the beginning of construction focuses on the actual expenditures made by the applicant, and it requires that the applicant: has paid or incurred 5% of the total actual costs of specified energy property.meets the “economic performance rule” from Section 461(h) of the tax code â€" this means that the applicant has to actually make the payment and reasonably expect to receive the property within 3½ months. “Receiving” or being “provided” the property can mean delivery, acceptance, or the passage of title of the property, but the applicant must use the same method throughout the term. Making a deposit on the property is NOT sufficient to count toward the 5% safe harbor.incurs any contract-based costs pursuant to a binding written contract, legally enforceable, with damages not less than 5% of the total contract.possibly needs to have a project site identified (this issue is not entirely clear under current U.S. Treasury guidance).The 5% safe harbor method also has the following flexibility:  Costs/contracts may be for services, not just goods.There is no need to build/construct anything.There is no continuity requirement.“Off-the-shelf” items qualify towards the 5% of costs (but note that purchases of extended warranties do NOT count toward the 5%).There is a special “look through” rule that can be used to meet the economic performance rule for the applicant:if the applicant’s supplier meets the economic performance rule, then this can be attributed to the applicant. Potential Section 1603 applicants should also be aware that the date for beginning construction is December 31, 2011, and applications for projects that will begin construction but will NOT be placed in service by the end of 2011 must be submitted by September 30, 2012. Developers should also keep in mind that Section 1603 grants are available for expansion of existing projects, as long as there is additional capacity being provided at the facility. Even if a Section 1603 grant was used for the original facility, the developer can still be eligible for an additional grant if additional capacity is being created. The Treasury Department emphasizes that the completeness of an application by the final date is of paramount importance, and applicants should make use of the Section 1603 website and associated checklists and other guidance to ensure that they understand all application requirements. Disclaimer: As with all of our blog posts, this is not legal advice. Every situation regarding Section 1603 eligibility is fact-specific and would need to be treated on a case-by-case basis. No decisions should be made based on the information contained in this blog post alone. Readers are encouraged to make sure they have gathered all relevant information and to contact an attorney to discuss their specific situations.