The Internal Revenue Service (IRS) has finally released guidance on the extension of the Production Tax Credit (PTC). There is a change in eligibility requirements from when a project is "placed in service" to when a project has "commenced construction."

While predominantly utilized by the wind industry, the PTC applies to the geothermal, biomass, waste-to-energy and hydropower industries as well. The American Taxpayer Relief Act provided a one-year extension of the PTC through January 1, 2014; however, the above change extends the timeframe for project developers beyond the one year. In the guidance document, the IRS lays out two alternative approaches to fulfilling the "commence construction" requirement – actual beginning of the physical construction of the project or meeting a safe harbor provision.

The guidance establishes detailed parameters over what activities are to be considered for "commencing construction" both on-site and off-site. To meet the safe harbor provision, project developers have to incur five percent or more of the total cost of the facility and make continuous efforts to advance the completion of the facility up to January 1, 2014. Additional details are provided as to what expenses are to be considered in this calculation and what "continuous efforts" means. Another key provision of the guidance is that it enables developers to consider wind projects as a whole to fulfill the safe harbor provisions rather than treat turbines as individual projects.

This guidance should give many in the industry the certainty they need to move forward with project development.

State-level production tax credits do not necessarily reflect this change in IRS policy.