On November 3 the U.S. House of Representatives released the “Tax Cuts and Jobs Act” (the Act) which contains provisions that will significantly affect production tax credits (PTC) for wind projects. Based on a review of Section 3501 of the initial draft and conversations with legislative staffers, we expect the potential financial impact to negatively affect planned expansions in wind capacity in the United States.

First, the Act could require wind project developers to make a factual showing to establish a “continuous program of construction” between the date on which construction is deemed to begin and the date the facility is placed in service. Although a “continuous program of construction” standard already applies under Internal Revenue Service (IRS) guidance, the Act appears to require a continuous program, eliminating the current safe harbor established by IRS guidance based upon time. The current safe harbor allows a project to qualify for the PTC by showing simply that the project was placed in service by the later of December 31, 2018, or 4 calendar years after the calendar year in which construction began.

Tax equity investors requested the safe harbor in 2013 because they were unwilling to invest unless they could receive sufficient assurances from tax counsel that a project had engaged in “continuous construction” (a fact-based determination that tax counsel was unable to provide). This change could hamper project finance if tax equity investors are again reluctant to fund projects without those same opinions tax counsel was previously unable to provide.

With respect to the tax rate, the Act would also terminate the existing inflation adjustment, which would have the effect of reducing the existing tax rate of approximately 2.4 cents per kilowatt hour for wind projects to 1.5 cents. The current draft states that the inflation adjustment does not apply to any electricity produced at a facility “the construction of which begins after the date of the enactment” of the provision, which would not retroactively reduce the PTC for projects currently in operation or under construction. The committee report suggests that removal of the inflation adjustment was also intended to apply to current projects, but our understanding is that the language in the report is simply an error brought on by the workload facing the committee.

The Act presents considerable uncertainty for wind project developers – with more uncertainty expected as the bill moves through the legislative process. Of course, the language in Section 3501 is not a foregone conclusion. As one might expect, Senator Grassley (who secured the production tax credit provisions in the 2015 tax bill) was reportedly very upset. Discussions with the Ways and Means Committee are ongoing, and the bill may change even ahead of the Committee vote scheduled for Monday.