Gear up for solar safe harbor 2019 and 2020
In 2016, it was wind. Now it’s solar. With new guidance from the IRS, it’s time to “safe harbor” your projects.
Last year, the United States Internal Revenue Service (IRS) issued guidance that clarified the future of the Investment Tax Credit (ITC) for US solar projects. For projects starting construction in 2019, the 30% ITC will be available as long as projects are placed in service by the end of 2023. Projects starting construction in 2020 and placed in service by 2024 can qualify for 26% ITC, while projects starting construction in 2021 can qualify for 22%.
Sound familiar? It is. This step-down mirrors that of the widely-used Production Tax Credit (PTC) for wind projects, which started its step down in 2016. Following this example, the solar industry is gearing up to safe harbor equipment to qualify later projects for the ITC. This move will also allow time to continue development and potentially avoid solar tariffs imposed on imports now through 2021.
What you need to know about the safe harbor option
There are two methods to pre-qualify for the ITC: 1) safe harbor equipment, or 2) continuous, custom site work construction. Based on ICF’s experience with wind, the safe harbor equipment option is a popular choice because the requirements are generally understood and relatively simple.
So, what do you need to know about safe harboring for solar projects? Here are a few key tips to consider.
- Don’t wait until December.
- Know what your project is going to cost.
- Evaluate equipment options for safe harbor and know your suppliers.
- Make sure you get proper tax advice.
- Negotiate your safe harbor supply agreements carefully. (Be mindful of warranty provisions!)
- Tie up your safe harbor plan neatly by obtaining independent delivery verification.
Crafting a strategy
Negotiating supply agreements, coordinating transportation and storage logistics, and planning for safe harbored equipment can take time. Module lead times today range from three to 12 months and will continue to change, given the rapidly-evolving tariff status and technology options.
Preparing early for safe harbor will put you in the best position to procure the right equipment, gain confidence in your cost estimates, feel good about your deadlines, and make the most out of your safe harbor opportunity.
Developing conceptual project designs, layouts, and cost estimates is a necessary part of a safe harbor strategy. A reliable estimate for your project cost will allow you to allocate the right amount of money, select the optimal safe harbor equipment, and reduce your risk of qualifying for the ITC after the step-down.
Knowing your options
One important takeaway from the wind industry is that you have more than one option for equipment to safe harbor your project. There’s precedent for alternatives that qualify as starting construction.
Here’s a quick list of safe harbor options. The possibilities are not limited to the items below, so take time to evaluate and consider what is best for your project and risk profile.
|
Option |
Pros |
Cons |
|
Safe Harbor PV Modules |
A significant portion of project capital cost. Tariff exemptions based on technology or manufacture location may lead to low-cost opportunities. If stored appropriately, no degradation or quickly recoverable once installed Minimal to no maintenance required during or after storage |
Technology advancements could impact alignment with the balance of project equipment at the time of full procurement and construction Evolving global policies create uncertainty in pricing and availability. Consider the impact on warranty start date. Suppliers may have issues ramping capacity to meet demand. |
|
Safe Harbor Inverters |
Enclosures designed for outdoors, expect simplistic storage requirements Relatively easy for suppliers to meet increased demand No maintenance required during or after storage (confirm with the supplier) |
Technology advancements could impact alignment with the balance of project equipment at the time of full procurement and construction. Evolving global policies create uncertainty in pricing and availability. Consider the impact on warranty start date. |
|
Safe Harbor Steel |
Simple storage Short lead times |
Potential for steel prices to decrease over time as trade tensions ease |
|
Safe Harbor Transformers |
Static technology developments, applicable to the balance of project equipment Simple storage requirements |
May not be ideal for medium-voltage (MV) units, as the MV transformer and inverter are commonly provided as integrated units for central inverters For high voltage (HV) units, order and specifications are unique to detailed design making units and, thus, less transferable across projects. However, it is possible HV transformers or components could be used to qualify under the “continuous, custom construction” criteria. |
Essential calculations for solar safe harbor
Make sure to get an opinion from your tax counsel to understand what portions of the project cost apply to the safe harbor calculation. In addition, know your exact deadline for taking delivery of your equipment.
Depending on what equipment you choose to safe harbor, you will want to negotiate supply agreements carefully. Critical items for consideration include 1) how and when the warranty will apply, 2) delivery schedule and obligations, and 3) transfer of care, custody, and control.
You will also need to arrange proper transportation, storage, and maintenance of your equipment for the safe harbor period. Will you be obligated to purchase the remainder of the project’s equipment from the same manufacturer? Will the manufacturer be subject to liquidated damages should they miss delivery deadlines? Be sure to get the right help in negotiating the technical aspects of your contract to reduce risk to your project.
Lastly, as we saw with wind projects in 2016, you will need to tie up your safe harbor arrangement neatly with a visit to your storage location by an independent party. This party will document that the equipment was delivered prior to the necessary deadline and that storage conditions are appropriate based on supplier recommendations. At ICF, we send professionals to take time-stamped photos and independently document the delivery of the equipment.
In sum, you will be ready to safe harbor your solar projects this year and next by following a few simple steps—all to reduce risk down the road:
- Estimate capital costs to help determine the value associated with the 5% required for safe harbor.
- Conduct technical evaluation of equipment to be safe harbored.
- Review and negotiate supply terms and warranties for safe harbored equipment
- Review storage terms and requirements.
- Audit and review delivered equipment.
