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Solar Hosts and Developers Scrambling to Make Year-End Deadline

Posted on October 25th, 2011 | Author: James H. Laskey

Combined incentives from the United States federal government and the State of New Jersey have made New Jersey an extremely attractive market for European and Asian manufacturers of solar panels.  Published reports consistently rank New Jersey as number one or number two in terms of solar installations, neck and neck with the much larger (and somewhat sunnier) State of California.

However, the looming expiration of a key federal program has helped stimulate a feverish acceleration of developments that in turn has had an impact on the value of New Jersey’s Solar Renewable Energy Certificates, or SRECs.  Section 1603 of the American Recovery and Reinvestment Act (ARRA) offered certain owners of renewable energy projects, including photovoltaic solar, the opportunity to receive a cash grant in lieu of the usual 30% investment tax credit for such projects.  While taxpayers with large amounts of taxable income might regard a cash grant and tax credit as equivalent, the grant is a very attractive option for taxpayers that have limited taxable income and that accordingly would need many years to use up the full amount of the credit.

For projects that are not on-line by the end of this year, the grant is only available if “physical work of a significant nature” has begun before December 31, 2011.  The U.S. Treasury has created a “safe harbor” that says the taxpayer may treat “physical work of a significant nature” as beginning when the taxpayer incurs, in the case of an accrual basis taxpayer, or pays, in the case of a cash basis taxpayer, more than 5% of the total cost of the project (excluding the cost of any land and preliminary activities, such as planning or designing, securing financing, exploring, or researching).  The 5% threshold must be met by the applicant and not the applicant’s suppliers or contractors. The economic performance rules of Section 461(h) of the Internal Revenue Code apply, which means, in the case of an accrual basis taxpayer, that accruing (or paying) for a service is insufficient and the service for which the payment is being accrued must have been performed. Thus, prepayments for future services will not count toward the safe harbor.  By its terms, this rule does not apply to cash basis taxpayers.

In the wake of the year-end rush, SREC prices have fallen from the equivalent of $.60 per kWh to about $.20 per kWh. While this still provides a significant support for projects relative to the value of the solar energy itself, both hosts and developers are taking a much harder look at the viability of solar projects in New Jersey.