Clarification Suggested for Safe Harbor of Energy Credit Guidance

Possible Clarification regarding federal lands and transmission provisions in Notice 2021-05, dated July 1, 2021

The below assumes that, first, Notice 2021-05 would be clarified such that “Federal Land Project” in section 4.02(2) would be as refined to mean a construction project involving a qualified facility or an energy property (a) more than 25 percent of which will be placed in service on Federal Land, as determined by relative value, cost, area or nameplate generation; and (b) that will require the construction of one or more high-voltage transmission lines to connect the qualified facility or energy property to the Grid.” The below discusses further clarification (beyond that definitional change) that would be beneficial to taxpayers and the IRS in administering that definition.

A. Issue: What project components should be considered when determining Relative Cost or Relative Value?

Clarification:

Whether 25 percent of a project utilizing wind energy is placed in service on Federal Lands is determined by reference to the qualified facilities (that is, wind turbines, together with the towers on which the wind turbines are mounted and the pads on which the towers are situated) and not by reference to any other property, such as a computer control system, substations, transmission interconnection facilities or other property that serves some or all such facilities. The cost or value of any land is also excluded from the computation of Relative Cost or Relative Value.

B. Issue: At what point in time is the Relative Cost or Relative Value determined?

Clarification:

Where relative cost or relative value will be used to determine whether 25 percent of a project utilizing wind energy is placed in service on Federal Lands, the cost or value of the qualified facilities that are part of the project should be determined at the time each is placed in service. Because it is anticipated that other qualified facilities that are part of the same project may be placed in service over a period of time, the taxpayer may utilize the aggregated actual initial cost or actual initial value (with value to be based upon initial tax basis).

Explanation for both A and B:

In Rev. Rul. 94-31, the Internal Revenue Service held that the term “facility” under Section 45(c)(3) means the wind turbine, together with the tower on which the wind turbine is mounted and the pad on which the tower is situated. Notice 2013-29 (as modified and clarified by later Notices¹) provides that, solely for purposes of determining whether construction of a facility has begun for purposes of Section 45 and 48, multiple facilities that are operated as part of a single project (along with any property, such as a computer control system, that serves some or all such facilities) will be treated as a single facility. Whether facilities are operated as part of a single project depends on the relevant facts and circumstances. Notice 2013-29 and the prior notices provide factors to be considered in this determination.

C. Issue: How is the Relative Area test applied?

Clarification:

Where relative area will be used to determine whether 25 percent of a project utilizing wind energy is placed in service on Federal Lands, taxpayers may choose to make such determination by calculating either (a) the ratio (expressed as a percentage) of the number of qualified facilities (that is, wind turbines, together with the towers on which the wind turbines are mounted and the pads on which the towers are situated) sited as part of the project on Federal Lands to the total number of qualified facilities sited on Federal Lands and on other land or (b) the ratio (expressed as a percentage) of the number of acres of Federal Lands that are leased from the United States for purposes of the project to the total number of acres of Federal and non-Federal Lands that are owned or leased by the taxpayer for purposes of the project.

D. Issue: How is the Relative Nameplate Generation test applied?

Clarification:

Where relative nameplate generation will be used to determine whether 25 percent of a project utilizing wind energy is placed in service on Federal Lands, taxpayers may choose to make such determination by calculating the ratio (expressed as a percentage) of the total nameplate generation of qualified facilities sited on Federal Lands that are leased from the United States for purposes of the project to the total nameplate generation of qualified facilities sited on non-Federal Lands that are owned or leased by the taxpayer for purposes of the project. Again, here, qualified facilities should be limited to the wind turbine and their towers and pads and should not include other equipment, such as energy storage equipment.

E. Issue: Should a government required Environmental Impact Statement (EIS) be a safe harbor for being a Federal Lands project?

Clarification:

Either as its own test (independent of relative value, cost, area or nameplate generation) or as a way to be deemed to have satisfied one or more of those tests, an EIS should qualify a project as being sufficiently on Federal Lands to justify qualification for the 10-year safe harbor.

Explanation for E:

Notice 2021-05 (Section 3.02) explains that two reasons for the increased project delays experienced by facilities constructed on Federal Land are the significantly more stringent permitting requirements and the heightened environmental regulation required for such projects, such as the environmental analysis process carried out by the Bureau of Land Management (BLM). The BLM requires applicants for qualified facilities to be constructed on Federal Land administered by that agency to obtain permits which trigger the agency's obligation to comply with the National Environmental Policy Act (NEPA) (42 U.S.C. §§ 4321-4345). The terms used in NEPA are defined in the regulations of the Council on Environmental Quality (CEQ), which regulations are applicable to all Federal agencies. There are three levels of agency documentation for compliance with its NEPA obligations: (i) a documentation of NEPA adequacy may be used if an existing environmental analysis is determined to adequately assess the environmental impacts of the proposed action; (ii) an environmental assessment, which is a concise written document that provides sufficient evidence and analysis for an agency to determine that a proposed action will not have a significant impact on the environment; and (iii) an EIS, which is the detailed written document required by NEPA. An EIS is not required for all proposals on Federal Land; rather, an EIS must be prepared only for major Federal actions that may have significant environmental effects.

The complexity of an EIS will vary depending on the scope of the proposed action (e.g., the number of turbines and nature and quantity of supporting facilities, the environmental sensitivity of the project area for impacts to water resources, plants and wildlife (in particular, those that are classified as sensitive by the BLM or other agency administering the lands), soils, historic and cultural resources (including historic and scenic trails), Native American resources, recreation, visual resources). An EIS must take a “hard look” at the environmental consequences of a proposed action, and it must include a detailed discussion of all reasonable alternatives to the proposed action. Although the CEQ regulations state that the text of an EIS shall normally be 150 pages or less, except for proposals of unusual scope or complexity, which shall be 300 pages or less, the CEQ has noted that final EIS's average 661 pages in length.

NEPA compliance is the duty of the agency, not the applicant. Although the applicant is often expected to underwrite the cost of an EIS, the agency is responsible for the accuracy, scope and content of an EIS prepared by the applicant or a contractor under the supervision of the agency. Therefore, the applicant can only encourage prompt completion of an EIS but it cannot control the timing of the NEPA process.

In addition, preparation of an EIS requires public involvement. A Federal agency, including agencies that administer Federal Land, cannot issue a decision on a proposed action such as a permit for qualifying facilities until 30 days after publication of the notice of the final environmental impact statement is published in the Federal Register. Records of decision are often not signed until well after the expiration of that 30-day period.

Because of the lengthy time involved for an agency to prepare an EIS on a qualified facility construction project on Federal Land before issuing any permit for such project, the need for an EIS greatly expands the lead time for projects which require an EIS as compared to those that do not. Further, because projects which require an EIS will have been determined to have a significant impact on the environment and apply only for major Federal actions, the project can be treated as a Federal Land Project irrespective of the specific amount of Federal Land involved (whether by cost, value, nameplate generation or area) relative to non-Federal Land.