Market update: new solar start of construction guidance
The Treasury issued their long-awaited guidance on Friday. It's a net negative for the industry, but was certainly better than some of us feared. Nuanced details matter A LOT for M&A, so here’s a link to the actual guidance from the IRS, which is fairly readable.
Here are our top takeaways:
It's not retroactive
Anyone who had previously taken safe harbor actions, or who take action in the next two weeks, may safe harbor projects under the previous guidance. 9/1/25 is the last day to take action.
Continuity safe harbor
If a project begins construction at any point in 2025, it has to be turned on by 12/31/29. If it begins construction between 1/1/26 and 7/3/26, it has to be turned on by 12/31/30. This maintains the snapshot approach for "beginning construction", as opposed to an ongoing burden.
5% spend threshold only <1.5MWac
Between 9/2/25 and 7/3/26, the Five Percent Spend Threshold will ONLY apply to projects <1.5MWac. We expect this nuance to maintain ~1,500 projects between 2027-2029. These will be both C&I projects and small community solar projects. Almost all of these will be <1.0MWac to avoid prevailing wage requirements and to stay under state programs thresholds for optimal value.
Physical work test for all projects
Whether offsite or onsite physical work, this will be the new norm. It will be needed to safe harbor projects between 9/2/25 and 7/3/26 which are greater than 1.5MWac (it also can apply to those projects under 1.5MWac).
Offsite physical work still qualifies
This is the cheapest low risk option for safe harboring a project. The industry will complete a lot of off-site physical work, such as issuing binding contracts for work to begin on custom transformers for a specific project.
Onsite physical work still qualifies
This was clarified in the guidance. Installing racking will qualify. Geotech, grading, site clearing, etc. will not. There will be gray areas here, and tax equity hates the color gray.
Here’s what this all means:
Site selection required on projects >1.5MWac
With the 5% spend test, it’s been common industry practice to buy equipment now and select sites after the deadline. Key stakeholders including tax equity and attorneys have supported this approach, and we expect it to continue for projects <1.5MWac.
But larger projects that require physical work, whether onsite or offsite, to safe harbor tax credit eligibility will need to have sites selected.
Crunch time
The rush is on to safe harbor projects. It will be particularly strong over the next 9 months for larger projects >1.5MWac that require site selection and physical work.
For smaller projects <1.5MWdc, we expect developers and IPPs to create LLCs safe harbored via equipment purchases for sites to be identified between 2026 and 2029. Here, the rush is on for equipment with eye on FEOC requirements.
