Ep313: New Construction-Start Rules

Summary

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Currents Podcast Ep313: New Construction-Start Rules

Host: Todd Alexander, Partner, Norton Rose Fulbright
Guest: Keith Martin, Partner, Norton Rose Fulbright
Release Date: August 26, 2025
Topic: New Treasury rules on construction-start qualification for wind and solar; impacts of recent legislation and executive actions on project finance in renewables.

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Episode Overview

This episode dives into the Treasury’s newly issued rules redefining what counts as the "start of construction" for wind and solar projects, focusing on critical changes impacting project qualification for key tax credits. Host Todd Alexander and returning guest Keith Martin unpack the practical implications of the changes, examine how they intertwine with provisions in the reconciliation bill, and discuss emerging market risks—especially amid evolving federal policy and trade restrictions on Chinese equipment.

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Key Discussion Points & Insights

1. Treasury’s New Construction-Start Rules

[00:33-05:16]

• The most significant change is the removal of the “5% safe harbor test” for wind and solar. Developers can no longer secure tax credit eligibility simply by incurring 5% of project costs. Only the “physical work test” remains for projects starting after September 1, 2025.
  • Quote: “The main change was to deny solar and wind developers the option of using the 5% test...They now have to rely solely on the physical work test.” – Keith Martin [00:58]
• The “physical work test” requires demonstrable, on-site progress. However, what exactly qualifies as sufficient “physical work” is less clearly defined.
  • The Treasury changed the required action from “begin physical work of a significant nature” to “have performed physical work of a significant nature,” raising uncertainty.
    • Quote: “The issue with physical work is...there are no clear lines about how much work has to be done.” – Martin [01:19]
  • Tax equity investors’ acceptance of documentation will set the market standard for compliance with these rules.
• Historically, larger developers used the 5% test, but due to its high cost, most of the market already used the physical work test.
  • Quote: “The larger developers have the wherewithal to rely on 5%, but over time people have realized that's a very expensive route. So we see a lot of physical work cases and the tax equity market has been comfortable with that approach.” – Martin [02:09]

2. What Counts as Physical Work?

[02:39-03:52]

• Main Power Transformers were the market standard for physical work but have become difficult to source.
  • Quote: “The market is comfortable with main power transformers, but they have become so hard to get. So then the question is what else works?” – Martin [02:39]
• The work must not be “inventory” activities—equipment must be specialized for that project.
  • Market is exploring options but expectations are still forming.
• On-site construction activities (e.g., building roads, installing solar piles) are “a much better approach”:
  • Quote: “If you could put in say 10% of the solar piles, for example, it looks a lot more impressive like you truly have started work on the project.” – Martin [03:23]
• Project definition and documentation are critical: contracts should clearly identify the work being undertaken and the specific project.

3. Uneven Application of Rules Across Technologies

[03:52-04:47]

• The new, stricter start-of-construction rules only apply to wind and solar. Other asset classes—energy storage, geothermal, hydro, etc.—continue under previous, more flexible standards.
  • Quote: “These rules have been tightened just for solar and wind...the construction start tests have not changed” for other asset types. – Martin [04:14]
• Completion deadlines stay the same: generally four years, with longer periods (ten years) for projects on federal land still subject to some uncertainty.

4. Major Impacts of the Reconciliation Bill

[05:16-08:29]

• Accelerated phase-out of tax credits: Wind and solar credits are being wound down faster than anticipated, but many developers can still advance large project pipelines that “will carry them through the full Trump term.”
  • Quote: “Many of them have large pipelines of projects that are already under construction that will carry them through the full Trump term. So the pain is notable, but it's not insurmountable.” – Martin [05:50]
• The FIAC (Foreign Influence and Control) restrictions:
  1. Limits on Chinese equipment share in projects.
  2. Restrictions on project company ownership or involvement by entities with significant Chinese ties.
  3. Contractual “effective control” by Chinese suppliers is now expressly forbidden, even retroactively. There’s a “one-year look-back,” so existing contracts need urgent review.
  • Quote: “If they've made payments under them, it may be too late to salvage tax credits for next year. There's a one year look back. I think that's the bigger issue.” – Martin [07:04]
• FIAC rules are challenging but “largely workable.” The greater near-term challenge is regulatory obstruction:
  • Federal agencies—including Transportation, Agriculture, and Interior—are introducing additional barriers, notably for offshore wind.
    • Example: Construction halt on the Revolution wind farm, viewed as possible negotiating leverage.

5. Impact on Energy Storage

[08:29-10:32]

• While the tax credit phase-out addressed mostly wind and solar, energy storage faces heavy burdens under FIAC:
  • Up to 77% of lithium-ion battery components come from China.
  • Stricter thresholds for non-Chinese content: Batteries must be under 45% Chinese content now, tightening to 15% after 2029; wind and solar allowed up to 60% now.
    • Quote: “The FIAC limits on use of Chinese equipment set a higher bar for batteries to meet than for solar and wind power projects.” – Martin [09:32]
  • Urgency: Battery projects need to start physical construction by the end of 2025 to avoid tougher Chinese content limits.

6. Executive Orders and Political Risks

[10:32-12:17]

• Recent executive orders have frozen offshore wind projects and are making it more difficult to secure federal permits—even for non-offshore renewables.
  • Debate over scope: RE team thinks only 5% of projects require Department of Interior approval; others believe many more are affected.
  • Regulatory risk: “There are 69 separate approvals that one might need.” – Martin [10:58]
• State-level political pushback is expected as electricity prices rise and project blockage slows supply.
  • Risk of re-regulation: If energy markets cannot deliver or prices soar, regulators may take action.
    • Quote: “Could it also be a break on economic growth?” – Alexander [12:10]

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Notable Quotes

• “The tax equity investors will be the ultimate arbiters of how much work is required.” – Keith Martin [01:43]
• “If you could put in say 10% of the solar piles, for example, it looks a lot more impressive like you truly have started work on the project.” – Keith Martin [03:23]
• “Contracts can’t give those [Chinese] suppliers effective control over your project. And that part is retroactive.” – Keith Martin [06:46]
• “I think that that will be a real challenge for the battery industry. They need to start construction more importantly than others by the end of this year to avoid those limits on Chinese equipment.” – Keith Martin [10:09]

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Timestamps for Key Segments

• [00:33] Introduction to new construction-start guidance
• [00:58-02:25] End of the 5% test and transition to physical work test
• [02:39-03:52] What qualifies as "physical work" under the new rules
• [03:52-04:47] Differences for solar/wind vs. other renewables
• [05:16-08:29] Impacts of the reconciliation bill and FIAC restrictions
• [08:29-10:32] FIAC’s unique impact on energy storage/batteries
• [10:32-12:17] Executive order/regulatory blockage and political risks

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Summary and Takeaways

This episode delivers a crucial update for anyone developing or financing wind, solar, or energy storage. With significant changes to construction-start qualification—especially the removal of the 5% test—developers must now carefully document physical, project-specific construction to ensure eligibility. The retroactive and more stringent trade restrictions on Chinese content, especially for batteries, introduce new urgency and complexity. Finally, evolving federal policy is injecting new uncertainty into market planning, with mounting regulatory and political obstacles posing longer-term risks to US renewables.

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Transcript

[A]

Foreign. Welcome to Currents, the Norton Rose Fulbright podcast. Today we welcome back my partner Keith Martin, to discuss the new construction start rules for wind and solar. And we'll also probably take some stock of the effect of the reconciliation bill on the market since its adoption in early July. Keith, there's a lot happening. You've been on a bunch of times now, but welcome back. I guess an indicator of how much the sands are shifting under us these days.

[B]

So thanks for having me, Todd.

[A]

All right, so first let's talk about the most recent thing, which is the start of construction rules that treasury just came out with did I guess one to take some of the thunder away and then we can go into the details. But did these new rules really make it materially harder for solar and wind projects to qualify for their start of construction or is this kind of just a refinement?

[B]

That's to be determined. The main change was to deny solar and wind developers the option of using something called the 5% test, where they would incur 5% of the total project cost to start construction. They now have to rely solely on the physical work test, that is for construction starts after September 1st. The issue with physical work is, is there are no clear lines about how much work has to be done. And the treasury made it a little more complicated by saying by changing the wording, instead of having to begin physical work of a significant nature, developers merely now have to have performed physical work of a significant nature. The word from the treasury is that no change was really intended, but I think there's some residual risk around use of the word performed. The tax equity investors will be the ultimate arbiters of how much work is required.

[A]

Roughly what percentage of deals would you say ballpark were relying on the 5% test as opposed to the physical work test?

[B]

It's a good question. The larger developers have the wherewithal to rely on 5%, but over time people have realized that's a very expensive route. So we see a lot of physical work cases and the tax equity market has been comfortable with that approach.

[A]

And so in practice it might only it eliminated one avenue for qualifying your project for to have evidence that it started construction, but it may not really impact too many projects. Is that the idea?

[B]

I think the challenge with physical work is the market is comfortable with main power transformers, but they have become so hard to get. So then the question is what else works? The issue is that it doesn't work on equipment. That is, inventory, like the equipment has to be specially tailored for use of the project. And so you Know, we are all, all the tax lawyers in our group are getting lots of questions about things besides transformers. And it will, I think it will take a little time for the tax equity market to warm to some of these.

[A]

You, you can do on site work too, right? Like building a road or something like that that's specific for that use of the.

[B]

Yes, and that's a much better approach. If you could put in say 10% of the solar piles, for example, it looks a lot more impressive like you truly have started work on the project. Another issue that people have been wrestling with. Most tax lawyers think that common sense suggests you should know what you're starting work on if you use the physical work test. And so that I think that's important to identify the project in whatever contracts are signed.

[A]

Okay. And in terms of the application across the board, like in the reconciliation bill there the. Is it correct that these rules, these new rules only apply to solar and wind? And so now we've got solar and wind having one set of rules and other assets like energy storage having a different set of rules. How is this going to work?

[B]

It's even worse than that. These rules have been tightened just for solar and wind, but not for avoiding parts of the FIAC restrictions on use of Chinese equipment for that purpose. The deadline is the end of this year to start construction. And. And the existing construction start tests still apply even to solar and wind for batteries, geothermal, pump storage, hydro, anything that otherwise qualifies for tax credits that is not solar and wind. The construction start tests have not changed.

[A]

And how about the time period you have to complete construction?

[B]

That didn't change either. It's generally four years there. There was a 10 year period for projects on federal land, but there's some uncertainty about whether that has carried over. It clearly does not carry over for solar and wind starting construction on September 2nd or later. As to projects that started before and for non solar and wind, there's room for debate.

[A]

All right, I'm going to switch off this start of construction guidance that came out in just since I got you pick your brain a little bit in terms of now that you've had I guess almost two months now to see what the impact of the big beautiful bill is here. What do you think were in practice the, the most important changes that are going to have lasting consequences on the renewables market?

[B]

I think there are two. One is the tax credits are being wound down more quickly than they were supposed to be. But I think the issue for the developers is many of them have low, large pipelines of projects that are already under construction that will carry them through the full Trump term. So the pain is notable, but it's not insurmountable. And part of the game is to just live to fight another day. I've been at this for a long time, as you have. We've seen these tax credits since 1992. They have come and gone and they could very well come again. The other part is the FIAC restrictions, which require a three part analysis. One is there's a limit on the amount of Chinese equipment that can be used. A second limit is on taxpayers who have too much Chinese investment or debt or participation in management. They can't claim tax credits. And then the third part, which is the stickiest, is if you have contracts, for example, with Chinese suppliers, the contracts can't give those suppliers of equipment effective control over your project. And that part is retroactive. People need to be scrubbing those sorts of contracts already this year. If they've made payments under them, it may be too late to salvage tax credits for next year. There's a one year look back. I think that's the bigger issue. There were people in Democratic ranks who thought that the FIAC rules were so complicated purposely to set up a maze out of which no one can emerge. I don't think we're in that camp. We think they're largely workable, but the jury's still out in some set corners of some of the opinions we're being asked to write. The bigger issue is not the obba, but just the obstruction that we're starting to see industry wide from the Trump administration. Various agencies are now piling on Transportation, agriculture, the Department of Interior, making it hard for projects to get any approvals to move forward. And you saw on Friday night Trump stopped construction of the nearly complete Revolution wind farm off Connecticut and Rhode Island. A lot of people think that will follow the same pattern as the Empire project that he stopped construction on, but then relented after the CEO, I assume, called. And in this case, he probably wants to hear from the governors of Connecticut and Rhode island about what they can offer him to let construction resume.

[A]

What I say two questions for you. One is in thinking about how this is going, if you looked at the headlines and you saw that the phase out of the ITCs, PTCs was really targeted towards wind and solar, it seemed like energy storage really got through mostly unscathed. But then you look at the fiat restrictions and those probably are more burdensome on energy storage. How, from the feedback that you're hearing in the marketplace. Do you think that the energy storage market is really going to be damaged by the fiat rules or do you feel like there's ways to obviously they have to comply with them, but that it's just a matter of kind of being aware of them and contracting carefully?

[B]

I think this is a real challenge for battery developers. The rest of the market, not one insular got to the end of 2033 to start construction and claim full tax credits and end of 2035 to claim partial tax credits. But with batteries, 69 to 77% of the components for lithium ion batteries come from China. Ironically, the fiat limits on use of Chinese equipment set a higher bar for batteries to meet than for solar and wind power projects. For example, they have to have less than 45% Chinese equipment from the start and that ratchets down to less than 15% after 2029. This is based on when construction starts, whereas for power projects it's less than 60% Chinese equipment initially ratcheting down to 40%. So I think that that will be a real challenge for the battery industry. They need to start construction more importantly than others by the end of this year to avoid those limits on Chinese equipment.

[A]

And last question for you on the executive order which you touched on. You know it's not just the offshore wind, but there's now seems to be impediments for developing on federal lands and receiving approvals from federal agencies. How much of an impact do you see that happening?

[B]

Having that that's open for debate. I know our real estate team thought that about 5% of projects require approvals from the Department of interior. That includes BLM, U.S. fish and Wildlife and others. But I think there are people in the market who think the required approvals reach more broadly. There are 69 separate approvals that one might need. And there was a letter from the governor, Nevada, very well written Republican who said to the Secretary of Interior, look, I know you're trying to promote fossil fuels. We don't have them in Nevada. What we have is sunlight. And you have to have a process here that allows us to generate electricity we need for data centers, casinos, whatever else requires electricity there. I think we're going to see an emerging political issue as the price of electricity goes up. We're already seeing some pushback from regulators about price increases. Utilities are requesting one at one risk to keep an eye on is do we see some re regulation of the industry over time just because the industry can't provide the electricity. It has one arm tied behind its back now and then the regulators get frustrated. Frustrated state legislators. This is an emerging political problem. Could it also be a break on economic growth?

[A]

Yeah, I mean, that's a bigger macro issue, I guess. Probably too big for us, but anyway, well, that's for another day. Appreciate your time today, and I'm sure given the way the market's evolving here, I'll be talking to you again on this podcast soon.

[B]

Okay, Todd, nice to talk to you. Salute.

[A]

You can find us online at www.proctor project finance law or send us an email at currentsordonrosefulbright.com please rate, review and subscribe on Apple Podcasts, Spotify or your preferred podcast app. Our show today was produced by Emily Rogers.

[B]

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