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.

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.

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]

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]

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

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.