When the Trump administration passed legislation in July to abruptly phase out billions of dollars of subsidies for wind and solar projects, the renewable energy industry was left fearing strict rules would be imposed to limit the number of projects that could be grandfathered into the expiring tax credit program. Guidance released by the Treasury Department and IRS on August 15, however, proved more lenient than anticipated, preserving a key pathway for many project developers to secure the lucrative credits.

The guidance is expected to enable the continued expansion of solar and wind over the short-term. By clarifying the terms for eligibility, the new rules provide a viable, albeit narrower, course for developers to qualify for the credits. Investors cheered the news, with shares of renewable energy companies from First Solar to NextEra Energy surging on the release of the guidance.

The prospect of a continued renewable expansion, and the increased competition and shape risks that accompany it, will likely weigh on PPA valuations. Despite this, the market showed little immediate reaction, with PPA valuations holding steady after the new guidance was released.  

The fair-market value of an as-generated, 10-year wind PPA, starting in 2027, for ERCOT’s benchmark North Hub reached $45.44/MWh on Aug. 18, up 46 cents, or 1%, from the previous trading day, according to Pexapark’s PPA data. This valuation reflects the value of a Green-e Texas Wind certificate and a low renewable energy build out scenario.

The new guidance largely kept intact the existing so-called Physical Work Test for wind and solar projects. The rule allows developers to qualify for the federal tax credits if they demonstrate the start of “physical work of a significant nature” by July 4, 2026, one year after passage of President Donald Trump's "One Big Beautiful Bill" Act. Meeting these criteria is contingent solely upon the characteristics of the work performed – not the cost or amount of work – and can entail offsite work, such as component manufacturing. Advanced stage projects, on the other hand, can qualify for the credits by placing the facilities into service by the end of 2027.

The guidance also preserved the Continuity Requirement, which gives projects four years after the start of construction to be placed in service. In yet another win, the guidance applies to projects that begin construction on or after Sept. 2. Industry groups were concerned that the new rules would apply retroactively.

The guidance, however, wasn't entirely lenient. It all-but-eliminated the 5% Safe Harbor provision, which allows developers to qualify for the credits if they spend at least 5% of the total cost of the facility. Effective Sept. 2, this provision will be exclusively available to solar facilities with maximum net output of 1.5 MW AC or less.  

Global law firm K&L Gates LLP agreed that the new guidance blunts some of the industry’s fears related to the OBBBA. “Because many developers were already using the Physical Work Test instead of the 5% Safe Harbor, and because the four-year safe harbor for the Continuity Requirement was retained, the actual impact of the changes remains to be seen,” the firm wrote in an August 15 note.