Storage Kept Both Safe Harbors. Solar and Wind Did Not.

VDE Americas published a technical memorandum titled “Beginning Construction Technical Memorandum,” walking developers through the Physical Work Test that is now the sole method for solar and wind projects above 1.5 MW to establish construction commencement under IRS Notice 2025-42. The memo provides step-by-step guidance for navigating a compliance framework that has narrowed considerably since the passage of OBBBA. It is detailed, practical, and focused entirely on the wrong technology for the developers who need the most help right now.

Battery energy storage projects retained both safe harbor options under OBBBA. Solar and wind did not.

What OBBBA changed. The law terminated Sections 45Y and 48E clean energy tax credits for facilities placed in service after December 31, 2027, unless construction begins within twelve months of enactment. That puts the hard deadline at July 4, 2026. IRS Notice 2025-42 eliminated the 5% cost safe harbor for wind and solar facilities where construction had not begun before September 2, 2025. The only solar exception: facilities with maximum output of 1.5 MW (AC) or less may still use the cost method if construction begins before July 5, 2026.

For every commercial and utility-scale solar and wind project above that threshold, the Physical Work Test is now the exclusive path. No more writing a check for 5% of project costs to lock in credit eligibility. Developers must demonstrate “physical work of a significant nature,” whether on-site (excavation, anchor bolts, concrete pads) or off-site (custom manufacturing of components, mounting equipment, inverters, transformers). Planning, permitting, financing, and site studies do not count.

The storage exception. Notice 2025-42 specifically addresses wind and solar. Battery energy storage was not included in the safe harbor elimination. Storage projects retain access to both the 5% cost safe harbor and the Physical Work Test, with no equivalent 2026 or 2027 sunset. For standalone storage claiming the Section 48E investment tax credit, this creates a fundamentally different compliance timeline.

A solar developer racing to meet the July 4 deadline must now mobilize construction crews, coordinate contemporaneous documentation, and produce inspector reports proving that work is “integral to the facility.” A storage developer can still execute a binding contract for 5% of total project costs (battery cells, enclosures, power conversion systems) and satisfy the safe harbor through procurement alone.

What the Physical Work Test requires. The VDE Americas playbook, written for the solar developers who no longer have the simpler option, outlines a documentation-intensive process. Every qualifying activity needs contemporaneous evidence, not post-hoc reconstruction. The memo distinguishes between qualifying on-site activities (steel pile driving, trenching for conduit, foundation work) and non-qualifying preliminary work. It also addresses the distinction between custom-manufactured components (which qualify as off-site physical work) and commodity purchases (which may not). The guidance reflects what is now the only available compliance path for the majority of solar and wind projects seeking to lock in tax credit eligibility before the deadline.

The hybrid play. The dual safe harbor for storage reshapes project structuring for solar-plus-storage systems. A developer can use the Physical Work Test to establish construction commencement for the solar component (which must meet the July 4 deadline) while applying the 5% cost method independently for the battery storage portion. The storage component does not need to clear the same evidentiary hurdle, and its timeline is not yoked to the solar deadline.

This flexibility matters most where solar construction timelines are already compressed. Interconnection queue delays, permitting backlogs, and supply chain disruptions can push physical work milestones past a fixed deadline. For developers carrying both solar and storage in the same project, the ability to safe harbor the storage component through procurement rather than physical construction acts as a partial hedge. If the solar side fails to meet the Physical Work Test, the storage ITC survives independently.

The continuity question. Even projects that establish construction commencement face a second hurdle: the continuity safe harbor. Under the four-year rule, a project is deemed to maintain continuous construction if placed in service by December 31 of the fourth calendar year after construction begins. A solar project beginning construction in mid-2026 has until December 31, 2030. Miss that window, and the developer must prove continuous construction activity through a facts-and-circumstances analysis, a standard that invites exactly the kind of audit risk the safe harbor was designed to prevent.

For storage projects that establish commencement through the 5% cost method, the continuity clock starts at the point of cost incurrence. The administrative simplicity of writing a check versus mobilizing a construction site is not trivial when the consequence of failure is losing a 30% investment tax credit.

Market scale. SEIA confirmed that the United States installed 57.6 GWh of new battery storage capacity in 2025, with cumulative commercial and industrial installations reaching 19 GWh. The EIA projects battery storage will account for 28% of all new U.S. generating capacity in 2026, approximately 24 GW out of 86 GW total. The volume of projects that need to navigate these safe harbor rules is no longer measured in dozens.

The VDE Americas memorandum is a useful document for its intended audience. Solar developers above 1.5 MW have one path, and the playbook maps it clearly. The memo’s silence on storage is itself informative. The storage industry does not need a Physical Work Test playbook, because storage developers still have the option that solar and wind lost: satisfying the safe harbor through procurement rather than construction mobilization.

That asymmetry, more than any single provision in OBBBA, may prove to be the most consequential structural advantage for battery storage deployment in 2026 and 2027.

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