IRS clarifies tax credit rules for renewable energy projects

In the United States, on July 5, 2026, the Internal Revenue Service (IRS) issued revised guidance for eligibility concerning wind and solar tax credits under sections 45Y and 48E of the Internal Revenue Code. This update focused on the requirement that a Physical Work Test must be met for projects to qualify for these credits. Specifically, to fulfill this requirement, significant physical work must have begun. Analysts had previously expressed concern about the strict nature of the rules but found the new guidance considerably more favorable than expected. The revised guidelines replaced previous regulations established under The One Big Beautiful Bill Act. Earlier, projects were eligible for tax credits if they commenced construction by 2026, defined by spending 5% of the capital expenditure or if they were put into service by the end of 2027. This change provided essential clarification, stating that both off-site and on-site work could demonstrate physical work of a significant nature. Off-site work might include manufacturing components, while on-site work could involve beginning onsite excavation for foundations or anchoring bolts. Consequently, preliminary activities like site clearing or excavation for land contour modification no longer qualified under the new guidance. Analysts at major investment firms, including Jefferies and Goldman Sachs, acknowledged that the updated IRS rules were a much-improved outcome compared to initial fears, calling it close to the best possible scenario. Goldman analyst Ajay Patel indicated that these changes remove significant uncertainties surrounding Vestas, a company in the wind energy sector, potentially increasing their market attractiveness. Following this announcement, Vestas shares surged by over 15% in Copenhagen, marking the most substantial increase since July 2022. Market analysts projected that this clarity in regulations would facilitate a notable uptick in orders for Vestas as existing pipelines are converted into actual projects, potentially leading to better profitability and cash flow in the second half of the year. With rising order activity in the U.S., a stronger picture for top-line growth is also emerging for Vestas, as they navigate through increased demands and ramp up offshore operations this year.