The Energy Collective Group

This group brings together the best thinkers on energy and climate. Join us for smart, insightful posts and conversations about where the energy industry is and where it is going.

9,904 Members

Post

Solar Policy Battle: IRS Now Part of Fierce Debate Over How to Value Solar Energy

solar energy valuation and Internal Revenue Service

The rift over how to equitably compensate distributed solar power producers for the electricity they generate has just gotten a bit more stark.

The Alliance for Solar Choice (TASC), a downstream solar advocacy group whose members include SolarCity, Solar Universe, Sungevity, Sunrun, and Verengo, just sent out a release revealing that the conflict has escalated to the point of requiring a decision from the U.S. Internal Revenue Service.  

An electric utility can pay a producer of distributed generation like rooftop solar using a value-of-solar tariff (VOST) or through net energy metering. NEM spins the power meter backward and pays the consumer the retail rate for power exported to the grid, whereas a VOST calculates the “value” of solar and pays the consumer that rate for all solar produced by the rooftop system. However, the true “value” of solar is highly open to interpretation.

Net metering has been adopted by 43 states, but the city of Austin, Texas implemented a VOST in October 2012, and Minnesota has gone the VOST route as well.

But TASC — and by extension, SolarCity and Sunrun — is intent on keeping the VOST model from spreading. TASC notes that as a result of the filing of an Information Letter Request (ILR) with the IRS by an “Austin homeowner,” the IRS will now “formally review VOSTs and their impact on taxpayers.”

According to a redacted version of the ILR, the taxpayer is requesting a ruling that addresses this hypothetical situation: 

“If, under a program established by Austin’s retail public electric utility company, he sells all energy generated by the solar energy property to the utility and, in exchange for the sale, the utility makes payments to him in the form of utility bill credits; and (b) if such payments from the utility are includable in his taxable income.”

TASC suggests, “Under a VOST, solar customers cannot use the power generated by their solar systems. Instead, they must sell all the power their solar systems produce to the utility at a price set by the utility (and often reevaluated on an annual basis). Meanwhile, they must continue to purchase all the electricity they need from the utility just like a homeowner without solar. Utilities support VOSTs over the widely effective net metering policy.”

TASC and other NEM proponents cite a 2013 brief from law firm Skadden, Arps, Slate, Meagher & Flom which claims that VOSTs jeopardize homeowners’ ability to claim the 30 percent federal Investment Tax Credit (ITC). The brief also claims that VOSTs could increase homeowners’ income taxes because VOST payments would be considered to be income. For example, an average-size PV system at the residence of an Austin homeowner in a a median-income tax bracket would incur approximately $250 per year in income taxes because of the VOST, according to Bryan Miller, co-founder of TASC.

“VOST schemes expose unassuming homeowners to thousands of dollars in additional taxes,” he contends.

Miller, a Sunrun employee as well as a leader of TASC, told GTM that a VOST is a “front-of-the-meter” scheme and repeated his claim that utilities are using the VOST as a “Trojan horse” to “eliminate rooftop solar” and “take away choice and competition.” Miller says the VOST “expands monopolies by forcing homeowners to sell all their power to the utility.”    

Miller said that the utilities’ “frontal assaults” on NEM “don’t work” and that they’ve lost that argument — so the VOST is a way for the utility to “eliminate competition.” Miller claims that the utilities are “well aware of the tax issues.”

According to Miller, “The IRS will clarify this and stop the VOST movement in its tracks.” He added that the Austin City Council can solve this problem tomorrow by reinstating NEM as an option for the customer.

As Herman Trabish has reported, the opinion from Skadden, Arps, Slate, Meagher & Flom partners Sean Shimamoto and Emily Lam suggests that a VOST could result in tax problems for solar owners.

“The payments received by a taxpayer for the sale of electricity under feed-in tariffs appear to fall squarely within the definition of taxable gross income,” wrote Shimamoto and Lam.

“The terms of FITs provide for the sale by the taxpayer to the utility of all electricity generated by the taxpayer’s residential solar system,” they added in the memorandum filed by TASC.  “In exchange, the utility compensates the taxpayer with either cash or a credit on the taxpayer’s utility bill. Although the taxpayer may also purchase electricity from the utility, under FITs, the two transactions are separate and distinct. The proceeds from the taxpayer’s sale of electricity to the utility therefore likely constitute gross income.”

This conclusion, they added, “is supported by Senate Bill 1225.” The federal bill specifically excludes the possibility of “any gain from the sale or exchange to the electrical grid” being counted as taxable income.

As we reported previously, Shimamoto and Lam also concluded the Arizona Public Service “bill credit” proposal would put solar owners at risk of losing the 30 percent federal ITC. The system owner has to use “at least 80 percent of the electricity generated” for non-business purposes to qualify for the personal ITC, the attorneys wrote. “Under FITs, 100 percent of the electricity generated is sold to the utility, and thus 100 percent of the use of the residential solar system is for business use.”

Shimamoto and Lam are correct about the income tax issue, agreed a New York tax attorney familiar with renewables tax issues who asked not to be named in the article by Trabish. The APS “bill credit” is, at best, “not helpful” to rooftop solar owners and could result in taxation if a system’s output is high enough. The source disagreed about the 30 percent ITC being at risk, however. If sale of the electricity to the utility makes system owners ineligible for the residential ITC, he said, they would then be eligible for the 30 percent business tax credit. And that would make them eligible for the benefits of accelerated depreciation as well, he added.

Karl Rábago is a co-creator of the first value-of-solar tariff. He told GTM yesterday that “utility rate-making is a full contact sport.”

Much of this comes down to language. Is the VOST transaction “a sale?” Rábago was careful to craft the language in the Austin VOST to refer to “credits,” never using “sales” or “cash.” He points out that “Miller is wrong on his facts — VOST is a behind-the-meter system and there is no forced sale.” 

He told GTM that a VOST is “just a different way of calculating the credit. It’s still a credit on the bill. Your net bill is the same as it would be for NEM. It’s still a netting process that happens on the customer side of the transaction. It’s not a sale.” He suggested that “With NEM systems that close out the year with a cash payment, under the TASC reasoning, the utility has to issue every NEM customer a 1099 for the sale. A 1099 is not required with VOST because there is no sale and no income.”

Rábago told Midwest Energy News, “The big piece of the value-of-solar concept that is embodied in this law is that if you fairly compensate customers for the value of the solar energy, you can have a fair conversation about charging customers for the distribution [and] for the utility services they still use.” He added, “It just happens to be that solar is the most charismatic and most rapidly declining in technology cost. It’s the one that sees the headlines, but behind the value of solar are the value of storage, the value of savings (energy efficiency and demand response), the value of security, and the value of smartness.”

The VOST veteran concludes: “This is inviting the IRS to rule with some precision that sales incidental to use are all sales, which we’ve kind of gotten away with with NEM. Asking for a specific ruling is a little shortsighted.”

Thad Kurowski, SolarCity’s director of policy and electricity markets, noted in an email obtained by GTM, “It will be interesting to see what the IRS determines.”

A lawyer close to this decision said yesterday, “The Skadden memo is the best thinking we have on this — and it appears the VOST income will be taxable.” Another tax attorney said, “They’re likely to rule that it’s income.”

Rábago suggested that if the IRS determines that it is not taxable income, “then the TPO companies could get comfortable with a VOST.”

In any case, the decision is now in the hands of the IRS.

Photo Credit: IRS and Solar Valuation/shutterstock

greentech mediaGreentech Media (GTM) produces industry-leading news, research, and conferences in the business-to-business greentech market. Our coverage areas include solar, smart grid, energy efficiency, wind, and other non-incumbent energy markets. For more information, visit: greentechmedia.com , follow us on twitter: @greentechmedia, or like us on Facebook: facebook.com/greentechmedia.

Eric Wesoff's picture

Thank Eric for the Post!

Energy Central contributors share their experience and insights for the benefit of other Members (like you). Please show them your appreciation by leaving a comment, 'liking' this post, or following this Member.

Discussions

Bob Meinetz's picture
Bob Meinetz on September 30, 2014

Job001, utilities are not worried about significant numbers of customers going fully off line because it’s not practical, nor are they worried about having to declare power generated by the sun as “income” (utilities are required to buy it, so it’s an expense they can write off).

They’re not even particularly worried about the solar industry attempting to portray solar as being more valuable than it is, because most utilities are entitled by law to simply raise their rates to cover the cost. Who should be worrying is anyone who can’t afford their own solar array and will end up cross-subsidizing richer people who can.

Whether it’s education, security, or energy, the nation’s poorest end up footing the bill with these free market privatization schemes.

Nathan Wilson's picture
Nathan Wilson on September 30, 2014

The IRS has another reason not to treat solar energy FITs as income: if they do, then system owners could presumable write-off the cost of their systems as business expenses (as an annual depreciation).  That could leave the government providing another huge subsidy (in the form of reduced taxes to owners of expensive older systems) if the utility rates change, and decrease FITs (e.g. to track falling costs for new systems), so that many older systems would generate losses instead of profits for their owners.

I suspect they’ll opt to keep things simple, and pretend the grid is a big, free battery, and allow FITs to offset electricity purchases within a tax year, tax free. (Although tracking separate sub-hourly prices for electricity sales and purchases would more closely resemble the way the IRS handles stock trades.)

Bob Meinetz's picture
Bob Meinetz on October 1, 2014

Job001, you have a fundamental misunderstanding of not only how utilities work in the U.S., but the exhorbitant subsidy structure behind solar power, without which the industry would not exist.

The American utility industry is the most highly regulated in the country, and its executives are the lowest paid. In many respects, the “industry” is a government agency with enough financial incentives to drive innovation while keeping a tight lid on profits. In California, utilities are prevented by state law from raising their rates more than 10% above costs. There is no other business in the country with this level of oversight and restriction on profitability.

Despite all the hype, solar power generates less than 1% of U.S. electricity. The only reason solar costs are declining 11%/year is the government is handing out 30% of solar installation costs to everyone who wants it, whether they live in sunny Arizona or rainy Seattle. On a per-kilowatthour basis, that’s twice the subsidy which is offered the nuclear industry, which nationwide generates seventeen times as much carbon-free power. It’s power which is available day or night, rain or shine, and doesn’t require fossil fuel backup. It costs one-third less than solar and, contrary to popular belief, is even safer.

So I have to laugh at your portrayal of utilities as powerful monoliths bent on crushing solar innovation under their heavy boots. That’s a fantasy invented by Greenpeace and solar entrepreneurs, who are rushing to capitalize on an obscene federal windfall before the cash runs out.

Have you considered that the reason “utility guy blogs show no cognizance of learning curve progress with wind, storage, fuel cells, or solar” might be because none of those technologies are proving adequate for either providing power or addressing climate change?

John NIchols's picture
John NIchols on October 1, 2014

If the solar crowd doesn’t like VOST, I think they should pay imputed income tax on the economic benefit associated with using the grid for free under net-metering.  Alternatively, they can pay the same rate to distribute electricity to the grid as non-distributed owners pay to receive electricity from the grid.  After all, solar and wind add next to nothing to capacity value.  Thus, they offer no societal benefits. 

Jeffrey Miller's picture
Jeffrey Miller on October 1, 2014

I hope the IRS doesn’t decide to pretend that the grid is a big free battery, although that certainly is how many solar promoters look at it. As I’m sure you agree, we’re not going to end up with a good (carbon free, reliable, affordable) energy mix if we set our economic incentives around the absurd idea that the grid is free (and can be used freely, just as long as you sell as much as you buy) and that the value of power is a constant through time independent of supply and demand.

 It seems clear from both an economic and social fairness point of view that all retail customers should pay the same (ideally ‘time of use’) rates for the energy they consume regardless of whether, at other times, they might be selling energy to the grid. It also seems clear that when they sell, they should receive ‘time of sale’ wholesale rates for the energy and not retail rates + transmission costs + distribution costs + taxes like they do under net metering. Solar providers should help to pay for the grid that they use to buy and sell electricity and not try to dump the cost for this socially valuable infrastructure on everyone else.

 The IRS should tax income from the sale of energy – what possible justification could they have for not doing so? Does the IRS allow me to net out the vegetables I sell in the summer from my garden with the vegetables I buy in the winter from the supermarket? Obviously not. They should also allow people with solar systems to take depreciation charges. To avoid this turning into a huge unintended tax subsidy, they should only allow depreciation on that fraction of the solar capital costs that go toward generating the power they sell to the grid rather than use for their own consumption. The IRS does something exactly analogous when you rent out a room in your house. You need to report the income, but can take deduct charges against the costs of renting. You can’t deduct the costs of running your whole house, just that the fraction that is associated with renting the room.

 

This comment may come off as anti-solar. It’s not meant that way. I’m not anti-solar, I’m anti bad economic incentives.

Nathan Wilson's picture
Nathan Wilson on October 1, 2014

Agreed.  The grid-as-a-free-battery issue also has implications for storage.  A renewables-rich grid will most likely need a lot of energy storage, and that storage can’t exist in a free market if the rules insist that the variable electricity going into storage has the same value as the dispatchable electricity coming out.

I also think electric bills should include a monthly connection fee that is independent of the amount of electricity bought or sold.

Nathan Wilson's picture
Nathan Wilson on October 1, 2014

“…the government is handing out 30% of solar installation costs..that’s twice the subsidy which is offered the nuclear industry…”

I’m afraid that much of residential solar is much more heavily subsidized than that.  As described in this TEC article by Severin Borenstein, net metering effectively allows owners of home solar to sell power into the grid at retail prices, and for high volume users, the top rate in California can be extreme:

The Southern California Edison site says that their top rate is 32¢/kWh.  Treating 2/3 of this as a subsidy, this is more than an order of magnitude more than the new nuclear plants in Georgia and South Carolina are getting.  The federal 30% solar investment tax credit (subsidy) is in addition to this.

As reported here-2012here-2013 and here-2014,  California installed 1.0 GW of PV in 2012, 2.6 GW  in 2013 and is expected to complete 3.2 GW for 2014; of this 200, 400, and 600 MWatts, respectively is residential.  So this net-metering subsidy is worth billions of dollars in California.

Nathan Wilson's picture
Nathan Wilson on October 2, 2014

So how do you justify a grid maintenance charge of only $10/month?  The Southern California Edison site says that electricity generation is only 56% of customer’s bill; the rest is distribution, transmission, programs for the poor, etc.  I don’t see any reason why net-metering customers should be able to opt out of these other costs.  The total grid costs don’t depend on how much net-electricity is used in a month, it depends only on the peak hour demand, and that occurs around sunset, when PV (without storage) is of no benefit. 

` `

Get Published - Build a Following

The Energy Central Power Industry Network is based on one core idea - power industry professionals helping each other and advancing the industry by sharing and learning from each other.

If you have an experience or insight to share or have learned something from a conference or seminar, your peers and colleagues on Energy Central want to hear about it. It's also easy to share a link to an article you've liked or an industry resource that you think would be helpful.

                 Learn more about posting on Energy Central »