Title: Tax Issues for Co-location of Energy Storage with Solar or Wind
Speakers: Christine Byrnes and Anne Loomis
Christine Byrnes (00:07):
Thanks so much for joining me, Anne.
Anne Loomis (00:10):
Yeah, I’m happy to be here.
Christine Byrnes (00:12):
Yeah. We’re gonna, I think, spend a few minutes talking about everybody’s favorite topic, Inflation Reduction Act, and specifically some of the issues surrounding battery storage. Pre-IRA, batteries could only claim ITC if they were co-located with an ITC eligible wind or solar project. How has passage of the IRA changed that?
Anne Loomis (00:43):
Yeah, so prior to the IRA, energy storage was only eligible if it was considered energy property that was solar property, or a few years ago wind property that was eligible for ITC. And that was a result of treasury regulations that defined solar energy property or wind energy property to include storage. But storage didn’t qualify in and of itself. So that meant that it was treated as dual purpose property under the regulations and it was subject to these grid charging restrictions. It made it very impractical to use the battery the way that you really would like to with the project, and still qualify for the full ITC. The Inflation Reduction Act was great news for standalone storage, and for storage that was connected with generation because now it qualifies independently for the investment tax credit as energy storage technology. It’s a new definition within the code.
It’s very broad. So a lot of different technologies should fit within that definition. And because it’s qualifying by itself, it’s not part of these treasury regulations. There are no more grid charging restrictions, which opens up a lot more flexibility in how you use your battery.
Christine Byrnes (01:57):
So in terms of projects that were placed in service prior to 2023, where you have a co-located battery project that was subject to the grid charging restrictions, does the passage of the IRA eliminate those restrictions or is the battery project still bound by the pre-IRA rules?
Anne Loomis (02:28):
For projects placed in service prior to 2023, they are still under the old law. So they only qualify as solar property or as wind property, which means they are still subject to those treasury regulations with the grid charging restrictions. They are not independently qualifying as energy property.
Christine Byrnes (02:50):
And how has the market reacted to this new energy storage ITC?
Anne Loomis (02:58):
For co-located storage with generation, it’s been a little bit more of a mixed reaction. There’s a no double dip role that says that energy property doesn’t include anything that’s part of a qualified facility that takes a PTC. And so that has created some ambiguity about whether you could have a project that includes a battery claiming ITC while you have solar that is taking the PTC.
Christine Byrnes (03:28):
So how does that affect projects where you have a co-located battery with a solar project? Can the solar project elect to take PTCs and does the storage project take ITCs?
Anne Loomis (03:45):
So our view is that we think that you can do that, that the generation side, the solar side can qualify as a qualified facility that’s eligible for PTC, while the battery is qualifying as energy storage technology that is energy property eligible for ITC. And those two things can happen separate from each other. And we think that view is supported by the legislative history, where there’s actually a statement in the congressional record when they pass the IRA, from the Ways and Means Committee addressing the fact that they intended when they wrote the legislation that a facility could have PTC on the generation side and ITC on the storage side.
Christine Byrnes (04:35):
And my understanding of that is when the legislation came out, the industry was a little unsure because the language isn’t explicitly clear, right?
Anne Loomis (04:53):
That’s right.
Christine Byrnes (04:54):
That you can have a solar project take the PTCs with the battery electing to take ITCs. So the industry kind of came together and asked that that point be clarified in the congressional record, which it was. So with that clarification, is there still a question that you have to have the battery follow whatever election that the solar project makes, that you can’t have this split between PTC, ITC?
Anne Loomis (05:35):
There is still a bit of a question because legislative history is very informative and helpful in understanding the process of how the legislation came to be. But it is not necessarily authoritative, particularly in various courts should the question get put through a litigation context. And so I think for some in the industry the legislative history helps to answer the question. But what would help even more is having some guidance from the IRS, particularly if that guidance is consistent with the legislative history, which we would expect that it likely will be. And once that guidance out there clarifying the ambiguity that people see within the no double dip rule in the statute, then we should have a clear path forward.
Christine Byrnes (06:29):
So we’ve just been talking about this ambiguity with co-located batteries, whether or not you can take PTC on the solar, ITC on the battery. Does that same ambiguity apply to technology neutral ITC?
Anne Loomis (06:49):
No, it does not. We actually have a different statutory structure when we get to the clean energy technology neutral ITC that starts for projects placed in service after 2024. For that, the no double dip rule applies to qualified facilities. And the way qualified facility is defined, it is actually completely independent of energy storage technology. So an energy storage technology qualifies for that tech neutral credit with its own category, not as a qualified facility. And so that means that the no double dip rule does not create the same type of ambiguity and it’s clearer there that you can do the PTC on the generation and the ITC on the storage, which is another reason why we think that our current structure with our current ITC and current PTC is meant to be applied the same way as our future technology neutral ITC and PTC.
Christine Byrnes (07:52):
So we have this statement in the legislative history that indicates that the intention is to be able to split PTC and ITC between the generation project and the battery. When do we think the IRS will clarify this point for the industry?
Anne Loomis (08:19):
We expect that they are trying to issue a lot of guidance this year on the IRA. There are certainly many questions that need to be answered and no indication officially of what that timing is, or in what order they’re going to answer questions. But we do expect that as they are able to answer questions, they will be issuing guidance, formally and informally and really trying to help taxpayers as much as they can this year.
Christine Byrnes (08:48):
So the ambiguity we’ve been talking about between claiming PTC on the generation asset and ITC on the battery is just one of many ambiguities with the IRA. So what parties are doing in the documentation stage is building in the flexibility to react to guidance once it’s issued, but not baking in, let’s say, the adders from day one. So basically the parties will have the flexibility to transfer the tax credits or claim certain adders, but only once guidance is received. On the question of splitting PTCs versus ITCs between the project and the battery, you can build that flexibility into the documents, but at a certain point you have to make a decision and go with it. Just because the modeling and all of the financial aspects of the deal depend on whether or not you’re claiming a PTC or an ITC.
So it’s an interesting question, but I think that a lot of tax equity investors will want the firm guidance before they maybe go down that path.
Anne Loomis (10:28):
I think you’re right. I agree with you. It’s nice to maintain flexibility for as long as you can. And then hopefully we have the guidance soon that will allow those documents to get firmed up. Well, thank you so much for joining me for this discussion today.
Christine Byrnes (10:44):
Yeah. Happy to be here. Thanks for having me.
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