The tax equity investor invests to own only a portion of the production tax credits (PTCs) up front, since there is an unknown of the actual production levels of the wind farm. What does the project company do with the portion of the PTCs not sold up front? Are they generally sold to the same tax equity investor year after year, or is there some other way for the project to receive value for them?
In a typical wind tax equity partnership that follows the safe harbor in Revenue Procedure 2007-65, the tax equity investor is allocated 99 percent of the profit and loss (which is different from its right to distributable cash), determined using tax principles until the later of (a) when it achieves after-tax flip rate and (b) five years. That allocation of profit and loss brings with it the right to 99 percent of the PTCs. PTCs are generated for 10 years from the project’s placed-in-service date (i.e., when it starts operating). If the tax equity investor achieves its flip rate before that 10-year period is over, the tax equity investor’s allocation declines. The minimum revenue procedure permits the investor’s allocation can decline to 4.95% (i.e., 5 percent of 99 percent), but the exact level to which it declines is negotiated up front in the limited liability company agreement (LLCA).
Navigant Consulting on February 19 submitted a report, Solar Project Return Analysis for Third Party Owned Solar Systems, to the Arizona Public Service (APS). The thesis of the report is that residential solar developers are charging homeowners unnecessarily high rates given the extension of so-called bonus depreciation1 and Congress pushing out when the investment tax credit ratchets down from 30% to 10% by a number of years. The implication of that thesis would seem to be that if the solar companies accepted more reasonable after-tax returns they would be able to lower the rates charged to homeowners; then the homeowners could pay more to utilities for transmission and other infrastructure that they need access to when the sun is not shining while still paying less overall than customers who have not adopted solar.
Below are selected insights from the Infocast Wind Finance conference last week in San Diego.
First, as an indicator of the overall interest in wind finance, the conference had twice as many registrants as last year. The largest driver for that change is likely the extension of the production tax credit for projects that start construction before 2020.
Akin Gump partner, David Burton and Alfa Business Advisors partners, Vadim Ovchinnikov and Gintaras Sadauskas are hosting a seminar on Tax Equity Structuring, Financial Modeling and HLBV Accounting on Wednesday, February 24, 2016. This seminar will be a live presentation in the New York office of Akin Gump and will also be available as a webinar.
Arizona has enacted Arizona House Bill 2670 (adding Arizona Revised Statute 41-1520 and amending Arizona Revised Statutes 42-5063, 42-5159, 42-6012, 43-1083.04 and 43-1164.05), which includes taxpayer-friendly revisions to the state’s tax credit for investment in renewable energy facilities used for self-consumption (with such revisions now including defining “self-consumption” very broadly, as described below).
An article by David Burton and Richard Page analyzes a recent Tax Court opinion regarding the definition of a capital asset. The Tax Court case involved a real estate developer that sold its real estate and sought to treat the transaction as a sale of a capital asset, but the court held that it was the sale of an ordinary asset. The article discusses lessons from the case for renewable energy developers seeking to structure their exit strategies so as to realize capital gains. The article is available here.
On Friday, the IRS issued a heavily redacted Chief Counsel Advice (CCA) memorandum, which addresses the intersection of solar investment tax credit partnership flip transactions and the wind production tax credit partnership safe harbor in Revenue Procedure 2007-65. The CCA reaches two conclusions that are little more than stating the obvious.
First, the CCA concludes that Revenue Procedure 2007-65 does not apply to solar projects. Second, the CCA concludes that if a taxpayer wants to avail itself of the safe harbor in Revenue Procedure 2007-65, the taxpayer’s structure must meet all of the requirements of the safe harbor.1 Both of these conclusions from the CCA are entirely apparent in the second sentence of the Revenue Procedure: “This revenue procedure establishes the requirements (the Safe Harbor)… under which the [IRS] will respect the allocation of Section 45 wind energy production tax credits by partnerships . . . .”
Today, the IRS published Notice 2015-25 that provides guidance the wind power industry has been waiting for since the extension of the production tax credit (PTC) in December.
Notice 2015-25 provides that any wind power project (or other PTC-eligible project1) that started construction prior to 2015 has until the end of 2016 to be placed in service so as to avoid the application of either the “continuous construction” or the “continuous work” standards promulgated by the IRS in Notice 2013-29.2