Why “Passive Activities” May Be Clean Energy’s Biggest Hurdle

Date: 12 Mar 2012 | posted in: Energy, Energy Self Reliant States | 0 Facebooktwitterredditmail

If you care about the future of the American renewable energy industry, you need to learn what the Internal Revenue Service (IRS) calls “passive activities.”  Because these important rules mean that as long as the U.S. relies on the tax … Read More

Refundable Federal Tax Credit Could Remove Barrier to Community Wind

Date: 8 Mar 2012 | posted in: Energy, Energy Self Reliant States | 1 Facebooktwitterredditmail

Update 3/9/12:Turns out I would be a lousy tax attorney and that the form of tax credit does not affect the passive loss rules. What if a small change in federal renewable energy policy could make community wind development easier? … Read More

Listen: John Farrell Talks Renewable Energy Incentives and Boulder’s Municipal Energy Effort with Tom McKinnon on KGNU

Date: 15 Dec 2011 | posted in: Energy, Energy Self Reliant States, Media Coverage | 0 Facebooktwitterredditmail

In this short interview on KGNU’s science show – How on Earth– with Tom McKinnon, we talk about: the problems presented for local ownership of energy resources when federal incentives use the tax code, the trouble for clean energy when … Read More

Federal Tax Credits Handcuff Clean Energy Development

Date: 5 Dec 2011 | posted in: Energy, Energy Self Reliant States | 2 Facebooktwitterredditmail

Clean energy advocates should cast aside their worries about increasing Republican scrutiny of energy subsidies.  The clean energy industry’s foolish reliance on tax incentives has already handcuffed its expansion. Unlike the leading nations in the clean energy race, the United … Read More

Public Solar Often a No-Go With Fed’s Favor for Solar Tax Incentives

Date: 3 Nov 2011 | posted in: Energy, Energy Self Reliant States | 3 Facebooktwitterredditmail

You’re a city manager hoping to cut electricity costs at sewage treatment plant, a school administrator looking to power schools with solar, or a state park official needing an off-grid solar array for a remote ranger station. 

But unlike any private home or business, you can’t get 50% off using the federal tax incentives for solar (a 30% tax credit and ~20% from accelerated depreciation).  That’s because the federal government’s energy policies all use the tax code, and your organization is tax exempt.

What about a public-private partnership?  The private entity puts up some money and gets the tax benefits, and the public entity only has to pay half.  It can work, if you’re lucky, although a good portion of those tax benefits (half, in recent years) pass through to that private entity for their return on investment, not changing the price of your solar array.

But the legal niceties also matter.  One common option is a lease, where the public entity leases the solar panels from the private one.  One big problem: the IRS doesn’t allow the private entity to collect the 30% tax credit if they lease to a public entity. 

The cash grant program in lieu of the tax credit allowed leasing, but it expires in December.  Furthermore, it disallowed depreciation of the solar array, equivalent to 20% off.

Another clever arrangement is a power purchase agreement (PPA), where the third-party owns the solar array and simply sells the power to the school or city.  The third-party can claim both the tax credit and depreciation, but if you live in a state with a regulated utility market (and no retail competition), your utility might slap you with a lawsuit for violating their right to exclusive retail service.

The following chart illustrates the financial challenge for public entities created by using the tax code to support solar. 

Chart of public sector options for solar purchase and federal incentives lost

Even with a lot of legal creativity, the public sector is often stymied in accessing both federal solar incentives.  The result is that private sector solar projects always get a lower cost of solar, because the public sector can only access federal incentives through (costly) partnerships with third parties.

Using the tax code for solar (instead of cash grants, production-based incentives, or CLEAN Contracts) is bad for the solar business, bad for taxpayers and bad for ratepayers.  It’s time to change course, and let the public sector go solar, too.

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Change in Federal Incentive Enables Cooperative to Own Wind Project

Date: 19 May 2011 | posted in: Energy, Energy Self Reliant States | 7 Facebooktwitterredditmail

The use of tax credits as the primary federal incentive for renewable energy has often stymied cities, counties, and cooperatives from constructing and owning their own wind farm.  But the temporary cash grant in lieu of the tax credit (expiring this December) has opened the door for one South Dakota cooperative and over 600 local investors:

The Crow Lake Wind Project, built by electric cooperative Basin Electric subsidiary PrairieWinds SD 1, Inc., is located just east of Chamberlain, S.D. With 150 MW of the project’s 162 MW owned by Basin Electric subsidiary PrairieWinds SD1, Inc., the facility has taken over the title of being the largest wind project in the U.S. owned solely by a cooperative, according to Basin Electric. [emphasis added]

The project is also distinguished for having local investors in addition to ownership by the local cooperative:

The entire project consists of 108 GE 1.5-MW turbines, 100 of which are owned and operated by PrairieWinds. A group of local community investors called the South Dakota Wind Partners owns seven of the turbines, and one turbine has been sold to the Mitchell Technical Institute (MTI), to be used as part of the school’s wind turbine technology program, which launched in 2009. PrairieWinds, which constructed the seven turbines now owned by the South Dakota Wind Partners, will also operate them. [emphasis added]

The key to success was the limited-time opportunity for the cooperative to access the federal incentive for wind power:

The opportunity became viable following passage of 2009’s American Recovery and Reinvestment Act, which created a tax grant option allowing small investors to access government incentives and tax benefits, making public wind ownership possible. Creating the Wind Partners for that purpose were Basin Electric member East River Electric Power Cooperative, the South Dakota Farm Bureau Federation, the South Dakota Farmers Union and the South Dakota Corn Utilization Council…

“This development model created opportunity for small local investors to have direct local ownership in wind energy and access the tax benefits previously reserved for large equity investors,” said Jeff Nelson, general manager at East River Electric. “It offers a model for others to participate in community-based wind projects.”

The South Dakota Wind Partners consist of over 600 South Dakota investors, some who host the project’s 7 turbines and many who do not.  Investors bought shares in increments of $15,000 (combinations of debt and equity).  Brian Minish, who manages the project for the South Dakota Wind Partners, hopes to see future opportunities for this kind of development.  “There’s a lot of political benefit in letting local people become investors in the project,” Minish said in an interview this afternoon, “local ownership can help reduce opposition to wind power projects.”

Photo credit: Flickr user tinney

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Big Banks Inflate Solar Project Value to Boost Tax Credits

Date: 13 May 2011 | posted in: Energy, Energy Self Reliant States | 2 Facebooktwitterredditmail

Solar leasing has offered thousands of homeowners a “no money down” route to go solar, broadening participation in the distributed generation revolution.  Unfortunately, this revolution has been co-opted by high finance.  Big banks have been able to write off millions in taxes by over-reporting the cost of financed solar PV projects in what may be the country’s next banking scandal.

In a phone conversation last month, Jigar Shah of Carbon War Room (formerly chief of solar-as-a-service company SunEdison) disclosed that while solar leasing companies can install residential solar for between $4.00 and $5.00 per Watt, they routinely claim federal tax credits on the “fair market value,” a price nearly twice as high.  A solar tax lawyer confirmed this practice and that it also applies to the program providing cash grants in lieu of the federal Investment Tax Credit.  “The equipment may be financed in a way that allows the solar company to calculate Treasury cash grants on the fair market value of the systems rather than their cost,” he wrote to me this week.

The practice boost banks’ bottom line at the expense of federal taxpayers and unnecessarily increases the cost of public subsidies for renewable energy. 

In California, for example, 15 percent of small-scale PV projects completed in 2010 were “third party owned” – code words for a solar leasing arrangement.  If banks used “fair market value” rather than the actual system cost for the tax credits on those systems, the inflated tax credits could have totaled as much as $30 million instead of the $18 million justified by the actual project costs. 

That’s just the tip of the iceberg.  This $12 million difference only reflects about one-third of the U.S. residential solar PV market.  In other words, the over-payment to banks financing solar leasing could be as much as $36 million in 2010 alone.  It’s no wonder U.S. Bank just announced a new commitment to finance $200 million of residential solar PV.

The problem isn’t unknown to the federal government.  The solar tax lawyer I spoke to noted that “Treasury has been pushing back on some fair market value claims as too high.” 

Treasury should push a little harder.  Why should big banks get a bigger tax credit for the same size solar PV array than a homeowner?  

The lone bright spot is that the growth in solar leasing has slowed somewhat in the past two years.  Previously, solar leasing may have been the only way for some individuals to capture the federal solar tax credits, if they didn’t have enough tax liability.  As an alternative, big banks would provide up-front financing in exchange for the tax credits (and the opportunity to inflate their value).  We’ve previously discussed why tax credits make for lousy renewable energy policy.  In 2009 and 2010, however, changes to the federal tax credits allowed people to take a cash grant instead, reducing the need for third party ownership.  That ends in December. 

Long before that, Treasury should shut down the practice of over-estimating project costs with “fair market value.”  Solar energy incentives have built the American solar market and helped drive down the cost of solar.  Banks shouldn’t be allowed to subvert these public incentives.

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Cash Incentives for Renewables Cost Half as Much as Tax Credits

Date: 30 Mar 2011 | posted in: Energy, Energy Self Reliant States | 0 Facebooktwitterredditmail

Using the tax code to support wind and solar power significantly increases their cost.  I wrote about this problem last year because project developers were selling their federal tax credits to third parties at 50 to 70 cents on the dollar.

Along these lines, the Bipartisan Policy Center released a study [last week] showing that simply handing cash to clean energy developers is twice — yes, twice — as effective as supporting them through tax credits. [emphasis added]

The problem is that all but the largest renewable energy developers or buyers can’t capture the full value of the federal tax credits.  So, prior to the economic collapse, a number of enterprising investment banks (and others) started buying up tax credits to reduce their tax bills. 

This was great for big banks, but lousy for taxpayers and electric ratepayers.  In fact, using tax credits instead of cash grants for wind and solar projects increased the cost per kilowatt-hour produced by 18 and 27 percent, respectively.  (Wait, why not 50 percent?  Because even though the tax credit is only half as good as cash, the cash payment only covers up to 30 percent of a wind or solar project’s costs.  So cash in lieu of tax credits can only improve that portion of a project’s finances.)

Seen another way, if the $4 billion spent on renewable tax incentives in 2007 had been given as cash instead, it could have leveraged 3,400 MW of additional wind power and 52 MW of additional solar power.  This would have increased incremental installed wind capacity in 2007 by 64%, and installed solar capacity by 25%. 

The increased costs come from higher prices that utilities pay for wind and solar power (and pass on to consumers) as well as the the cost to taxpayers of passing half of the tax credit value to investment bank shareholders instead of wind and solar projects.

The problem isn’t solved, but has simply been postponed.

When the economy tanked, so did profits (and tax liability) for big banks.  Wind and solar producers had no one to buy their tax credits and the entire industry was in danger of collapsing.  The adjacent chart illustrates the idiocy of relying on the tax code for energy policy.

Congress stepped in with a temporary fix, allowing project developers to receive a cash grant in lieu of the tax credit.  The temporary cash grant (currently extended through 2011) kept the wind and solar industry running during the recession and has saved taxpayers and ratepayers billions of dollars. 

It’s also helped level the playing field, allowing for local ownership of wind and solar projects, rather than requiring complex tax equity partnerships.  It’s meant more revenue from wind and solar staying in the local community.  And this means a larger, stronger constituency for renewable energy.

The cash grant option will expire at the end of 2011, but hopefully the climate hawks and fiscal hawks in Congress will take note: we can support wind and solar at half the price with smarter policy.

Hat tip to David Roberts at Grist for the study link.

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