Kaplan Kirsch & Rockwell and Harris Miller Miller & Hanson Inc.
In our December 10th webinar, “Airport Solar Webinar: How to Maximize the Financial Benefits of Renewable Energy and Sustainability”,1 we discussed the federal Investment Tax Credit (ITC) and how the ITC can drive the economics of a solar project located on airport property. In response to inquiries from webinar participants, we would like to explain further how the ITC—and its phase down after 2016—creates near-term opportunities for airport proprietors interested in third party solar development.
The ITC is a credit against federal income tax otherwise due based on the eligible cost of qualifying assets. Qualifying solar equipment 2 earns a credit equal to 30% of expenditures (with no maximum value to the credit) for units placed in service by December 31, 2016. Solar projects placed in service starting in 2017 will only be eligible for a phased down credit equal to 10% of expenditures. Qualifying solar equipment is also eligible for accelerated depreciation.3 This means that there is currently a window of opportunity for solar developers, and airport proprietors desiring to engage in an airport-based solar project with a tax-paying solar developer, that will be expiring in less than two years.
The ITC, which has been the primary public policy tool used by the federal government to catalyze the growth of the solar market, is generally available only to the “tax owner” 4 of the equipment. Solar equipment that is owned or leased by governmental or tax-exempt entities is ineligible for the credit and for accelerated depreciation. Therefore, in order for most airport-based solar projects to take advantage of the current 30% value of the ITC, such projects need to be developed by tax-paying third party owners. As discussed in the webinar, leases by airports to third party solar developers have been the most successful model for airports to share in the financial and environmental benefits associated with solar. In addition to the airport proprietor acting as a lessor under a Lease Agreement, the airport proprietor might also be a power purchaser under a Power Purchase Agreement.5 Airport proprietors that have worked with third party developers to install solar facilities at their airports include those in Boston, Denver, Indianapolis, Newark, Phoenix, and San Diego.
However, the ITC benefits are not the only factor determining why the cumulative solar capacity added to the grid in 2015 and 2016 is expected to double existing solar capacity. It is estimated by some analysts that over the next two years there will be as much as 13 gigawatts of utility-scale solar added to the grid.6 As explained in the webinar, the reason is that the cost of solar photovoltaic equipment has dropped significantly in recent years. As a result, ITC-assisted solar power from PV projects is now competitive with more traditional sources for generating electric power. Of course, some of that competitiveness will be diminished when the ITC value is phased down to 10% for projects placed in service on or after January 1, 2017.
The timeline for the development of a solar project—including internal planning, permitting, contracting, and construction—can easily take more than one year. Our solar-development clients and other industry contacts indicate that most projects that are not past the internal planning stage by July 2015 are not likely going to be able to capture the full value of the ITC when it expires at the end of 2016. Of course, that depends upon the size, complexity and jurisdiction of the proposed project. Therefore, in order to take advantage of the ITC at the current 30% value, it is recommended that a project should commence development during the first half of 2015.7
Please let us know if we can answer your questions about developing an airport-based solar project. We will be participating at these upcoming airport conferences:
Kaplan Kirsch & Rockwell and HMMH are working together to provide our airport and energy clients with a coordinated resource for technical and legal support for their renewable energy development efforts. Kaplan Kirsch & Rockwell is a national infrastructure and land use law firm with offices in Denver, Colorado and Washington, DC. HMMH is an international leader in airport and airspace planning and climate and energy solutions, with offices in Burlington, Massachusetts, Sacramento, California, and Herndon, Virginia.
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, Kaplan Kirsch & Rockwell LLP would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.
1 Download the audio and video of the webinar.
2 Eligible solar equipment includes equipment that uses solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat. Eligible project costs include only the cost of tangible personal property integral to the production or storage of solar energy, and therefore do not include interconnection or distribution equipment, or most building or site improvements. At least 80% of project components must be new to be qualified for ITC eligibility.
3 Eligible solar equipment also qualifies for accelerated depreciation, where the eligible cost basis is reduced by half of any claimed ITC. At the current 30% level, the cost basis would be reduced by 15% and the remaining 85% would be depreciated using bonus depreciation up to the maximum bonus rate. Under the federal Modified Accelerated Cost-Recovery System (MACRS), tax owners may recover investments in eligible solar equipment through depreciation deductions for the remaining tax basis over an accelerated five-year recovery period.
4 Various factors are relevant to determining “tax ownership”. The Internal Revenue Service has published guidelines for distinguishing a lease from a secured financing that are helpful in determining which party will be treated as owner/lessor vs. lender/lessee (see Rev. Proc. 2001-28). It is clear that title does not control the determination. Rather, the IRS will generally focus on which party has the economic benefit of any upside and which party has the economic burden of downside in any given transaction.
5 It should be noted that a Power Purchase Agreement with governmental or tax-exempt energy purchasers (as is the case of most airport proprietors) must qualify as a service agreement and not as a lease or financing arrangement. The Tax Code specifies factors for distinguishing a lease from an agreement to provide services, and those factors focus on determining who has economic benefits and burdens similar to “tax ownership” test. (See note 4.)
6 “The One Chart That Shows Why 2014 Was a Breakthrough Year for Utility-Scale Solar in America”, Greentech Media (December 11, 2014).
7 It is worth noting that, in certain markets, long-term solar pricing may still be attractive even with a 10% ITC.