On March 2, 2018, the Internal Revenue Service (“IRS”) issued Private Letter Ruling 201809003 (the “PLR”) advising a homeowner that an energy storage retrofit of a residential solar energy system was eligible for the residential solar tax credit under Section 25D of the Internal Revenue Code (the “Code”). Not only is the PLR promising for homeowners who want to reap the benefits of adding storage devices to their solar energy systems, but it also could point the way towards the IRS's reaching a similar conclusion regarding eligibility for the Investment Tax Credit (“ITC”) under Section 48 of the Code for an energy storage retrofit of commercial solar projects. Together with the addition of financial incentives for pairing storage devices with solar projects under the Massachusetts SMART Program and Federal Energy Regulatory Commission (“FERC”) Order 841, which requires ISO New England to accommodate storage devices in its market rules and mechanisms, the PLR forms part of a promising trend for storage paired with solar projects.
PLR 201809003 Allows Tax Credit for Residential Solar Energy Storage Retrofit
The homeowner who received the PLR owned a residential solar energy system that had been installed the year before and for which the homeowner had received credit under Section 25D of the Code. The homeowner was contemplating an energy storage retrofit and sought guidance from the IRS as to whether the battery would be considered a “qualified solar electric property expenditure,” and, if so, whether it would still be eligible for the residential solar tax credit if it was installed a year after the original solar energy system. The IRS answered both questions in the affirmative, and thus concluded that the homeowner could receive the credit for the full cost of the battery storage device. However, regarding the first question, the IRS noted that “100% of the energy used by the battery must be derived from the sun” in order to qualify for the residential credit. The IRS opined that that was the case given that the homeowner, through the use of a monitoring and control device, was able to prevent the battery from storing electricity from the grid and thus ensure that all the electricity came from the solar energy system. On the second question, the IRS stated that “[e]arlier installations of qualifying property do not affect the availability of the credit for qualifying property in later years,” and therefore the homeowner could claim the tax credit for the storage device the year it was installed.
Potential Impacts for Commercial Solar Energy Storage Retrofit
It seems likely that the IRS’s treatment of an energy storage retrofit would apply in the ITC context as well. While the language of Section 25D and Section 48(a)(1) are not perfectly parallel, both state that an energy storage device is eligible for a tax credit under the Code the year it becomes operational and neither explicitly limits that credit to the year that any related renewable energy generation equipment itself claimed the applicable credit. Accordingly, there appears to be a strong likelihood that energy storage equipment would be eligible for the ITC even if installed as part of a retrofit of a solar energy facility that is already operational and already the subject of an ITC claim.
It is important to note that, unlike in the residential context, commercial storage devices may not have to derive 100% of their stored electricity from solar energy. In Private Letter Ruling 1308005, which was issued to an owner of commercial solar energy systems contemplating utilizing battery storage, the IRS stated that batteries attached to solar energy systems on commercial property need only receive a minimum of 75% of their electricity from solar energy to qualify for the ITC. However, the IRS also warned that the value of the ITC would be adjusted based on the relative amount of energy stored from the grid versus the system and would be subject to strict recapture policies if the percentage from the renewable energy system fell below the threshold. Owners can ensure that their storage device remains eligible for the ITC by managing the source of electricity stored on the device using monitoring and control software, as the IRS suggested to the homeowner in PLR 201809003.
What This Could Mean in an Evolving Energy Market
Given the strong likelihood that the ITC is available for an energy storage retrofit of an existing renewable energy facility, there may be inviting opportunities for augmenting existing solar energy facilities with storage, all the more so in light of an energy market that is evolving to allow for greater monetization of the value that storage alone and storage paired with solar can provide. For example, pursuant to FERC Order 841, ISO-NE is planning to implement on April 1, 2019 new market rules for the participation of energy storage in the forward capacity market, the provision of ancillary services, and the markets for all other services that storage is capable of providing, all of which will be unrolled in the next few years. Meanwhile, the Massachusetts Department of Energy Resources (“DOER”) has finalized its Guideline on Energy Storage in connection with the SMART Program and, in its D.P.U. 17-146 docket, the Massachusetts Department of Public Utilities is finalizing rules regarding ownership of the capacity rights for solar paired with storage (which may or may not adopt a compromise proposal developed jointly by multiple stakeholders and submitted by DOER). In addition, DOER is charged with implementing a Clean Peak Energy Standard (“CPS”) that would allow qualifying energy storage equipment owners to generate and sell an additional certificate for delivering energy during certain peak hours. While it has set the initial requirement at 0% for 2019 (based mostly on lack of eligible resources), DOER will be conducting a stakeholder process to more fully develop and implement this requirement this year. The decisions reached by regulators within the next year or two will continue to add clarity regarding the use of storage devices, and may be an important factor in determining the size of a storage device or whether to include one in a solar project at all. Based on the PLR, developers may be wise to design commercial solar energy systems to be compatible with storage devices; not only will this allow them to take advantage of potentially favorable future conditions for storage, but it can also help them market and sell their projects to savvy buyers who may want the option of pairing storage with the system in the future.
FURTHER INFORMATION
For further information about these matters, please contact Brendan Beasley at bbeasley@klavenslawgroup.com or 617-502-6288 or Courtney Feeley Karp at cfeeleykarp@klavenslawgroup.com or 617-502-6284.
ACKNOWLEDGMENTS
We wish to acknowledge the valuable contributions of Ben Martin-McDonough in the research for and drafting of this article.
DISCLAIMER
This document, which may be considered advertising under the ethical rules of certain jurisdictions, is provided with the understanding that it does not constitute the rendering of legal advice or other professional advice by Klavens Law Group, P.C. or its attorneys. Please seek the services of a competent professional if you need legal or other professional assistance.
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