This article comes from McDermott Will & Emery and is authored by Heather Cooper Kevin Spencer Philip Tingle
Are you considering adding batteries to your existing renewable energy facility? You are not alone, and the question we are consistently asked is whether the battery is creditable. Don’t be too “shocked” (pun intended), but we think the answer is yes, and here is how we get there.
The Internal Revenue Code (IRC) provides two primary tax incentives for renewable energy facilities: the production tax credit (PTC) in IRC Section 45, and the investment tax credit (ITC) in IRC Section 48. These tax credits are available for wind and solar projects and other renewable energy generation resources.
The PTC is calculated based on the electricity produced from “qualified energy resources . . . at a qualified facility.” Qualified energy resources include wind, and a qualified facility includes a facility using wind to produce electricity. Similarly, the ITC is based on the cost of the “energy property” placed in service during the tax year. Energy property includes equipment “which uses solar energy to generate electricity.”
Battery = ITC
Taxpayers can elect to claim the ITC with respect to certain property that is otherwise eligible for the PTC. In particular, the ITC is available for property that is integral to a “qualified investment credit facility.” Qualified investment credit facility means a qualified facility (within the meaning of IRC Section 45) generating energy from certain types of renewable energy, including wind facilities, that is treated as energy property for purposes of the ITC. Accordingly, wind projects are creditable under the ITC in lieu of the PTC.
The Treasury Regulations confirm that storage devices associated with wind and solar projects are eligible for the ITC. For example, Treasury Regulation Section 1.48-9(d)(3) provides that “solar energy property” includes “storage devices, power conditioning equipment, transfer equipment, and parts related to the functioning of those items” (emphasis added). Similarly, Treasury Regulation Section 1.48-9(3)(1) provides that “wind energy property consists of a windmill, wind-driven generator, storage devices, power conditioning equipment, transfer equipment, and parts related to the functioning of those items” (emphasis added).
The Internal Revenue Service (IRS) has confirmed that batteries and other storage devices qualify for the ITC in both the wind and solar contexts. In IRS Private Letter Ruling 201142005 (Oct. 21, 2011), for example, the IRS ruled that a battery that delivered electricity from a wind farm to the grid was eligible for the ITC. Likewise, in IRS Private Letter Ruling 201208035 (Feb. 24, 2012), the IRS ruled that a battery was eligible for the ITC when it was added to an existing wind farm that had previously claimed the ITC and Section 1603 Cash Grants. In both of these rulings, the IRS ruled that the battery was “part of the ‘qualified property’ at a ‘qualified investment credit facility’ within the meaning of Section 48(a)(5).” Similarly, the IRS has ruled that batteries are eligible for the ITC when installed as part of a solar facility. While it is not entirely clear, it seems that the facilities in these rulings either claimed the ITC or the cash grant. As a result, it appears clear under current law that a battery storage system added to a pre-existing solar or wind facility that claimed the ITC or Section 1603 Cash Grant is eligible for the ITC.
A battery is separate and creditable
While it is clear a battery system is eligible for the ITC, is a battery system eligible for the ITC if the wind farm has elected to claim the PTC? Pursuant to Section 48(a)(5)(A), “any qualified property which is part of a qualified investment credit facility”—including a battery—would be eligible for the ITC. Section 48(a)(5)(B), however, provides that no credit shall be allowed under Section 45 for any taxable year with respect to any qualified investment credit facility. As a result, if a battery system qualifies as a separate qualified investment credit facility, then it should be eligible for the ITC without effect to PTC for the adjacent wind farm.
Under this approach, the battery is viewed as a separate energy facility and not as part of the original wind facility. Indeed, IRS Private Letter Ruling 201208035 confirms that a storage device can be eligible for the ITC and does not need to be installed at the same time as the original facility. Likewise, IRS Private Letter Ruling 201208035 provides that a battery is qualified property at a qualified investment credit facility, which supports the position that a battery system could be treated as a separate “qualified facility” for purposes of the tax credits.
In Revenue Ruling 94-31, the IRS ruled that a “qualified facility” for purposes of the PTC comprises a wind turbine, tower and supporting pad. The wind turbine consists of blades, a mechanical gearbox, generator, and a mechanism for control and communication. These items are necessary for the production of electricity from wind energy, and each turbine can be separately operated and metered and can produce electricity separately.
The ruling is silent on whether batteries are part of a qualified facility, but a battery system can also be separately operated, metered and store/discharge electricity. In fact, a battery system could properly be viewed as a “project within a project,” and could easily be viewed as a separate facility within the rationale of Revenue Ruling 94-31.
The regulations make it clear that “wind energy property” includes storage devices. If a battery is not a part of the turbine, tower, and pad facility, then the battery should be treated as a separate energy property and creditable under the ITC, regardless of whether the wind facility originally claimed the ITC or the PTC.
This position should not affect the original tax treatment of the facility. We come to the same conclusion even where a taxpayer installs the battery in the same year the wind farm is placed in service. Indeed, a taxpayer could maximize its tax incentives by claiming the PTC on the wind facility and the ITC on the battery. Moreover, nothing would preclude claiming the ITC on one wind facility and the PTC on another wind facility located within the same project.
Does distance matter?
There is no guidance on how far a battery can be placed from the energy property and still qualify for the ITC. Although Q&A 34 of the Section 1603 Grant FAQs suggests that certain equipment related to the operation of biomass equipment must be located on the site of the biomass facility, that rational does not seem relevant to the location of a battery. Despite the absence of guidance, where you place your battery should have no impact on its creditability. The regulations are clear that wind energy property includes batteries that store the energy generated by wind equipment. As long as the battery system remains integral to the wind project, it should not have to be located on contiguous property to the wind project. The guidance does not dictate where those batteries must be—they just have to be part of the system.
As battery technology improves, we anticipate that there will be more upgraded installations. The IRS is currently working on regulations that properly address issues related to battery systems. Clear guidance on the eligibility of battery systems added to PTC facilities would be helpful as the technology improves. Additional guidance that the location of the batteries is not necessarily determinative of ITC eligibility would also be helpful.
Filed Under: Energy storage