Tax equity moves into the utility mainstream for renewables

This article comes from law firm Holland & Knight LLP and is authored by Emily W. Streett.

The 30% investment tax credit for solar facilities continues to attract tax equity investors into the market for solar facilities, but it’s not just for independent power producers and developers anymore – now mainstream utilities have a path to save their customers 30% or more on the cost of solar power.

For the first time, a regulated electric utility using the tax equity financing model obtained Federal Energy Regulatory Commission (FERC) and state Public Utilities Commission (PUC) approval – setting a useful legal precedent but also signaling that the road is clear for typically conservative electric utilities to reap the benefits of this approach. Liberty Utilities LLC, Letter Order, Docket No. ER17-299-000 (Jan. 31, 2017); Cal. Pub. Util. Comm’n Decision No. 16-01-021. Five FERC approvals were needed, including the precedent-setting approval under Section 205 of the Federal Power Act for affiliate sales of power to the utility under a power purchase agreement (PPA) with the partnership entity (Luning Energy LLC) owned by the utility and a tax equity investor.

The utility demonstrated that the competitive solicitation process met FERC’s rules against affiliate abuse and supplied evidence that the PPA pricing was comparable with those in relevant markets. Similarly, the California Public Utility Commission’s approval of the transaction was reportedly the first time that regulator has authorized a utility to partner with an unrelated investor to reap the benefits of the 30% tax credit.

This development suggests that traditional utilities considering tax-favored investments (such as solar projects) will be more likely to investigate tax equity as a potential financing vehicle for their project.