Intermittency is one of the largest issues impeding increased reliance on energy from utility-scale renewable energy generation sources such as wind and solar. Battery energy storage systems (“BESSs”) can alleviate concerns related to intermittency and will play a vital role in transitioning to primarily renewable energy sources. However, BESSs has not received the same tax incentives as wind and solar facilities. Rather, BESS deployment has benefited from tax incentives only when incorporated as part of a solar facility.
Federal Investment Tax Credit
The energy investment tax credit (ITC) has been vital to the growth of solar industry and has also aided in the deployment of energy storage in limited cases. The ITC available under Internal Revenue Code section 48 provides a deduction of a certain percentage of the costs of installing a solar energy system from an owner’s / investor’s federal taxes. The ITC generally applies to “solar energy property”, which is defined as including equipment that directly generates electricity from solar energy (i.e., “generation property”). The regulations clarify that solar energy property includes storage devices; however, the regulations also limit the availability of the ITC for storage devices under certain circumstances.
For utility scale projects, the ITC is available when a solar facility and a storage device such as a battery system have the same owner, are located on the same site, are installed at the same time, are placed in service on the same date, and are subject to the same off-take agreement. However, to the extent the facts and circumstance of a specific project do not meet the above criteria, the ITC may be curtailed with respect to the storage device. For example, the following factors may impact the availability of the ITC:
- Location of Storage – Installation of storage on the transmission side of the meter may not qualify for the ITC as the storage property may not be considered “generation property”.
- Charging – If storage is charged more than 25% from the grid or a utility other than a solar facility, then the ITC is not available. If 75% or more is charged by a solar facility, the energy storage will be treated as dual-use property and allowed a reduced ITC.
- Timing of Installation – A storage device installed one year after the original solar system qualifies for the ITC. However, it hasn’t been confirmed by the IRS if storage can be added to older solar arrays and still receive the ITC. This may limit the feasibility of adding energy storage to older facilities.
- Ownership of Solar and Energy Property – Identical owners for the solar facility and storage device weighs in favor of the ITC’s availability.
As described above, to take advantage of the ITC when financing a storage project, BESSs must be incorporated into a solar facility.
California property tax exemption
Similar to the ITC, storage may qualify for a property tax exemption if the BESS is part of a solar facility. Under Proposition 13, California has an acquisition value-based property tax system, rather than a market value-based system, which requires property tax to be levied on an annual basis based on the base year value of real property (including structures and affixed fixtures). The base year value is determined at the time of a change of ownership (e.g., an acquisition) or completion of new construction. Annual increases to the base year value of real property is limited to no more than 2 percent, except when property changes ownership or undergoes new construction.
However, voter-approved Proposition 7 provides an exclusion from property tax for “the construction or addition of any active solar energy system” (Cal. Const., art. XIII A, subd. (c)(1)). An “active solar energy system” is a system that uses solar energy in the production of electricity and includes storage devices, power conditioning equipment, transfer equipment, and parts related to the functioning of those items. However, only the equipment used up to, but not including, the stage of conveyance or use of the electricity is considered part of the active solar energy system and, therefore, eligible for the exclusion. In general, a utility-scale system’s final stage of power generation is typically a “step-up” transformer, “where the output voltage is increased to meet the transmission grid voltage requirements” (Guidelines for Active Solar Energy Systems for New Construction Exclusion). As such, storage deployed up to and including the final step-up transformer within the on-site substation would be considered part of the active solar energy system, and subject to the exclusion.
This may be changing soon. On the November 2020 ballot is a measure that would revise the California Constitution to allow for the reassessment of commercial and industrial real properties at least once every three years at the properties’ current fair market value, rather than the “base year” value as described above. Inadvertently, this measure would likely impact solar facilities which are often located on property zoned for commercial and industrial use. Anticipating this issue, S.B. 364, which would ensure that certain utility-scale solar energy systems remain exempt from property tax if voters approve the ballot measure, was adopted and sent to the Governor for approval. It remains unclear if this law, if approved, would survive court challenge.
As you can see, tax incentives spurring deployment of energy storage are limited in their application to development in tandem with a solar facility. The requirements to receive the tax incentives, however, may not align with advancement in technology and/or designs for energy storage.
Lysondra Ludwig is a tax law associate in Farella Braun + Martel’s San Francisco office.
The views and opinions expressed in this article are the author’s own, and do not necessarily reflect those held by pv magazine.
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