The increased demand for energy from renewable sources and the resulting growth of the renewable energy industry has led to the development of an increasing body of law designed to address issues specific to this sector. Recently, questions have come to the forefront regarding the treatment of technology developed in order to store energy produced from renewable sources.
Certain limitations still exist that inhibit the industry’s growth despite the advances made in renewable energy technology and the best efforts of the sector’s governmental and non-profit advocates. Primary among these limitations is the difficulty of storing the energy produced through renewable sources for later use with the goal of providing a consistent source of power that may be drawn on as demand requires. Development of and advances in energy storage technology may help pave the way for renewable energy to serve as the primary source of electricity for a population center, rather than merely bolstering the supply produced through traditional power plants. As a result, energy producers and lawmakers alike have taken a keen interest in the tax treatment of energy storage devices, particularly with respect to their eligibility for certain benefits or subsidies available in connection with property used in the actual generation of energy from renewable sources (and not merely its storage). Increasingly, tax law, while initially behind the times, is beginning to catch up with the technology. However, questions still remain.
In general, renewable energy producers may choose between the Production Tax Credit (PTC), which provides a tax credit based on the amount of energy produced, and the Investment Tax Credit (ITC), which provides for a tax credit equal to 30% of the basis in an energy property (defined here) in the year it is placed into service.1 An energy property is deemed to be “placed into service” in the taxable year during which either (i) depreciation begins or (ii) the property is in a state of readiness and availability for its function.2 In the case of energy storage devices, where energy is stored rather than produced, taxpayers historically have only claimed the ITC, the applicability of which is contemplated in the regulations with respect to both wind and solar and subsequent Private Letter Rulings.3
As a result, the primary questions with respect to the availability of tax credits for batteries and other energy storage property have not centered on eligibility or which credit to use, but rather how the credits could be utilized with respect to functioning energy property that is retrofitted with energy storage capabilities. Specifically, how do we reconcile the fact that a battery is considered to be “qualified energy property,” and therefore eligible for the ITC under the applicable Treasury Regulations, with the fact that it is not clearly integral to the function, the production and transmission of energy, of said energy property. The situation becomes even more unclear in cases where preexisting energy property that already produces and transmits energy is retrofitted with energy storage devices. How does one argue that the battery is “integral” to this energy property that was clearly functioning without storage capabilities? Could a battery by itself be separately creditable from the energy property to which it is attached, and, as a result, could a taxpayer take advantage of the ITC with respect to a retrofitted battery even if already electing to utilize the PTC with respect to the preexisting energy property? Fortunately, the IRS has favorably ruled with respect to the first two questions, leading to optimism, but not certainty, with respect to the third. In order to further consider that question, it is helpful to review the rationale of the IRS in addressing the first two inquiries, particularly its detailed consideration of the benefit provided by energy storage relative to the energy property.
What Has Been Illuminated
With respect to the first question, in PLR 201142005, a taxpayer who was in the process of constructing a utility-scale wind project sought guidance from the IRS regarding the eligibility of energy storage equipment which was to be included in the project for the ITC. As described in PLR 201142005, the device would charge when wind speeds were high and discharge when they fell. According to the IRS, the storing of electricity for use at a later time is a classic use of a battery and therefore the energy storage device in question fell directly under the applicable Treasury Regulations and was fully eligible for the ITC. Perhaps tellingly, the IRS also discussed at some length the way in which the wind project was being built in order to supply energy to an electric grid that served nearby municipalities. In order to be selected to sell energy to this grid, the project needed not only the ability to meet forecasted demand, but also the ability to respond to the real time demand of an electric grid in a similar manner to nonrenewable energy power plants (an capability for which it would be paid additional compensation). In other words, in order for the wind project to fulfill this requirement, a battery was indeed necessary and, therefore, the storage device could be considered integral to the energy project in the particular instance. The IRS has mirrored this sentiment with respect to solar property. In PLR 201444025, the IRS similarly found that storage devices that were included in solar energy property were necessary in order for the solar energy property in question to optimally function.
How does this rationale apply in situations where existing renewable energy property, which clearly was functioning in the absence of a battery, is retrofitted with a storage device? In PLR 201208035, similar to the situation outlined above, a utility-scale wind project was seeking to sell energy to an electric grid. Like other wind energy producers, this project suffered from transmission constraints when there were low wind speeds, which limited its ability to act as the electric supplier to nearby municipalities. The developer retroactively added a storage facility to solve this issue. Not only would the addition of the storage device solve the transmission problem, it also would allow the producer to shift the time of the transmission from off-peak hours (when most of the wind energy was produced) to peak hours when the grid would pay a higher price for the electricity. Finally, it also would allow the wind farm to have more control over the flow of its electricity, which the grid required of its producers. Using rationale identical to that which it applied to the instances where batteries were included in the energy property from the outset, the IRS found that the storage devices were fully eligible for the ITC in the year such devices were included. Again, although the property was functioning prior to the addition of the battery, it was not functioning optimally and its shortcomings could decrease its earnings or result in it losing the opportunity to act as an energy supplier to the grid. As a result, the battery was necessary for the energy property to be fully functioning and to fulfill its intended purpose of supplying energy to the electric grid in question.
PLR 201308005 dealt with this issue as it related to solar energy. The taxpayer in this case was a large solar developer that leased constructed solar energy property to be attached to residences and businesses. The developer wanted to start including batteries on its solar energy projects so it could store energy that it produced during daylight hours and provide it during peak usage, the nighttime hours when the sun is not shining. The IRS specified four benefits the solar energy property would obtain from including batteries, including that the battery would allow (i) the energy property to store electricity from daylight that it then could then use during off-peak hours and then sell back any unused electricity to the grid, (ii) renewable energy producers to decrease the amount of energy it provides to the grid in situations where the amount produced fluctuates rapidly (as is required by most electric grids) and store the excess energy for later use rather than having it go to waste, (iii) for a stable flow of electricity to the grid (which is a particular difficulty for wind and solar developers) by allowing the grids to pull electricity from the battery when it needs and shed it to the battery when necessary, and (iv) the customer to limit its peak usage by pulling stored electricity to use during those times when electricity would cost more. Again, although the batteries were not included in the solar property originally, and are therefore obviously not technically integral to the functioning of the property, the IRS stressed the ways in which the addition of the battery would provide the energy project with the ability to function optimally.
Where We Remain in the Dark
While the guidance issued by the IRS clarifies the eligibility of storage facilities with respect to wind and solar projects which utilized the ITC, it remains unclear whether a retrofitted battery could take advantage of the ITC, even if the preexisting energy property is already utilizing the PTC. Specifically, is the energy storage device itself separately creditable or is it deriving its ability to take the credit because of the energy property to which it is attached? If the latter, would it then be possible for the battery to utilize the ITC if the device to which it is attached is not utilizing (or not eligible for) that tax credit? This is a particularly important issue for onshore wind producers who often derive a greater benefit from the PTC than the ITC.
There is some reason to believe that this is the case. As discussed above, the IRS has allowed a taxpayer to utilize the ITC with respect to a retrofitted battery in a later year despite the fact that the taxpayer utilized the credit in connection with the existing energy property in the year that the existing energy property was placed into service. This treatment by the IRS lends credence to the idea that the battery itself is separately creditable and not merely viewed as an extension of the preexisting energy property. However, until the IRS issues guidance where this issue is explicitly dealt with, onshore wind developers (and other energy producers that seek to utilize the PTC) will remain in the dark on whether they can retroactively add batteries and other storage technology and still be able to take advantage of the ITC with respect to that property.
2 Treas. Reg. 1.46-3(d).
3 See Treas. Reg. 1.48-9(d)(3); 1.48-9(e)(1); PLR 201142005; PLR 201208035; 201308005; 201444025.