Archive for Tax Incentives

US Senate tax bill complicates renewable energy

Author: Keith MartinPublication | December 2, 2017

The US Senate made two last-minute changes in a massive tax-cut bill yesterday that could prove harmful to renewable energy.

Senate leaders rewrote the bill December 1 in a scramble to win over Republican Senators and make the math work under Senate budget rules before the bill passed early on December 2.

Corporate minimum tax

One change would move most US corporations from the regular corporate income tax to the alternative minimum tax.

Not all tax credits can be used against the minimum tax, and depreciation must be calculated more slowly.

The US has essentially two corporate income taxes. US companies calculate regular taxes at a 35% rate and then compare the amount to what they would have to pay at a 20% rate on a broader tax base. They pay whichever amount is greater.

Both the Senate and House tax bills reduce the regular corporate tax rate to 20%.

If both the regular tax rate and the minimum tax rate are 20%, then corporations will have to pay minimum taxes.

Investment tax credits can be used against minimum taxes. Investment tax credits are claimed on solar projects.

Production tax credits can be used to reduce minimum taxes for only the first four years after a project is originally placed in service. Production tax credits run today on the first 10 years of electricity output from a new project. They are claimed on wind, geothermal, biomass, landfill gas, incremental hydroelectric and ocean energy projects. The change would have the effect of truncating the credit period to four years. It would apply to existing projects.

This may cause developers to switch to investment tax credits on new projects. Developers have the option currently on any new project that qualifies for production tax credits to claim an investment tax credit instead when the project is first put in service.

Production tax credits are also being claimed today on refined coal facilities, but all such facilities had to be in service by December 2011 to qualify. The bill would cut short any such remaining tax credits.

The Senate bill would not reduce the corporate tax rate to 20% until 2019. The House bill would reduce it starting in 2018. Thus, 2018 tax credits would not be affected if the rate change is delayed until 2019.

Depreciation is taken slightly more slowly under the minimum tax. Wind and solar projects are depreciated for regular tax purposes largely over five years using the 200% declining-balance method. The 150% declining-balance method must be used for minimum tax purposes.

BEAT

The Senate also made last-minute changes to a base erosion and anti-abuse tax, called BEAT, that the renewable energy industry fears could reduce the supply of tax equity.

The Senate bill would impose a base erosion tax on large companies that use cross-border payments to reduce their US tax bills below 10% of US income after adding back cross-border payments to affiliates. An example of such a payment is interest on an intercompany loan or a payment to a back office in India for services.

Large corporations making such payments would have to compare A to B. A is 10% of income with cross-border payments added back. B is the corporation’s regular tax liability reduced by the tax credits to which it is entitled. If B is less than A, then the US government will collect the difference as a tax.

At the last minute, the Senate increased the tax rate in A on banks and securities dealers to 11%. The banks appear to have traded a higher tax rate for being spared from having to add back into income cross-border “qualified derivative payments” to affiliates.

The base erosion tax may make banks and other large tax equity investors reluctant to finance projects in ways that entitle them to tax credits, since every dollar of tax credit has the potential to create a gap between A and B. The BEAT calculation would have to be made at the end of each year. A tax equity investor will not know when it invests whether it will receive the tax credits on which it is counting. Tax credits in existing tax equity financings could also be at risk. The tax would take effect in 2018.

Next steps

The House passed a different version of the bill on November 16.

The House would eliminate the corporate minimum tax as did the original Senate bill. The Senate had to restore the minimum tax to plug a $40 billion revenue gap.

There is no base erosion tax in the House bill. It would impose a 20% excise tax on some cross-border payments instead.

These and other differences will have to be ironed out in negotiations between the two houses and then a single bill sent back to both houses for another vote. The House is expected to name “conferees” on Monday. Republican leaders are eager to finish work on the bill by December 22, the earliest date on which the new Senator elected in the Alabama special election could take his seat, for fear that any new Senator will vote against the bill. Congress will be under pressure from the Trump administration to move more quickly.

Keith  Martin

Keith Martin

Washington, DC

ITC Cliff

The potential loss of solar capacity is about equal to the total amount currently installed

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What will happen if the federal investment tax credit (ITC) so many solar developers depend on isn’t extended?

“If the investment tax credit is not extended, we see it as a disruption, not a death for the industry,” said Maddy Yozwiak, U.S. Power and RECs analyst  and co-author of the recently-released report, “How extending the investment tax credit would affect US solar build,” from Bloomberg New Energy Finance (BNEF).

“It will be a disruption that will take years to recover from, but the recovery is there. Long-term costs continue to improve,” Yozwiak added. “That doesn’t go away, even without the ITC.”

For now, the ITC is a 30% tax credit, but that is slated to change at the end of 2016, when it would drop to 10% for business investments in solar, and nothing for residential solar projects.

With that policy change, BNEF calculated that  the US can expect about 73 GW of solar PV to come online by year-end 2022. Build rates will fall from “an average of 8 GW per year from 2014-16 to 6 GW per year from 2017-22.”

The solar industry is lobbying hard for a five-year extension of the 30% business and personal ITC. If congress puts it in place by mid-2016, that would boost average build rates to about 10 GW per year from 2017-2022, the analysis concluded, amounting to an installed capacity of over 95 GW.

Given the success of the ITC and the value of solar, Yozwiak said, the real question “is whether it is worth causing the change after 2016, and havingdisruption at the scale we forecast it.”

Standard Solar CEO Tony Clifford agreed.

“There are going to be changes in 2017, likely very dramatic changes,”  Clifford said. “But we shouldn’t spend time arguing about how big this cliff will be. We should be working to make sure we don’t go over it.”

Solar facility that could power 500 Marin homes

By Janis Mara, Marin IJ

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Roy Phillips, president of REP Energy, leads a tour of an abandoned quarry on June 9 in Novato. His company, REP Energy, wants to build a solar energy facility at the site near the McIsaac Dairy west of Novato. The quarry, no longer in use, was mined for the mineral serpentine, a source of asbestos. (Frankie Frost — Marin Independent Journal)

A proposed solar facility just outside Novato that could generate enough electricity to power more than 500 Marin homes is up for approval at the Marin Planning Commission meeting Monday.

Located on the isolated grounds of a former rock quarry, the solar farm would have 4,272 solar panels up to 6 and a half feet high on 11.5 acres of the 952-acre quarry. The $6 million project would generate 1.98 megawatts of electricity, delivered to Marin Clean Energy via nearby power lines.

The quarry was once mined for serpentine rock, which contains asbestos. Quarry operations shut down in 1990.

Installations like the solar project “are a good way to use formerly disturbed locations” like the quarry, said Andrew Campbell, the executive director of the Energy Institute at Haas, a research and teaching facility at the University of California at Berkeley.

Campbell said the proposed location also was beneficial because it is close to the people who would use the energy.

“Having the generation close to an area where consumers are also has benefits, since some power is lost when it is transmitted over long distances,” the executive director said.

The site is west of the city of Novato, east of Stafford Lake and about a mile north of Novato Boulevard. It is not visible from the road. County staff has recommended that the permit be granted, with some qualifications.

Crawford Cooley and Beverly Potter, who own the former quarry, would lease the land to San Rafael-based Danlin Solar, along with San Rafael-based REP Energy. Those two companies would own and build the solar installation.

“That’s a pretty typical arrangement,” Campbell said.

“Solar is a green energy source, no doubt about it. There is no pollution or greenhouse gas emitted at the place where you are generating the power,” the executive director said.

“This would be quite a win if it happened. The people who are very concerned about seeing beautiful agricultural land taken up with solar panels have a valid point. You’d hate to lose a lot of natural Marin. That makes this an ideal project because it’s sitting in an abandoned quarry essentially on bare rock,” said Bob Spofford, vice president of Sustainable San Rafael.

“Solar is in some ways the most ideal of all alternative energy because it doesn’t make noise, it doesn’t pollute, it produces power close to the time when it’s most needed, and it does not harm wildlife,” said Spofford.

Addressing Spofford’s last point, “Photovoltaic panels definitely do not kill birds,” said Michael D. McGehee, a Stanford University associate professor and a senior fellow at the university’s Precourt Institute for Energy. McGehee teaches classes on solar cells. Wind turbines such as the ones at Altamont do pose a danger to avian life, perhaps causing some to confuse the effects of this alternative energy source with those of solar, McGehee said.

No letters of opposition to the project had been received by the staff by Friday.

The state Office of Mines Reclamation and the Department of Public works oversaw the reclamation of the land since the 1990s, according to the county staff report. The project is exempt from the California Environmental Quality Act because it will not cause environmental impacts, the staff report said.

“My job is to work with clients to help them avoid environmental impacts,” said Dana Riggs, a project biologist with San Rafael-based WRA Environmental Consultants. “We planned it (the project) in a manner to avoid impacts on sensitive resources including species and habitat,” Riggs said.

If the permit is granted, construction could begin as early as mid-August and wrap up by November, according to Frank Gobar of Danlin Solar.