Clarifying That an Integral Analysis Is Not Required for Storage Devices to Be a Part of Solar Energy Property Under Regulation Section 1.48-9(d)(3), Through Irs Published Guidance

• Publication year: 2019
• Author: By Shirley Chin & Wolfram Pohl

Clarifying That an Integral Analysis Is Not Required for Storage Devices to Be a Part of Solar Energy Property Under Regulation Section 1.48-9(d)(3), Through IRS Published Guidance or Expanding the Definition of Solar Energy Property Under Regulation Section 1.48-9(d)(1) to Include "Equipment And Materials . . . That Use Solar Energy Directly to Generate Electricity or That Store the Solar Energy so Generated" (IRC Section 48, Treasury Regulations Section 1.48-9(d)(1) and (3))

By Shirley Chin¹ & Wolfram Pohl^2,3

EXECUTIVE SUMMARY

Section 48(a)(3)(A)(i)⁴ defines the term "energy property" to include any property that "uses solar energy to generate electricity." Regulation Section 1.48-9(d)(1) clarifies that the term "energy property includes 'solar energy property' [which, in turn,] includes any equipment and materials (and those parts relating to the functioning of such equipment) that use solar energy directly to generate electricity." Regulation Section 1.48-9(d)(3) further clarifies that "storage devices, power conditioning equipment, transfer equipment, and parts related to the functioning of those items" are part of "solar energy property." Because the regulations provide that a storage device needs to be "parts related to the functioning of" (referred to herein as the "part of" requirement) the qualifying solar property in order to qualify for the ITC, tax practitioners generally view the regulations as requiring the storage system to be considered "integral" to the solar property in order to qualify for the ITC. This requirement leaves open many questions as to what specific fact patterns will cause a storage device to qualify for the ITC. Without clear guidance, tax practitioners, developers, investors, and other financing parties are hesitant to pursue storage projects where there is a risk that the storage device will not qualify for the ITC. Uncertainty over how to satisfy the "integral" requirement is hindering the financing of storage devices associated with solar energy systems.

This paper argues that "solar energy property" under Regulation Section 1.48-9(d)(1) is too narrowly defined and should be revised to include not only those equipment, materials and parts "that use solar energy directly to generate electricity" but also those equipment, materials and parts that store the solar energy so generated. Specifically, the following italicized phrase should be added to Regulation Section 1.48-9(d)(1) to read: "energy property includes 'solar energy property' [which, in turn,] includes any equipment and materials (and those parts relating to the functioning of such equipment) that use solar energy directly to generate electricity or that store the solar energy so generated."

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Alternatively, the IRS could release interim guidance on the specific questions relating to storage described below.

DISCUSSION

I. THE TAX PROBLEM: CURRENT DEFINITION OF SOLAR ENERGY PROPERTY UNDER THE TREASURY REGULATIONS IMPOSES AN ARTIFICIAL STRAITJACKET ON SOLAR ENERGY PROPERTY AND CREATES UNNECESSARY REQUIREMENTS, THE RESULT OF WHICH IS CONTRARY TO LONGSTANDING U.S. SECURITY, ENERGY, CLIMATE AND TAX POLICIES TO PROMOTE THE RENEWABLE SECTOR

Section 48(a) provides for an energy investment tax credit ("ITC") equal to 30 percent of the cost basis of qualifying energy property placed in service during the taxable year. Section 48(a)(3)(A)(i) defines the term "energy property" to include any property that "uses solar energy to generate electricity."

Regulation Section 1.48-9(d)(1)⁵ clarifies that the term "energy property includes 'solar energy property' [which, in turn,] includes any equipment and materials (and those parts relating to the functioning of such equipment) that use solar energy directly to generate electricity."

Regulation Section 1.48-9(d)(3) further clarifies that "storage devices, power conditioning equipment, transfer equipment, and parts related to the functioning of those items" are part of "solar energy property."⁶

Under the definition currently set forth in Treasury Regulations Section 1.48-9(d)(3), storage devices are part of "solar energy property" and not a solar energy property in its own right.

Many tax practitioners interpret being part of as possibly requiring an integral analysis, which might require the practitioner to consider such factors as whether the storage device is placed in service at the same time, by the same owner, and located physically close to the solar energy property, in order to be part of the solar energy property (although, as discussed below, there are two private letter rulings ("PLR") which provide some comfort on the timing question). Also, in addition to storing energy from solar energy property, storage devices can be used for various purposes (such as peak-shaving, time of use offset, grid management, or limiting curtailment), and the use of a storage device for these other purposes can raise a question as to whether the storage device is integral to the solar energy property. These requirements are not explicitly stated in the Code or the Treasury Regulations and should not be required.⁷

The uncertainty created by whether an integral analysis is required by Treasury Regulations Section 1.48-9(d)(3) is hampering the financing to enable the market deployment of storage devices; with only a very short runway remaining on the ITC—the full 30 percent tax credit is available only for projects beginning construction by the end of 2019—it is crucial that Congress and Treasury clarify the requirements of Treasury Regulations Section 1.48-9(d)(3) and 1.48-9(d)(1) in order for market participants to efficiently scale the storage market, driving down the cost of storage devices so every homeowner with a solar system can rely on a storage device long after sunset. In so doing, we unleash market forces to realize the full potential of solar energy, we further long-standing U.S. policy to promote energy independence and climate friendly policies, and we fulfill Congressional vision underlying the enactment and the repeated renewal of Section 48.

II. THE CHALLENGES TO SCALING SOLAR ENERGY PROPERTIES AND THE SOLUTIONS AND EFFORTS PROVIDED BY DIFFERENT BRANCHES OF THE U.S. GOVERNMENT

There are two main challenges to meaningfully scaling solar energy for homeowner use. First, there is a financing issue. Residential solar is a capital and labor intensive business. Solar energy system prices vary state-by-state and according to size, and each system is bespoke and individually-designed base on factors such as roof tilt, roof materials, sun exposure, and shading. The average price for a system was approximately $25,000 per 10 kW rooftop installation in 2015.⁸ Operational and maintenance costs also accompany the system during its useful life.⁹ Given the high up-front cost, the slow rate of return over the long useful life of the system, and the intimidation of purchasing an electrical system with maintenance needs, few Americans can afford, or dare to, purchase a solar energy system outright. The 2014 median U.S. household income was $53,657, placing solar well beyond the reach of most Americans.¹⁰

This first challenge—solar financing—has largely been met through the efforts of the U.S. Congress and the U.S. Department of Energy. As discussed below, Congress has provided consistent and long-standing support for investment tax credits through repeated renewals and extensions of the ITC. The U.S. Department of Energy, through the SunShot Initiative, the National Renewable Energy Lab ("NREL") and the Lawrence Berkeley National Laboratory have provided the thought leadership in tracking, structuring, and

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analyzing the renewable market. The results of these market-oriented incentives are private sectors innovation—such as third-party owned solar lease products with no money down contracts to attract customers.

As a result of the governmental support, U.S. residential solar has demonstrated impressive growth rates over the last ten years. Total solar generation has increased over fifty times since 2005, and residential solar installed capacity has grown seventy seven times.¹¹ From 2014 to 2015, the sector witnessed capacity growth over 60 percent.¹²

The second challenge is the intermittency of energy flows generated by solar energy and the need for storage. Solar energy is cyclical and unpredictable; for the average homeowner, the sun shines when he or she is at work during the day and does not utilize substantial household energy, so the solar energy produced during the day is either wasted or sold back to the grid in jurisdictions where net metering is available. However when that same homeowner comes back home in the early evening and begins using the multitude of electronic devices which power American evening routines (including lights, televisions, kitchen appliances, washers/dryers, etc.), the sun is setting and unavailable to satisfy household energy demand. Many in today's renewables industry believe that for solar (and other intermittent resources, such as wind) energy to realize its full potential, solar panels will need to be accompanied with battery storage devices in order to align energy needs and energy consumption for the average household. When the U.S. Department of Energy launched the SunShot Initiative in 2011, its focus was on solar installation, not storage devices, because the technology, price and design for storage devices were not ready for mass production at that time. Yet in less than six years, by 2017, the U.S. Department of Energy, Office of Energy Efficiency & Renewable Energy, would declare the SunShot goal—enabling solar electricity costs to be competitive with conventionally generated electricity by 2020—a success, and three years ahead of schedule.¹³ The Department of Energy proudly declared that while "solar energy comprised less than 0.1 percent of the U.S. electricity supply with an installed capacity of just 3 gigawatts" in 2011, as of 2017, "solar now...