Energy storage is hot topic in the renewable energy industry. Our colleague, Caileen Gamache, hosted the Infocast webinar “Energy Storage Contracting: Key Commercial and Legal Issues in a Developing Market” and had over 1100 participants! She shared with us the follow-up questions that the participants asked about the investment tax credit (ITC) available for batteries. Here are those questions and answers:

Question 1: Can storage be combined with other ITC-eligible renewable assets (e.g. hydropower, etc.) and qualify for the ITC?

Answer: The ITC is available for a qualifying battery that is installed as part of any type of renewable energy project that qualifies for investment tax credits. This would include storage combined with a hydropower plant if the hydro plant elected to claim the ITC rather than production tax credits.

There is a private letter ruling that supports adding storage to an operating project that qualified for the ITC in a previous year. See Priv. Ltr. Rul. 201208035 (storage added to an existing wind project where the owner elected to claimed the ITC in lieu of the production tax credit). However, there is no established standard on how old the facility can be when the storage is added. Further, a private letter ruling is not binding precedent, other than for the party that received the ruling.

Here is a link to an article regarding batteries and tax credits that gives a useful overview of the relevant criteria in determining whether a battery will qualify for the ITC: https://www.projectfinance.law/publications/batteries-and-tax-credits

Question 2: I heard the 30 percent ITC is no longer available that the credit is now 26 percent for 2020 and will continue to go down over the and going down further over the next two years. Is that true?

Answer: You are partially correct. The ITC would be 26 percent for any battery for a solar project for which construction has not yet begun and construction starts this year. If construction starts in 2021, the ITC will be 22 percent and after that it is permanently 10 percent. There is still a possibility of a battery for an incomplete solar project qualifying for the 30 percent ITC. That would be in the case of a battery for which construction started before the end of 2019 under the requirements of IRS Notice 2018-59, assuming it was placed in service before the end of 2023. There are generally two ways to start construction under the IRS Notice. One is to start physical construction of a significant nature and the other is to incur five percent of the total costs of the battery.

Question 3: Is it possible to qualify for a 30 percent ITC on the cost of a solar project and an associated battery energy storage system (BESS) with costs incurred solely for 2019 safe harbor modules, assuming the cost of the modules equals at least five percent of the combined cost of the solar project and the BESS?

Answer: There does not appear to be any technical reason that precludes the costs incurred for modules from counting towards start of construction of the BESS. Treasury Regulation Section 1.48-9(d)(3) expressly describes storage as being solar energy property just like any other type of solar energy generating equipment. However, for the costs to be looked at on a combined basis for purposes of the five percent safe harbor, the solar project and the BESS would need to be considered a “single” facility under Section 7.01(2)(a) of Notice 2018-59, which sets forth the list below of factors relevant to the determination. It should also be noted that the five percent test is applied against the tax basis in the project for purposes of claiming the ITC, which in many circumstances may be higher than the construction cost.

The following factors support treating the BESS and solar equipment as a single facility under the Notice. The factors are non-exclusive guidelines; with the ultimate determination being subject to the judgment of the IRS or a court.

1. Are the BESS and solar equipment owned by a single legal entity?
2. Are the BESS and solar equipment constructed on contiguous pieces of land?
3. Are the BESS and solar equipment described in a common power purchase agreement or agreements?
4. Do the BESS and the solar equipment have a common intertie?
5. Do the BESS and the solar equipment share a common substation?
6. Are the BESS and solar equipment described in one or more common environmental or other regulatory permits?
7. Are the BESS and solar equipment constructed pursuant to a single master construction contract?
8. Is the construction of the BESS and the solar equipment financed pursuant to the same loan agreement?

The application of the ITC rules to storage is a developing area of the tax law. It has been five years since the IRS announced in Notice 2015-70 its plan to overhaul the ITC rules generally and requested comments on the existing ITC regulations. The industry would welcome such guidance to include updated rules for storage. Comments to that effect were submitted by the Solar Energy Industry Association in 2016.