U.S. Court of Appeals Rules for the Government in Alta Wind Case

On July 27, 2018, the United States Court of Appeals (the “Court”) published its long awaited decision in the case of Alta Wind I Owner-Lessor C et al. v. United States, 2018 U.S. App. LEXIS 20931 (Fed. Cir. July 27, 2018) (“Alta”). The Court vacated and remanded the lower court decision, holding that allocation of the purchase price should be made using the residual method of Section 1060 of the Code.

In Alta, the developer (the “Seller”) of several wind farms (the “Projects”) sold the Projects to an investor (the “Buyer”) shortly before the Projects were placed into service and immediately leased the Projects back from the Buyer. Once the Projects had been placed in service, the Buyer applied for grants under Section 1603 of the American Recovery and Reinvestment Act of 2009 (“Section 1603 Grants”). The Section 1603 Grant program was created to increase investment in domestic, clean energy production. Under Section 1603, Treasury made payments in lieu of investment tax credits to eligible applicants for specified energy property used in a trade or business or for the production of income. The purpose of the 1603 payment was to reimburse eligible applicants for a portion of the cost of installing the specified energy property, including solar, wind, geothermal, biomass, fuel cells, hydropower, combined heat and power, landfill gas, municipal solid waste, and microturbine property. In the case of Alta, the Buyer treated virtually the entire purchase price as eligible basis for purposes of the Section 1603 Grants and claimed a total of over $700 million in Section 1603 Grants. In turn, Treasury reduced the amount of Section 1603 Grants to approximately $495 million, a reduction of over $206 million. Treasury based its determination based on the actual development and construction costs of eligible property, plus a “turn-key premium since the Projects were complete and ready to operate. The Buyers filed suit in the Court of Federal Claims (the “Claims Court”) to recover the $206 million shortfall and the government counterclaimed, stating that it had overpaid plaintiffs by $59 million.

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IRS Issues New Guidance on Beginning Construction Requirement For ITC

The IRS recently issued Notice 2018-59 (the “Notice”) which provides clarification to “beginning of construction” for taxpayers seeking to take advantage of the section 48 renewable electricity investment tax credit (ITC) for solar and other renewable energy facilities including qualified fuel cell, combined heat and power, qualified small wind and geothermal heat pump. The Notice largely follows the “begun construction” guidance that the IRS has previously issued for energy facilities that qualify for the production tax credit (PTC), discussed in our blog post here (“Notice 2016-31”), and the follow up guidance that clarifies the beginning construction safe harbor for those facilities, discussed in our blog post here (“Notice 2017-4”). 

Here, as in Notice 2016-31 and Notice 2017-4, taxpayers have two ways to establish start of construction. They can either show that they (i) began physical construction of a significant nature (the “Physical Work Test”), or (ii) incurred at least 5% of the total cost of the eligible facility (the “5% Safe Harbor”). The Physical Work Test does not consider the amount of work or its cost but only focuses on the nature of the work performed being significant. Both off-site (including the manufacture of components, mounting equipment, and support structures) and on-site work (including the installation of racks and other structures to affix PV panels, collectors, or solar cells) may be taken into account for purposes of demonstrating that physical work of a significant nature has begun. However, physical work that constitutes a preliminary activity, such as planning, designing, or researching, and physical work that produces components of energy property that are held in inventory do not qualify for the Physical Work Test. Once construction has begun or costs have been paid or incurred, taxpayers must make continuous progress towards completion to satisfy both the Physical Work Test and the 5% Safe Harbor (“Continuous Construction Requirement”). Continue reading this entry

DTE Energy and Consumers Energy Commit To Increase Renewable Portfolios

In an effort to stave off a grassroots movement to increase the State of Michigan’s renewable energy mandate, DTE Energy and Consumers Energy announced on May 19, 2018, that they have agreed to significantly increase their renewable energy portfolios.

Both DTE Energy and Consumers Energy, Michigan’s two largest investor-owned utilities, agreed to boost clean energy production/usage to at least 50% by 2030, which is expected to be implemented through 25% renewable energy and 25% energy efficiency gains.

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California Mandates Solar for Nearly All New Homes

In a historic move, California has become the first state in the country to require solar panels on nearly all new homes.

On May 9, 2018, the California Energy Commission (CEC) unanimously approved standards that, among other things, mandate the installation of solar energy systems on all new residences and major home renovations on buildings under three stories, starting on January 1, 2020. In the event the building is not suitable for a rooftop solar array, the standards require that the homes have access to community solar or offset energy usage through additional efficiency gains, while some homes may be exempt entirely.

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IRS Releases 2018 PTC Amounts

The IRS just published its annual notice that provides the inflation adjustment factors and reference prices used in determining the amount of the section 45 production tax credit (PTC) for the production of renewable energy and refined coal.

The credit for the production of renewable energy from wind, closed-loop biomass and geothermal facilities remains at 2.4 cents per kilowatt hour for 2018. The credit for the production of renewable energy from open-loop biomass, small irrigation power, landfill gas, trash, qualified hydropower, and marine and hydrokinetic facilities remains at 1.2 cents per kilowatt hour. The credit for the production of refined coal is $7.03 per ton for 2018 (up from $6.909 in 2017). No phase-outs apply to the credits for these energy resources in 2018.

A copy of the notice is available here.