2019 deloitte renewable energy seminar...−majority of analysis focuses on thermal •more...

2019 Deloitte Renewable Energy SeminarPowering a bright futureOctober 2-4, 2019

Brian Americus, Principal, Deloitte Tax LLPChris Chiriatti, Deloitte & Touche LLPGary Hecimovich, Partner, Deloitte Tax LLPJean-Denis Ncho Oguie, Deloitte & Touche LLP

Battery Storage Hot

Topics

Copyright © 2019 Deloitte Development LLC. All rights reserved. 32019 Deloitte Renewable Energy Seminar

Tax

ITC and PTC Landscape 5

ITC for Energy Storage 10

Notable PLRs 14

ITC Regulations 18

Common Concerns 19

Accounting

Overview 22

Offtake Arrangements 28

Developer/Generator Arrangements 31

Final Thoughts 34

Agenda


Source: Rocky Mountain Institute

Emerging use cases


Investment Tax Credit (“ITC”) andProduction Tax Credit (“PTC”)Current landscape


Type of Energy Property

Date Construction Begins Placed in Service Date ITC Amount

Solar

Before 1/1/2020 Before 1/1/2024 30%Calendar 2020 Before 1/1/24 26%Calendar 2021 Before 1/1/24 22%

Before 1/1/22 On or after 1/1/24 10%

On or after 1/1/22 Any 10%

Fiber-Optic Solar



On or after 1/1/22 N/A 0%

Qualified Fuel Cell




Investment Tax Credit—timing


Type of Energy Property

Date Construction Begins Placed in Service Date ITC Amount

Qualified Small Wind

Before 1/1/2020 Before 1/1/2024 30%

Calendar 2020 Before 1/1/24 26%

Calendar 2021 Before 1/1/24 22%



Qualified MicroturbineBefore 1/1/22 Any 10%


Combined Heat and Power (CHP)

Before 1/1/22 Any 10%


Geothermal Heat PumpBefore 1/1/22 Any 10%

On or After 1/1/22 N/A 0%

Geothermal Any Any 10%

Investment Tax Credit—timing


Qualified Resources/Facilities

Credit Amount for 2019

Construction Beginning…

Phase-out (PTC Amount)

30% ITC Election

Wind 2.5 cents/kwh

Before 1/1/2017 100% 30%Calendar 2017 80% 24%Calendar 2018 60% 18%Calendar 2019 40% 12%

Geothermal 2.5 cents/kwh Before 1/1/2018 None 30%

Closed-loop biomass 2.5 cents/kwh Before 1/1/2018 None 30%

Open-loop biomass 1.2 cent/kwh Before 1/1/2018 None 30%

Municipal solid waste (landfill gas, trash)

1.2 cent/kwh Before 1/1/2018 None 30%

Hydropower 1.2 cent/kwh Before 1/1/2018 None 30%

Marine and hydrokinetic renewables (including small irrigation power)

1.2 cent/kwh Before 1/1/2018 None 30%

Production Tax Credit and ITC in lieu of PTC


Qualified Resources/Facilities ITC rate Placed-in-Service Statutory Deadline

Solar

30% Before 1/1/2020

26% Calendar 2020

22% Calendar 2021

Fuel cell

30% Before 1/1/2020

26% Calendar 2020

22% Calendar 2021

Geothermal heat pump

30% Before 1/1/2020

26% Calendar 2020

22% Calendar 2021

Small wind

30% Before 1/1/2022

26% Calendar 2020

22% Calendar 2021

Residential ITC—Section 25D


ITC for Energy Storage


Historical tax code treatment

• Commercial ITC can be traced as far back as 1962

• Tax regulations in 1978 included “storage devices” in the definition of qualifying energy property for solar, wind, and geothermal—but equipment that used only qualified energy

• If property used both qualified and non-qualified energy (“dual use property”), it was not considered qualifying solar, wind, or geothermal energy property for purposes of the ITC

• In 1987, Treasury re-considered legislative intent and adopted so-called “75% Cliff”


Primary elements to dual use property rule

• Dual use property may qualify to the extent of the property's basis or cost allocable to its annual use of qualified energy so long as the use of non-qualified energy does not exceed 25 percent of the total energy input of the property in “annual measuring period” defined as the “365-day period beginning with the day it is placed in service or a 365-day period beginning the day after the last day of the immediately preceding annual measuring period.”

• Allocation may be made by comparing, on a Btu basis, energy input to dual use property from qualified sources with energy input from other sources.

• However, the Commissioner may accept any other method that, in his opinion, more accurately establishes the relative annual use of energy from qualified sources and energy from other sources.

• Recapture required for any reduction in basis or cost allocable.

Historical tax treatment


Recent evolution in tax treatment

• Little case law applying dual use rules to energy property− Majority of analysis focuses on thermal• More recently, rules applied to 1603 Grants• Beginning in 2011, IRS would issue Private Letter Rulings that would show an evolution in the application of commercial ITC rules to energy storage devices− Beginning in 2015, IRS stopped issuing rulings after Notice 2015-70• Note that only the requesting taxpayer may rely on the ruling


Notable energy storage private letter rulings

PLR 201142005July 11, 2011

PLR 201208035 October 27, 2011

PLR 201308005 November 20, 2012

Energy property Utility-scale wind Utility-scale wind(subject to curtailment)

Rooftop solar PV(prospective for typical setup)

Storage device Li-ion battery Undisclosed battery Undisclosed battery

Use case(s) Frequency regulation - Time shifting

- Frequency regulation

- Time shifting- Frequency regulation- Ramp rate- Demand charge management- Time of use

Non-qualified input %

Redacted—reportedly ~3%no methodology

Redacted—reportedly ~15%no methodology

No mention of inputs from grid or other non-qualifying sources

IRS analysisMentions dual use rules, but only concludes that it is not auxiliary equipment

Mentions dual use rules, but only concludes that it is not auxiliary equipment

Notes inputs from solar and grid for off-peak/peak use, as well as supplying to grid during peak hours via NEM

IRS conclusionFull cost eligible for ITC in lieu of PTC election under IRC Section 48(a)(5)

Full cost eligible for ITC in lieu of PTC election under IRC Section 48(a)(5)

- Applies dual use rules- No additional credit for subsequent increase in %


Notable private letter rulings (cont.)

PLR 201444025 May 5, 2014

PLR 201543001 July 17, 2015

Energy property DG solar PV (reportedly solar infrastructure/light poles)

No generation – Storage onlyPLR request on asset class life for depreciation purposes

Storage device Undisclosed batteries Undisclosed technology

Use case(s)

• Designed for self-consumption• Capable of exporting energy to the grid in some cases

Frequency regulation only

Non-qualified input %

No mention of inputs from grid or other non-qualifying sources Only inputs from grid energy

IRS analysis

• “Single solar energy system” • Emphasizes certain components will support lights, surveillance equipment, motion detectors, two-way transmission

Despite buying/selling electricity, transactions are "ancillary to frequency regulation service“ and effectively the cost of providing serviceFunction is not transmission and distribution

IRS conclusion

• Storage device fully eligible• Requires allocation of basis to the extent the support components perform another function as non-energy property (no methodology)

• Storage device is deemed to be Rev. Proc. 87-56 class 57—Distributive Trades and Services • 5-year MACRS property


Recent PLR Issued for Residential ITC

PLR 201809003

Summary of the Holding

This favorable PLR provides that:

1) a taxpayer (an individual) can claim an IRC section 25D residential investment tax credit (“ITC”) for 30% of the cost of installing a battery at its home when the battery is paired with solar property, and

2) the taxpayer can claim the credit even if the battery is installed in a later year than the year in which the solar property was installed.


1. This is the first PLR (or published IRS position) on the eligibility of a battery (electric storage) for the Section 25D tax credit.

• The IRS confirmed the eligibility of storage under 25D generally, and the eligibility of storage adding to existing solar projects.

2. The IRS position removes uncertainty for taxpayers that purchased their solar rooftop systems in prior years

• The ruling’s significance will only grow as the percentage of cash sales of solar systems increases relative to third-party ownership and more taxpayers are claiming the section 25D credit.

3. Taxpayers will have to determine whether the ruling might also have implications on the eligibility of energy storage for the section 48 commercial ITC that has similar statutory language.

PLR 201809003 takeaways


• Status of commercial ITC Regulations to address open items on storage?• IRS Notice 2015-70− Requested public comment for new regulations on definition of “qualifying energy property”

Notice 2015-70 Issued

October 2, 2015

Comments Due

February 16, 2016

Proposed Regulations Issued

Summer 2020 (Deloitte projection)

Final Regulations Issued

Summer 2021 (Deloitte projection)

Taxpayers submit comments

IRS/Treasury draft proposed regulations

IRS/Treasury review comments and finalize

regulations

60-day comment period

Public hearing held approximately 3 weeks after 60-day comment window

Looking ahead


• Introduce energy storage technologies and market applications• Emphasize regulations should re-affirm positions concerning:− Eligibility of energy storage device generally− Storage added to existing energy property (i.e., retrofits)− Separate ownership− Residential energy property divided between IRC sections 48 and 25D • Proposal for application of Primary Use standard to Dual Use Equipment• Sizing of battery relative to generation facility• Treatment of contracts for battery usage as service contracts versus leases• ITC for storage on retrofit of a PTC facility not available• Beginning of construction of the battery

Summary of issues in industry comment letters and other common concerns


Proposed Legislation for Energy Storage ITC

Energy Storage Tax Incentive and Deployment Act of 2019• Modifies the commercial and residential ITCs to include energy storage as an eligible

standalone technology.• Senators Heinrich and Gardner introduced S. 1142.• Representatives Doyle, Sanchez, and Blumenauer introduced H.R. 2096.

• Add category to section 48 for:equipment which receives, stores, and delivers energy using batteries, compressed air, pumped hydropower, hydrogen storage (including hydrolysis), thermal energy storage, regenerative fuel cells, flywheels, capacitors, superconducting magnets, or other technologies identified by the Secretary in consultation with the Secretary of Energy, and which has a capacity of not less than 5 kilowatt hours

• Add category to section 25D for:an expenditure for battery storage technology which— (A) is installed on or in connection with a dwelling unit located in the United States and used as a residence by the taxpayer, and (B) has a capacity of not less than 3 kilowatt hours.

• Timing pegged to phase down of solar ITCs


• Consider submitting a Private Letter Ruling on eligibility of storage for commercial ITC when paired with a renewable energy facility

• Develop and implement strategies for ITC eligibility• Review agreements in place• Recordkeeping and gathering exercises − Current dual use rules require documentation on the front-end concerning eligibility, as well as ongoing review ◦ Procedures for measuring energy usage◦ Procedures to mitigate risk

Final thoughts


Accounting for Battery Storage Agreements


Overview


-Utility Scale vs. Residential vs. Commercial & Industrial

-Established as part of an interconnected group of assets

-Attached to:

◦ Specified facility

◦ Interconnection point of multiple generating facilities or assets

-Type of technology utilized with the battery:

◦ SaaS Arrangement (cloud based)

◦ On premise software

General ConsiderationsOverview


Questions to be addressed…• What types of involvement by the purchasing party will be

deemed to constitute design of the asset? Specifying the site? Specifying the technology? Specifying the configuration and layout? Combination of factors?

All three must be present to satisfy design?

How and for what purpose • How and for what purpose decisions often predetermined

• Asset owner typically responsible for O&M• Need to evaluate whether the customer designed the asset

in a way that predetermines the most relevant decisions about how and for what purpose

Dispatch versus curtailment• Definitions• How considered in lease assessment

Overview Considerations for Renewable Energy Power Purchase Agreements


Understanding the criteria under ASC 842Identified asset

Right of substitution

• Would result in the asset not being deemed a specified asset• Substitution would be considered only if substantive: −Lessor has the practical ability to substitute the asset−Lessor would economically benefit from exercising its right of substitution

Contract must depend on use of identified asset• Asset may be explicitly or implicitly specified• Physically distinct part of a larger asset may be an identified asset• Capacity portion of a larger asset is generally not an identified asset


Benefits related to the ownership of an asset should not be included in the assessment of whether an arrangement contains a lease

Can obtain economic benefits from the use of an asset directly or indirectly in many ways

Economic benefits from the use of an asset include its primary output and by-products, including potential cash flows derived from these items

Right to obtain substantially all of the economic benefits from use

Obtain substantially all of the economic benefits from useRight to control the use


• Ability to direct “how and for what purpose” the asset is used throughout the period of use; or

• Relevant decisions about “how and for what purpose” the asset is used are predetermined and either: – The customer operates the asset or– The customer designed the asset that predetermines how it will be used over the

period of use

Right to direct the useRight to control the use (cont.)

Right to direct the use of the asset throughout the period of use

Protective rights, while defining the scope of the asset use, generally do not, in isolation, prevent the customer from being able to direct the use of the asset


Offtaker Arrangements


What are the considerations to determine the “Unit of Account” for accounting analysis?

Are there assets within the agreement that can be/have:

• Separate/Different depreciable lives?

• Separately abandoned?

• Separately disposed of?

• Separately destroyed?

• Separately warrantied?

Defining the “Unit of Account”Offtaker Considerations


View A.

The unit of account is the entirety of the Facility itself. Proponents of View A believe the unit of account should be assessed from the customer’s perspective (i.e., what does the customer think they are buying).

• The customer has contracted for the purchase of solar energy as well as the capability to shift energy consumption.

• The production of the energy and the storage capability are both critical to the customer and are effectively inseparable from a value perspective.

• The decisions about how and for what purpose the battery is used are dependent on how and for what purpose the Panels are used, and therefore, the battery is not a separately identified asset.

View B.

Each physically distinct asset should be evaluated when determining if a customer controls the right to use the asset (or assets).

• The refence to “asset” throughout ASC 842 should be assessed in a manner that is similar to how individual assets are accounted for under ASC 360.

• Assets that would be separately identified as a class of asset (e.g., different depreciable life) and that would be accounted for individually if owned (e.g., could be separately abandoned, disposed of, destroyed, etc.), should be assessed separately to determine if they are subject to a lease

Defining the “Unit of Account”Offtaker Considerations


Developer/Generator Arrangements


Identify the various services and/or performance obligations (including scoping):

• Does the Agreement Transfer of title (or control) of the battery?

− If not, is the battery subject to a lease?

• Did you develop a customized battery or was it separately purchased (i.e. is the battery is a readily available commodity)?

• Do you perform the installation of the battery (can the installation be outsourced)?

• Do you perform the O&M Servicing of the battery?

•What technology is utilized in the batter to make the charging and dispatch decisions?

Understanding the ArrangementDeveloper/Generator Considerations


Lease Model

- Are payments all variable?

- Day one loss?

- What is the unit of account subject to the lease?

- Are there non-lease components?

- What is the lease term?

Potential ModelsDeveloper/Generator Considerations

Revenue Model

- What are the performance obligations?

- Does the battery transfer to the customer?

- What is the transaction price?

- What is the measure of progress (how is revenue recognized)?


Final Thoughts!

Questions?

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2019 deloitte renewable energy seminar...−majority of analysis focuses on thermal •more...

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