Analysis of Energy and Tax Proposals in the 2018 Budget Proposal

President Trump released his budget proposal for the 2018 FY on May 23, 2017, expanding on the budget blueprint he released in March. The budget proposal and blueprint reiterate the President’s tax reform proposals to lower the business tax rate and to eliminate special interest tax breaks. They also provide for significant changes in energy policy including: restarting the Yucca Mountain nuclear waste repository, reinstating collection of the Nuclear Waste Fund fee and eliminating DOE research and development programs.

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Maryland Likely to Become First State to Adopt Energy Storage Tax Credit

UPDATE: This bill was signed into Maryland law on May 4, 2017 with a $75,000 maximum credit for commercial systems. A previous version of the bill offered credits to commercial systems up to $150,000.

In April, the Maryland legislature passed a bill creating a state income tax credit for the costs associate with installing an energy storage system. Governor Larry Hogan is expected to sign it into law. Unlike measures in other states such as California and Massachusetts, the Maryland bill does not contain mandated amounts of energy storage that utilities must procure. Instead, if the current bill is signed, Maryland will be the first state in the country to incentivize the deployment of energy storage systems by offering a tax credit. Presently, an energy storage system can qualify for the federal investment tax credit if it is installed alongside a solar photovoltaic system. This is the first ever tax credit for storage-only projects, although qualified energy storage systems still may be paired with renewable energy projects.

Under the terms of the bill, a taxpayer will receive a credit equal to 30 percent of the installed costs of the system, not to exceed $5,000 for a residential system or $150,000 for a commercial system. The incentive program has a funding cap of $750,000 per year, and applications for the credit will be approved on a first-come, first-served basis. Additionally, the tax credit may not be carried over for use in future tax years. The tax credit is currently slated to run from 2018 to 2022. Continue Reading

EPA Requests Comments on Regulatory Rollbacks

Last week, the US Environmental Protection Agency (EPA) published a request for comment asking for “input on regulations that may be appropriate for repeal, replacement, or modification.” EPA’s request is part of a federal government initiative under Executive Order 13777, “Enforcing the Regulatory Reform Agenda,” which established a federal policy “to alleviate unnecessary regulatory burdens” on the American people. The Executive Order directs federal agencies to establish a Regulatory Reform Task Force that will evaluate existing regulations and make recommendations on repeal, replacement and modification.

Pursuant to the Executive Order, the Task Force will identify regulations that:

  1. Eliminate jobs, or inhibit job creation;
  2. are outdated, unnecessary, or ineffective;
  3. impose costs that exceed benefits;
  4. create a serious inconsistency or otherwise interfere with regulatory reform initiatives and policies;
  5. are inconsistent with the requirements of section 515 of the Treasury and General Government Appropriates Act, 2001 (44 U.S.C. 3516 note), or the guidance issued pursuant to that provision in particular those regulations that rely in whole or in part on data, information, or methods that are not publicly available or that are insufficiently transparent to meet the standard of reproducibility; or
  6. derive from or implement Executive Orders or other Presidential directives that have been subsequently rescinded or substantially modified.

EPA’s request comes on the heels of the Department of Commerce’s request for comments from manufacturers asking what regulations the government could repeal to benefit domestic manufacturing. Commerce received approximately 170 responsive comments, nearly half of which targeted various environmental regulations for amendment or repeal.

EPA offices are conducting various outreach programs designed to engage the public. These include public teleconferences, public meetings and contact with key stakeholders. Outreach efforts will begin on April 24 with a public meeting via teleconference held by the Office of Air and Radiation. Other divisions of EPA, such as the Office of Small and Disadvantaged Business Utilization, Office of Water, Office of Chemical Safety and Pollution Prevention, and Office of Land and Emergency Management will hold scheduled outreach sessions through May 9.  Comments are due to EPA by May 15.

NY Moves from Retail Rate Net Metering to Value-Based Compensation for Distributed Generation

The New York Public Service Commission (NYPSC) approved an order on March 9 that will shift the state’s mechanism for compensating distributed energy resources from retail rate net metering to value-based compensation. The order is the next step in New York’s broad Reforming the Energy Vision (REV) plan and was praised by environmental groups and solar advocates for both preserving existing net metering (NEM) benefits for residential and small commercial customers and boosting benefits for community solar. New York’s move away from net metering follows a hard-fought compromise in Arizona that will move Arizona away from net metering as well.

The New Value Stack Tariff

The order created a new Value Stack tariff intended to more accurately reflect the value of distributed generation renewable resources. The Value Stack tariff will set forth a mechanism to compensate distributed energy resources based on the value of the products the resources provide: energy, capacity, environmental attributes, and demand reduction and locational system relief. The value of the environmental attributes will be the higher of the latest Tier 1 REC procurement price published by NYSERDA or the Social Cost of Carbon (as calculated by the US Environmental Protection Agency). Eligible projects will be entitled to receive compensation for 25 years from their in-service date. The Value Stack tariff will be available for all technologies and projects that are currently eligible for NEM.

The Transition

All projects interconnected to the grid in New York prior to March 9, 2017, will continue to receive NEM compensation under existing tariffs. Additionally, new wind projects will be eligible to receive existing NEM rates until the existing statutory cap under NY Public Service Law § 66-1 is reached. Projects operating under existing NEM compensation are eligible to opt-in to the Value Stack tariff.

A transitional “Phase One” NEM tariff will be available to residential and small commercial service class customers interconnected before January 1, 2020. The Phase One NEM tariff is identical to the current NEM tariff, except that projects will be compensated for a term of 20-years from their in-service date and will have the ability to carry-over excess credits to subsequent billing and annual periods. Service under the Phase One tariff will be subject to a MW capacity allocation for each utility. Phase One NEM will also be available to certain projects that interconnect or pay 25 percent of interconnection costs by June 7, 2017. This option is available to remote net metered projects (residential and nonresidential farm operations), large on-site projects (non-residential demand-based or mandatory hourly pricing customers), and community distributed generation projects, which is expected to provide a boost to community solar in New York.

What’s Next?

Phase Two of the REV is expected to refine the methodology for calculating the components of the Value Stack compensation. Thursday’s order included compensation for energy storage paired with an eligible resource. Future orders are expected to address stand-alone storage facilities.

Electric Utility and Solar Advocates in Arizona Reach Compromise Rate Settlement for Rooftop Solar

The Arizona Public Service Co. (APS) and solar industry representatives and advocates have reached a settlement on rooftop solar compensation and rate design, following years of heated policy debate.  The settlement, which the Arizona Corporation Commission (ACC) is expected to vote on this summer, required compromise from both sides on a variety of issues.

Future Rate Design

The settlement nixes APS’s request for a mandatory demand charge on all residential and small business customers.  Instead, the settlement gives new solar distributed generation customers the option to choose between a time-of-use or demand-based rate.  Under the settlement, APS would compensate solar customers with an export credit rate of 12.9 cents per kWh.  APS initially proposed to cut compensation from the retail rate, which is approximately 13 to 14 cents per kWh, to the wholesale rate, which is only 3 cents per kWh.  The export credit rate will decrease by up to 10 percent annually.  However, customers will be able to lock in their rates for 10 years, providing some long-term certainty.

Current Net Metering Customers

The settlement will preserve existing net metering benefits for distributed generation customers who file an interconnection application before the ACC issues a decision in the case.  Those customers will be grandfathered in and continue to receive the full retail rate for a period of twenty years from the date of interconnection.

Utility-Owned Generation

The settlement allows APS to invest $10 to $15 million per year in AZ Sun II, a new program for utility-owned rooftop solar for low- to moderate-income customers.  The agreement puts a moratorium on new self-build generation by APS until 2022, excepting distributed generation, microgrids, and renewable generation.

What’s Next?

The settlement moves Arizona away from retail rate net metering and towards value-based solar rate design.  While solar advocates do not believe the settlement fully recognizes the value of solar, the settlement preserves benefits for existing customers and allows the state’s solar industry to move forward with more certainty.  APS, industry representatives, and many solar advocates committed to stand by the settlement agreement and refrain from seeking to undermine it through ballot initiatives, legislation or advocacy at the ACC.

IRS Issues Guidance on Tax Treatment of Energy Savings Performance Contracts

On January 19, 2017, the Internal Revenue Service (IRS) issued Rev. Proc. 2017-19, 2016-6 I.R.B. (the Rev. Proc.), providing a safe harbor under which it will not challenge the tax treatment of an Energy Savings Performance Contract Energy Savings Agreement (ESPC ESA) as a service contract under Section 7701(e)(3). While the application of the guidance is limited to the ESPC ESA context, the Rev. Proc. nonetheless provides potential insight into the IRS’s views of other power purchase agreements for the purchase of renewable energy generally.

Read the full article.

Government Appeal of Alta Wind Supports Decision to File Suit Now

As you may know, several taxpayers have sued the federal government because they believe they were underpaid under the Section 1603 grant program. Indeed, the taxpayer in the Alta Wind case was successful in convincing the court that the government had inappropriately reduced the amount of its 1603 grant by approximately $200 million. For more information about the Alta Wind case, see our previous On the Subject, “Act Now to Preserve Your Section 1603 Grant.” We have been following these cases, and believe that the grant applicants have strong arguments in their favor. As expected, right before the New Year, the US government appealed the Alta Wind case, asking the US Court of Appeals for the Federal Circuit to overturn that decision.

Taxpayers with the same or similar legal issue need to make a decision of what to do. We strongly recommend that you file your case immediately against the government seeking redress for the inappropriate reduction in the amount of the 1603 grant that the government paid to you. If you file suit, we expect the court will stay your case pending the outcome of the Alta Wind appeal. Nevertheless, we believe that this is the best course of action for the reasons outlined below:

  • First, filing suit now will toll the statute of limitations on your claims. Every case must be filed within the statute of limitations. If you do not file your suit within the statute of limitations, you will not be permitted to file suit in the future. Appeals can take years to resolve. If you wait until the court rules on the Alta Wind appeal you risk losing your claim because the statute of limitations may have expired by the time that case is fully decided. Filing your claim now will stop the limitations period from running, preserving your ability to have your claims heard by the court.
  • Second, we expect that the appeals court will affirm the taxpayer’s win in Alta Wind. If you have a pending case in court when that occurs, you will be in a better position than those taxpayers who wait to file suit because the government will have to address your case immediately after the appeal is decided and the stay is lifted. Moreover, filing suit and “getting in line” early will be especially important if the government tries to settle the claims against it because you will be able to argue that you should be entitled to a greater percentage of your claim than if you had filed after the appellate court rules against the government.
  • Lastly, filing suit now will increase your ability to withstand any attempts by the US Department of the Treasury to retroactively change the 1603 grant program. The new administration has taken over, and it is possible that it could implement rules for the Section 1603 grant program that are harmful to your claim and try to implement them retroactively. That is an issue that would have to be litigated, but your argument would be easier to make if you have a pending case at the time the rules are implemented.

We estimate that the cost of filing your suit will be very low, but the benefits can be very important to positioning yourself for the best possible outcome.

Additionally, we would encourage you to join forces with other taxpayers that have the same or similar issue, and file an amicus (“friend of the court”) brief in the pending Alta Wind appeals case. We are in the process of assembling a coalition of taxpayers to file an amicus brief. The amicus brief would, of course, be in support of the taxpayer’s case and legal theory, which could also improve your case in court.

Please contact us if you would like to discuss this matter further.

FERC Issues Policy Statement on Storage Resources with Multiple Payment Streams

Last week, the Federal Energy Regulatory Commission (FERC) issued a Policy Statement to provide guidance on the ability of electric storage resources to recover costs through both cost-based and market-based rates concurrently. The Policy Statement appears intended to reconcile two lines of FERC precedent on this topic. The issue of multiple payment streams is one of particular concern for electric storage resources that, due to their technological capabilities, can switch from one type of service to another almost instantaneously. The Policy Statement is separate from FERC’s ongoing Notice of Proposed Rulemaking regarding electric storage resource participation in wholesale electricity markets (RTO/ISO markets), discussed here and here.

FERC’s guidance stems from two orders with opposite outcomes – Nevada Hydro and Western Grid. In the 2008 Nevada Hydro order, FERC denied a hydroelectric storage project’s petition to be treated as a transmission facility that would receive payments through cost-based rates. Then, in the 2010 Western Grid order, FERC granted the applicant’s request for cost-based rate recovery for its sodium sulfur batteries that would provide voltage support and thermal overload protection for transmission facilities.

FERC identified three major concerns present in scenarios where an electric storage resource seeks both cost-based and market-based rates: (1) the potential for cost-based and market-based rate recovery to result in double recovery; (2) the potential for cost-based rates to inappropriately suppress competitive market prices; and (3) the level of control of a storage resource exercised by a RTO/ISO that could jeopardize the RTO/ISO’s independence from market participants.

To address the concern of double recovery, FERC suggested that crediting any market revenues back to the cost-based ratepayers is a possible solution. Such crediting may vary depending on how the cost-based rate is structured; FERC provided examples of an up-front reduction in the cost-based rate or a later crediting procedure for cost-based ratepayers. Addressing the issue of suppressing competitive market prices, FERC disagreed with commenters that allowing market participants with cost-based rate recovery to also sell at market-based rates would create an adverse impact on other market competitors. FERC pointed out that some vertically integrated public utilities currently recover costs through cost-based retail rates while also making market-based rate sales to others. Finally, to maintain RTO/ISO independence, FERC clarified that RTO/ISO dispatch of a storage resource should receive priority over the resource’s provision of market-based rate services and that the provision of market-based rate services should be under the control of the resource owner rather than the RTO/ISO.

FERC Commissioner LaFleur dissented from the Policy Statement, arguing that its sweeping conclusions related to storage resources may be read to reflect FERC’s views about the impact of multiple payment streams more generally. Commissioner LaFleur also disagreed with FERC’s decision to separate the issues from FERC’s pending Notice of Proposed Rulemaking on storage participation.

Environmental Organizations File Litigation Briefs Supporting New York’s ZEC Program

Two environmental organizations, Environmental Defense Fund (EDF) and Natural Resources Defense Council (NRDC), have weighed in to defend the legality of New York State’s Zero Emissions Credit (ZEC) program in ongoing litigation concerning that program.  This blog is tracking the ongoing litigation and this article summarizes the arguments made by EDF and NRDC in their recent filings.

The ZEC program, which was approved by the New York Public Service Commission (NYPSC) in August 2016, compensates eligible facilities for the zero-emissions attributes of produced nuclear energy through long-term contracts with New York State Energy Research & Development Authority (NYSERDA) for the purchase of ZECs.  New York’s load-serving entities are required to purchase those ZECs from NYSERDA in proportion to their share of statewide load. The NYPSC determined that New York’s FitzPatrick, Ginna and Nine Mile facilities were eligible to participate in the ZEC program.

In October 2016, various electric generators in New York and surrounding states filed a complaint against the NYPSC in federal court, asserting that the ZEC program intrudes on the exclusive authority of the Federal Energy Regulatory Commission (FERC) by “effectively replacing the [wholesale electricity market] auction clearing price” received by the nuclear facilities with a higher price and thus artificially suppressing wholesale electricity prices in the New York market.  The NYPSC and the owners of the New York nuclear facilities moved to dismiss the complaint in December and both EDF and NRDC recently filed briefs in support of the motions to dismiss.

The environmental organizations (like the NYPSC) deny that the ZEC program intrudes on FERC’s authority.  They argue that the program compensates the nuclear power providers for the environmental attributes of their electricity, rather than sets wholesale electricity prices.  The environmental organizations’ support stems from the similarities between the ZEC program and renewable energy credits, which are a key component of many state renewable energy programs and might be threatened by a judicial opinion extending FERC’s exclusive jurisdiction to the sale of unbundled environmental attributes.

The outcome of litigation over New York’s ZEC program will likely have impacts outside New York.  In Illinois, the recently enacted Future Energy Jobs Bill establishes a Zero Emission Standard program that utilizes the same framework to support nuclear generation facilities in Illinois.  Illinois and other states considering such programs will be watching the outcome of the litigation in New York to determine whether and how to implement their own programs to support struggling nuclear facilities.

Some Considerations for Comments to FERC on Electric Storage NOPR

As this blog previously reported here, the Federal Energy Regulatory Commission (FERC) issued a notice of proposed rulemaking (NOPR) last month with the goal of requiring organized wholesale electricity markets (RTO/ISO markets) to modify their tariffs and rules to accommodate electric storage resources. FERC has received several comments and recently agreed to extend the deadline for filing comments until February 13, 2017.

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