GTM reported earlier this week on a filing made by The Alliance for Solar Choice (TASC) that exposed potentially serious tax liabilities in net energy metering (NEM) alternatives for solar.
TASC was forced into submitting the filing to the Arizona Corporation Commission after Arizona Public Service, the state’s biggest electricity provider, proposed two alternatives to its NEM program.
APS believes NEM shifts the burden of paying for transmission and distribution from solar owners onto its other ratepayers.
One APS alternative is imposing a flat charge on solar owners for infrastructure costs. But numbers in the APS filing with the Arizona Corporation Commission (ACC) show that such a charge would compromise rooftop solar’s value proposition. The other alternative is to bill solar owners at retail rates for all their electricity but remunerate them with a “bill credit” at a lower, ACC-set rate for all the electricity generated by their systems.
Some in the solar industry think a feed-in tariff or value-of-solar tariff would be better than net energy metering or either of the APS proposals.
But the TASC filing contained a legal memo from Skadden, Arps, Slate, Meagher & Flom LLP partners Sean Shimamoto and Emily Lam finding that a feed-in tariff or value-of-solar tariff might require solar owners to pay income tax for the returns on their system's electricity generation.
A feed-in tariff (FIT) provides an above-retail payment to solar system buyers for all their production. It successfully drove solar growth in Germany and other countries, but many in solar believe current low PV prices make such an expensive incentive unnecessary.
“Continue net metering, but build a FIT program alongside it,” said Paul Gipe, often called the godfather of the U.S. FIT movement. “Once the feed-in tariff program is successful, regulators and the industry can choose whether to continue net metering.”
Gipe agreed with the Skadden attorneys’ conclusion that FIT remunerations are taxable. “If you earn income, you pay taxes on it.”
“The VOST is first a calculation of the costs and benefits of distributed solar. Then comes rate design, which can be good or bad,” explained Rabago Energy principal Karl Rabago, a former Texas utility commissioner and one of the key designers of the first VOST, which he helped develop during his tenure at Austin Energy.
Austin Energy was aware of the taxable income issue when the incentive was being designed, Rabago said. “VOST gets around the taxation for income the same way NEM gets around it. The remuneration for electricity produced by the solar system is treated as a credit on the bill, not a payment.”
APS described its bill credit program as a buy-all, sell-all arrangement. In such a program, Rabago explained, the solar owner loses title to all the electricity generated by the system because it is sold. That is also typically how a FIT works, he added. Both would make income from rooftop solar taxable. “The Skadden memo is completely right about that issue, and I am really glad somebody raised it.”
Austin Energy’s VOST, Rabago said, “keeps its quantifications on the customer’s side of the meter. The utility does not pay. It credits the customer. But instead of using the retail rate as the credit value, like NEM does, it uses the VOST value as the credit amount.”
The core of the Skadden memo, Rabago explained, is that the IRS does not see the sale of less than 20 percent of a system’s output as generation for sale.
A VOST can be structured to make it a credit for consumption, Rabago said, but you have to get the rate design right. “In the Skadden memo, they wrote that a VOST and a FIT are the same thing. But in a footnote, they acknowledged that it is rate design that matters.”
At Austin Energy, Rabago said, he intentionally included “indicators that customers were not generating for sale, like zeroing out the credits at the end of the year instead of paying off the balance. That provision shows they are generating for consumption.”
The Austin Energy legal staff reviewed and approved the VOST as not creating taxable income, Rabago added.
Rabago says that his intention is not to discredit the NEM concept. It was created to drive growth when there was very little solar adoption. The retail rate, which at the time was just a convenience, has turned out to be pretty close to solar’s value, Rabago said. “It just doesn’t pick up all the benefits and all the costs. That is why people call it 'rough justice.' Maybe it is the only justice solar can get. With the value of solar tariff, I tried to improve on the justice.”
The fundamental question is the value of solar, agreed Crossborder Energy principal Tom Beach, perhaps the foremost NEM expert.
That value can be used to create a VOST, or it can be compared with the net metering credit, Beach said. “If it is 'rough justice,' policymakers can keep net metering in place. If the value of solar is higher than the retail rate, they can add incentives. If it is lower, they can put a charge on net-metered customers or change the rate design.”