Energy storage is considered the next frontier in the renewable energy world. For certain energy storage systems, the ITC can serve as a valuable financial incentive that could help promote the widespread adoption of storage.
Energy storage systems have qualified for the ITC for solar and wind property under longstanding regulations, but the applicability of the ITC to battery storage under those regulations is uncertain in several respects. In the past five years, the IRS has issued several private letter rulings that have clarified certain issues.
The regulations provide that battery storage must be integrated with a generating facility that itself qualifies for the ITC (e.g., a solar or wind facility). Because the regulations provide that qualifying energy property does not include transmission property, storage property must also be located on the low side of the interconnection point (or behind the meter, in the case of residential or distributed generation systems). The recent private letter rulings have confirmed that batteries (and other storage equipment) that are integrated into a solar or wind facility may constitute energy property eligible for the ITC.
However, in the more recent rulings, the IRS has ruled that energy storage property that stores energy both from an associated solar or wind project and from the grid is "dual-use property" subject to special rules. As dual-use property, storage property is qualifying energy property only if at least 75% of the energy comes from the solar or wind project—i.e., no ITC is allowed for the storage property if more than 25% of the energy comes from the grid. In addition, the ITC is pro-rated to the extent that the energy from the solar or wind project is more than 75% but less than 100% of the total energy used in the storage property. Furthermore, if during the five-year ITC recapture period, the percentage of solar or wind energy decreases from a previous year, but remains at 75% or above, previously claimed ITC will be recaptured based upon the additional amount of the storage equipment's basis that is no longer considered to be qualified energy property multiplied by the respective recapture percentage for that year (100% in the first year, 80% in the second year, 60% in the third year, etc.). Finally, if the percentage of solar or wind energy stored by the device drops below 75% anytime during the five year recapture period, then all of the remaining ITC claimed would be subject to recapture based upon the respective recapture percentage for the year of such event.
For example, if the basis of storage property is $10 million and 90% of the energy used in the property is from an integrated solar facility, the ITC would be $2.7 million ($10 million basis x 90% solar use x 30% ITC). If the amount of solar energy used in the storage property decreases by 10% to 80% in the third year, the recapture amount would be $180,000 ($10 million basis x 10% solar energy decrease x 30% ITC x 60% recapture percentage).
The Treasury Department and the IRS are considering revising applicable regulations to address, among other things, the extent to which energy storage facilities may qualify for the ITC. A request for comments issued in late 2015 (which can be found here) solicited responses to the following questions:
- Whether only property that actually produces electricity may be considered energy property or whether property such as storage devices and power conditioning equipment may also be considered energy property?
- Whether dual-use property (such as property that stores electricity from a solar project and also electricity from the grid) should qualify for the credit and, if so, under what circumstances it should qualify? If it does qualifies, what portion of the basis of the dual-use property should be taken into account in computing the energy percentage and thus the amount of credit?
- Whether there should be revisions to the definitions of energy property?
- Whether there should be clear definitions of additional terms such as storage devices?
Many of the comments that were submitted before the February 16, 2016 deadline requested additional guidance concerning storage property, and several comments requested that the dual use test be removed in favor of a more lenient "primary use" standard.
The timing of the forthcoming guidance is unknown at this time, but we will provide updates on the guidance project as they become available.
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