incentives available in each state (see
www.dsireusa.org).
Monetizing Tax Credits
Over the years, private developers
have utilized an assortment of business
models to entice capital investment in
renewable energy projects by monetizing
tax incentives. For example, under the
sale-leaseback model, the developer sells
the project to investors, and the investors
in turn lease the equipment back to the
developer to operate and maintain the
system. As the owner of the project, the
investors are allocated the tax credits.
In a “partnership flip,” the developer
and investor form a partnership to own
the project, and a majority of the income
and loss of the project, along with the tax
credits, are allocated to the investor. At
some point in the future (generally at least
five years after the property is placed in
service so that there are no recapture issues
for investment tax credits), the interests
are “flipped,” causing the partners’ interests
in the allocation of profits and losses of
the partnership to shift.
While tax-exempt entities might take
advantage of these models, there are
some limitations. For instance, sale-leaseback transactions generally cannot involve
tax-exempt property. Likewise, state law
may limit participation in partnership flips,
and risks could include a revocation of
tax-exempt status.
The Third-Party Alternative
Another structure gaining in popularity
is the third-party ownership and management of renewable and efficiency projects
through the use of power purchase agreements or performance contracts. This
model may be easier to implement than
those described above.
The power purchase agreement (PPA)
model has typically been used for solar
panel systems, although it could apply to
other renewable technologies. A developer
installs the system on the customer’s property, owns and operates the facilities, and
is responsible for all maintenance. The
developer then sells the energy produced
by the system to the customer under the
PPA, and the tax benefits are realized
through a reduced price for the energy.
Similar to the PPA, the performance
contract model is often used to implement
energy efficiency projects. Here, the customer contracts with a private energy service
company (ESCO) for retrofits and other
energy-saving equipment. This might include
adjusting HVAC systems, installing energy
management control systems or modifying
boilers and chillers. The customer pays the
ESCO to design, install and maintain the
equipment. The ESCO is responsible for
financing the project and usually guarantees a level of energy savings over the
term of the contract. Again, the tax credits
available to the private ESCO could be
reflected in the price paid for services
under the performance contract.
These third-party contracting models
have both benefits and potential drawbacks. On the plus side, there is no upfront
cost to the customer. The developer owns
the equipment and is responsible for its
operation and maintenance. However,
there are still transactional and operational
costs involved in these projects. There is
also some risk in allowing a third-party
access to the premises and to on-site facilities.
No Silver Bullet
Business structures do exist to allow
public institutions to realize the benefit of
tax incentives though partnership with private entities. However, there is no silver
bullet – any deal will have its benefits and
potential downsides.
Third-party contracting arrange-
ments are probably the easiest
to implement.
Third-party contracting arrangements
are probably the easiest to implement.
There are a number of issues to consider
when negotiating these deals: What happens to the equipment at the end of the
contract term? How do you manage the
risk of providing the contractors access to
your facilities? What, if any, coordination
with the local utility is necessary? How do
the savings compare to the cost of financing and constructing the project on your
own? These, and other factors, may influence the ultimate viability of these third-party options.
Elizabeth Teuwen is an
energy lawyer with Jennings
Strouss & Salmon PLC in
Washington, D.C. Her practice focuses on the electric
and natural gas sectors of
the energy industry. She
represents municipal utilities and rural cooperatives before the Federal
Energy Regulatory Commission and advises
clients on electric industry restructuring,
renewable energy development, power supply arrangements and transmission issues.
Teuwen can be reached at eteuwen@
jsslaw.com.
Nancy Pohl is a tax and
estate planning attorney in
Jennings Strouss & Salmon’s
office in Phoenix, Ariz. She
handles corporate and partnership tax planning, estate
planning, tax-exempt organizations, general business
planning and federal and
state tax litigation. Pohl’s transactional tax-planning practice includes structuring partnerships and limited liability companies,
mergers and acquisitions, reorganizations,
spin-offs and restructuring transactions. She
can be contacted at npohl@jsslaw.com.
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