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    Tuesday, January 05, 2016


    Net metering & feed-in tariffs: Understanding the tax implications of distributed generation policies

    December 2015 (Clean Coalition)

    Executive Summary

    Policies designed to support customer-sited distributed generation (DG) are evolving. For years, net energy metering (NEM), or “net metering”, has been used widely across the country, but many states are now studying or transitioning to successor NEM policies.1 As new tariffs or standard contracts are developed, it is essential that policymakers consider the potential tax implications of each option because this may affect the ability of the NEM successor policy to continue to drive successful deployment of customer-sited solar photovoltaic (PV) systems.

    For this reason, the Clean Coalition conducted an analysis to compare the tax impacts on a residential customer-generator under a feed-in tariff (FIT) program as opposed to net metering. The Internal Revenue Service (IRS) has not ruled that energy sold to a utility under a FIT is taxable gross income. However, in this analysis, the Clean Coalition analyzed the implications for the customer-generator if the IRS were to determine that the revenue from energy sales under a FIT constitute taxable gross income. Under this scenario, we evaluated the tax implications for a typical California residential customer, served by Pacific Gas & Electric (PG&E), with a solar system size of 5 kilowatts (kW) at an installed price of $3/WDC.

    The conclusion is that any new income tax liability from energy sales under a FIT would be largely offset by associated deductions available under a FIT at rates up to $0.15 per kilowatt-hour (kWh)…


    Under NEM, generation from a DG system is first used to meet on-site load. When generation from a NEM system exceeds on-site load, the excess energy is exported to the grid and the customer is credited at the full retail value of electricity for each kWh delivered. When a NEM system is not producing enough power to meet on-site load, the customer buys power from the electric utility at the standard retail rate.

    Rarely does the output of a NEM system precisely match on-site consumption. Therefore, a NEM customer exports excess power to the electric grid at some times and imports power from the grid at other times. As a result, a customer is billed only for the net electricity used during each billing period.5 In California, utilities annually “trueup” NEM customers’ bills to reconcile all electricity charges and credits for the prior 12- month billing cycle. If any remaining charges exist at this time, the utility will invoice the customer. Alternatively, the utility will issue payment for any excess electricity generated, which is known as Net Surplus Compensation (NCS).6 Customers may opt to either accept payment for NCS or receive a credit that will apply to the next 12-month true-up period.


    Under a FIT, a customer-generator sells all power produced to the local utility at a longterm, fixed-rate and continues to buy all their energy at the retail rate. The FIT rate can be set based on any number of factors, including the benefits and costs a DG system places on the grid. In some FITs, customers can apply the fixed-rate credits against their bill, but the FIT credits are usually above or below the retail rate.

    Tax treatment under a residential FIT compared to NEM

    With NEM, a customer is simply credited at the retail rate for energy exported to the grid. Through this accounting mechanism, there is no sale of energy to the utility, which means no potential taxable income.

    Unlike NEM, a FIT approach may involve the customer directly selling electricity to the utility. Although the IRS has not ruled as such, it is possible they will determine that the sales from the utility to the customer-generator—and from the customer-generator to the utility—are separate and distinct transactions subject to state and federal income tax.7 If the IRS makes this determination, then payments received by a customergenerator from the utility for the sale of electricity under a FIT may fall within the definition of taxable gross income.

    Taxing energy sales under this scenario would appear to lessen the economic desirability of the FIT approach. However, the impact is mitigated by tax deductions associated with the DG system, which this analysis investigates. It is also worth noting that using specific language to structure a FIT may avoid tax issues altogether. For example, Austin Energy’s Value of Solar Tariff refers to “credits” and never uses the terms “sales” or “cash.”8 In this way, a FIT approach could be viewed in the same manner as behind-themeter systems such as those enrolled in NEM programs—with no sales that could potentially be construed as taxable gross income.

    Regardless, in the following analysis, we assumed that the IRS has ruled that energy sales under a FIT constitute taxable gross income, and we investigated the financial impacts of taxing energy sales under a FIT…

    Details of the analysis…A typical California customer…Electricity consumption and PV generation…Federal, state, and local tax treatments…Current rate schedule…Future rate schedule…ITC and post-ITC scenarios…Model assumptions…System costs…System financing…Full suite of assumptions…Results…Various FIT rates…NEM and FIT payback periods…NEM and FIT—with ITC expiration and rate-tier changes…Hybrid self-supply plus FIT approach...


    The analysis revealed that tax deductions applied to a FIT system with a rate up to $0.15/kWh largely offset 20 years of gross income tax liability. However, to achieve a payback period similar to that of an identical NEM system, the FIT rate must increase to approximately $0.25/kWh. Even then, the NEM system would have a higher NPV over 20 years because of the increased value caused by avoiding rising retail energy prices. Finally, for systems operating under California’s new rate structure in 2019, a $0.15/kWh FIT yields a payback period similar to the NEM system, but with just over half the NPV…


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