Solar Facilities in Massachusetts Are Worth a Second Look

July 20, 2010

Several recent events have led property owners and tenants to give serious consideration to the advantages of obtaining electricity from solar facilities. Recent improvements in the efficiency and price of solar panels have made them more attractive. Nevertheless, this alone would not be enough to justify solar facilities, particularly in a state such as Massachusetts where the amount of “insolation” (the measure of solar radiation energy) is much lower than in places with more intense and reliable sunlight, such as the southern California desert. It is a series of legislative and administrative actions in Massachusetts, together with the federal tax code and the American Reinvestment and Recovery Act grants, that offset the lower insolation levels and allow solar facilities to be much more attractive investments.

The first concept of importance is “net metering.” A customer of a utility company can sell electricity generated by its solar facility to the utility when the power generated by the solar facility is greater than the amount of power the customer consumes at its property. The excess power generated in any month results in a “net metering credit.” The value of this net metering credit per kilowatt hour is very close to the customer’s cost per kilowatt hour when it purchases power from the utility. The net metering credit can be carried forward indefinitely and can be used to reduce the customer’s future electric bills from the utility. Further, the net metering credits are transferable so that a customer that does not expect to be able to use all the net metering credits it produces can designate other parties as recipients of the credits. This allows the host customer to capture all the electrical value from its solar facility.

There is another value that results from the production of electricity from solar facilities called Solar Renewable Energy Credits (“SRECs”). Massachusetts has promulgated a renewable portfolio standard that requires each utility to obtain a certain amount of electricity from renewable sources. There is a separate “solar carve-out” to the renewable portfolio standard that requires a certain amount of renewable electricity come from solar facilities. A utility that falls below the prescribed standard must make an alternative compliance payment for each megawatt hour of solar energy it has failed to purchase. Host customers who own solar facilities receive an SREC for each megawatt hour of energy they produce and can sell the credits to the utilities. The utilities, in turn, use the SRECs purchased from host customers to satisfy the solar carve-out and, consequently, avoid making alternative compliance payments. The price for SRECs is market driven with the alternative compliance payment being an effective cap on value. Host customers who wish to have certainty with respect to the value of the SRECs can participate in an auction run by the Commonwealth. The purpose if the auction is to ensure that owners of solar facilities that elect to participate will receive payment of $300, less the 5 percent auction fee for a number of years. That number is set out in the certificate the owner receives stating that its unit is eligible for SRECs. Initially, the period is 10 years.

Solar facilities are also eligible, subject to certain limitations, for a 30 percent federal investment tax credit as well as five-year “MACRS” (modified accelerated cost recovery system) depreciation on the portion of the cost in excess of the credit. Parties who do not want the credit may, if they start their projects this year, be eligible to receive a payment in lieu of the federal tax credit pursuant to section 1603 of the American Recovery and Reinvestment Act. Massachusetts generally allows a 3 percent investment tax credit to manufacturing corporations. A corporation installing a solar facility may, as an alternative, elect to expense the entire cost of the facility in the year of installation for Massachusetts corporate excise tax purposes. Property subject to such an election is exempt from the property component of the corporate excise tax. If such property is sold more than three years after the property is placed in service, basis recovery is allowed notwithstanding the expense election, computed based on straight-line depreciation over the useful life of the property.

These factors combine to make solar energy facilities worth a careful second look.

For more information about this alert, please contact:

Vincent Sacchetti, Partner, Real Estate Group

John Utzschneider, Partner, Corporate, M&A and Securities

Marc Reardon, Partner, Energy and Project Finance

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