The rift over how to equitably compensate distributed solar power producers for the electricity they generate has just gotten a bit more stark.

The Alliance for Solar Choice (TASC), a downstream solar advocacy group whose members include SolarCity, Solar Universe, Sungevity, Sunrun, and Verengo, just sent out a release revealing that the conflict has escalated to the point of requiring a decision from the U.S. Internal Revenue Service.  

An electric utility can pay a producer of distributed generation like rooftop solar using a value-of-solar tariff (VOST) or through net energy metering. NEM spins the power meter backward and pays the consumer the retail rate for power exported to the grid, whereas a VOST calculates the "value" of solar and pays the consumer that rate for all solar produced by the rooftop system. However, the true "value" of solar is highly open to interpretation.

Net metering has been adopted by 43 states, but the city of Austin, Texas implemented a VOST in October 2012, and Minnesota has gone the VOST route as well.

But TASC -- and by extension, SolarCity and Sunrun -- is intent on keeping the VOST model from spreading. TASC notes that as a result of the filing of an Information Letter Request (ILR) with the IRS by an "Austin homeowner," the IRS will now "formally review VOSTs and their impact on taxpayers."

According to a redacted version of the ILR, the taxpayer is requesting a ruling that addresses this hypothetical situation: 

"If, under a program established by Austin’s retail public electric utility company, he sells all energy generated by the solar energy property to the utility and, in exchange for the sale, the utility makes payments to him in the form of utility bill credits; and (b) if such payments from the utility are includable in his taxable income."

TASC suggests, "Under a VOST, solar customers cannot use the power generated by their solar systems. Instead, they must sell all the power their solar systems produce to the utility at a price set by the utility (and often reevaluated on an annual basis). Meanwhile, they must continue to purchase all the electricity they need from the utility just like a homeowner without solar. Utilities support VOSTs over the widely effective net metering policy."

TASC and other NEM proponents cite a 2013 brief from law firm Skadden, Arps, Slate, Meagher & Flom which claims that VOSTs jeopardize homeowners' ability to claim the 30 percent federal Investment Tax Credit (ITC). The brief also claims that VOSTs could increase homeowners' income taxes because VOST payments would be considered to be income. For example, an average-size PV system at the residence of an Austin homeowner in a median-income tax bracket would incur approximately $250 per year in income taxes because of the VOST, according to Bryan Miller, co-founder of TASC.

“VOST schemes expose unassuming homeowners to thousands of dollars in additional taxes,” he contends.

Miller, a Sunrun employee as well as a leader of TASC, told GTM that a VOST is a "front-of-the-meter" scheme and repeated his claim that utilities are using the VOST as a "Trojan horse" to "eliminate rooftop solar" and "take away choice and competition." Miller says the VOST "expands monopolies by forcing homeowners to sell all their power to the utility."    

Miller said that the utilities' "frontal assaults" on NEM "don't work" and that they've lost that argument -- so the VOST is a way for the utility to "eliminate competition." Miller claims that the utilities are "well aware of the tax issues."

According to Miller, "The IRS will clarify this and stop the VOST movement in its tracks." He added that the Austin City Council can solve this problem tomorrow by reinstating NEM as an option for the customer.

As Herman Trabish has reported, the opinion from Skadden, Arps, Slate, Meagher & Flom partners Sean Shimamoto and Emily Lam suggests that a VOST could result in tax problems for solar owners.

“The payments received by a taxpayer for the sale of electricity under feed-in tariffs appear to fall squarely within the definition of taxable gross income,” wrote Shimamoto and Lam.

“The terms of FITs provide for the sale by the taxpayer to the utility of all electricity generated by the taxpayer's residential solar system,” they added in the memorandum filed by TASC.  “In exchange, the utility compensates the taxpayer with either cash or a credit on the taxpayer's utility bill. Although the taxpayer may also purchase electricity from the utility, under FITs, the two transactions are separate and distinct. The proceeds from the taxpayer's sale of electricity to the utility therefore likely constitute gross income.”

This conclusion, they added, “is supported by Senate Bill 1225.” The federal bill specifically excludes the possibility of "any gain from the sale or exchange to the electrical grid" being counted as taxable income.

As we reported previously, Shimamoto and Lam also concluded the Arizona Public Service “bill credit” proposal would put solar owners at risk of losing the 30 percent federal ITC. The system owner has to use “at least 80 percent of the electricity generated” for non-business purposes to qualify for the personal ITC, the attorneys wrote. “Under FITs, 100 percent of the electricity generated is sold to the utility, and thus 100 percent of the use of the residential solar system is for business use.”

Shimamoto and Lam are correct about the income tax issue, agreed a New York tax attorney familiar with renewables tax issues who asked not to be named in the article by Trabish. The APS “bill credit” is, at best, “not helpful” to rooftop solar owners and could result in taxation if a system's output is high enough. The source disagreed about the 30 percent ITC being at risk, however. If sale of the electricity to the utility makes system owners ineligible for the residential ITC, he said, they would then be eligible for the 30 percent business tax credit. And that would make them eligible for the benefits of accelerated depreciation as well, he added.

Karl Rábago is a co-creator of the first value-of-solar tariff. He told GTM yesterday that "utility rate-making is a full contact sport."

Much of this comes down to language. Is the VOST transaction "a sale?" Rábago was careful to craft the language in the Austin VOST to refer to "credits," never using "sales" or "cash." He points out that "Miller is wrong on his facts -- VOST is a behind-the-meter system and there is no forced sale." 

He told GTM that a VOST is "just a different way of calculating the credit. It's still a credit on the bill. Your net bill is the same as it would be for NEM. It's still a netting process that happens on the customer side of the transaction. It's not a sale." He suggested that "With NEM systems that close out the year with a cash payment, under the TASC reasoning, the utility has to issue every NEM customer a 1099 for the sale. A 1099 is not required with VOST because there is no sale and no income."

Rábago told Midwest Energy News, "The big piece of the value-of-solar concept that is embodied in this law is that if you fairly compensate customers for the value of the solar energy, you can have a fair conversation about charging customers for the distribution [and] for the utility services they still use." He added, "It just happens to be that solar is the most charismatic and most rapidly declining in technology cost. It’s the one that sees the headlines, but behind the value of solar are the value ofstorage the value of savings (energy efficiency and demand response), the value of security, and the value of smartness."

The VOST veteran concludes: "This is inviting the IRS to rule with some precision that sales incidental to use are all sales, which we've kind of gotten away with with NEM. Asking for a specific ruling is a little shortsighted."

Thad Kurowski, SolarCity's director of policy and electricity markets, noted in an email obtained by GTM, "It will be interesting to see what the IRS determines."

A lawyer close to this decision said yesterday, "The Skadden memo is the best thinking we have on this -- and it appears the VOST income will be taxable." Another tax attorney said, "They're likely to rule that it's income."

Rábago suggested that if the IRS determines that it is not taxable income, "then the TPO companies could get comfortable with a VOST."

In any case, the decision is now in the hands of the IRS.