More than half the states have established "renewable portfolio standards" requiring a minimum percentage of the electricity delivered by retail public electric utility companies to come from renewable energy sources. To document compliance, utilities typically must obtain "renewable energy credits" or "RECs," tradable commodities evidencing that one megawatt-hour of electricity has been generated from a renewable energy source. Utility companies can obtain these RECs by producing electricity from renewable resources themselves or by purchasing them from renewable energy generators, such as wind and solar farms. To help satisfy their state REC requirements, some utility companies have established renewable energy incentive programs, under which they purchase RECs from homeowners with residential renewable energy systems. A recent private letter ruling issued by the Internal Revenue Service addresses the tax consequences to an individual with a residential renewable energy system who sells RECs to a utility company for cash.
By way of background, Congress has enacted various tax incentives for individuals to purchase certain residential renewable energy systems and to undertake energy conservation measures at their homes. For example, individual taxpayers are allowed a tax credit under Section 25D of the Internal Revenue Code equal to 30 percent of certain qualified renewable energy property expenditures. In addition, under Section 136 of the Internal Revenue Code, homeowners can exclude from gross income certain energy conservation subsidies provided by public utilities to purchase or install energy conservation measures in their homes.
Private Letter Ruling 201035003 (Sept. 3, 2010) dealt with a homeowner who purchased and installed a grid-tied solar electric power system to convert sunlight into utility-grade electricity, which was used in the homeowner's residence. The homeowner entered into an agreement with a retail public electric utility company to sell the RECs associated with the solar electric power system during a fixed term for a one-time payment, and requested rulings from the IRS on the tax consequences of the payment.
In the ruling, the IRS first noted that the payment to the homeowner was neither a rebate nor a purchase price adjustment for the solar electric power system, since the homeowner did not purchase the system from the utility and the utility had no relation to the system's vendor. The IRS also concluded that the payment was not a subsidy intended to facilitate the purchase or installation of a conservation measure.
Instead, the IRS ruled that the transaction between the homeowner and the utility was a sale of property rights—namely, the RECs—in exchange for cash. Accordingly, the IRS concluded that the gain from the sale of the RECs was includable in the homeowner's gross income and that the transaction was not governed by Section 136. Finally, the IRS ruled that the homeowner could still claim the Section 25D credit equal to 30 percent of expenditures for the qualified solar electric property, without having to reduce the amount by the utility's payment.
While private letter rulings can be relied on only by the taxpayers to whom they are issued, they provide insight into the thinking of the IRS on the issues addressed. Thus, while Private Letter Ruling 201035003 does not directly address utility companies, it may be useful for public utilities to be generally aware of the tax consequences to homeowners from whom they purchase RECs, particularly that receipt of a cash payment, while includable in income, will generally not affect a homeowner's ability to claim the Section 25D credit based on the full cost of the renewable energy system.