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Health & Fitness

Hidden Implications

A new memo from the country’s top law firm reveals that residential solar Feed-in-Tariffs (FITs) and Value of Solar Tariffs (VOSTs), alternatives to net energy metering (NEM) favored by big utilities, have major hidden tax implications for consumers. This affects thousands of customers in FIT programs across the country, including ratepayers of the Los Angeles Department of Water and Power (LADWP), Sacramento Municipal Utilities District (SMUD), and the City of Palo Alto.

The memo from Skadden, Arps, Slate, Meagher & Flom LLP explains that FITs and VOSTs make residential solar customers ineligible for a 30% federal tax credit (cited in the memo as “Section 25D credit”) toward their rooftop installations, and that the payments a consumer receives for solar power generated under these arrangements will likely be considered taxable gross income.

While the memo has national implications, it was filed in Arizona by TASC (The Alliance for Solar Choice) in response to a proposal Arizona Public Service submitted with a suggested FIT arrangement for replacing net metering.  TASC President Bryan Miller explained, “We didn’t want to have to file, but felt it was imperative given the implications for consumers nationwide.”

According to the Skadden memo:

Under FITs, 100% of the electricity generated is sold to the utility, and thus 100% of the use of the residential solar system is for business use. Therefore, even if a residential solar system were otherwise eligible for a Section 25D credit, because all of the electricity generated is sold, none of it is used by the taxpayer for nonbusiness purposes, and thus none of the expenditures qualify for the Section 25D credit.

The memo also states:

Further, payments received by a taxpayer under FITs are likely includable in taxable gross income.

The policy that is fair for consumers and successful in 43 states is net metering (NEM). With NEM, consumers with home solar installations get credited at the full retail rate for the electricity they deliver back to the grid. Studies show NEM is a financial benefit to the utility and non-solar ratepayers as well.

Breaking down the legal jargon: When utilities support FITs instead of net metering, they are really imposing new taxes on customers and stripping customers of tax credits. With two thirds of California’s home solar installations now occurring in low and moderate-income households, FITs would not just be an added burden to current solar homeowners; they could hamper or halt the trend toward rooftop solar that is revolutionizing our energy grid and making it more sustainable.

Additional information on FITs vs. NEM can be found in a previous column that recaps a conversation I had with Dirk Morbitzer of Renewable Analytics.

This article originally appeared on The California Majority Report.

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