COZEN O'CONNOR PUBLIC FINANCE ALERT
IRS Clarifies Private Business Use and Renewable Energy Credits
Dated: April 16,2009
Some states provide for renewable energy credits ("RECs") to be earned by electric generation units which use renewable energy sources (such as hydroelectric or solar). In order to comply with state rules on renewable energy, utilities in some of these states can buy RECs from other generators in lieu of developing their own renewable generation capacity. One open question in financing renewable generation units on a tax-exempt basis has been to what extent the sale of RECs could give rise to private business use of the generation unit by the utilities buying the RECs.
In PLR 200915002 released April 10, 2009 (http://www.irs.gov/pub/irs-wd/0915002.pdf), the IRS clarified that the sale of RECs by a hydroelectric plant would not give rise to private business use. First, because the production of the RECs did not increase or affect the output of electricity of the plant, the RECs were not be considered "output" under the IRS Code, and the rules on output facilities did not apply. Second, since the sale of the RECs did not give the purchaser any control over the plant or any special legal entitlements, it did not give rise to any private business use.
While a number of renewable projects have been financed with tax-exempt bonds prior to this ruling, clarity on these issues should help in structuring future deals. Depending on the state, RECs are not limited to standalone generating units; for example, a municipality, a school district or a 501c3 nonprofit entity could finance solar panels with tax-exempt bonds and help subsidize the project with a contract to sell the RECs going forward.