Renewable energy has seen continuous growth driven by tax incentives; improvements in technology and manufacturing methods; and environmental, social, and governance (ESG) support policies.
As a result, planned renewable energy capacity in the U.S. is greater than all other forms of electric generation by a factor of 2 to 1. The rate of growth is expected to accelerate considering the recently passed Inflation Reduction Act legislation. Most notably, a recent study estimates the U.S. solar market will grow 40% more through 2027 than estimated in prior forecasts as a result of the legislation.
This report will briefly examine which segments of renewable energy are experiencing the highest level of planned generation expansion and explore considerations that should be given when developing a property tax estimate for new projects.
Areas of Renewable Growth
Increased Solar Projects Across the U.S.
Once reserved primarily for the southern and western regions, significant utility-scale solar investment is now being planned for nearly every state within the U.S. The map below summarizes currently operating and planned solar projects with generating capacity of at least 10 megawatts (MW).
©2023 S&P Global Marketing Intelligence. All rights reserved. Esri, HERE, Garmin, FAO, NOAA, USGS, EPA - September 25, 2023
Wind Moving Off-Shore
Unlike solar, most planned wind investments are generally occurring in areas with an existing wind farm presence. There is, however, significant planned expansion of offshore wind capacity.
©2023 S&P Global Marketing Intelligence. All rights reserved. Esri, HERE, Garmin, FAO, NOAA, USGS, EPA - September 25, 2023
Battery Storage Expansion
Renewable projects paired with a battery energy storage system (BESS) allow electricity to be distributed when the sun isn’t shining and the wind isn’t blowing. Additionally, a BESS allows for a more controlled release of electricity to the grid and is much easier to install than alternative energy storage solutions.
As illustrated in the map below, BESSs are growing in popularity across the U.S.
©2023 S&P Global Marketing Intelligence. All rights reserved. Esri, HERE, Garmin, FAO, NOAA, USGS, EPA - September 25, 2023
BESS demand and installations in the U.S. have been increasing for years. Beneficial tax treatment created in the 2022 Inflation Reduction Act (IRA) has further accelerated the adoption of BESS for projects associated with solar farms, as well as standalone units.
U.S. Utility Scale BESS Capacity
Planning for Renewable Project Property Taxes
The property tax liability over the life of a renewable project varies significantly depending on the underlying assessment and taxation structure of the jurisdiction and the availability of tax incentives. An inaccurate estimate that is too high may lead to a decision to not proceed with a project, whereas an estimate that is too low may lead to the project not producing the expected rate of return.
Understanding and applying current industry metrics and trends to minimize costs and reduce tax liabilities is essential for these companies to expand in new markets and remain competitive.
The following are several items to consider when preparing a property tax forecast:
Assessment Landscape
Is property assessed by the state or county?
Many renewable assets are assessed at the local level; however, they may be assessed by the state if owned directly by a traditional power utility.
Standard assessment model
The approach to valuing renewable assets for property tax purposes varies by jurisdiction and can have a significant impact on the total tax paid over the life of a renewable project. When preparing a forecast, the first recommended step is to reach out to the local jurisdiction and obtain a copy of its assessment model. If the county is not able to provide, contact the state.
What is the legal assessment requirement?
Is property required to be valued based on a standard model, with no opportunity for deviation, or is the property required to be valued at market value? If market value, an opportunity may exist to contest the standard valuation model utilized by the jurisdiction.
Taxing Jurisdiction Considerations
When preparing the tax estimate, ensure the following items are as accurate as possible:
Expected tax rate
Tax rates vary significantly from state to state and county to county. Confirm the most recent tax rate and consider incorporating a 1–3% annual increase in the tax rate to account for gradual increases over time.
Assessment ratio
Confirm whether the jurisdiction applies an assessment ratio to the assets, and if so, if the ratio is different for real property and personal property.
Does a project span multiple jurisdictions?
Large-scale renewable projects often span multiple taxing jurisdictions. Requesting a geographic information system (GIS) download of the taxing districts in the planned project area and then overlaying with the planned site development are recommended.
Does the assessing jurisdiction have experience with this property type?
Renewable investments may be new territory for not only the taxpayer but the assessing jurisdiction as well. In fact, some jurisdictions have yet to confirm how renewable energy assets will be assessed. If the jurisdiction is unfamiliar with the asset type, it may be useful to reach out and discuss the project, educate them on the asset type, and obtain a sense of how they intend to value the assets.
Assessment and taxation of these assets is new territory not only for owners but also for many of the assessing jurisdictions in which they are developed. Staying informed on the changing legislative and case-law landscape will be critical to estimating costs prior to deciding to invest as well as ensuring your existing investments are assessed at the lowest possible value.
How Is Property Valued?
The valuation methodologies utilized by the assessing authorities varies significantly from jurisdiction to jurisdiction, which can result in different indicated taxable values. Consider the following valuation methodologies when developing:
Cost Approach
The cost approach appears straightforward; however, depreciation tables and useful lives assigned by the assessing jurisdiction can vary significantly from state to state. Additionally, elements of the project may be assigned to a variety of useful lives and depreciation schedules. Finally, the elements of the project may be capitalized but not considered taxable for property tax purposes. A detailed analysis of the anticipated projects spend by category should be compared to the assessment practices of the jurisdiction.
It should be noted, many assessing jurisdictions are unfamiliar with valuing BESS assets and have not developed an appropriate useful life, depreciation schedule, or index factor to incorporate into their cost approach. The state of Washington is one of the first states in the nation to recognize the unique construction cost nature of assets associated with BESS. Specifically, Washington utilizes a declining trend factor for BESS, as well as solar and wind assets. Washington’s declining trend factors were generated based on feedback from the renewable energy industry and the National Renewable Energy Laboratory (NREL).
For states that incorporate a trend factor for their depreciation schedules, we would highly recommend reviewing whether the trends applied to solar, wind, or BESS assets increase or decline over time. If the trend factors increase over time, it may present an opportunity to file an appeal once the assets are in operation.
Income Approach
The income approach will be the most familiar to the developer. Following is a generic income approach, with items to consider when preparing the model.
Sales Comparison Approach
The sales comparison approach will likely not be utilized in an assessing jurisdiction’s standard model to value renewable assets. The approach may, however, be considered by the taxpayer when determining whether the current assessed value is appropriate. As with any sales comparison analysis, the comparable sales should be as like the subject property as possible.
Items to consider when determining comparability with subject property:
- Capacity
- Technology
- Age
- Annual expenses
- Is there a Power Purchase Agreement (PPA) in place? If so, how many years remain?
- If a PPA is in place, are rates at, below, or above market?
- Existing federal, state, and local incentives
- Access to ISOs
Renewable Property Tax – How Ryan Can Help
Understanding industry trends, jurisdictional requirements, tax law, and valuation methodology are essential to managing the burden of complex property taxes and remaining competitive in the market. We know the highly volatile and ever-changing market demands faced by the renewable industry, as well as any changes in tax law because of tax reform.
Our client service teams provide North American coverage backed by local knowledge and relationships, supported by specialized power industry expertise. Our professionals are the most respected in the industry, having earned CMI, ASA, and MAI designations backed by many years of experience as former assessors, attorneys, appraisers, economists, engineers, and more.
