IRS Rescinds PLR: Changes Valuation Structure of Energy Facilities

20 Dec 2012

In January of 2012 the IRS released a Private Letter Ruling (PLR) indicating that energy facilities with specific PPAs would be valued based on the pooled value of the physical asset as well as the value of the PPA.  In essence, this means that two otherwise identical projects would be valued differently if one has a more lucrative PPA than the other. Through this ruling, energy facilities with favorable PPAs could increase their value, thereby increasing the size of the Investment Tax Credit.

However, on December 7, 2012, the IRS released a “Revocation of Private Letter Ruling”, stating that the asset and the PPA would be valued separately, not together, as originally specified. Since 2011 the Treasury has been valuing projects in this manner, and the IRS’ most recent ruling aligns the valuation methodology between the two agencies.

At this time, it is unclear how exactly this change will play out in the ITC marketplace. Our initial analysis indicates that many projects will have a less favorable valuation.  If a project with a PPA already in place is purchased, a certain amount of the purchase value in a sale of the project may be allocated to the value of the PPA.  As a result, a reduced portion of the overall purchase price would then be allocated to the hard project assets (the basis upon which the ITC is calculated).  Thus, project valuations may experience a marginal decline, as may the amount of the related ITC.

About Sol Systems

Sol Systems is a solar finance firm and a leader in financial innovation in the renewable energy industry. Since its inception in 2008, Sol Systems has partnered with 350 solar installers and developers to bring over 3,000 solar projects from conception to completion by offering innovative financing solutions for residential, commercial, and utility-scale projects.

Sol Systems’ financing programs catalyze investments for a broad set of solar projects by simplifying their origination, diligence, and financing processes. Developers seeking financing for solar projects can access over $2.5 billion in capital through the Sol Systems investor network.

In addition to providing financing, Sol Systems also offers project due diligence, deal structuring, and asset management services – all designed to reduce overhead and transaction costs and quicken project development timelines.

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William Graves

William Graves