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Power Company (LDC) will consult with large industrial and commercial customers in its service territory to determine large scale energy efficiency needs, scale of project and related costs and efficiency gains.
The project would be eligible for a 20% ITC once it meets the test described below. If the efficiency project already falls under the current definition of energy property under Section 48 (for instance CHP), the existing percentage under Section 48 would apply (such as 10% for CHP).
Power company will then consult with state regulators regarding the identified projects, overall costs, energy efficiency savings and compare that to the cost of building a power plant. If approved, cost of project will be put into ratebase of utility (similar to the manner in which the cost of a power plant is put into ratebase). The tax credit value will flow through to ratepayers using rules defined by utility commissions.
With State regulatory approval, projects will proceed using capital provided by utilities. Federal tax credit will be provided to utility once the project is in service. Consumers will benefit from lower cost of project to meet energy demand vs. the utility building new power plants. Customers will also benefit from a diversified source of methods to meet demand (energy efficiency). States will benefit from keeping overall rates lower than they would otherwise be as well as from increased productivity of industrial and large commercial customers, increasing the state tax base.
In order to reduce the cost of the tax credit, the industrial customer will pay back the value of the credit to the Treasury over time. The first two years, there would be no obligation to pay, the final three years the value of the credit will be paid back in three annual payments.
Example 1: Assume a utility and a customer identify a project which will cost $10 million to implement. The tax credit rate for that project is 20%, and the utility will therefore claim a $2 million credit.
The customer has no taxable income resulting from this project and has no basis in the facility. The customer will however pay the $2 million value of the credit to the Treasury. In year three through five after the investment is made, the customer will pay approximately $670,000 per year.
In this example, if the project is a generating facility and if there is any excess power resulting from the project, that excess power will go to the utility. The utility will also receive all environmental attributes relating to the project.
Example 2: If a utility invests 50% in a project and the customer also funds the project at 50% (say for a combined heat and power project) totaling $20 million, the tax credit would be 10% (which is the current rate for Section 48 credits in the tax code for combined heat and power projects). The utility will claim $1 million in credit under the new ITC, while the industrial customer will receive the other $1 million credit under the existing Section 48.
The customer will still not be required to claim taxable income for the utility’s portion of the investment. While the utility portion of the investment won’t be added to basis, the customer’s portion will be depreciated over time like any other investment the customer would make.
The customer will pay back the $1 million utility ITC, but not its Section 48 credit.
In this case, since the utility owns one/half of the investment, one/half of excess power will flow to customers.
The utility and customer would also split any environmental or renewable energy credits resulting from the investment.
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