ITC normalization?

Hi,

I am looking to model the impact of ITC normalization required for utility ownership (spreading the ITC over the life of the project) compared to PPAs from third-parties (applying 5-year MACRS).  What financial models and settings will most directly mimic a rate-base return for utilities?

Thanks,
Kevin

Hi Kevin,

I was not aware of this tax normalization issue for for-profit utilities, but found these helpful articles to learn about it:

• www.utilitydive.com/news/itc-tax-normalization-limits-solar-growth-and-favors-fossil-fuels/577920/
• www.communityenergyinc.com/solaritcpaper

SAM does not have an input for normalized ITC, but I think you could get close to modeling it by reducing the Federal income tax rate by the normalized annual credit percentage.

I am a little confused by your question about "rate-based return" because I'm not sure how that term relates to "ITC normalization."

Best regards,
Paul.

Paul,

Thanks for the reply. IOUs are required to spread the ITC over the life of the project, so a 30-year asset would get 1/30 of the ITC benefit each year. Maybe setting a custom depreciation schedule at 3.33% per year and ticking the ITC check marks might accomplish this?

The rate-based return comment was not directly related to the ITC normalization. I was referring to cost of service regulation where the utility gets straight-line depreciation of the asset and earns a regulated rate of return on the net asset value plus recovery of expenses and taxes  Essentially, I am trying to compare the revenue requirement of a utility-owned, rate-based project to a PPA from an IPP for the same size project with the same capital costs. I am not sure which model best duplicates the utility ownership structure. 

Thanks,
Kevin

Hi Kevin,

SAM's PPA models are designed for IPP projects, so they do not have these features that would apply to an IOU owner.

For the normalized ITC: I think you could model this by setting the ITC on the Incentives page to zero and reducing the Federal Tax Rate by the normalized ITC amount. For example, given a federal income tax rate of 30%, 26% ITC, and 30-year analysis period, you would use Federal Tax Rate = 0.30 - 0. 26 * 0.0333 = 0.291, or 29.1%.

The "ITC Qualification" check boxes on the Depreciation input page determine whether the portion of the capital cost associated with a given depreciation class qualifies for the ITC. But, for this normalized ITC, we are setting the ITC to zero, so the check boxes should have no effect on the results.

Best regards,
Paul.

Hi Kevin, if you would like to discuss ITC normalization modeling, I would be happy to do that. - Weimin