IRS reverses tax ruling on wind PPAs

The U.S. Internal Revenue Service has reversed its previous position on how it will treat power purchase agreements from wind energy facilities. 

Earlier this year, IRS issued a private letter ruling addressing a tax issue arising when a taxpayer purchases wind energy facilities operating under facility-specific power purchase agreements.  Under Section 167 of the Internal Revenue Code, which establishes how depreciation works under tax law, the computation of an adjusted basis for an asset is essential to calculating tax values and liabilities.  What happens when a taxpayer purchases a wind project that operates under one or more PPAs?  Should the purchase price affect the basis of the facilities, or should part of the purchase price be allocated to the PPAs?

In January 2012, in Private Letter Ruling 201214007, the IRS concluded that the purchase price should be included in the adjusted basis of the facilities, rather than allocating any portion of it to the PPAs.  Last week, the IRS issued Private Letter Ruling 201249013, which revokes its previous private letter ruling.  According to the new ruling, "the Service has determined that Private Letter Ruling 201214007 is not in accord with the current views of the Service."  Rather, the IRS now holds that the portion of the purchase price paid by the taxpayer that is attributable to the PPAs is to be allocated to the PPAs and not to the wind energy facilities.

While private letter rulings are directed to the specific taxpayers involved and may have limited precedential value, the ruling indicates a shift in the IRS's thinking about the tax treatment of transactions involving operating renewable energy generation projects.

Inflatable flashboards at hydro dams

Dam owners are increasingly enhancing their revenue by using inflatable flashboards to optimize their hydroelectric production.  This new technology offers dam owners and operators increased safety and increased hydroelectric generation, as well as opening the door to tax credits and other incentives.

Flashboards have traditionally been a palisade of wooden boards inserted into the top of a dam's crest.  Flashboards increase a dam's capacity to hold water.  They are typically used seasonally in temperate climates, and are removed before winter.  Flooding or even high water can wash flashboards away, impairing the dam's ability to hold water until they can be replaced.  Replacing flashboards can entail danger to personnel, and it might be a long time before water levels recede enough to allow safe reinstallation.  In the meantime, a dam's ability to safely store water can be reduced.


Inflatable flashboards allow operators to increase or decrease the effective height of the flashboard system remotely.  The ability to quickly and safely restore pond elevation after a high flow event translates into increased electricity generation.  For example, inflatable flashboards at the Deer Rips - Androscoggin 3 Hydroelectric Project on the Androscoggin River in Lewiston and Auburn, Maine, have been calculated as likely to increase electric generation by 4.56% compared to a historical baseline.

This incremental hydropower generation can be valuable to the dam owner.  Not only does it allow the facility to produce more electricity, but it may also qualify the project for federal and state tax incentives.  For example, Section 45 of the Internal Revenue Code provides a renewable energy tax credit to owners or operators of qualified renewable electric generation facilities.  That credit was extended to the incremental production gains from efficiency improvements or capacity additions developed between 2005 and 2013.  Developers can ask the Federal Energy Regulatory Commission to certify a historic baseline of power produced at existing dams, as well as the incremental increase in hydropower production due to qualifying investments.  Once FERC has issued this certification, dam owners can provide that to the Internal Revenue Service to receive the tax credit.