OYA Solar Explains Why Tax Revenue from Solar is Smart, Stable, and Community-Driven
In New York, the number of large-scale solar installations increased substantially over the past ten years. While the focus, rightly so, is on the environmental and health benefits to citizens, there are significant financial benefits for communities that welcome solar developments, and one such benefit comes in the form of tax revenue to local governments. In the example of Jefferson County, New York, the tax revenue from solar could increase substantially over the next few years if the solar projects in the pipeline reach completion.
The Impact of the Real Property Tax Law § 487 on Solar
As a measure to drive growth in the solar industry in New York, the State adopted the Real Property Tax Law (RPTL) § 487, which exempts the value of the solar panel system from local property taxes. Similar to tax incentives for other energy sectors, such as oil and gas, the measure encourages innovation and growth. As a way to replace those tax benefits for the local communities, the law allows for a “payment-in-lieu of taxes” (PILOT). Governments can seek a PILOT from a solar developer as compensation for those lost tax revenues.
Opting Out Disincentivizes Solar
A second path is available to municipalities and other levels of government; they can choose to opt out of the Real Property Tax Law (RPTL) § 487 and make solar installations fully taxable. However, this increases the homeowner’s private installation costs, in addition to the large-scale solar developer’s. In effect, solar becomes financially inviable on both ends of the spectrum. As a result, the number of solar installations within the jurisdiction will inevitably decrease. If the choice becomes a negotiated PILOT for tax revenue or nothing, then generating revenue is generally the better option.
Additionally, the cost of opting out and, in effect, disincentivizing solar development have implications for the widespread adoption of solar energy. The early adopters of solar encourage their neighbors to accept solar and increase the adoption and acceptance of solar in a community. By opting out, the local government not only prevents the early adopters from installing solar but also the second generation influenced by the actions of a few members of the community ahead of the pack. Read more about the impact of neighbors on widespread solar adoption in this article by The Atlantic.
How does a PILOT agreement work?
NYSERDA has developed a toolkit to help communities assess the value of large-scale solar projects in their communities. Two common questions arise when faced with negotiating a PILOT agreement for a solar project:
- What is a fair PILOT amount?
- How do we negotiate a successful PILOT agreement?
What is a fair PILOT amount?
In short, NYSERDA recommends that PILOT rates fall between 1% and 3% of the compensation which solar developers receive for the electricity. This recommended percentage comes from an independent analysis of the current solar market data, the VDER stack amount, and the Public Service Commission proceedings.
The long answer is that the amount is dependent on the overall project economics – how much can the solar developer afford and allow the local community to benefit from the project without making it financially unviable? The factors within project economics include development, construction, and maintenance costs, in addition to the revenue from electricity sales.
Jefferson County: More Solar Projects Mean More Tax Revenue
In Jefferson County, there are around 9.9 MWac of commercial or industrial projects. If they all were large scale projects and PILOT agreements were negotiated for all of them, then the County would receive $16,830 in tax revenue each year. That may seem like a small amount, but if the full pipeline of 139 MWac solar projects reached operational, then that number balloons significantly to $236,300 each year. Over the life of the projects, and in a rough calculation, they generate $5.9 million for none to minimal resource use from the county. At 3% tax revenue, that number grows to $17.7 million over 25 years.
How do we negotiate a successful PILOT agreement?
The first step is to understand the value of the project. NYSERDA has provided two calculators that are appropriate for either a jurisdictional-wide blanket calculation or a site-by-site calculation. Using the formulas created by NYSERDA, it’s simple to see how much is appropriate to request in taxes.
Note that for smaller projects under 1 MWac, it may not be worthwhile to negotiate a PILOT agreement when weighing the costs versus benefits.
The second step is to review the applicable laws and consider creating one of your own. NYSERDA again has created a resource for creating a PILOT law that ensures the entire benefits are available to the whole community.
Finally, the last step is to sign an agreement. Your jurisdiction may want to write an agreement or choose to use the NYSERDA agreement as a template.
The last word, PILOT agreements are a tool to reward communities for opening the door to solar development while still maintaining the financial feasibility of solar. The cost of solar has gone down significantly in the past 10 years, which alleviates some of the financial pressure on solar companies. Yet, the margins are still razor-thin for many of these companies, a fact, that has become more obvious during the economic impact of COVID-19. If we compare the overall carbon impact of solar, a mere 6 g/kWh, on the environment as compared to coal, 109 g/kWh, solar becomes the obvious healthier option for U.S. communities.
If you have questions about some of the facts we’ve noted here or how PILOT agreements work, please reach out to email@example.com.