In Michigan, solar energy development is gaining momentum thanks to legislation that streamlines processes and supports local communities and developers. Here’s what the Solar Energy Facilities Taxation Act means for the state.
Michigan demonstrated its commitment to promoting solar energy development in legislation that went into effect on July 27, 2023. House Bill 4317, which is tie-barred with House Bill 4318, establishes the Solar Energy Facilities Taxation Act and revises the General Property Taxation Act. The dual aim of this legislation is to galvanize support for solar development within local communities and give developers a clearer financial landscape via a predictable Payment In Lieu Of Taxes (PILT) system, potentially lowering conflicts and expensive legal battles between local governments and solar project stakeholders.
Predictability and Stability in Solar Energy Financing
Ad valorem property taxes are among the highest recurring costs for utility-scale solar development and also generates significant revenue for the communities in which these developments are situated. However, this revenue often gets dispersed in multiple directions, not always benefiting the communities directly. Additionally, assessments can vary year to year making the flow of funds unpredictable. The Act’s PILT framework can provide local communities with reliability and certainty in revenue.
Addressing Challenges for Solar Developers
Solar energy developers face a long road when they commit to a greenfield development project since such projects are subject to strictly enforced local ordinances, sometimes simultaneously, across multiple jurisdictions. Additionally, some rural communities have yet to adopt solar ordinances, requiring project leaders to work with local governments to amend and/or adopt new ordinances. Not all communities welcome solar development projects, leading to extended timelines and uncertain outcomes. The Act offers developers reduced costs early in a project’s lifespan and predictability throughout.
Shaping the New Solar Infrastructure: Details Matter
Under the new legislation, local governments have the option to establish “solar energy districts” within which solar facility owners may opt into a PILT system. The Act’s definition of “qualified facilities”—located within a solar energy district—includes, for tax exemption purposes, all land improvements (except buildings) exclusively used for solar energy generation, which, includes photovoltaic panels, access roads, security fences, and communication facilities. Interested owners or developers must apply to local governments for a solar energy exemption certificate. These certificates grant a 20-year exemption from ad valorem property taxes, effective December 31st of the year they are issued.
The Financials: Breaking Down the PILT System
The amount a facility pays under the PILT framework is based on the assessed value of the facility, less the value of the land on which it sits or is planned for. Assessments are annual, pursuant to a facility’s annual filing. The new tax rate is equal to $7,000 per megawatt of nameplate capacity, alternating current, as reported on the filing. The Act provides for some facilities, such as those located in federal “opportunity zones” in low-income communities, to benefit from a lower rate of $2,000 per megawatt. All facilities qualify for a 50% rate cut during construction until the facility is placed into service, as well as a 100% rate cut during the period after the certificate’s effective date but prior to the start of construction.
The Future of Solar Energy Development
This new legislation provides an opportunity for both communities and developers to create a more financially certain and less contentious road to a solar development project’s completion. However, because the Act’s solar energy districts and PILT system are elective, their true impacts have yet to be observed.
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