Note: This tool was updated on July 1st, 2021 to reflect the new changes to Revenue Share calculations as described in HB2269

This tool was developed by the Weldon Cooper Center at UVA, Virginia Energy and others. This tool is meant for use by localities to help them decide which taxation model to use for solar generating facilities, either the new Revenue Share model, or the old M&T/Real Estate tax model. Each of these models has benefits and drawbacks depending on the types of solar facilities that are being developed and the various tax rates of the localities where they are being built.

With passage of HB1131 in 2020, Virginia now offers localities two options to generate revenues from utility-scale solar development. The default option is for localities to levy a Machinery and Tools (M&T)/Real Estate tax on capital investments in solar generation facilities. Alternatively, a locality may adopt an ordinance to replace the M&T/Real Estate tax with a Revenue Share arrangement. Under the Revenue Share model, localities receive income from solar facilities at a flat rate in dollars per megawatt of generation capacity per year. The revenues that a locality could realize under each of these two taxation arrangements involve calculations that are non-trivial in complexity.

The Virginia SolTax Model is designed to assist Virginia localities to estimate the revenues they could realize under these two distinct policy regimes. Its purpose is to provide local official with insights regarding which model will provide the greatest financial benefits for a locality.

This tool will permit adjustment of project specifications as well as the ability to consider new investments in multiple years to allow examination of the revenue implications of alternative scenarios.


Login Instructions

To create a new profile, select the "Create New Profile" Button in the top right corner of the page. This will direct you to a page to enter a username, email and password. Once the account has been created, you will be asked to select a locality on which to base your initial profile parameters. This can not be changed for your profile. In order to create new projects associated with another locality's parameters, you should create a new profile.

If you have already created an account, select "Login" above.



The Decision: A Choice Between Two Revenue Model Options


The Machinery & Tools/Real Estate Tax Model

The Machinery & Tools (M&T)/Real Estate Tax is the default mechanism for localities to realize revenues from utility-scale solar projects. The tax is calculated as a percentage of the assessed value of certain capital investments made within a locality. In the case of utility-scale solar projects, the annual amount of the tax levy depends on several parameters:

  • The notional dollar value of the initial capital investment made by project developers.
  • The schedule of exemptions that apply specifically to utility-scale solar projects per § 58.1-3660 of state law.
  • The depreciation schedule applied to capital investments, whether applied by the State Corporation Commission (SCC) or the locality (whichever is applicable).
  • The size of the solar project in MW.
  • The local M&T tax rate and real estate rate, which may vary by locality.

For the M&T/Real Estate tax model, the tax rate, depreciation schedule, and exemption rate applied to projects can vary based on the size of the solar project and who is operating the project. There are three possible ways the M&T/Real Estate tax model can be applied to a project based on these parameters:

  • If a project is 25 MW or less and is not owned by an electric supplier, electric company (Dominion, APCo, or Old Dominion Power) or an electric cooperative. The M&T tax rate is used along with the locality's depreciation schedule and the M&T stepdown exemption rate.
  • If a project is greater than 25 MW and less than 150 MW OR is owned by an electric supplier, electric company (Dominion, APCo, or Old Dominion Power) or an electric cooperative. The real estate tax rate is applied to the project along with the SCC depreciation schedule, the M&T stepdown exemption rate, and uses local assessment ratios.
  • All projects 150 MW and greater will use the real estate tax rate and the SCC depreciation schedule. There is no mandatory tax exemption applied on these projects.

The 25 MW limit for projects comes from Virginia's definition of an electric supplier as defined in Virginia Code 58.1-2600 and the local taxation of electric suppliers defined in Virginia Code 58.1-2606 (Paragraph C). These two pieces of legislation state any electric supplier can not be taxed at a higher rate than the real property rate, and that an electric supplier is any person operating a facility that generates more than 25 MW of energy.

A breakdown of these categories of projects and their implications can be viewed in the image below.

In addition to these direct factors, the use of the M&T tax may cause an additional indirect effect on local revenues, through its influence on state funding for education. Under Virginia law, the costs of supporting public schools is effectively shared between state and local governments. The state’s per-pupil contribution varies by locality: it is lower for wealthier counties that are better positioned to fund schools on their own, and greater for poorer counties. The exact amount of the state’s contribution is based on the value of the Composite Index of Local Ability-to-Pay (CI), an estimate of each locality’s taxable wealth. To put the issue briefly: a new solar project may increase a locality’s CI, triggering a decrease in education funding from the state.

M&T Flowchart

The Revenue Share Model

The Revenue Share is an alternative method for localities to extract value from solar projects that was established in HB1131 and SB762 after being passed during the Spring 2020 Virginia General Assembly session. The legislation allows a locality to assess a yearly flat rate through ordinance of up to $1400/MW on solar projects built within the jurisdiction. In Spring 2021, HB2269 was passed, allowing localities to increase the revenue share rate by 10% every 5 years starting July 1, 2026. The new maximum revenue share rate per MW for yearly intervals are described in the table below. Adopting this option grants a 100% tax exemption for solar projects in exchange for the revenue share.

M&T Flowchart

Procedures for computing cash flows under the two models

The tool will prompt the user for seven pieces of information:

  • The initial year the solar project will operate in.
  • The total capitalized investment into the solar project.
  • The size of the project in megawatts.
  • The total acreage of the project.
  • The total acreage of the project that is "inside the fence".
  • The value of the land, both baseline value, and the value of land "inside the fence".
  • Whether the project is operated by an electric supplier, electric company (Dominion, APCo, Old Dominion Power) or an electric cooperative.

In addition to these variables for each analysis, each user is tied to a locality with locality specific parameters including:

  • The revenue share rate (max. $1400/MW).
  • M&T Tax Rate.
  • Real Estate Tax Rate.
  • Assessment Ratio.
  • The locality's depreciation schedule.
  • SCC's depreciation schedule.
  • The discount rate to be applied to all projects.

These variables can be changed by a user to make their analyses more accurate.

Based on this data, the tool will calculate the expected tax revenue for a locality for each of the two tax models. Results will be presented side by side, allowing for comparison.

The M&T model

To calculate the expected tax revenue from the M&T system, the model will take each year’s expected solar investments from the schedule provided by the user and break their lifetime into three periods that represent each stepdown in the M&T tax exemption. Within each period, the yearly expected tax revenue will be calculated by multiplying the project’s assessed value with the exemption level outlined in HB 1434 (80% exempt in the first 5 years, 70% for the next 5 years, then 60% for the rest of the project’s life) and the effective M&T tax rate for the indicated locality. The effective M&T tax rate is derived by multiplying a locality’s statutory rate per $100 by its depreciation schedule, should it have one.

The Revenue Share model

To calculate the value of tax revenue in an individual year from solar projects larger than 5 MW built in year \(t\), the revenue share rate is multiplied by the total number of qualifying megawatts built in year \(t\).

Composite Index

Both the M&T tax and Revenue Share models will increase a locality's Composite Index value. As stated previously the Composite Index is used to determine how much money a locality must contribute to its education funding.

For the M&T tax, the increase in the Composite Index comes from the increase in taxable land value as a result of the new project and the value of the equipment for the project. However, for the revenue share model, the increase for the Composite Index is only due to the increase in taxable land value.

Important values are needed for the Composite Index calculations. These values will be assigned to a locality's profile and a user can change them across the locality's profile. The values that are needed for the Composite Index calculations are:

  • Locality Baseline True Value.
  • Adjusted Gross Income.
  • Taxable Retail Sales.
  • Population.
  • Average Daily Student Membership (ADM).
  • Required Local Matching - Current data is from FY 2019 and can be viewed here. Value entered into the field is the sum of RLE for the Standards of Quality and RLM for Incentive and Lottery Accounts.

Converting future cash flows to Net Present Value

Under either taxation model, a stream of future revenue flows can be converted to present-value equivalents by discounting at an appropriate discount rate. Let \(t = 0, 1, \ldots, T\) index the several years over the planning period, where \(t=0\) corresponds to the present year (here, 2020), and \(T\) denotes the number of years until the limit of the planning horizon (say, \(T = 30\)). For each year \(t\), let \(c_t\) denote the cash flow received by the locality as revenue. The Net Present Value of this stream of cash flows is given by the well-known \(NPV\) formula

\[ NPV = \sum_{t=0}^T \frac{c_t}{(1+r)^t} \] where \(r\) denotes the discount rate the locality uses for its capital budgeting. The appropriate choice of the discount rate \(r\) is not obvious, and can have a significant effect on the NPV calculation. For our base case, we will assume a six-percent discount rate (\(r = 0.06\)). The tool will also allow users to enter alternative discount rates, allowing for the performance of a sensitivity analysis.

Auxiliary assumptions

  • The policy environment will remain stable (i.e. the M&T tax program will not sunset in 2030, and the revenue sharing model remains in its current form in perpetuity).
  • All new builds filed their interconnection request form after January 1, 2019 (the maximum MW level is higher for earlier dates).
  • A locality's education budget will increase by 1 percent every year. Every other value used for the composite index calculations will remain constant over time.

Uncertainties and risks

  • This calculation ignores any revenue that might come from already existing solar projects. If a revenue share is adopted, a locality cannot mandate that a preexisting project pay a revenue share rather than the traditional M&T.
  • Increases in revenue from new solar builds may trigger reductions in state education funding, which may not be fully offset by solar revenue.
  • Competition from neighboring counties on revenue share rates may lead to over- or underestimates of the extent of solar development in a locality.

Acknowledgements

A special thanks is extended to the following people for the guidance and feedback they provided throughout the development process of the SolTax application.

  • Robert Crockett, Advantus Strategies
  • Francis Hodsell, SolUnesco
  • Ken Jurman, Virginia Department of Mines, Minerals and Energy
  • Joe Lerch, Virginia Association of Counties
  • Scott Simpson, Halifax County
  • Tom Swartzwelder, King and Queen County
  • Bobby Tucker, State Corporation Commission
  • Todd Flowers, Dominion Energy


Disclaimer

This is not a forecasting tool. This is a tool is to be used as a consulting tool for localities. The suggestions from models does not constitute legal advice.