In a recent private letter ruling, LTR 201311003 (read the private letter here), the Internal Revenue Service (the “Service”) concluded that a wind farm was placed in service despite the fact that the permanent interconnect to the power grid was not completed.
Under the facts of the ruling the taxpayer was building a wind farm (the “Project”) that consisted of a number of wind turbine generators (“WTGs”) and electrical gathering and transmission facilities. By the end of Year 1, all of the WTGs are expected to have been commissioned and available to produce electricity for sale to the electric grid. However, the interconnection between the Project and the transmission line is not expected to be completed by the end of Year 1.
Because the interconnection will not be ready at the end of Year 1, the taxpayer has arranged to connect to the grid through a temporary arrangement under which power from the WTGs will be transmitted through a temporary tie line that will be energized and available prior to the end of Year 1. Each of the WTGs will be rotated across the temporary tie-line so that each will be operating a reasonably consistent number of hours.
In analyzing whether the Project will be placed in service in Year 1, the Service considered the five factors that are generally taken into account in determining whether a generating facility has been placed in service:
- Approval of required licenses and permits;
- Passage of control of the facility to the taxpayer;
- Completion of critical tests;
- Commencement of daily or regular operations; and
- Synchronization into the power grid for generating electricity to produce income.
The taxpayer represented that before the end of Year 1:
- All necessary permits and licenses with respect to the WTGs will have been obtained;
- Each WTG will have been synchronized to the grid for its function of generating electricity for the production of income;
- The critical tests for the various components of the WTGs will have been completed;
- The WTGs will have been placed in the control of the project company by the supplier and the contractor; and
- The taxpayer expects to have sold a non-deminimus amount of electricity generated by the Project and by each of the WTGs.
The taxpayer also represented that in the event of a delay in the completion of the interconnect past the end of Year 1, the taxpayer would rotate the WTGs across the temporary tie-line so that each would be operating a reasonable number of hours.
Based on the facts and the taxpayer’s representations, the Service concluded that the Project would not be precluded from being placed in service during Year 1, if the interconnection was not completed as long as it was able to deliver an unspecified portion of its capacity to market via the temporary tie-line and the WTGs were rotated across the temporary tie-line so that each is operating on a regular basis. “Daily operation of the WTGs at full rated capacity is not necessary to establish that the WTGs are placed in service. . . . As long as the WTGs are ready and available for use and producing commercial output on a regular basis, operating at full capacity is not necessary to establish that the WTGs are placed in service.”