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Prepaid Power Contracts

Some renewable projects, especially solar projects, use prepaid power contracts. Under a prepaid power contract, the offtaker enters into a long term contract with the supplier to buy electricity. Upon the closing, the offtaker prepays the supplier for a portion of the electricity to be delivered under the contract.  

Before the Tax Cut and Jobs Act ("TCJA"), if the prepayment is properly structured, the supplier of the electricity may be able to defer the inclusion of the upfront payment for income tax purposes. Instead of reporting the full prepayment as its taxable income upon the receipt of such prepayment, the supplier was allowed, before the enactment of the TCJA, to take the prepayment into income only as and when the performance for such prepayment occurs, i.e. when electricity is delivered to the offtaker in the future under the contract. That resulted in a deferral benefit to the supplier because the supplier received cash payments upfront, but reported taxable income much later, typically over the course of the prepaid power contract. 

The TCJA disallows such deferral benefits from prepayments for "goods and services" identified by the IRS. The TJCA requires a prepayment for such "goods and services" to be reported immediately as income, or at best, partly in the year the prepayment is received and the balance in the year immediately thereafter. Even though the IRS has not issued guidance to identify such "goods and services", since electricity has been treated by the IRS as "inventoriable goods", it is expected that prepaid power contracts for the delivery of electricity will be affected by the TCJA. 

Before the enactment of the TCJA, the tax benefits of prepaid power contracts enabled developers to reduce the cost of capital for renewable energy projects. The changes imposed by TCJA likely would affect the pricing on prepaid power contracts, and incentivize developers to find alternative sources of capital.

© 2022 Bracewell LLPNational Law Review, Volume VIII, Number 60
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About this Author

Liam Donovan Bracewell
Principal

Liam Donovan develops effective advocacy and communications strategies for clients on tax, infrastructure, energy and other public policy issues, and helps guide these clients through the federal legislative and regulatory process.

Liam joined Bracewell from Associated Builders and Contractors (ABC), where he served as ABC’s lead on tax, energy and fiscal legislative issues for more than six years, representing the construction industry before the House, Senate, White House and federal agencies, while providing strategic guidance on the association’s political activities. He also...

202-828-5847
Vivian Ouyang, tax, transactions, capital markets, attorney, Bracewell law firm
Senior Counsel

Vivian Ouyang focuses on federal tax issues in a wide range of transactions, including joint ventures; project finance; mergers; acquisitions; divestitures; and cross-border transactions.  Vivian also has experience in capital markets transactions, traditional and structured financial products, financing transactions, and investment fund transactions.

Vivian has represented domestic and foreign financial institutions including commercial and investment banks and insurance companies, energy companies, technology companies, and consumer products...

212-938-6406
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