Does My Solar Project Require a Payment in Lieu of Taxes (PILOT)

In Massachusetts, the answer is maybe and it all depends on who owns the system and how it is interconnected. M.G.L. c. 59 Sect. 5, Clause 45 (scroll down to forty-fifth clause) states that solar and wind powered devices are exempt from property taxes for a period of 20 years from the date of installation. The Massachusetts Dept. of Revenue has interpreted the statute to apply to all systems owned by the end use consumer of the energy output and interconnected on a "behind the meter" basis. The DOR provides a nice write-up of their logic in the March 2012 City and Town Newsletter.

I've noticed that many solar developers in MA seem to push a direct connection to the grid as opposed to a behind the meter connection. With a direct connection, the solar output is exported to the grid and the value of the output is assigned to the host customer via net metering credits. Developers tend to prefer this because direct connections can be easier from a technical standpoint and because direct connections also offer more arbitrage opportunities regarding the rate assignment that determines the value of the net metering credits (e.g., NGrid G1 vs. G3). What these developers often sweep under the rug is that direct connections require a PILOT and the PILOT negotiation process varies on a town by town basis.

Any solar system that is owned by a third party and/or connected directly to the grid will be subject to a PILOT agreement. For any system owned by a third party, it doesn't matter if the host customer is a public or private sector entity. There are three ways that the PILOT payment can be determined: the cost approach; the comparable sales approach; and the income capitalization approach. Since there are few comparable sales of completed solar arrays, the choice for new systems is really between the cost approach and the income capitalization approach. There are risks to each method due to the variability in the income streams associated with electricity avoided costs, net metering credits, and Solar Renewable Energy Credits (SRECs.). When negotiating a PILOT, success is defined as achieving a manageable PILOT that will not negatively impact project economics or be large cost burden in the future if the financial performance of the solar array is worse than anticipated.