Can Tennessee tell tax assessors to value solar, wind, and geothermal power generation property at a discount because those technologies produce less electricity than coal or gas?

Subject

Opinion No. 13-19, Valuation of Property that Generates Electricity Using Certain Energy Sources, March 11, 2013

Plain-English summary

A state senator asked whether a proposed amendment to SB1000 was constitutionally defensible. The amendment would expand Tenn. Code Ann. § 67-5-601(e), which already gave wind-generation property a valuation rule of "not . . . in excess of one-third of its total installed costs," to cover geothermal, hydrogen, solar, and wind sources. The new language would set initial valuation ceilings of 33% of total installed costs for wind property and 12.5% for solar property, with similar "ratio between the estimated actual electricity output" treatment for other renewable property.

The AG concluded the amendment was constitutionally defensible. Tennessee's uniform-taxation provision (Tenn. Const. art. II, § 28) requires that "[t]he ratio of assessment to value of property in each class or subclass shall be equal and uniform throughout the State, the value and definition of property in each class or subclass to be ascertained in such manner as the Legislature shall direct." The AG emphasized the second clause: the legislature has "broad discretion to determine the methods for valuing property in this state."

The AG's office had previously addressed the same statutory framework. Op. 03-068 (May 27, 2003) concluded that the existing § 67-5-601(e) language (the wind-only version) was constitutionally defensible. Op. 12-102 (November 1, 2012) confirmed that the statute provides a "credible rationale" for the lower valuation because of the restricted use of the property, and emphasized that the statute "instructs local assessors to take this rationale into account in appraising the property, but it does not impose an absolute cap on the appraisals."

The proposed amendment followed the same pattern. It established a credible rationale (intermittent energy sources produce less electricity than conventional generation), tied the rationale to specific valuation percentages, and instructed assessors to "take these findings by the general assembly into account in determining the sound, intrinsic, and immediate economic value of such property." Because the amendment didn't impose a per se cap and rested on a credible rationale, the AG concluded it would likely withstand constitutional challenge.

The opinion was careful with its caveat. As in Op. 03-068, the AG could not "be certain of a court's conclusions about" the amendment. The legislative history would matter. A court would look at whether the General Assembly's findings about the lower productivity of renewable-energy property were supported and whether the resulting valuation methodology was reasonably related to that lower productivity. The AG's analysis pointed to Marion County v. State Board of Equalization (Tenn. 1986), which upheld the Greenbelt valuation methodology on a similar restricted-use theory.

Currency note

This opinion was issued in 2013. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

The statutory landscape around renewable-energy property valuation in Tennessee has continued to evolve. Section 67-5-601 has been amended multiple times since 2013, and the certified green energy program rules (referenced as § 67-4-2004) have also been touched. Anyone applying these rules today should pull the current text and check for any specific valuation percentages or formula adjustments the General Assembly has made.

Background and statutory framework

Tennessee's uniform-taxation framework starts from the principle that all property must be taxed and that within each class the assessment ratio must be equal and uniform statewide. But the constitution leaves valuation methodology to the General Assembly. As long as the chosen method produces a "value" within each class that's applied uniformly, the methodology is permissible.

The challenge with renewable-energy property is that "value" for property-tax purposes typically tracks sound, intrinsic, and immediate economic value, which the assessor approximates using a mix of cost, income, and market approaches. Renewable-energy generation property installed at significant cost can produce dramatically less electricity than a conventional plant of comparable nameplate cost. If a conventional plant produces 90% capacity factor and a solar facility produces 25%, the renewable's economic value per installed dollar is lower than the conventional plant's economic value per installed dollar. The legislature's 2013 amendment was a way of recognizing that mathematical reality in the valuation rule.

The AG's earlier opinions had developed a "credible rationale" framework. Op. 03-068 said the wind valuation rule (33% of total installed costs) was defensible because intermittent wind production reduces the property's economic value relative to a comparable conventional generator. Op. 12-102 reinforced that point and added the observation that the statute didn't impose a hard cap; it instructed assessors to take the legislature's findings into account.

Marion County provides important supporting analogy. The Greenbelt program is essentially a method of valuing agricultural land at its agricultural use value rather than at full market value, on the theory that statutory restrictions on the land's use justify a lower valuation. The Tennessee Supreme Court upheld that approach. The reasoning extends to other restricted-use property: if the property is restricted in some way that genuinely affects its economic value (whether by zoning, by intermittent generation, or by some other constraint), the legislature can direct the assessor to take that restriction into account.

The proposed amendment expanded the framework to geothermal, hydrogen, and solar in addition to wind, and added a flexible "ratio between the estimated actual electricity output" mechanism for property covered by Tenn. Code Ann. § 67-4-2004 (the certified green energy production facility definition). The AG read all of this as well within the legislature's discretion.

Common questions

Does this mean renewable energy property pays less property tax than conventional generation?

In effect, yes, when the legislature's rationale holds. The valuation is lower, so the property tax is lower. The constitutional theory is that the lower valuation reflects the lower economic value of the property, not a special exemption. That's a meaningful distinction. A pure exemption for renewable property would run afoul of Art. II, § 28's limited exemption categories (see Op. 13-11). A lower valuation tied to a credible rationale about the property's actual economic value is permissible.

Could a private taxpayer challenge the valuation rule?

Yes, in principle. A property tax challenge typically runs through the State Board of Equalization, with judicial review available. A challenge could focus on whether the General Assembly's findings about reduced productivity are accurate for the specific property and whether the resulting valuation is reasonably related to those findings. The amendment's instruction that assessors "take these findings into account" rather than apply them as a cap leaves some room for case-specific adjustment.

What about residential rooftop solar?

The opinion was about commercial and utility-scale renewable energy. Residential solar property is typically captured by the residential property valuation rule, which is a separate constitutional question. The opinion didn't address residential rooftop solar.

How does this compare to Op. 13-11 (the capital improvements phase-in)?

The two opinions seem to push in opposite directions but they're actually consistent. Op. 13-11 (capital improvements phase-in) was a partial exemption: the property's actual value was unchanged, but the assessment ratio temporarily understated that value. That's the kind of exemption the constitution doesn't allow. Op. 13-19 (renewable energy valuation) is different: the rule changes the valuation itself, on the theory that the property's economic value really is lower. As long as that theory has factual grounding, the valuation rule is constitutionally permissible.

What about hybrid renewable/conventional facilities?

The opinion doesn't directly address that scenario. Section 67-4-2004's "certified green energy production facility" definition presumably resolves classification at the facility level. A facility with both renewable and conventional generation might be split for valuation purposes, but the practical implementation would depend on the specific facility and the assessor's approach.

Citations

• Tenn. Const. art. II, § 28 (uniform taxation; legislature determines valuation methodology)
• Tenn. Code Ann. § 67-5-601 (general valuation rules; § (e) on renewable energy)
• Tenn. Code Ann. § 67-4-2004 (certified green energy production facility definition)
• Marion County v. State Board of Equalization, 710 S.W.2d 521 (Tenn. 1986) (Greenbelt valuation upheld on restricted-use theory)
• Tenn. Att'y Gen. Op. 03-068 (May 27, 2003) (current wind valuation rule constitutionally defensible)
• Tenn. Att'y Gen. Op. 12-102 (Nov. 1, 2012) (credible rationale; not absolute cap)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2013/op13-019.pdf

Original opinion text

S T A T E O F T E N N E S S E E
OFFICE OF THE
ATTORNEY GENERAL
PO BOX 20207
NASHVILLE, TENNESSEE 37202

March 11, 2013

Opinion No. 13-19

Valuation of Property that Generates Electricity Using Certain Energy Sources

QUESTION

Is the language of a proposed amendment to Senate Bill 1000/House Bill 0062 of the 108th Tennessee General Assembly (hereinafter "SB1000") constitutionally defensible in the manner in which it sets forth guidelines for valuing property that generates electricity using geothermal, hydrogen, solar, or wind energy sources?

OPINION

Yes, the proposed amendment to SB1000 is constitutionally defensible.

ANALYSIS

The proposed amendment to SB1000, a copy of which was provided to this Office with this opinion request, would delete subsection (e) of Tenn. Code Ann. § 67-5-601 and substitute the following language in relevant part:

(1) The general assembly finds that any public utility property or commercial and industrial property that generates electricity using geothermal, hydrogen, solar or wind as its energy source, is generally capable of producing less electricity than conventional energy sources, and use of these facilities should be encouraged to promote North American energy independence and to conserve limited natural resources. The general assembly further finds that, unless these findings are considered in the determination of value for tax purposes under this chapter, investment in property to generate electricity using geothermal, hydrogen, solar or wind sources will be unreasonably discouraged, denying the citizens of this state the energy sovereignty, security and environmental benefits associated with the greater use of these domestic renewable energy resources for electric power generation.

(2) The general assembly further finds that, due to their dependence on intermittent energy sources and after due consideration, the sound, intrinsic and economic value of property that generates electricity using wind as its energy source should not initially exceed a value in excess of thirty-three percent (33%) of its total installed costs, and property that generates electricity using the sun as its energy source should not initially exceed a value in excess of twelve and one-half percent (12.5%) of its total installed costs.

(3) The general assembly further finds that due to its reliance on non-traditional energy sources that are generally capable of producing less electricity than conventional energy sources, the sound intrinsic and economic value of any property that generates electricity using machinery and equipment from a solar machinery and equipment or certified green energy production facility, as defined in § 67-4-2004 and not otherwise addressed in this subsection (e), should not initially exceed a value in excess of the ratio between the estimated actual electricity output of such facility type, as determined by the commissioner of the department of environment and conservation. . . .

(4) The assessor of property, in assessing any such commercial and industrial property, or the comptroller, in assessing any such public utility property, that generates energy using as its energy source wind, solar, or using equipment as defined in § 64-7-2004 shall take these findings by the general assembly into account in determining the sound, intrinsic, and immediate economic value of such property, when the property is initially appraised and each the time the property is reappraised.

To a large degree, the foregoing language appears to be modeled on the current language of Tenn. Code Ann. § 67-5-601(e), which states that

The general assembly finds that any public utility property or commercial and industrial property that generates electricity using wind as its energy source is generally capable of only generating approximately one-third (1/3) of the electricity that competing generation properties are capable of producing using coal or other conventional energy sources and that the commercially competitive disadvantage of such generation property due to its dependence on the intermittent nature of wind as an energy source similarly evidences that its sound, intrinsic, and immediate economic value for all purposes under this chapter should not initially exceed one-third (1/3) of its total installed costs. The general assembly further finds that, unless the findings are considered in the determination of the sound, intrinsic, and immediate economic value of such property for all purposes under this chapter, investment in property to generate electricity using wind as its energy source will be unreasonably discouraged, denying the citizens of this state the environmental benefits associated with the greater use of wind, as a renewable energy source, for electric power generation. The assessor of property, in assessing any such commercial and industrial property, or the comptroller, in assessing any such public utility property, that generates electricity using wind as its energy source, shall take these findings by the general assembly into account in determining the sound, intrinsic, and immediate economic value of such property, when the property is initially appraised and each time the property is reappraised.

In Tenn. Att'y Gen. Op. 03-068 (May 27, 2003), this Office opined that the current language of Tenn. Code Ann. § 67-5-601(e) is constitutionally defensible. That opinion focused on whether the language violated the uniform taxation provision of the Tennessee Constitution, which requires that "[t]he ratio of assessment to value of property in each class or subclass shall be equal and uniform throughout the State, the value and definition of property in each class or subclass to be ascertained in such manner as the Legislature may direct." Tenn. Const. art. II, § 28. Observing that "the Legislature has broad discretion to determine the methods for valuing property in this state," this Office reasoned that the current language in Tenn. Code Ann. § 67-5-601(e) contains a credible rationale for the valuation methodology set forth therein. Tenn. Att'y Gen. Op. 03-068, at 3 (May 27, 2003). In a more recent opinion, this Office explained that Tenn. Code Ann. § 67-5-601(e) "provides a credible rationale for setting the value of property at 'one-third of its total installed costs' because of its restricted use." Tenn. Att'y Gen. Op. 12-102, at 3 (Nov. 1, 2012). This opinion further observed that "the statute instructs local assessors to take this rationale into account in appraising the property, but it does not impose an absolute cap on the appraisals." Id. The principle that a restriction on the use of property may affect its valuation for purposes of ad valorem taxation was recognized in Marion County v. State Board of Equalization, 710 S.W.2d 521, 523 (1986) (upholding Greenbelt valuation methodology).

Like the current version of Tenn. Code Ann. § 67-5-601(e), the language of the proposed amendment sets forth a credible rationale for establishing lower values for property that generates electricity using geothermal, hydrogen, solar, or wind energy sources due to the intermittent nature of these energy sources that results in a restricted use of the property. Moreover, the proposed amendment does not impose a cap on appraisals of such property but merely requires the comptroller and local assessors to take the General Assembly's findings into account in appraising the property. Should this proposed amendment to SB1000 be enacted as law, the courts likely would take into consideration any information in the legislative history that supports the findings and valuation levels set out in the bill amendment. As noted in Tenn. Att'y Gen. Op. 03-068, at 3, "we cannot be certain of a court's conclusions about" the language of the proposed amendment; however, we believe that the proposed amendment is constitutionally defensible as written.

ROBERT E. COOPER, JR.
Attorney General and Reporter

WILLIAM E. YOUNG
Solicitor General

MARY ELLEN KNACK
Senior Counsel

Requested by:

The Honorable Lowe Finney
State Senator
312 War Memorial Building
Nashville, Tennessee 37243