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The Urgency of 25c Extension

September 20, 2010
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HARDI recently launched www.savehvacjobs.com, a website created to provide a central grassroots portal for the entire HVAC industry to convince federal legislators that extending the $1,500, “25c” residential tax credits before they expire is essential for continued employment and economic recovery. In just the first 24 hours after its launch, over 200 letters had been sent to members of the U.S. Congress and Senate. That’s a fine start, but it will likely take about 100 times more letters over just a few short weeks to give ourselves a chance. “But why the urgency?” some may ask. Just nine months removed from the worst calendar year our industry has ever seen provides much of that answer. Here are three reasons why these tax credits must be extended before they expire in just over three months.

• 2010 looks a lot better than 2009, but a closer look reveals a weak recovery. Several factors aligned in 2010 for our industry that should have combined for pre-2008-ish kinds of sales in the residential sector. After two years of mild summers, 2010 featured record heat for long periods of time.

Even despite a delayed summer in much of the Western states, the sweltering temperatures in other markets kept cooling systems humming, breaking, or in dire need of replacement with more efficient, cheaper to run new systems. The 2010 general economic climate is much improved from 2009 with consumer spending and household cash both up considerably (however 2010 did pale in comparison to most post-recession recovery years).

Finally, 2010 will end up being a record-setting year for energy efficiency incentive funding. The $1,500 federal tax credits have not stood alone this year. Most states included high-efficiency HVAC systems in their State Energy Efficient Appliance Rebate Programs.

If there were ever a time to see large volumes of system replacements, this should have been the year. However, through July with most HVAC distributors confirming more aggressive-than-usual inventory strategies this year, residential a/c and heat pump unitary shipments failed to exceed 4 million.

• The mix of high-efficiency units has improved, but by how much and for how long? The industry’s strong sales in 2010 with only moderate improvement in unitary shipments indicate two trends that undermine confidence in our industry’s long-term recovery prognosis.

About 27 percent of U.S. unitary a/c and heat pump shipments were higher than 13 SEER. HARDI estimates 2010’s cooling equipment shipments will far exceed 30 percent, perhaps near 40 percent greater than 13 SEER. This positive trend has been great for gross revenues and margins, but the lack of unitary volume spikes indicates continuing high rates of repairs.

There are many reasons to believe that absent a well-advertised, well-marketed $1,500 incentive to reach higher than the bare minimum, 2011’s product mix and unitary sales volumes could look much more 2009-ish than 2006-ish as JP Morgan and some OEMs have forecasted. This may not be felt as much on the heating side, but central a/c and heat pump unitary sales of greater than 13 SEER systems could easily dip into the low 20 percent range or worse without the federal tax credits in 2011.

• If 25c is not extended in 2010, it may not get extended for some time. The fall legislative calendar is a mess and the mid-term elections aren’t helping, however there will be lame-duck activity before the end of this year’s session. If 25c extension does not get done this year, the 2010 “extenders” bill is the next best chance, but that could easily extend into the second quarter of 2011, if at all.

It is important not to underestimate the cost of a three-plus month delay in the 25c’s extension. Manufacturers and distributors are preparing now for 2011 but don’t know what to produce, stock, or market at this point. Contractors are thinking about advertising and marketing campaigns for the 2011 heating season, and planning for the 2011 cooling season, but are those ads going to say “claim your $1,500 extended tax credit” or something else? How much 2011 business might get pulled into 2010 as homeowners scramble to take advantage of the expiring tax credit (when the child tax credit was increased, delivery rooms saw a spike in late December labor inducements)? If the credits are eventually extended sometime in 2011, how long will it take for manufacturers to adjust their production, and distributors to adjust their inventories?

No one in the HVAC industry should see any of these three scenarios as positive for 2011. They can all be avoided by giving Congress no other choice but to renew these credits this year.

Publication date: 09/20/2010
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