The 30 percent federal tax credit for residential geothermal heating and cooling installations (as well as solar and wind) is set to expire at the end of 2016.
This is an irrefutable fact, but everything else surrounding the tax credit remains in a state that is best described as limbo. Will the credit be renewed or extended? Will it be forgotten? Maybe it will be partially renewed?
These are all speculations being raised throughout the industry, and while contractors have expressed doubt and concern over the potential continued existence of tax credits past 2016, geothermal experts have a much greater sense of optimism for what’s in store once the calendar turns to 2017 and beyond.
A CLEAR FOCUS
Doug Dougherty, president and CEO of the Geothermal Exchange Organization (GEO), and others at GEO have been at the forefront of the geothermal industry’s efforts to extend the federal tax credits in their current state.
“Our primary focus at GEO for the next year and a half is to get Congress to extend the tax credits,” said Dougherty. “Between our board and advocacy team, we’ve made hundreds of trips to Capitol Hill to express the true value of these tax credits. One of the points we make is that, shortly after the credits were introduced in 2008, the economy went into the tank. The solar and wind credits were immune from the recession because they were producing electricity regardless of where the economy went. The geothermal credit, however, went right to building owners, and few buildings were being built during the recession.”
Statistics from U.S. NEWS reaffirm the points made by Dougherty, stating: “In the four years following the end of the recession in 1974, 1981, and 2001, construction of new houses averaged 5.7 percent, 40.5 percent, and 23.4 percent more than during the last year of the recession.”
However, it’s been a different story since 2008. “In 2008, housing under construction was 780,900 units. The following year, it dropped to 495,400 and during the next four years averaged 40.56 percent less than in 2008.”
“We’ve told Congress we know we’re a little different,” said Dougherty. “You gave us a credit that we couldn’t really use because of the recession. We’re hearing good news on housing now, and we want an extension to see how well the credit can do.”
“The feedback we’re getting out of Washington from senators and members of the House of Representatives is good, and it is strong,” said Steve Smith, president and CEO, Enertech Global. “There have been positive responses to the idea that the geothermal credit should be extended with an eventual phaseout.
“Our first goal is a four-year extension of the tax credits,” continued Smith. “The tax credits became a fantastic tool for us during the recession that helped the industry keep its head above water. However, we haven’t had the full benefit of having the credit with a strong economy. Our sales just haven’t taken off to a high level just yet. A four-year extension would allow the economy to build and give us a sales and installation boost before phasing out the tax credit.”
IF ALL ELSE FAILS
Even with industry optimism surrounding the tax credits’ renewal after 2016, there is also a chance the federal government opts to end the credits.
“It won’t be the death of the industry if it goes away,” said Dougherty. “The geothermal industry sold units before the tax breaks, and geothermal systems will continue to sell based on their true cost and efficiency. The lifetime cost of the unit sells itself, and it’s all about how you sell it.
The tax credits caused contractors to become less focused on cost analysis, payback, and return on investment [ROI]. They just say, ‘Look at the tax credit and its benefits.’ We need to sharpen our marketing tools if the credit does
“If the benefit is not renewed, we may see a small group of contractors who only used geothermal because of the credit stop selling geothermal,” continued Dougherty. “But, we will still have the business capacity to meet demand.”
Smith admitted some contractors are concerned and continue to actively monitor the credit’s status. “Contractors approach this differently, but, if they’re committed to geothermal, they’ll still thrive when the tax credits eventually come to an end. The majority of contractors who promote geothermal are in it for the long haul and do a great job of bringing it to homeowners. Our average sale is probably a 4-ton unit for a 2,000-square-foot home. We see homes under 1,000 square feet with geothermal and homes larger than 20,000 square feet that also have geothermal installed. It’s something that really can be a fit for everyone.”
Dougherty also said while the ending of the tax credits may bring a dip in sales for geothermal, a quick rebound would be likely, and there is historical evidence to back that up.
“The dip in demand would lead to consolidation of geothermal contractors in the industry. When Canada’s [ecoENERGY Home Retrofit] tax credit went away, they had a 20 percent decline in sales, but were back to pre-credit sales levels within two years. The U.S. would probably
see the same impact — a 20 percent decline in year-over-year sales and a full return within two years.”
“We want a phaseout instead of a dropout,” said Smith. “We believe we will be successful in our efforts to extend the tax credits. If not, you’ll see a drop in the geothermal business, but it will rebound in a reasonable amount of time. It’s about recognition of the industry. Two years is a reasonable amount of time.”
For Dougherty, regardless of the tax credit outcome, he is optimistic the technology will rise above.
Smith agreed, saying, “As geothermal heat pump technology advances, it will continue to grow more efficient. Homeowners will benefit from lower energy bills and comfort, and, no matter what, that will continue as we move forward.”
Publication date: 10/26/2015