For the past decade, those in the geothermal heating and cooling industry have benefited from two tax credits that incentivize residential and commercial geothermal installations. But both of these tax credits are four months away from expiring, and all efforts to extend them have failed thus far.
Meanwhile, as they are keeping a close eye on the situation and supporting the lobbying efforts of organizations like the Geothermal Exchange Organization (GEO), geothermal manufacturers and dealers are also looking ahead to what a future without these tax credits might look like.
A DISAPPEARING ACT
From 2005-2008, the Section 25D income tax credit allowed homeowners to claim 30 percent of the cost of a geothermal installation up to $2,000; in 2008, the $2,000 cap was removed.
“That was the biggest tax benefit this industry has ever experienced,” said Doug Dougherty, president and CEO, GEO. “Along with that, a section of the internal revenue code dealing with the investment tax credit for commercial energy-efficient properties was amended to offer a 10 percent investment tax credit for commercial [geothermal] installations with no cap, and that became a bigger tax benefit for those in the 48a section of the code — along with wind, solar, and fuel cell [technologies] — who not only got the 10 percent investment tax credit, but could have the systems’ accelerated depreciation over a five-year period rather than a 39-year straight-line depreciation. Also, if one can utilize accelerated depreciation, which geothermal can, one can then also take advantage of the 50 percent first-year bonus depreciation.”
Both of the tax credits expire at the end of 2016, and while solar and wind technologies received a five-year extension in the omnibus bill late last year, geothermal was left out.
“We heard from leaders afterward that it was a mistake and that there would be a willingness to bring geothermal technologies in line, in parity, with what solar and wind got,” Dougherty said. “So, we then began a very concerted lobbying effort in Washington.”
Earlier this year, GEO’s lobbyists attempted to attach the tax credit extensions as amendments to the Federal Aviation Administration (FAA) tax authorization bill, which was expiring in late March. However, the bill was extended without amendments in March and passed without amendments in July.
“And so, now, we’ve had conversations with leadership again asking where we stand, and they said in the House there is a bill, HR 5167, which now has 20 cosponsors on it, and 13 of them are Republicans,” Dougherty said. “The bill was introduced by two Republicans and two Democrats, and it would fix our issue. So, we have been building a lot of support for people to cosponsor that bill and show House Ways and Means Committee Chairman Kevin Brady, R-Texas, and Speaker Paul Ryan, R-Wisconsin, that there is Republican support for fixing this. And in the Senate, there’s a bill that was introduced last year that only deals with the residential credit, but we are also working on the Senate side to build support and show leadership that there are members [of Congress] who believe this is a very important policy issue that needs to be fixed and that the federal government should not be in the business of picking winners and losers, which is exactly what they’ve done this year.”
Dougherty contends that extending the solar and wind tax credits while leaving out geothermal has created an uneven playing field in the renewables market.
“We believe it’s blatantly unfair,” he said. “There are some who say we should be able to survive without the tax credits, and I believe that, too. We were an industry that was viable prior to the tax credits being issued, and we’ll still be a viable technology after the tax credits, but from a public-policy standpoint, we shouldn’t be picking winners and losers in the same space. It’s a question of fairness at this point.”
AN ELEVENTH-HOUR FIX?
An extremely compressed calendar for Congress means it is highly unlikely the credits will be extended before the election, said Barton James, senior vice president of government relations for ACCA.
“Unfortunately, we’re in a record-setting presidential cycle,” James said. “When [Congress] comes back in September, they will have been out for the longest recess on the record books. The conventions started earlier than they ever had, both the Republican and Democratic sides, which is a sign of how political our country has become. They come back for a whopping 17 days of session before the election cycle, and nothing is going to happen then. This certainly won’t happen then. So, the lame-duck session after the election is a possibility.”
However, James said even the lame-duck session is no guarantee at this point.
“If I were a betting man, I would bet it will be reinstated retroactively,” he said. “That seems to be how they do tax credits when they renew them.”
Dougherty is holding out hope for a lame-duck fix at the end of the year.
“There might be an omnibus bill or a continuing resolution or something,” he said. “It’s very frustrating at times, but you have to be persistent and consistent, and at the end of the day, I believe we will be successful.”
The geothermal industry is already seeing the number of installations, especially commercial new-build projects, drop off as Dec. 31 approaches, as the wording of the tax credit requires commercial geothermal installations to be completed and placed into service by Dec. 31, Dougherty said.
“When the solar and wind industries got their extension in December, they changed ‘placed into service’ to ‘commenced,’ which is big because if you’re building a large building with a geothermal heat pump system, the building has to be built and the system has to be operating by the end of this year. And you can’t build a six-story office building in six months. We’re already seeing the impact of not having certainty with the tax credits, especially in the commercial space.”
“For all intents and purposes, the 48a commercial credit is already dead, as the language in the current tax code calls for the installation to be complete by the end of the tax year,” said Joe Parsons, vice president and COO, EarthLinked Technologies Inc. “Commercial projects typically have long project cycles, and architects and design engineers who once considered the benefit of the tax credit are not relying on it in their energy life-cycle cost calculations. It is important that any future tax credit be tied to the commencement of a project rather than its completion.”
On the residential side, Dougherty anticipates geothermal installations in custom homes will also take a hit. “We’re already seeing people who had planned to go to geothermal systems for their 4,000-square-foot homes not putting geothermal in because they won’t have the system up and running by the end of the year. So, that’s another reason we’re fighting every day to get this changed. We want parity.”
IF THEY DISAPPEAR
Roshan Revankar, training program manager, International Ground Source Heat Pump Association (IGSHPA), said the organization is closely monitoring the tax credits and working closely with GEO to advocate for their extension. If the credits are allowed to expire and are not renewed, however, there are ways to keep geothermal a viable option, despite its higher first costs, he said.
“We’re working closely with different states to help them promote different state tax credits, and IGSHPA is a member of different sectors,” he said. “One of them is the utilities sector. They are part of our core mission to make this technology accessible and affordable. A lot of the programs we’re hearing about involve financing, loop leasing, and taking away the first cost. For example, individual borehole systems for individual homes are owned by the utility and put in as a fixed rate in their bill.
“The best example that one utility gave us is that, for 2,000-square-foot homes, a geothermal system could reduce a monthly bill by close to $100. Even if a homeowner buys or pays for the whole system and adds it to his or her monthly mortgage, it goes up $50-$60 per month. So, in a sense, they are still saving about $40-$50 per month. In fact, they are making money from those systems. Those are the types of marketing points you’re trying to bring across.”
Revankar also predicts that if the credits are allowed to expire, the industry may drop its prices accordingly. “The industry has a tendency to drop prices on the front end, typically starting from the manufacturers or distributors down to the dealers, so the product prices might reduce. And the focus will be on the selling points of the technologies in spite of the little higher first cost.”
Planning for a future without the credits is a good idea, Revankar added, even if the tax credits are extended in the lame-duck session or retroactively next year.
“Federal tax credits are not something that will always be there,” Revankar said. “A lot of our members know this has to happen sometime. The sooner it happens, the better, because you’re giving them time to be educated and be able to sell the systems.”
CONTRACTORS IN LIMBO
Chuck White, vice president of regulatory affairs for Plumbing-Heating-Cooling Contractors (PHCC) — National Association, said his organization supports extending the tax credits.
“We do have a number of contractors who do a fair amount of [geothermal], and they are, of course, supportive of continuing [the credits], which certainly help consumers afford this efficient technology,” he said. “We do try to support any efforts for any legislation proposed [that would extend the credits].”
Steve Bowman, president and owner of Bowman Mechanical Services in Garner, North Carolina, said he is frustrated by both the uncertainty and the politics involved in the tax credit issue.
“Our frustration is that we think the opposition to renewable energy tax credits is not grounded in economic fact — it’s a political issue,” he said. “They are opposed to renewable energy because for some reason they associate it with being touchy-feely ‘green.’ It’s just a question of trying to get it on a level playing field with the other renewables and fossil-fuel-based products.”
Bowman said geothermal installations have waned, and if the federal credits go away, he’s not sure what the industry will do.
“It’s like having your legs cut out from under you,” he said. “If you make a commitment to something, you should follow through. Five years is not enough time to bring a technology like geothermal into the mainstream.”
Like Revankar, Bowman believes public utilities should get into the loop business. “To get geothermal into the mainstream, we’re going to need to have that infrastructure handled by someone else to drive down the end price to the consumer. Then you will see it flourish, it would be so logical at that point. It’s a good business model for utilities, too.”
MANUFACTURERS ARE CAUTIOUSLY OPTIMISTIC
Geothermal heat pump manufacturers are acutely aware of the expiring tax credits, though they do not necessarily think the end of the credits would spell disaster for their businesses.
Mark Ladd, residential geothermal platform manager at Carrier Corp., said that while geothermal tax credits incent some customers to choose geothermal who otherwise wouldn’t, “the majority of customers choose geothermal because of the long-term energy savings, and for customers who are willing to look at the long-term savings from geothermal, the loss of tax credits will not make a difference.”
Naveen Halbhavi, director of marketing, ClimateMaster Inc., also said the tax credits are likely to push customers over the edge who are otherwise on the fence, though cost is not the only thing their customers consider.
“Many consumers make the choice of geothermal not just based on cost,” Halbhavi said. “The market segment that is highly sensitive to cost will probably look harder at other alternatives, but many consumers make the choice of geothermal not just based on cost but for other benefits, like higher efficiency, environmental friendliness, and the absence of a noisy outdoor unit.”
For EarthLinked Technologies Inc., the federal tax credits have had a positive impact on sales over the years, Parsons said. “We have used the 30 percent [credit] in promotional literature, and our dealers/installers have used the credit to help close sales by helping to level the cost to install when competing against high-efficiency air-source heat pump and gas-fired heating systems.”
If the credits expire, Parsons said, “There will be a short-term decline in sales, but I feel the consumer demand for geothermal heat pumps will remain constant and will increase once the cost of fossil fuels once again begins to rise.” He added, “It’s important to remember that the years with the highest number of geothermal heat pump sales were years without a federal income tax credit.”
Steve Smith, president and CEO of Enertech Global LLC, predicts the tax credits stand a 70 percent chance of being extended before they expire on Dec. 31.
“We don’t think there’s been much effect up to this point, but we do expect to see an increase in sales during the fourth quarter of this year from those homeowners who have waited to take advantage of the expiring tax credit,” he said. “We expect to see some adverse effects, but Enertech has been working on other avenues that will positively impact the net installed cost of a geothermal system. We want to turn a negative into a positive.”
Tim Litton, director of marketing and communications, WaterFurnace Intl. Inc., is also optimistic about the future of geothermal — with or without the tax credits.
“Geothermal heat pumps make sense with or without an incentive, and many of our most successful years were prior to the 30 percent federal credit,” Litton said. “Most of our dealers have been with us for a long time and began selling WaterFurnace products based on concepts like positive cash flow, return on investment, increased comfort, increased reliability, and quiet operation. We’ve been working to prepare them to be successful if the credits were to expire.”
Litton added, “The expiration of the federal tax credit would be a setback for the residential geothermal industry, but we believe it would only be temporary.”
Publication date: 8/29/2016