Geothermal Industry Continues Life Without Tax Credits
HVAC contractors aim to shift their sales strategies
The geothermal industry has had a rough couple of months.
On Dec. 31, 2016, the 30 percent residential and 10 percent commercial federal tax credits for geothermal heat pumps expired while credits for solar and wind were extended. The geothermal industry has been working tirelessly to rectify this Congressional oversight and reinstate the geothermal tax credits to create parity amongst renewable energy technologies.
Doug Dougherty, president and CEO of the Geothermal Exchange Organization (GEO), said the geothermal industry is banding together with other ‘orphaned technologies’ left out of the tax credit extension to create parity.
“Since last December, when Congress extended solar and wind beyond 2016, we have been working to get the ‘orphaned technologies’ that were left behind included in the portion of the tax code in section 48, which is commercial, and 25D, which is residential,” Dougherty said. “We formed a coalition with the other orphaned technologies, which include combined heat and power [CHP], fuel cells, and small wind along with geothermal heat pumps. Our bill in the house, HR 1090, now has more than 100 bipartisan cosponsors, so we’ve built a large support behind our efforts, but it continues to be an uphill battle.”
The Reed Bill, legislation introduced by Tom Reed, R-N.Y., will attempt to reinstitute and extend the credits through 2021 for geothermal heat pumps, fuel cells, microturbines, small wind, and CHP equipment.
Additionally, the recent introduction of S 1409 in the Senate by Sens. Tom Carper, D-Del., and Dean Heller, R-Nev., which is very similar to HR 1090, would retroactively reinstate the residential and commercial tax credits for geothermal.
“We’re spending time on the Hill building support for the senate bill,” Dougherty said. “However, there are two other energy-related issues that we think can be combined with our efforts that would get a lot of bipartisan support. One is a nuclear facility issue on a production tax credit tied to two nuclear power plants in South Carolina and Georgia, and the other is to amend the tax code for carbon dioxide sequestration. We think combining these three bills would garner support in Congress. I think that trifecta will work, so I’m fairly confident that we’re going to get our tax credits reinstated.”
According to Dougherty, the tax credit expiration has significantly hurt geothermal sales.
“I don’t represent all the manufacturers, but sales are down more than 40 percent for the ones I do represent,” he said. “Enertech Global laid off 27 people in its production facility in Mitchell, South Dakota — that’s public record. The irony of all this is many of the HVAC contractors in the green space also sell solar, so now they’re pushing solar for homeowners because of the tax credit. It’s a double whammy.
“It’s also a domestic job issue,” he continued. “If you think about it, 76 percent of all solar panels installed in the U.S. are imported — and most of them come from China. So, you’re giving a tax break to Chinese production facilities. All of the geothermal heat pumps installed here are made in the U.S. All of the components that go into a geothermal heat pump are made in the U.S. All of the pipe and grout that goes into the ground, the drill rigs that are produced, and all of the maintenance contracts that are done are all domestic 100 percent. The bottom line is, Congress created a tax application inequity that is wrong, and they’ve pledged to fix it. We’ve waited 18 months for them to fix it, and they haven’t.”
Jay Egg, president, Egg Geothermal Consulting, Orlando, Florida, said that while tax credits are important for sales, the contractors he interacts with have not complained about falling sales.
“I have heard more talk of improved sales strategies,” he said. “It is my experience that consumers, of which I am one, are interested in green products if they can be seen. Geothermal heating and cooling is an invisible green technology. By that, I mean there are no solar panels, wind-mills, or even cars to drive that say ‘Tesla’ to showboat around in. Bragging rights occupy a lofty place in the minds of consumers with regard to green technology. Yes, consumers are interested in green products, as long as they have the bragging rights to go along with them.”
Though bragging rights may play a part, geothermal is an easy sell if approached correctly, Egg noted.
“I suggest that contractors may want to rearrange their selling strategies,” he said. “I believe that consumers are turned off when they hear the term energy efficiency.
“I also believe that it does not work when contractors propose a more expensive product and rationalize the expense to the potential customer with a return on investment [ROI] table,” he continued. “Immediately, this places the value only on the product’s ability to save energy. This is not the way to sell any luxury item; could you imagine the Audi dealer trying to sell cars just on fuel efficiency? I suggest folks sell on luxury features because geothermal has an impressive list.
“Some of the features that are found only on geothermal systems make them ‘exclusive,’” Egg continued. “If presented properly, geothermal is a must-have product, even at a higher cost. A geothermal heating and cooling system eliminates outdoor equipment, provides storm proofing, offers longevity with no outside equipment to weather-away, eliminates noise pollution, opens up valuable real estate, eliminates fresh water consumption from cooling towers, eliminates on-site greenhouse gas [GHG] emissions, and is highly energy efficient.”
Jens Ponikau, co-owner of Buffalo Geothermal Heating in Cheektowaga, New York, and vice president of New York Geothermal Energy Organization (NY-GEO), said consumers are still interested in green products, it just comes down to a price.
“A lot of customers follow incentives,” he said. “They certainly look at monetary value of an installation. There’s no question they save energy costs by putting a geothermal system in, but the point is that the payback time is lengthened or stretched because there is a lesser amount of financial incentives provided to entice people to invest money into it. Sometimes people clearly see that while there is a longer payback, there is a comfort advantage and environmental benefits, meaning no outside emissions anymore. But, it’s simply the upfront costs and sometimes access to cheap, natural gas as an alternative that deter people to a certain amount.
“Consumers still want green products, but it has to make financial sense to them,” Ponikau continued. “They follow the dollars. They all like to be green, but they also like the green on the dollar bill.”
Ponikau said his company has begun to focus more on territories, as in targeting more consumers who don’t have cheap, natural gas alternatives.
“We’re targeting those who depend on oil or propane, which is significantly more expensive as a fuel,” he said. “In this market here, we have customers who are within the gas distribution network, and they don’t have many incentives to move away from this. It’s a different target for customers out there who don’t necessarily need a replacement of existing equipment but are suddenly paying $5,000 in oil a year. Those customers have very different incentives. New construction is also a little bit different because people can add new systems into the overall cost, so they see much better cash flow positive. And the question is not, ‘How much is a system,’ but, ‘How much more than a conventional system is it?’ So, essentially, it’s more targeting of customers using oil and propane, because it becomes a very good value proposition, and more targeting of the new construction market, where people need to put in a system anyway, because those expenses, while significant, are much less than ripping a conventional system out to install a geothermal system.”
John Ciovacco, president, Aztech Geothermal LLC, Ballston Spa, New York, said his company is down about 20 percent year to date in contracts signed.
“New York state introduced a geothermal rebate program and that’s helping maintain affordability for many customers,” he said. “It does not make up for the full 30 percent of the tax credit that expired at the end of 2016, but it’s actually easier for a larger number of home and business owners to access. Most customers are interested in green products or technologies if they feel it will also be a good financial investment. I would say only about 20 percent of our customers elected to install geothermal systems primarily to reduce their environmental impact. So, the other 80 percent also needed to see the energy savings in order to feel comfortable moving forward.”
Ciovacco said his sales approach has changed only slightly.
“We used to spend a fair amount of time explaining how tax credits worked and if someone would be able to take the credit or not,” he noted. “All that tax discussion has been deferred, so to speak. I know there are a lot of people in the industry saying we need to focus more on the non-monetary benefits, like comfort, quiet operation, or even the environmental messages.
“We still find the largest motivator is savings,” Ciovacco continued. “Luckily, with the NYS rebate available for many oil and propane heating customers, the savings are sufficient to make the installation a good investment.
“I think many of the existing geothermal design and installation companies in New York state will be OK [if tax credits are not reinstated,]” Ciovacco added. “The rebate really helps. Now, we’re seeing a lot of movement by the electric and gas utilities to find ways to incorporate more heat pumps in their service areas. There will likely be significant shifts in how customers are introduced to the concept. It’s not clear that those involved in today’s industry will be the primary installers in the future. In truth, we need many more people involved in the design and installation of these systems to meet even the most basic climate and energy goals. I would like to see a movement toward a more unified approach to promoting heat pumps — both air-source and ground-source heat pumps. I see a big shift to non-fossil fuel heating alternatives, but presently, customers have trouble making non-biased informed decisions about what type of heat pump technology is best for them. We will need more clean/renewable electricity for both electric vehicles and heating homes. Heat pumps are a core component to a comprehensive solution, so let’s not confuse people by polarizing the discussion about their non-fossil fuel options.”
A geothermal heating and cooling system is ‘the masterpiece’ of HVAC technology, and it should receive that treatment from contractors, said Egg.
“Geothermal should be our first offering to customers, both commercial and residential,” he said. “It’s surprising how easy it is to sell a product that has so many exclusive perks. I’m finding that architects and owners are embracing geothermal for its peaceful, quiet ambiance and ability to eliminate outdoor condensers and cooling towers. I’m certain these ‘sparks’ are igniting a geothermal revolution that will be remarkable over the next couple of decades.”
Publication date: 9/25/2017