Federal Geothermal Tax Credits Included in House GOP Tax Bill
Industry excited yet cautious about the potential return of the 30 and 10 percent federal tax credits
After two years of strenuous, grassroots efforts, it appears as if geothermal tax credits are making a comeback.
The credits, which were discontinued Dec. 31, 2016, were included in the House tax reform bill, HR 1, “Tax Cuts and Jobs Act,” introduced by Kevin Brady, R-Texas, on Nov. 2.
Under HR 1, the residential income tax credit would be retroactive to Jan. 1, 2017, at 30 percent and continue at that level until 2020 when it would drop to 26 percent. The credit would continue at 22 percent until Dec. 31, 2021, when the credits would end.
The 10 percent commercial investment tax credit would remain flat through Jan. 1, 2022. The language in the bill would allow projects to continue through 2022 as long as the property where the construction occurs began before Dec. 31, 2021.
“We are very excited,” said Doug Dougherty, CEO, Geothermal Exchange Organization (GEO). “Our sole purpose at GEO over the last two years has been to fix this tax inequity. We’ve had tremendous support from the industry and appreciate everyone who’s walked the halls in Washington, wrote letters, or placed calls. This is a huge step forward for us.”
EVEN OUT THE PLAYING FIELD
In late 2015, Congress prepared to extend the geothermal credits — along with credits for wind, solar, and a list of other renewable energies — as part of its end-of-the-year omnibus bill.
But, when the dust settled, the wind and solar credits were extended while geothermal, fuel cells, and a handful of other renewable energies were not.
At the time, House Minority Leader, Nancy Pelosi, chalked this up to a drafting error and vowed to fix Congress’s mistake.
Two years later, that correction has yet to materialize.
“All along, all we’ve wanted was parity with solar and wind,” Dougherty said. “The No. 1 goal of sensible public policy is to provide sensible public policy. That’s not occurring currently. Under the current policy, government is picking winners and losers, which is unfair.”
Dan Ellis, CEO of ComfortWorks Inc., an Oklahoma City-based residential and commercial geothermal contractor, agreed, saying legislators shouldn’t be selecting the players in the energy space.
“These individuals are politicians; they’re not experts on every matter,” Ellis said. “In the long run, I’m in favor of a technology-neutral policy regarding energy technologies. Both renewable and fossil fuel energies should be incentivized or neither. Let the market decide which is best on a case-by-case basis. With the history for fossil fuel tax incentives dating back to 1913, I am not holding my breath. ”
The sudden elimination of the 30 and 10 percent tax credits negatively impacted the geothermal industry.
“Residential shipments are down 45 percent — we’re getting crushed,” Dougherty said. “Manufacturers have laid dozens of people off. Geothermal installers can make as much as $80,000, and we’re losing jobs left and right. If government’s end game is to create jobs, this policy is doing the exact opposite.
“A lot of geothermal contractors operate in the green space and also sell solar panels,” he continued. “If they can offer solar at a 30 percent discount, they’re most likely not even going to bring geothermal into the conversation.”
Over the past year, Ellis said the residential geothermal sector has suffered the most.
“The loss of the residential credit created a significant hole,” Ellis said. “Drill rigs can cost $1 million, and loop contractors can’t afford for those machines to sit idle. Layoffs have occurred, and some installation companies have shifted toward conventional HVAC systems out of necessity to make up ground.
“Customers are being signaled that solar and wind are better technologies because the government is on their side, but this is certainly not the case when it comes to the thermal energy we need for space conditioning and water heating,” Ellis continued.
WILL IT ACTUALLY HAPPEN?
While the geothermal industry has been largely receptive to the inclusion of the tax credits in HR 1, nothing is final until it’s signed into law.
The Senate version of the tax reform bill, which was introduced on Nov. 9, lacked any energy provisions. Senators have proposed more than 355 amendments to the initial filing, including one from Dean Heller, R-Nev., and Rob Portman, R-Ohio, called the “Technologies for Energy Jobs and Security Act,” which includes the geothermal credits.
Even if tax reform stalls, Dougherty is confident the credits have overcome the necessary bureaucratic hurdles and could be included in an end-of-the-year omnibus bill.
“We had more than 120 cosponsors for HR 1090, including eight Republicans who sit on the House’s Ways and Means committee,” Dougherty said. “Chairman [Kevin] Brady accepted the language, which was huge for us. Then, he convinced Speaker [Paul] Ryan to go along, which is how the language ended up in the tax reform bill. Additionally, we have [House Minority Leader] Nancy Pelosi and [Senate Minority Leader] Chuck Schumer on board as well. All four leaders have shown a desire to fix this tax inequity. We’re in a much better place now than we were previously. As a politician, you can’t sign off on something and renege. Now, for us, it’s a matter of keeping our eye on the ball and getting it across the goal line.”
THE INDUSTRY REACTS
Dougherty is confident that the industry will return to its pre-2016 sales and installation levels within one year of the tax credits’ reintroduction.
“These tax credits will facilitate a significant uptick in sales and installations,” he said. “I believe there are people in the middle of retrofits who are waiting for this to occur. People are delaying action until this is resolved. There will be a tremendous surge in sales once this is finalized.”
“There are three things this bill does,” said Ellis. “It gives us our incentives back for five years directly in line with those for solar and wind, it provides a ramp down instead of dropping us off a cliff on the residential side, and it adds the ‘construction commenced’ language that allows commercial projects to be planned based on breaking ground rather than trying to predict completion dates when the incentive ends. We’re happy to see this come to fruition. It’s been a long time coming.”
Jay Egg, president, Egg Geothermal Consulting, Orlando, Florida, believes the passage of this bill will markedly increase geothermal contractors’ confidence.
“I am abundantly pleased and impressed with the Herculean efforts of GEO,” he said. “There is no doubt in my mind that they are the reason geothermal tax credits are in the Kevin Brady Bill. Interestingly, I do not think that the passage of this bill into law will necessarily increase the number of contractors doing geothermal dramatically. That said, those who are already in the industry will find a renewed success as they pick up where they may have left off.”
While some are thrusting both fists in the air as a result of this news, others aren’t so enthusiastic.
“I’m not a great fan of cash incentives for the ground-source heat pump industry or for any part of the energy industry, including other renewable energies, such as wind, solar, biomass, etc., or conventional energies, including gas and oil, nuclear, etc.,” said Ed Lohrenz, founder, GEOptimize Inc., Winnipeg, Manitoba, Canada. “Government or utility incentives are invariably provided to ‘kick start’ an industry and have an end date. Contractors, system designers, and consumers can become dependent on the incentives. Often, word of these incentives becomes public some time before people can apply for them, so they wait for the incentives, and the market slows down, which affects suppliers and contractors across the industry. When the incentives end, the same thing happens again, in reverse. The market disappears the minute the incentives disappear. This became very clear when the incentives were removed in the U.S. last year.
“Additionally, people begin to believe the technology can only survive when there are incentives, and designers and contractors with little or no experience start designing and installing heat pump systems simply because their clients want a system laden with incentives,” he continued.
Terry Proffer, geothermal manager, Major Geothermal, Wheat Ridge, Colorado, said, for the most part, he is not a fan of incentives because they encourage a false market and poor installations.
“Tax credits and incentives tend to lack the ‘teeth’ in them to verify a competent installation before awarding or approving the incentive,” he said. “Ground-source heat pump design and installation, while not exceptionally difficult, does not tolerate assumptions and cookie-cutter approaches. Sometimes a boilerplate installation works, though this is usually by accident and not by deliberate design and due diligence.
“There is no doubt we will see a lot of good new installs resulting from tax credits, but we will also see a lot of bad projects — ones that would not have gone in without the incentives,” Proffer continued. “The bad ones tend to dominate memories and perceptions. Contrary to bad conventional furnaces and a/c systems, people are more sensitive to bad ground-source heat pump systems because they are expensive.”
“We feel this is very good news,” said Steve Smith, CEO, Enertech Global LLC. “But, we don’t want to overshadow the fact that geothermal systems stand on their own merit with all the advantages they provide, such as they’re environmentally friendly, they provide the highest level of comfort, they’re safe because they require no fossil fuels, and they’re long-lasting since they don’t need replacement for at least 20 years-plus, and the ground loops last a lifetime.”
While Smith does not expect an immediate rebound, he does believe the return of the tax credits will have a drastic impact.
“From 2008 through 2016, HVAC contractors became accustomed to selling residential geothermal systems based on the 30 percent tax credit, so we do believe this will bump the confidence for contractors to begin offering geothermal again,” he said. “Without the tax credit, contractors are concerned the initial investment in geothermal is too high, so it isn’t even presented as an option to homeowners. As a manufacturer, we feel this is the biggest hurdle to overcome. Lower energy costs are part of the cycle, so natural gas and propane costs will rise again. In scenarios where homeowners have been educated on geothermal, we’ve seen they’ll choose it regardless of a tax credit. That’s why it’s beneficial for contractors to educate people on all their options, so they can pick what’s best for them and their goals.”
Lyndal Moore, national sales manager, residential a/c, Bosch Thermotechnology Corp., said the potential reinstatement of a federal geothermal tax credit is great news on several levels.
“One of the greatest long-term advantages of a geothermal heat pump system compared with other emerging technologies is that its ‘efficiency multiplier’ is simply loops of plastic piping and circulating water in the ground,” he said. “Future generations will benefit from virtually maintenance-free loops, which stay protected in the ground.
“Geothermal heat pump technology also has been around for decades, meaning the results are proven: The industry can confidently demonstrate a calculable energy reduction impact over both short- and long-term scenarios,” Moore continued. “Even a moderate adoption of geothermal heat pump technology has the ability to drastically cut energy consumption in both residential and commercial applications while reducing utility infrastructure loads overnight, which is a win for us all.”
With the wind and solar industry’s recent rapid growth, geothermal heat pump technology is one of the final pieces of the puzzle to help these other energy sources truly pay off, Moore said.
“Because the heart of the system multiplies the effectiveness of both solar and wind technologies, coupling these technologies with the potential of a reinstated federal tax credit means geothermal heat pump technology is poised for mass adoption.”
Pairing the incentives with a properly trained workforce, Bosch expects exceptional geothermal demand in 2018 and beyond.
Todd Graf, vice president and general manager of ClimateMaster Inc., said the lack of tax credits has directly impacted the industry’s growth and profitability.
“If the House and Senate pass legislation recognizing geothermal as an equivalent renewable energy by restoring the tax credits, it will significantly improve the health of the industry and our business,” he said. “The extension of the tax credits for some renewable energy products beyond 2016 and the exclusion of geothermal has given pause to contractors and homeowners. If the geothermal tax credits were reinstated to indicate equivalent technology, it would reenergize geothermal contractors with something exciting to discuss with their customers. For homeowners, it improves the option to purchase an environmentally friendly system with low operating expenses.”
Scott Miller, vice president of Modine HVAC, believes the reintroduction of the credits will have a positive impact on Modine’s geothermal offerings as well as the entire industry.
“Any type of tax benefit, rebate, or credit that lowers the installation cost for customers and reduces the investment payback time should have a positive impact on the market,” Miller said. “Geothermal is a small but growing part of our HVAC portfolio. We believe this technology is here to stay with tremendous future growth potential. In January 2017, we launched our GeoSync residential line, so we are prepared for any upswing with competitive products.”
Miller expects contractors to see an increased market pull from the reintroduction of tax credits.
“For multi-line contractors that offer a range of heating and cooling product installations, a renewed interest in geo technology would give them more selling options for their customers,” he said. “Does it pump a great deal of confidence back into the geothermal sector? In the short-term – yes; however, we don’t believe that this market can thrive long-term with constant discounting and incentivizing activity from external forces. The impact of natural gas price inflation and maturing of the installation process coupled with lower up-front investment are significant factors that will drive greater acceptance of geo technology over the long term.”
Publication date: 11/27/2017