HVAC Industry Prepares to Dig Into Reinstated Geothermal Tax Credits
Residential, commercial incentives retroactive to 2017 and extend through 2021
Following a contentious two-year struggle, the HVACR industry is enthusiastically applauding Congress’ decision to reinstate the federal residential and commercial geothermal heat pump tax credits.
The 30 percent residential and 10 percent commercial tax credits were included as part of Congress’ $320 million continuing resolution (CR) that was passed Feb. 8. The residential incentive is retroactive to Jan. 1, 2017, and will continue at that level until 2020, when it will drop to 26 percent. The credit will phase down to 22 percent in 2021 and officially sunset on Dec. 31, 2021.
The 10 percent commercial investment tax credit will remain static through Jan. 1, 2022. One significant change in the credit’s language allows projects to continue through 2022 as long as construction commenced before Dec. 31, 2021.
“This decision finally fixes the inequity Congress created two years ago when tax credits for solar installations were extended through 2021,” said Doug Dougherty, president and CEO, Geothermal Exchange Organization (GEO). “GEO’s message to legislators was ultimately heard: Congress shouldn’t be picking winners and losers when it comes to renewable energy and fairness in tax policy. And now, we have finally achieved parity with solar.”
Dan Ellis, CEO of ComfortWorks Inc., a Goldsby, Oklahoma-based residential and commercial geothermal contractor, said getting back onto common ground with solar and wind in federal tax policy is a major victory for the future of the industry.
“Solar and wind can provide electricity, but a large portion of the energy used in buildings — in fact, the largest consumer of energy in single-family homes — is related to the thermal loads of heating, cooling, and water heating,” he said. “The playing field for renewable Btu and kilowatt hours has been leveled again.”
Ellis said the response to the renewed credits has been extremely positive, and his company has already accumulated a long waiting list of residential leads.
“Many of these projects are upcoming new home starts, as retrofits are rare in the middle of winter, so while the response has been outstanding, we feel we have yet to see the true impact,” Ellis said. “We also have a few on-the-bubble commercial projects that are now moving forward with geothermal, thanks to the reinstatement of the credit.”
Terry Proffer, geothermal manager, Major Geothermal, Wheat Ridge, Colorado, said the tax credits could prove to be a very good way to get the geothermal sector of the industry kick-started again.
“We are already seeing more inquiries for both residential and commercial applications in just the past week,” said Proffer, who has designed and reviewed more than 400 ground-source heat pump systems for commercial, municipal, institutional, and military facilities. “It’s a shame so much time and treasure must be expended with our government for such a common-sense thing to do.”
Lyndal Moore, national sales manager, A/C division, Bosch Heating and Cooling North America, said the return of the tax credits is a big relief for the industry.
“We’re very pleased with the decision to reinstate the credits,” he said. “We believe geothermal is the most energy-efficient technology available.”
Moore said the return of the credits immediately piqued the attention of customers.
“We experienced an overnight response of people being re-engaged in the industry,” he said. “We’ve seen an increase in orders from existing customers and a renewed interest in some of the training programs we have. We’re just over 30 days from the announcement, and we’ll really have a better feel for it after the IGSHPA [International Ground Source Heat Pump Association] convention in March.”
Richard Boothman, director of North American sales, Modine Mfg. Co., said the company has already ramped up its activity following the return of the tax credits.
“We’ve already added distribution that we had been courting for a while,” he said. “They’d been unwilling to stock these heat pumps prior to the credit. In Ontario, where a similar initiative was recently reintroduced, we quickly saw an increase in activity.”
Jay Egg, president, Egg Geothermal Consulting, Orlando, Florida, said he is pleased the tax credits are back for geothermal HVAC systems, and he hopes the manufacturers and professionals in the industry will be diligent in supporting the organizations that have led the effort.
“It is clear that the manufacturing leaders of the geothermal HVAC industry have reached the level we now enjoy through their investment into the legislative processes that promote the geothermal technologies,” he explained. “Geothermal manufacturing companies have spent millions upon millions of dollars through their affiliation with the Geothermal Exchange Organization and other industry associations. If not for the investment over previous decades of these good manufacturers and others like them, geothermal would still be a speck on the map, and the economic and environmental geothermal benefits would not have reached the consumer.”
Steve Smith, CEO, Enertech Global LLC, said in the very near future, the company will optimistically start increasing its inventory levels and hiring back employees it was forced to lay off.
“We received a response from customers before 8 a.m. the morning the bill was signed,” he said. “New jobs were immediately switched over to geothermal with the news, and some contractors had builders return to offering geothermal with their new builds immediately.”
Joe Parsons, president, EarthLinked Technologies Inc. and GEO board chairman, noted that while the battle to reinstate the tax credits was long and hard, the efforts have been validated.
“Achieving this critical milestone for our industry couldn’t have been accomplished without the positive and aggressive leadership of GEO’s staff, manufacturers, members, our D.C. lobbying team, and the tireless efforts of my fellow board members during several fly-ins to Washington during the past two years,” he said.
Now that the credits have returned, many manufacturers, distributors, and contractors are working diligently to raise consumer awareness any way they can.
“People spend an average of 4,000-6,000 hours in their home per year, yet they don’t pay that much attention to the heating and cooling systems that keep them comfortable,” Smith said. “Identify their hot-button issues and hit on those. Are they interested in renewable energy, being economically sound, having no outdoor unit, equipment longevity, improved comfort, etc.? Or, are they interested in the fact that geothermal provides better dehumidification in the cooling mode or more even heat through the home in the heating mode? Geothermal systems have so many benefits. Sell geothermal on its benefits first and offer the tax credit as the icing on the cake.”
For those in residential-heating-dominant markets competing against natural gas, it’s important to take advantage of this period of tax assistance to educate and establish a self-sustaining residential geothermal base, according to Proffer.
“We’ve been making some progress by explaining we can eliminate external condensers, domestic hot water assistance from ground-source heat pump units, and that some triple-function units omit the need for a water heater, etc.,” he said. “We are finding some developers and their customers wanting to really set themselves apart with a truly ‘green’ residence that a geothermal system contributes to.”
When presenting proposals or evaluations, contractors should provide a payback estimate and life-cycle analysis.
“We need to educate end users that geothermal works even without any kind of assistance,” Proffer continued. “Another approach is to offer options where a tax credit can be the tipping point for a better system. This results in more profit for contractors, wholesalers, and manufacturers. For example, take a 2,500-square-foot home with a basement, main floor, and upstairs. A single 5-ton packaged heat pump might work, but there may also be comfort conflicts with multi-levels to condition using a single, centralized unit. The limited factor is first cost. A better option might be a smaller heat pump on the upper level with maybe a 4-ton unit taking care of the two lower levels. This would yield far greater comfort to the occupants and typically lower operating costs. The tax credit might offset this first cost enough for a customer to upgrade, and, in this case, the entire ground-source heat pump food chain wins.”
The real challenge lies in simply getting the word out, Ellis said.
“The geothermal trade may know all about this, but we have architects, engineers, general contractors, builders, owners, and others that we need to inform,” he said. “That takes time and money. We are in the planning stages of how we might best do this in our local area. We plan to increase our staffing to gear up for higher demand, which is something we were reluctant to do prior to this announcement. Our industry needs to do a better and more coordinated job on getting the word out on this, as the time we have available is short this go-around.”
Todd Graf, vice president and general manager, ClimateMaster Inc., said ClimateMaster has already started to receive contact from homeowners regarding the details of the reinstated incentives.
“Commercial geothermal projects will take a little more time to develop due to the inherent timing that comes with larger jobs,” he said. “Regardless of the demand, ClimateMaster’s business model will allow us to respond to the market and readily satisfy customers’ needs.”
While considering how the industry can better tout the benefits of geothermal comfort, Tim Wright, residential sales manager, Enertech Global LLC, said every branch of the industry must commit to spreading the word.
“Contractors should be offering geothermal on every single job,” he said. “That always gets contractors farther ahead, simply because they’ll minimize their competition if they’re already starting to talk about geothermal instead of conventional systems. With the tax credits returning, we encourage contractors to seek manufacturers or distributors that have excellent support and training. We have an opportunity to grow this industry, and we need to make sure it’s done the right way.”
While the return of the tax credit is often praised, there is some debate within the industry whether the proposed phasedown timeline is adequate or if the tax credits should have been reinstated at all.
“In the long term, yes, the industry would be better off without the welfare of the tax credit,” said Boothman. “But it takes a determined sales effort to properly present the benefits of geothermal. Fully understanding what heat of extraction means, and that you are making an extremely long-term investment in your energy independence, is not always adequately sold. The cost of other energy sources’ infrastructure, like gas lines, large propane tanks, etc., needs to be included in any comparison. The industry needs to focus on the education of the installers and distributors.”
Ellis said he’ll take what he can get when it comes to a tax incentive.
“I think the original phasedown schedule that solar and wind received was reasonable, but we lost more than a year due to our incentives expiring, and we can never make up that loss,” he said. “Even worse, we lost momentum, and it will take some time to ramp things back up to where we were. Overall, this is probably like losing two years of the phaseout that solar and wind received. Regardless, the phasedown we have moving forward is much better than the cliff we were thrown off at the end of 2016.
“Additionally, the government has provided tax incentives to the fossil fuel industry for nearly a century,” continued Ellis. “It seems prudent to invest in some different approaches to meeting our nation’s energy needs, and I believe these investments are working. Positive change is occurring in the adoption of renewables overall and also within our industry.”
To achieve parity, Proffer said it’s only fair to extend the geothermal tax credits a couple more years.
“The solar industry has had the same incentives active since January of 2017,” he said. “While the geothermal incentives are retroactive to the same date, how many installations were lost while we did not have them? Those are projects that have been forever lost, so I believe we should have our incentives for another two years to make up for the oversight of our elected representatives who apparently did pick their favorite technologies.”
Moore said the industry, as well as an evolving utility infrastructure, needs this credit.
“Utility companies are changing,” he said. “They’re getting away from their coal power plants and are headed in a different direction. As the industry changes and we see new technology and solar farms evolve, we need to establish a better build out, which our downstream geothermal equipment ties into. Once this build out occurs, our products and downstream equipment will mean more to them. At that point, we don’t even know what the true cost of electricity will be as the solar, wind, and geothermal tax incentives expire. Geothermal is a form of energy insurance for the end-user’s utility cost because it maximizes the use of old and new utilities.”
While tax incentives are valuable, the industry needs to poise the market for geothermal systems to stand on their own merits, according to Graf.
“We should look to a future where the incentive is derived from the energy savings realized,” he said. “Geothermal systems can stand on their own and outperform any other system on the market today. Regardless of government intervention, a geothermal system is the clear choice in HVAC.”
HISTORY IN THE MAKING
The federal geothermal heat pump tax credits have navigated a convoluted path to reinstatement.
The 30 percent residential and 10 percent commercial geothermal tax credits were first introduced Jan. 1, 2008, as part of the Energy Improvement and Extension Act of 2008, and extended eight years — set to expire Dec. 31, 2016. The credit was further enhanced in February 2009 by the American Recovery and Reinvestment Act of 2009, which removed the maximum credit amount placed in service after 2008.
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.
When the dust settled, the wind and solar credits were extended, while geothermal, fuel cells, and a handful of other renewable energies were left out of the bill, or “orphaned,” according to Doug Dougherty, president and CEO, Geothermal Exchange Organization (GEO).
The elimination of the tax credits had a significant impact on the manufacturers, distributors, and contractors operating in the geothermal sector.
“Our residential sales fell 45-50 percent in 2017, compared to 2016,” Dougherty said. “The impact was drastic and sudden.”
Since then, members of GEO; ACCA; the National Rural Electric Cooperative Association (NRECA); Air-Conditioning, Heating, and Refrigeration Institute (AHRI); Heating, Air-conditioning & Refrigeration Distributors International (HARDI); and a number of other organizations, manufacturers, distributors, and contractors have spent countless hours attempting to fix this inequity before Congress.
“I have a stack of 312 business cards I’ve collected over the past two years from meetings with our elected officials and/or their staffers,” Dougherty said. “Even our own members were starting to think I was losing it. But we pushed and pushed and pushed some more.”
Geothermal advocates received some good news in the fall of 2017 as the reinstatement of the geothermal tax credits were included in the House’s version of the Tax Cuts and Jobs Act; however, the Senate’s version of the tax reform bill — and ultimately the conferenced version that was signed into law by President Donald Trump on Dec. 22, 2017 — failed to include any tax extenders or energy provisions.
“When the Senate-House Conference Committee released its agreed-upon tax reform bill, to the surprise and dismay of GEO, our hard-fought language to finally bring tax credit parity back to the geothermal heat pump industry was not included within the bill,” Dougherty said. “Needless to say, we were extremely disappointed in the tax credit inequity created by this Congress.”
Following several marathon visits to Washington, Dougherty said he could finally start to see the light at the end of the tunnel.
“During a visit with the staff in Orrin Hatch’s office, we were told a sidecar bill was coming,” he said. “And, sure enough, we were lumped in a bill that included credits for a number of industries, including timber, race cars, horse racing, tribal land, and more; however, we felt our case was different than the others. We’d been vetted, gained bipartisan support, and were included in the House tax reform bill. The staffer in Hatch’s office told me it was not a case of if but when. He told us the omnibus bill in March could be a possibility. So, I asked, ‘Why not the Continuing Resolution (CR), slated for passage on Feb. 8?’”
Dougherty said he was surprised and ecstatic to learn the tax credits were, in fact, included in the language of the CR enacted on Feb. 9, and he is optimistic the geothermal industry could rebound to its pre-2016 form in less than a year’s time.
Publication date: 3/19/2018