Most HVACR distributors who sell geothermal products and equipment recognize Dec. 31, 2016, as a dark day. That’s the day the U.S. government discontinued the 30 percent residential and 10 percent commercial federal tax credits for geothermal installations.
While many in the industry have experienced a decline in sales since the credits were eliminated, good news appeared in the form of the House tax reform bill.
HR 1, which was passed by the House 227-205 on Nov. 16, reinstated the residential geothermal tax credit 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 cease. The 10 percent commercial geothermal 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.
While the return of the credit in the House bill created a buzz in the industry, that excitement was tempered as the credits were excluded from the Senate version of the bill. More bad news came in the form of Congress's reconciled bill, released Dec. 14, which also neglected to include the geothermal tax credits.
While the outlook is cloudy, Senator Lisa Murkowski, R-Alaska, told reporters not to panic as the "orphan" energy resources remain in flux following a conference committee on the bills. She also mentioned the tax incentives not included in the tax reform bill could be included in a subsequent extenders package.
Despite the setbacks, Doug Dougherty, CEO, Geothermal Exchange Organization (GEO), is optimistic the credits will still be implemented in time for the start of 2018.
“Our sole purpose at GEO over the last two years has been to fix this tax inequity,” he said. “We’ve had tremendous support from the industry and appreciate everyone who’s walked the halls in Washington, wrote letters, or placed calls.
“The geothermal tax credits are one of many differences between the House and Senate bills, but one of the smallest dollar differences,” Dougherty continued. “There is a substantive reconciliation process ongoing, and we are reaching out to our House Republican champions to press for keeping our language in a reconciled bill. If dropped out of the tax bill, we will be advocating for an end-of-year fix in the continuing resolution. While we’re never nervous, we’re always anxious.”
EVEN 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.
Though, 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.
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 one 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.”
David McIlwaine, president, HVAC Distributors Inc., Lancaster, Pennsylvania, agreed that the government shouldn’t be picking winners and losers.
“As a conservative, I don’t like it,” he said. “However, from a selfish standpoint, when incentives move the mix, it’s certainly good for us. For example, when we were able to sell 16-SEER products at a 13-SEER price, we benefited from that.
“The challenge is, should the government really be doing that?” he continued. “I’m conflicted, because I believe it’s helping to lessen energy usage and offering a much better long-term incentive by selling the superior efficiency of geothermal, but I also think there should be a level playing field and people should just go at it business-wise.”
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.”
About 6-8 percent of Cincinnati-based Corken Steel Products Co.’s sales come from geothermal components, and approximately 25-30 percent of the company’s equipment business is geothermal.
Jeff Corken, owner, Corken Steel Products, said the elimination of the federal tax credits significantly hampered his business.
“We’re down about 60 percent in 2017,” he said. “We sell a lot of geothermal pipe fittings, grout, and accessories, which have all fallen significantly. The incentives helped us, no doubt about it.”
With or without a credit, Corken Steel Products stands behind geothermal technology.
“Of all the energy technologies we can utilize, geothermal is the real deal,” said Jay Kaiser, director of sales and marketing, Corken Steel Products. “You can use it in any part of the country; it doesn’t matter if the sun is shining or not, and it’s good for the earth. It was very discouraging when geothermal lost its tax support. Here in Cincinnati, solar really isn’t an option. Geothermal is a renewable energy that offers a great long-term return on investment.”
Doug Young, president and CEO, Behler-Young, Grand Rapids, Michigan, called the return of the credits a plus for the HVACR supply chain.
“This will be helpful for anyone considering geothermal,” he said. “Our business has fallen to about one-third of what it was back in 2011. We once had a strong base there, but it continues to fall. There’s a large up-front cost with geothermal, which includes the equipment as well as the loop. The 30 percent residential tax credit would help pay for the cost of the loop, which would put geothermal on a more even keel with other equipment.”
WILL IT ACTUALLY HAPPEN?
While the geothermal industry has been largely receptive to the inclusion of the tax credits in HR 1, the fact the credit is not included in the Senate bill is troubling.
The original version of the Senate bill was introduced on Nov. 9 and more than 355 amendments were immediately filed, including one from Dean Heller, R-Nev., and Rob Portman, R-Ohio, called the “Technologies for Energy Jobs and Security Act,” which included 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 that 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.”
If the tax credits are reinstated, Corken expects a short-term jolt, but he’s not counting on anything until a bill is officially signed into law.
“We’re excited about it if it happens, but the key word there is ‘if,’” Corken said. “This is tied into these tax bills, and Lord knows what’s going to happen there. Until it’s signed, sealed, and delivered, I temper my expectations.”
THE INDUSTRY REACTS
If the credits are reinstated, Dougherty is confident the industry will return to its pre-2016 sales and installation levels within one year.
“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 Dan Ellis, CEO of ComfortWorks Inc., an Oklahoma City-based residential and commercial geothermal contractor. “It gives us our incentives back for five years, it provides a ramp down on the residential side, and it adds the ‘contract commenced’ language that allows projects to break ground in late December and continue into 2022. If it’s approved, we’ll be 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 the GEO organization,” 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 that are already in the industry will find a renewed success as they pick up where they may have left off.”
Those who are environmentally minded tend to be the strongest supporters of geothermal technologies, said Young.
“Geothermal is a renewable energy, because you’re using constant temperature ground water to heat the loop rather than warming cold air,” he said. “Therefore, you’re starting with a higher place to heat from, which will offer some energy savings.”
While some are enthusiastically pumping their fists in the air, others are proceeding a little more cautiously.
Regardless if the tax credit returns, McIlwaine is concerned about geothermal’s return to the volume it once held.
“Inverter technologies have been closing the gap on the differential on efficiencies, which is concerning regarding geothermal,” he said. “The difference between a high-efficiency inverter system and a high-efficiency geothermal system is very slim on an equipment cost basis. The additional expense for geothermal is the cost of the wells. So, that will be the challenge. How effective will geothermal be in regaining its lost share now that inverters have arrived when we have to overcome the cost of the wells? Geothermal is a superior long-term investment product, but the issue is getting consumers to look that far into the future.”
Corken is also skeptical of geothermal’s future.
“There was a lot of excitement about geothermal, but that may have passed with time,” he said. “Contractors may not want to get back on board now. We’ll have to wait and see.”
Young said geothermal can be a complicated matter and that all parties involved should be constantly educating themselves.
“This is a technical sale, and these items don’t sell themselves,” he said. “Contractors who are face to face with homeowners need to be trained to be able to present the benefits of a geothermal system. That requires extensive training, and manufacturers, distributors, and geothermal associations need to be continually offering that education.”