HVACR Distributors, Manufacturers Dig into Reinstated Geothermal Heat Pump Tax Credits
Congress reintroduced the 30 percent residential and 10 percent commercial ground-source heat pump (GSHP) tax credits on Feb. 9
The U.S. government shouldn’t be choosing winners and losers in the renewable energy landscape.
In the eyes of geothermal heat pump advocates, that’s been the case since Dec. 31, 2016, when Congress extended tax incentives for the solar and wind industries but failed to do the same for investments in geothermal equipment.
That inequity came to an end on Feb. 9 as Congress reinstated the 30 percent residential and 10 percent commercial ground-source heat pump (GSHP) tax credits as part of its $320 million continuing resolution (CR). 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 will 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 throughout 2022 as long as the project 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.”
Jon Hirsch, director of business development, Auer Steel & Heating Supply Co. Inc., believes the return of the credit is a positive for all sectors of the industry.
“Assuming this drives purchasing behavior, it should be good for contractors and distributors,” he said. “The tax credit should create an upside for everyone in the channel including consumers. We appreciate the tax credit and will enjoy any market influence it creates.”
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 Bosch's 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 form 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, said the company has 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.”
Renata Morgan, director of marketing and information at Century A/C Supply and Air Management Supply, said tax credits can be incredibly helpful for everyone in the supply chain; however, she believes the geothermal heat pump incentives won’t have a significant impact on the market due to the high cost of geothermal installations and equipment, which makes it a price-prohibitive product.
“Geothermal is exponentially more expensive than the typical split systems we sell in Texas and has, therefore, always been a special-order product for us,” she said. “We don’t really keep any in inventory.”
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 geothermal technologies,” he said. “Geothermal manufacturing companies have spent millions upon millions of dollars through their affiliation with the Geothermal Exchange Organization [GEO] 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 the company will optimistically start increasing its inventory levels and hiring back employees it was forced to lay off in the very near future.
“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.”
“Achieving this critical milestone for our industry couldn’t have been accomplished without the positive and aggressive leadership of GEO’s staff, manufacturers and members, our D.C. lobbying team, and the tireless efforts of my fellow board members during several fly-ins to Washington over the past two years,” said Joe Parsons, president, EarthLinked Technologies Inc. and GEO board chairman.
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.”
Hirsch said Auer Steel is currently discussing how it will market the tax credits, though the brunt of the effort will occur through the company’s sales team and social media platforms.
Manufacturers should be in the driver’s seat when it comes to marketing geothermal, said Morgan.
“Geothermal is such a niche product, that I would rely on the manufacturers to communicate the information and market it to end users,” Morgan said. “The typical geothermal buyer is a more educated consumer who researches multiple options before deciding on a brand or contractor. In my experience, a consumer wouldn’t select a geothermal system based on the recommendation of a contractor without having researched the product beforehand and narrowed down his or her preferences to a list of the top two or three systems, nor would they opt to go with geothermal over a traditional system just because of a 30 percent tax credit. The consumer research process would likely involve visits to manufacturer sites before the wholesaler or contractor ever enters the equation, which leads to my belief that manufacturers have the most influential role in the buying cycle.”
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 phase down 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 Modine’s 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.”
Hirsch said he’s comfortable with the phase down schedule.
“We were not concerned when the prior tax credit ended,” he said. “We felt it had run its course.”
Morgan said the timing of the phase down could be debated endlessly.
“Government intervention can push consumers toward more efficient options than they would have selected with no incentives, like geothermal and state/local utility incentives,” she said. “Considering that the last round of significant HVAC tax incentives coincided with the economic downturn of 2008-2009, it would be difficult to draw any conclusions about their effectiveness in today’s economy. As anecdotal evidence, many contractors still say that selling systems was easier when they had a large tax credit to tout.”
Bosch’s 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, said ClimateMaster’s 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 traveled 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. Ultimately, the wind and solar industries' credits were extended while geothermal, fuel cells, and a handful of other "orphaned" renewable energies were left out of the bill.
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 GHP 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 started 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 side-car bill was coming. 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, 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 is optimistic the geothermal industry could rebound to its pre-2016 form in less than a year’s time.
Published date: 03/07/18