Category Archives: Tax Incentives

Federal income tax credits and deductions.

How the Sequester will Impact the Home Energy Efficiency Industry

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By Johnny Ritzo

Home Performance with Energy StarThere has been considerable speculation about how the mandatory budget cuts, known as the sequester, will impact key government functions beginning March 1, 2013.  Primary concern has focused on large-ticket items such as national defense, education, and transportation.  But what about the Home Performance Industry?  The White House has made broad claims that the sequester will hurt the Renewable Energy Industry, but details regarding home energy efficiency, in particular, have been sparse.

The hardest-hit agencies in the energy efficiency sector will be the Department of Energy (DOE) and the Environmental Protection Agency (EPA).  Under the Budget Control Act of 2011, such non-exempt federal departments, such as the DOE and EPA, are required to trim roughly 8.2% from their budgets during FY2013.  Lacking the authority to prioritize particular goals, the budget cuts will apply evenly across the DOE and EPA’s programs and projects alike.  The following is a summary of the anticipated cuts and their impact.

Less Focus on Scientific Innovation: Both the DOE and the EPA fund significant grants for scientific research in energy efficiency, solar energy, battery storage, and other critical areas of the Renewable Energy Industry.  In addition to reducing available grants, both organizations will have to downsize research labs and operations.

Cuts to Weatherization Programs: The DOE is expected to reduce contributions to state programs providing weatherization services to low-income families.  Department experts project that the budget cuts will lead to 1,000 fewer homes being retrofitted during FY2013.  Another significant result is that up to 1,200 weatherization professionals could lose their jobs, according to the DOE.

Cuts to HPwES Programs:  Both the DOE and EPA fund state programs providing incentives for home energy retrofits.  In his recent letter to the Senate Appropriations Committee, Steven Chu, Secretary of Energy, contended that the sequester could threaten the ongoing viability of state retrofit programs and training centers.  Details on the impact to state programs, however, were not provided.

Fewer Energy Star Certified Products:  The EPA predicts the budget cuts will hinder its ability to maintain its Energy Star product specifications.  Currently covering more than 65 categories of goods and appliances, the EPA will no longer be able to label as many products, which could lead to slow downs in energy-efficient electronics, appliances and home heating and cooling systems.

Decreased Involvement with Industry:  The EPA estimates it will have to terminate partnerships with several “energy-intensive industrial sectors” and will not be able to publish as many Energy Efficiency Guides.

Less Software Development and Support: The EPA created a software tool called “Portfolio Manager,” which enables users to track energy and water usage across a portfolio of buildings.  EPA officials are concerned the cuts may jeopardize planned software upgrades as well as its ability to provide ongoing support for its users, which include several major cities, states, and the federal government.

In conclusion, the EPA and DOE are scrambling to determine the exact impact of the budget sequester scheduled to take place this Friday.  Originally intended to pressure Congress into enacting comprehensive budget reform, the sequester poses harsh consequences to many industries, including Home Performance.  Lacking the ability to prioritize certain projects, such as Home Performance with Energy Star, the DOE and EPA need to trim spending across the board.  The impact of some cuts are fairly obvious, like decreased support for Portfolio Manager, whereas others will take quite some time to shake out.

One thing seems fairly clear, though: The Home Performance Industry needs to take steps to reduce its reliance on federal and state programs beginning immediately.  The introduction of cheap natural gas, coupled with sensationalized stories of waste, has placed the industry on the back burner.  Political support for large subsidies and incentives seems very unlikely moving forward.  So, from this position, we must pull ourselves up by the bootstraps and begin to market the many benefits of Home Performance: comfort, sustainability, monthly savings, indoor air quality, and more.  These benefits more than justify the cost of a home energy retrofit, so it’s our job to begin spreading the word of home energy efficiency through collaborative marketing tactics.

Funding Local Energy Efficiency Initiatives

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By Johnny Ritzo

ImageLast month, Eric Mackres and Sara Hayes of the American Council for an Energy-Efficient Economy published an extensive report detailing the various funding sources used by local energy efficiency programs.  I definitely recommend reading  Keeping it in the Community: Sustainable Funding for Local Energy Efficiency Initiatives. But, if you don’t have time, I thought you should at least know what options are out there if you’re interested in starting an energy efficiency program in your community.

So, here’s a basic summary of the types of funding sources–both seed and recurring:

Grants

In this context, a grant is an award from the Federal Government to a state, county or city.  Although a grant doesn’t have to be repaid, there is usually a rigorous application process.  The most significant grant in the home performance category is the Energy Efficiency Conservation and Block Grant (EECBG), which was part of the American and Recovery Reinvestment Act of 2009.  EECBG funds distributed to large cities and counties have totalled more than $2.7 billion to date.  Further, these grants have funded a wide range of activities–from program planning to seeding revolving loan funds.

Bonds

A bond is a type of debt instrument whereby investors loan money to local governments for a certain period of time, and in return, are repaid the loan principal with interest.  Typically, local governments use their general funds (i.e. taxes) to pay the bond at the date of maturity.  Through the Qualified Energy Conservation Bonds tax credit, the Federal Government encourages local governments to issue bonds to fund efficiency programs by giving them a tax credit that offsets the interest on the bond.

Taxes

The most common practice is for a state or local government to impose a tax on certain energy-related activities, such as consuming energy or emitting carbon dioxide, and use the revenue to pay for efficiency programing.  However, Mackres and Hayes note that some towns are looking beyond “energy-related” activities and are considering taxing casinos as a way to pay for efficiency programs.

Fees

Communities may impose fees on waste, recycling, water, and rights-of-way, and like taxes, commit the revenue to energy efficiency initiatives.   The most popular fees, as noted by Mackres and Hayes, are franchise fees and systems benefit charges.

A “franchise fee” is paid by a private company to a local government in exchange for its use of a public-right of way or other type of infrastructure in conducting its business.

A “systems benefit charge” is when a utility adds a fee to a customer’s gas or electric bill.  There are a few different arrangements with regard to systems benefit charges.  Some investor-owned utilities partner with local governments to offer energy efficiency programs in a collaborative venture.  On the other hand, some utilities simply give the proceeds derived from the systems benefit charge to local governments who in turn establish an efficiency trust to be administered by a 3rd party.

Benefit Districts

We’re all well aware that municipalities and counties tax residents and use the revenues to pay for things like police departments, sewer, street lighting and the like.  Revenues from municipal taxes are usually applied to the city or county as a whole–not to particular neighborhoods.

But, what happens when a particular neighborhood wants to do a special project or offer an additional service?   Many states have enacted enabling legislation that allows property owners to band together and collect fees, so long as revenues stay within the neighborhood, which is called a benefit district.  Most often funds derived from a benefit district go to things like removing graffiti or cleaning streets.

With regard to energy efficiency services, though, communities have created what’s called an “ecodistrict,” which is a type of benefit district.  The fees collected from property owners are used to set target goals for energy reduction, help pay for energy efficiency upgrades, and/or track performance across the district.

Conclusion

Mackres and Hayes did a wonderful job aggregating and explaining all of the funding options used for local energy efficiency initiatives.  It’s important to keep these options in mind when you think about what you can do in your town or community to improve our housing stock, reduce greenhouse gasses, and increase our energy security.  Feel free to share your thoughts in the comments below!

“Cut Energy Bills at Home Act,” A.K.A. Proposed Section 25E of the Internal Revenue Code of 1986

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Overview

Section 25E, introduced to the Senate by Senator Olympia Snowe on November 18, 2011, would provide a federal income tax credit for individuals who make energy efficiency upgrades to their primary residences.

Tax Credits vs. Deductions

A deduction reduces your amount of taxable income dollar for dollar.  A credit, on the other hand, reduces your tax liability dollar for dollar, so it’s preferable to a deduction.  A dollar saved is a dollar earned!

How much would you get under proposed Section 25E?

The proposed credit amount is tied to energy savings achieved through a home energy retrofit project.  To qualify for the credit, you must get at least a 20% reduction in your home energy.  The base amount for a 20% is a $2000 tax credit, and an extra $500 for every additional 5% reduction.

20% reduction = $2000 credit

25% reduction = $2500 credit

30% reduction = $3000 credit

And so on . . .

The tax credit is capped at either $5,000 or 30% of the total cost of the energy efficiency work.

No Double Dipping Allowed!

If you receive a Section 25E credit one year, you cannot also get a credit for installing renewable energy (such as solar or geothermal) or a deduction for purchasing an energy efficient appliance.   Don’t forget to reduce your home’s tax basis by the amount of the credit.

What types of projects are covered?

Qualifying projects include improvements that will last longer than 5 years, such as:

The cost of an energy audit, which typically ranges from $300-$500, can be baked into the price of the upgrade.

However, specifically excluded are:

  • Renovations that increase the size of your home; and
  • Improvements to your pool or hot tub.

Furthermore, the work must be done by an “approved contractor,” which is someone with a BPI or RESNET certification.   Your BPI or RESNET certified professional has to first calculate the cost of “heating, cooling, hot water and permanent lighting” over the course of the year prior to the work.   An energy audit is typically performed to determine the upgrades that will deliver the most bang for your buck.  After the retrofit is complete, a test must be performed to determine the level of energy efficiency achieved.

Example:

Flora lives in Portland, ME and owns a landscaping business.  She makes $50,000 per year, pays $1,500 in interest per year for her home mortgage, and has a very leaky house.  After being cold for too long and paying crazy high heating bills, she decides to get an energy audit.

Auditor Sammy comes and inspects the home with his infrared camera and performs a blower door test, determining that the home’s energy consumption could be reduced by 40% with some air sealing and additional insulation.    Contractor Sandra performs the work, totaling $6000, which Flora pays out of pocket.

Here’s what Flora’s taxes are going to look like . . .

Gross Income                                         $50,000

Mortgage Interest                    -            $1,500

Adjusted Gross Income          =            $48,500

Tax Rate                                   x            $4,750 plus 25% of amount over $34,500

Tax Liability                             =            $8,250

Tax Credit                                -             $1,800

Total Tax Liability                  =            $6,450

So how did we determine the Section 25E tax credit?  The 40% reduction yields a $4,000 credit.  Remember, though, that the credit is capped at 30% of the cost of the project.  In this case, Sandra’s work cost $6,000 multiplied by 30% equals $1,800.   Thus, the energy efficiency project after the credit cost Flora $4,200.

Here’s what you can do if you want to support Section 25e?

  1. Write to your congressional representatives and tell them you support the bill.
  2. Visit Efficiency First and add your support.