Tax Incentives Promote Energy Efficiency

With taxes on the mind this month, some homeowners are discovering just how much investing in energy efficiency and renewable energy can pay off.

When Congress last year passed the American Recovery and Reinvestment Act (ARRA), better known as the stimulus package, it gave homeowners some powerful financial incentives for greening and weatherizing their homes.

How much? In the case of Barbara Gardner, a long-time homeowner in Sacramento, Calif., the local and federal savings added up to almost half the cost of a solar power system — and she erased her utility bill, once $1,100 a year, in the process.

“We installed 44 free-standing solar panels in the back field in 2008 but didn’t finish the job until 2009 because we heard about the tax credit,” Gardner told SolveClimate.

“The system would have cost us $55,000, but after a rebate from SMUD (Sacramento Municipal Utility District) of $15,300, based on the number of kilowatt hours our system was expected to produce, and the federal tax credit of $12,000, the net cost was $28,000.”

Moreover, she now sells extra electricity back to SMUD.

Raymond Lou, an accountant and lawyer in Glen Rock, N.J., explained how two of his clients also took advantage of the tax credits on a smaller scale for 2009:

One bought a high efficiency boiler costing $10,000 and got a $1,500 tax credit. The other insulated his garage and bought an energy efficient storm door; the original cost was $3,900 for both, but after his $1,170 tax credit, the net cost was $2,730. The insulation should save money in the long run, as well.

Here’s a look at what homeowners thinking about making energy efficient improvements or adopting renewable energy technology need to know, and a reminder for those who who made improvements in 2009 to claim the tax credits they are entitled to. The ARRA’s financial incentives are substantial, but they won’t last forever:

    • The federal Residential Energy Efficient Tax Credit expires on Dec. 31, 2010. It covers 30 percent of the cost, including installation, of an energy efficient product placed in service during 2009 and 2010; the cap is $1,500. (A tax credit directly reduces the amount of taxes to be paid.)

    This credit applies to biomass stoves, heating ventilation and cooling, and nonsolar water heaters, such as gas, oil, propane or electric heat pump. It also applies to the cost, but not installation, of insulation, reflective roofing, energy efficient windows, doors and skylights. To be eligible for the tax credit, all improvements must meet specific criteria, and must be made on an existing home that is a principal residence. The maximum credit is $1,500, even if several measures are implemented, but while the tax credit cannot be carried forward from 2009 to 2010, it’s possible to take part of the $1,500 credit in 2009 and the rest in 2010 if separate purchases are made.

    • The federal Residential Renewable Energy Tax Credit extends longer, to Dec. 31, 2016. It covers 30 percent of the cost, including installation, of qualifying geothermal heat pumps, small wind turbines for residences, and solar installations (solar water heaters and solar panels), and there is no cap. Installations can be made on existing homes and new construction, and on both principal residences and second homes.

    A tax credit of 30 percent of the cost, including installation, up to $500 per .5 kW of power capacity is also available for residential fuel cells and microturbine systems on principal residences. You cannot get back more in credits than you paid to the government in taxes throughout the year, but the unclaimed portion of the tax credit can be carried forward for as long as it is in effect.

To take the credits, file IRS Form 5695 and keep all receipts and the manufacturer’s certification that the product qualifies for the tax credit.


State Incentives

ARRA also channeled $3.1 billion to the State Energy Program, enabling many states to provide incentives to promote energy efficiency and renewable energy. Here are some examples of the variety of state incentives offered:

    • Arizona allows taxpayers who sell energy efficient single-family residences to take a tax subtraction of 5 percent of the sales price up to $5,000.

    • New York offers a 25 percent tax credit on solar energy systems with a cap of $5,000, and a 20 percent fuel cell tax credit with a cap of $1,500, both of which can be carried forward for five years.

    • Minnesota provides a 100 percent sales tax exemption for all solar water heat, solar space heat, photovoltaic and wind systems.

    • Wisconsin exempts the value added to a property by any solar or wind energy system from property taxes.

“Because many states are in such dire fiscal shape, more states offer ARRA funded rebates through the state programs and utilities than tax incentives,” said Lowell Ungar, director of Policy for the Alliance to Save Energy.

For example, Texas, Oregon and Florida have numerous utility-run rebate programs for energy efficiency measures and renewable energy technologies.

Rebates can be taken in conjunction with the federal tax credit: Homeowners who receive rebates do not have to report the rebate as income, but should subtract its amount from their tax basis. So, if a solar energy system costs $20,000 and the rebate is $2,000, the tax basis of the equipment is $18,000 — the figure then used to determine the 30 percent federal tax credit.

In addition, the Department of Energy (DOE) recently launched the $300 million Approved Energy Efficient Appliance Rebate Programs for all states (the programs in Iowa, Kansas, Rhode Island and Minnesota have already closed) to encourage the replacement of older appliances with Energy Star qualified ones for as long as funds last. Because of the recent report about the Energy Star label’s susceptibility to fraud, the DOE and the Environmental Protection Agency will expand testing of Energy Star qualified products. In the meantime, it’s a good idea to check Energy Star labeled appliances being considered for purchase with Consumer Reports.


Incentives and Their Impact

The Energy Tax Act first established personal income tax credits for renewable energy in 1978 in response to the oil shortage of the 1970s. But in the 1990s, when natural gas prices dropped, most of the federal and state incentives were eliminated.

In this decade, as oil prices climbed, the Energy Policy Act of 2005 provided a federal tax credit for energy efficient home improvements, and for solar electric, solar water heating and fuel cells. The act was extended and expanded by the Energy Improvement and Extension Act in 2008 and by ARRA in 2009, which ramped up efficiency standards requirements for most equipment, extended the credit to biomass stoves and cool roofs, and raised the cap for the credit on energy efficiency measures.

The renewable energy tax credits were expanded to include small wind systems and geothermal heat pumps, extended until Dec. 31, 2016, and allowed to be taken against the alternative minimum tax, and the cap was removed altogether.

In order to persuade Congress and the public that energy efficiency and renewables are worth supporting, accurately tracking the savings that result from incentives and programs is critical. But gathering the data is complex because it must measure the difference between actual consumption and what consumption might have been without the incentives. Weather, use and energy prices are just some of the factors that must be taken into consideration.

Right now, there is little hard information measuring the effectiveness of tax incentives on energy efficiency and renewables, according to ASE’s Ungar. The American Council for an Energy Efficient Economy (ACEEE) tracks energy efficiency in the U.S., but not how it’s affected by incentives.

“We know spending and savings were up in 2008 compared to 2006 and 2007, but then the recession hit in 2009,” said ACEEE Executive Director Steven Nadel.

However, anecdotal evidence suggests the tax incentives are working.

“Manufacturers say there is a clear difference from when the incentives changed in 2009,” said Ungar. “They saw a noticeable impact on sales, they’re running their factories more, and they’re hiring back workers. The current tax credits are making a difference.”

There are other signs of progress as well. Ungar noted that the Energy Efficient New Homes Tax Credit for builders, established by the Energy Policy Act of 2005 and subsequently extended, resulted in a dramatic increase in new energy efficient homes — between 2006 and 2008, 50,000 new homes qualified for the tax credit.

In addition, the U.S. Energy Information Administration’s (EIA) Annual Energy Outlook 2010 Early Release Overview found that shipments of geothermal heat pumps to the residential market increased 40 percent in 2008 as a result of the tax credits in the Energy Improvement and Extension Act of 2008.


On the Horizon: Homestar

The EIA projects that electricity from renewable energy will grow from 9 percent of total U.S. electricity generation in 2007 to 16 percent in 2030 due in large part to the federal tax credits and other incentives. But it also projects that this growth will slow significantly when the tax credits expire, according to Chris Namovicz, a renewable energy analyst at EIA.

Maintaining tax incentives would not only promote continued growth for renewables, it also would keep boosting the baseline for energy efficiency standards.

“What may be a premium product at the start of an incentive becomes the standard as criteria get ratcheted up to make products more energy efficient,” Ungar said.

“We need continuing incentives to make sure products keep getting better and to get the most energy efficient ones to market. … There’s a lot of support for these incentives and a recognition that we need to push the energy efficiency market for consumer protection, energy security and reliability, and to deal with climate change.”

Another federal incentive program may be just around the corner. To stimulate more energy efficiency and job creation, President Obama recently proposed the $6 billion Homestar Energy Efficiency Retrofit Program, which, if approved by Congress, would offer homeowners additional rebates for energy efficiency improvements — such as insulation, duct sealing, water heaters, HVAC (heating, ventilation and cooling) units, new windows, roofing and doors — and create an estimated 168,000 new jobs.

www.solveclimate.com

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