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By BOM Editorial Staff
December 2005 -
Energy Efficiency Article Use Policy
The federal energy act signed into law in August contains a few opportunities for commercial buildings making energy efficiency improvements in the next couple years to reduce their organizations’ tax liabilities.
And if the organization doesn’t pay taxes, such as government-owned buildings, non-profit hospitals, universities and schools, the best chance for savings comes from the bill’s efforts to promote new electric rates.
Be warned: Facility executives who want to take advantage of the law should move quickly. On many relevant options, the new law offers only a two-year window of opportunity.
Formally known as the Domenici-Barton Energy Policy Act of 2005, EPAct 2005 also contains provisions for improving energy product efficiencies, codes, metering, programs, user education and alternative vehicle fuels, plus pursuit of numerous energy studies.
As of October, regulations were still being developed to promulgate the 1,725-page law, so details of the effect on facilities may change. The goal is to have new tax provisions available Jan. 1.
While some of the law’s major changes will likely have long-term impacts, such as the repeal of PUHCA — the Public Utility Holding Company Act, which will further restructure utilities — building owners and facility executives may wish to focus on matters closer to their lobbies. Most of those issues fall into two general categories:
Much of EPAct 2005 involves fiddling with the federal tax code: the amount that can be deducted under Section 179, which allows capital expenditures to be expensed in the year they occur rather than depreciated, is expanded, for example. Also, one of EPAct 2005’s primary criteria is energy cost reductions, not just energy use reductions, though the two typically coincide.
What’s the difference? Cost reductions are affected by local fuel and electric pricing structures, how energy is bought, and the age and condition of a facility, whereas higher efficiency cuts energy use regardless of its price. Where peak demand charges are high, it is sometimes more profitable to cut demand than to significantly reduce electrical consumption. Facilities in the South, for example, often pay lower-than-average prices for both demand and energy and may not find it cost-effective to cut energy cost significantly, even if they receive the maximum $1.80 per square foot tax deduction.
That $1.80 multiplied by the total number of square feet in a building is also to be netted against any deductions previously taken for energy efficiency installations for a building in all prior taxable years. As a result, facilities built before the first energy crises in the ’70s that have never had their lighting or HVAC upgraded may be better candidates for securing the most tax deductions under EPAct 2005 requirements.
Energy system designs in a new building or a gut rehab of an existing structure must cut energy cost by at least 50 percent relative to what it would be consuming if designed under ASHRAE 90.1-2001. That’s the standard presently used by most state energy codes for new buildings, though a few states’ codes are already tougher. While many new building systems may beat ASHRAE 90.1-2001, doing so for an entire new facility, which may consume more energy because of loads from other needs, such as a 24-hour computer center, could be a challenge. If such loads are high relative to those for HVAC and lighting, cutting total building energy cost by 50 percent may not be possible without use of pricey options, including cogeneration or photovoltaics.
For upgrades that affect only a non-lighting system, such as HVAC or domestic hot water, a 60 cent per square foot deduction is offered if the upgrade is able to cut that new system’s energy cost by 50 percent relative to the same system if designed to meet ASHRAE 90.1-2001. For upgrades that affect only indoor lighting systems, two requirements must be met to secure the 60 cent deduction: a 25 percent reduction in lighting power density (50 percent for warehouse lighting) plus a 40 percent reduction in energy cost. If the 40 percent cost savings is not achieved, EPAct 2005 provides a formula for applying some of the 60 cent deduction.
Proving the savings involves use of computer modeling software to be certified by the Department of Energy. Software presently certified to meet California’s Title 24 will likely be accepted. Installations must also be certified by organizations recognized by DOE, such as professional engineering societies. Customers pursuing the tax deduction should factor in any extra cost for such engineering services, which may also be deducted.
Cutting energy costs is a two-sided coin. Improving building system efficiency is one side, while providing such systems with cheaper power and thermal energy to use is the other. EPAct 2005 offers tax credits for distributed generation using fuel cells or microturbines, and extends existing credits for solar energy, except when used for swimming pools. Fuel cells may generate tax credits of $1,000 per kilowatt of output up to 30 percent of the cost of the system. Microturbines may qualify for $200 per kilowatt up to 10 percent of the cost of the system.
Money is also available for demonstration projects involving renewable energy resources, including solar, geothermal and biomass.
An income tax deduction is only useful for a customer who pays income taxes. So what happens when the customer is a governmental entity, such as a public school, federal prison, city hospital, community college, public safety, or a non-profit entity, including private hospitals, universities or non-governmental organizations?
For government-owned property, EPAct 2005 provides the same tax deductions as for commercial customers but allocates them to the “person primarily responsible for designing the property [i.e., the new energy system] in lieu of the owner of the property.” This would presumably allow a public school to allocate the tax deduction to its engineering firm or contractor in exchange for an equivalent reduction in its fee or construction cost. If the customer was a private non-profit entity, however, no such allocation is provided. That means many private institutions, including college campuses and medical centers, cannot pass on the tax savings.
EPAct 2005 also pushes for new ways to price power and the metering needed to make those changes happen. Based on studies that show some customers will reduce demand and use when their power pricing is more time-sensitive, the new law calls for all state public utility commissions to examine and consider offering time-based utility tariffs. Under such rates, the cost of power varies with the time of day or the hourly wholesale grid power price.
Using such rates requires customers to have meters that measure and log power use during defined time intervals — for example, 15 minutes — and either record that data for later retrieval or continually send it back to the utility via a communication line. Generically called interval, advanced or time-based meters, these devices have become standard for many larger utility customers in high-cost areas. California, Ontario, Italy and various other states and nations have already mandated facilities — down to small commercial or, in a few cases, residential buildings — to use such meters.
EPAct 2005 requires that, during the next two years, every utility offer “a time-based rate schedule” (i.e., tariff) and a time-based meter to any customer requesting it. The law also calls for each state utility commission to determine if such new metering may be appropriate to customers not requesting it.
In addition to the usual time-of-use and real-time pricing options that have been offered for decades in some states, the new law encourages “critical peak pricing, whereby time-of-use prices are in effect except for certain peak days, when prices may reflect the costs of generating and/or purchasing electricity at the wholesale level and when consumers may receive additional discounts for reducing peak energy consumption.” These new rates would become available regardless of whether a state’s utilities have been deregulated.
Just how effective such a requirement would be on limiting peak demand is an open question. Where real-time pricing has been mandated in deregulated states, such as New Jersey, many customers simply switched to third-party providers and bought power under private contracts where pricing was based on negotiated rates insensitive to time or grid demand.
The law also promotes demand response programs, incentives and devices that encourage or control reduction of customer loads when hourly power prices are high, or the transmission grid is strained. In some states, customers receive a discount on all power they use if they allow their utility to install a radio-controlled demand limiting device — typically on window and central air-conditioning system compressors — that cycles or sequences loads at peak times so that their aggregate demand is reduced. Large customers participating in a demand response program may instead receive a communication calling for demand reductions and are paid a defined incentive for each kilowatt-hour they do not use relative to an established baseline.
Sections of the new law could affect retail electric rates in several regions, though the impacts would be defined by how the changes are implemented.
Where federal power marketing administrations such as the Bonneville Power Administration or Tennessee Valley Authority exist, they would be allowed, and perhaps encouraged, to join regional transmission organizations (RTO). RTOs are quasi-governmental bodies that manage multistate power grids. Some, known as independent system operators, or ISOs, control grids and wholesale power markets in New England, New York, most mid-Atlantic states, Texas, California and some Midwestern states.
Customers in power marketing administration areas often enjoy low and uncomplicated electric rates because of hydroelectric power plants installed for flood control under federally sponsored programs.
To encourage market-based pricing and new generation/transmission, some ISOs have fostered electric rates that are sensitive to time and market conditions, to location on the transmission grid and to the need for new generating capacity. These are commonly called installed capacity pricing, and some customers, utilities and states have balked at the results. By joining RTO/ISOs, power marketing administrations may expose their customers to such changes.
In New England, the potential imposition of locational installed capacity charges in some areas, such as Boston and southwestern Connecticut, raised such a ruckus that it was postponed for almost a year. In a deft political move, New England leaders got a special section in EPAct 2005 that calls on the Federal Energy Regulatory Commission to re-examine locational installed capacity charges and issue a report on its potential impacts before implementing it.
Some parts of EPAct 2005 providing tax deductions and credits expire at the end of 2007, so customers considering major energy projects, which can take a year or more to develop, design, install and commission, should expedite them to avoid missing out on the financial benefits. Because tax law is involved and some EPAct 2005 regulations are either interim or not yet created, involve an accounting professional before assuming any part of an energy installation’s budget will be covered by tax benefits.
Lindsay Audin is president of EnergyWiz, an energy consulting firm based in Croton, N.Y. He is a contributing editor to Building Operating Management.