A Special Report in conjunction with the National Electrical Manufacturesrs Association The Impact of EPAct - Facility Management Energy Efficiency Feature"/>
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By Dan Hounsell
September 2006 -
Energy Efficiency Article Use Policy
The arrival of the Energy Policy Act of 2005 (EPAct) coincided with two developments that have amplified its potential impact on institutional and commercial facilities. First, energy prices began an ascent that has not stopped and shows few real signs of slowing. Second, lighting technology — a key area of facility technology that EPAct targets — has evolved to the point that maintenance and engineering managers can specify products that curtail energy use while still providing quality lighting for occupants and operations.
Since the act’s arrival in 2005, managers seeking to qualify for the tax deduction EPAct offers have had to sift through a steady flow of information. While this task can seem immense, lighting manufacturers say the latest information on EPAct can make the task easier by clearing up gray areas and filling in gaps for end users.
“Many people believe that the process is so complicated that it’s difficult to navigate,” says Jim Himonas, executive vice president of Cooper Wiring Devices. “Frankly, that doesn’t need to be the case. There’s a lot of good information out there now.”
The act created a tax deduction of up $1.80 per square foot for new or existing buildings constructed or renovated to save at least 50 percent on the energy costs on HVAC, water heating, or interior-lighting systems in buildings that meet the efficiency guidelines in ASHRAE 90.1-2001. Though voluntary, most states have adopted the standard as their mandatory building energy code. California has adopted its own code.
Partial deductions of $0.60 per square foot (psf) are available for improvements to one of the three systems — including lighting — that reduces HVAC, water heating or lighting energy use by 16.6 percent.
The deductions are available for buildings or systems placed in service from Jan. 1, 2006, through Dec. 31, 2007. Congress, however, is debating whether to extend the deadline.
Among the most anticipated new pieces of information is Notice 206-52, Deduction for Energy Efficient Commercial Buildings, from the Internal Revenue Services (IRS). The notice clarifies several provisions of the act and lists software managers need to use to calculate energy and power use.
Some early information on EPAct created confusion among end users, so many manufacturers’ recent efforts have involved pushing information out to facilities so managers can make better decisions in selecting systems and technology that will help their organizations qualify for the EPAct tax deduction.
The misconceptions cover a number of important issues.
“People believe that only new construction will qualify,” Himonas says. The deduction actually applies to capital improvements to new or existing buildings.
“Some people aren’t aware that public buildings are eligible,” says Charlie Jerabek, CEO of Osram Sylvania. For energy-efficiency projects in public buildings, such as public schools, the IRS will issue regulations allowing the deduction to be allocated to the person responsible for designing the property. But it goes beyond that.
“The deduction is available for any building type covered within the scope of interior lighting in 90.1, so even (indoor) parking garages can qualify,” says Cheryl English, vice president of technical services and industry relations for Acuity Brands Lighting.
Customers also have questioned the size of the benefit to their organizations in undertaking lighting retrofits to earn the deduction.
“A common myth is that there is not a significant enough financial incentive to justify the effort,” she says.
In fact, she adds, “Many buildings can be renovated with new lighting systems and achieve up to 50 percent reduction in energy use with less than a one-year payback when claiming the tax deduction for lighting.”
She offers this example: “A school classroom using four-lamp troffers can be replaced with recessed T5 luminaires — reducing energy use by 60 percent — and installed with a two-year payback resulting from the energy savings combined with the tax benefit of the accelerated depreciation. The distribution of the new luminaires will provide a more comfortable environment, and using bi-level lighting associated with various classroom activities can reduce the energy cost even more.”
Questions also arose about the effort that is needed to certify projects as qualified to earn a deduction.
“Certification has been one of the biggest hurdles for building owners to decide whether to renovate facilities because we just didn’t know how cumbersome the certification process would be,” English says. The June IRS notice addressed the certification issue.
Says English, “With the June Treasury guidance, we know that certification can be as simple as retaining records regarding the energy efficiency installation and obtaining a certification statement from a qualified individual.” Many manufacturers offer template statements on the EPAct areas of their web sites.
Customers also have raised questions about specifying technology and systems that qualify. English cites the issue of lighting controls.
“New construction and renovations must include bi-level controls, which are intended to provide multiple levels of lighting within a space,” English says. “Many control options will meet the bi-level control requirement with various degrees of sophistication. The requirement can be met with manual or automatic switching of lamps or fixtures, switching zone circuits for areas when they are inactive, step-level dimming, or continuous dimming. This requirement presents a great financial incentive to install controls in existing buildings that can improve the overall efficiency and reduce operating costs.”
Finally, Jerabek says, there have been questions about who can apply for the deduction, such as in the case of public buildings or leased commercial space. The tax deduction is available to the entity that is carrying the fixtures as an asset on its books, which might or might not be the entity that pays the electric bill.
Timing is everything when it comes to EPAct. For now, at least, the window to qualify is small – projects put into service in 2006 and 2007. But EPAct also provides a quick benefit. Organizations can immediately deduct almost the full cost of a capital investment in a lighting system.
Many end users, English says, overlook “the financial benefits of the accelerated depreciation reducing payback, coupled with long-term energy savings.” So how should managers proceed?
“Don’t try to tackle everything at once,” English advises. “Conduct basic audits of facilities to identify the most significant opportunities. The most attractive candidates for renovation are those with large square footages, high energy rates, long operating hours, or lighting systems that have not been upgraded in the last five years.”
Himonas also urges managers to spend time on web sites — those of industry associations and lighting-product manufacturers — that offer EPAct-specific resources and answers. Beyond that, he says, managers and their organizations can benefit from discussing applications and opportunities with manufacturers, independent consultants, and associations.
To help maximize the benefits of EPAct, managers also need to work closely with other key players in the organization.
“You really need to get your financial people involved,” says Keith Ward, president and COO of Eye Lighting International of North America.
Adds English, “The accelerated depreciation from the tax deduction may reduce the payback period by 30 percent, depending on the corporate tax rate. Many applications can achieve a payback of less than one year with the benefit of the tax deduction.”
Finally, Jerabek points out that utility incentives promoting energy efficiency are available in many parts of the country can generate additional savings that might make lighting-system investments even more attractive. Utilities usually have information about these programs on their web sites or, and organizations such as the Consortium for Energy Efficiency document many of the national rebate programs on their web sites.
“There is legislation coming all the time that is mandating energy-efficient products,” Jerabek says. “It makes sense to be more proactive by putting technology in place now so you don’t have to worry about compliance down the road.
Among the biggest remaining uncertainties surrounding EPAct is whether Congress will extend the eligibility deadline and, if so, to what date. Manufacturers agree that an extension would help end users now under pressure to fit into the current two-year window.
“The first year is all about education,” Ward says. “And in ’07, everyone will be under the gun to get (the deduction). Some people are still finding out about it.”
A number of bills before Congress seek to push back the deadline, some as far as 2010. One bill proposing such an extension, English says, also increases the tax deduction, either from $1.80 psf to $2.25 psf for the total deduction or from $0.60 psf to $0.75 psf for the system-specific deduction.
Given the nation’s ongoing energy problems and growing interest in the financial benefits EPAct offers, manufacturers say Congress is very likely to give the matter serious consideration.
“My intuition tells me that the deadline will be extended,” Jerabek says. “The law was enacted before we got into the current (energy) predicament.”
Maintenance and engineering managers seeking information on the Energy Policy Act of 2005 (EPAct) have a range of resources to choose from. Among the available web resources are these:
www.lightingtaxdeduction.com — Developed by the Lighting Systems Division of the National Electrical Manufacturers Association (www.nema.org) and the Commercial Building Tax Deduction Coalition, the site provides education about the lighting aspects of the deduction and resources to help with its implementation.
www.efficientbuildings.org — The site for the Commercial Building Tax Deduction Coalition offers legislative updates and success stories, in addition to links to related groups. Coalition members include standards organizations, manufactures, trade associations, and government agencies.
www.energytaxincentives.org — The Tax Incentives Assistance Project (TIAP) site is sponsored by public-interest nonprofit groups, government agencies and others in the energy-efficiency field.
— Dan Hounsell
The National Electrical Manufacturers Association (NEMA) has about 430 member companies that manufacture products used in the generation, transmission and distribution, control, and end-use of electricity. NEMA provides a forum for the standardization of electrical equipment, enabling consumers to select from a range of safe, effective, and compatible electrical products. The association promotes safety in the manufacture and use of electrical products, provides information about NEMA to the media and the public, and represents industry interests in new and developing technologies.
For more information, visit www.nema.org