How Can Geothermal Installers Solve the ‘First Cost’ Problem?
Government stepping in almost always distorts things. Whether that distortion bends toward your advantage or disadvantage often makes the difference in how you feel about it. In the geothermal part of National Driller’s readership, we’re seeing the fallout now of government stepping out of a market, and how professionals in that market are trying to move on.
An important tax credit, which made geothermal HVAC installations more competitive with other types of systems, like forced air, expired at the end of 2016. (Read our cover story on page 12.) There are no clear sign as to whether it will be reinstated, and the geothermal sector now has to come to grips with how to survive and thrive without it.
I’ll delve more into that idea, but first I want to talk about what it means for an industry when government gets involved. This isn’t an anti-government screed. I bring my own biases to the distortion I mentioned, just as each of my readers do. But I do want to acknowledge the change inherent in government involvement in anything. I’ll use two examples.
First, a more macro example: the oil and gas industry. Tax credits, deductions and incentives add up to billions. That’s not a good thing or a bad thing, but it’s worth acknowledging as a thing. Businesses can write off all kinds of intangible costs related to drilling new wells. They can also get depreciation on many durable assets and may get tax incentives for investing in one state versus another. Those policies — like all tax policies — are designed to encourage or discourage activity, the distortion I’m talking about. Drill here, not there. Hire workers here, not there. Buy equipment, or don’t.
Now, a more micro example: a small geothermal contractor who runs a couple drill rigs. You struggled for a while because a geothermal system, while more efficient to operate, comes with that famous “first cost” problem. Now, the federal government all of a sudden decides that geothermal heat pump systems are “energy efficient,” and eligible for tax credits. All of a sudden, your phone is ringing off the hook. People who were curious about whether geothermal might be right for them, but daunted by the price, now reconsider. The “first cost” problem has been solved. Even architects are calling, asking about systems for new commercial builds and neighborhoods.
It’s not unusual for a business in that position to see revenue jump 30 or 40 percent. Kind of makes you want to see the government butt into your business, doesn’t it? We sure could use another 30 or 40 percent in revenue here at National Driller. Heck, I’d love a revenue bump like that for my personal balance sheet. Wouldn’t you?
But it was all distortion at work. Not a good thing, not a bad thing, but a thing nonetheless. I’m sure we can all think of tax incentives we might have been for or against. You may think giving a tax break to build a local stadium is a bad idea. I’m skeptical of the job promises such deals come with. You may love your home mortgage interest deduction. I know I do.
All of these change the way things actually behave under the “invisible hand” of the market. Those changes have a big impact. Ask someone in geothermal.
It’s not that I don’t have sympathy for all the drilling contractors who just had a tax credit yanked out from under them. I do. And it’s not like all of a sudden geothermal systems are no longer efficient and cheaper to run over the long term. They are. It’s just that the first cost problem is back. The question is, how are you going to solve it without government help?
What do you think? Do you have advice for geothermal contractors going forward? Send your ideas to firstname.lastname@example.org.
Stay safe out there, drillers.