Learning to Cope Without the Geothermal Tax Credit
Fire and Ice Geothermal LLC has been around since 1989 and Ray Bayliff, the owner of the Woodward, Okla., geothermal drilling company, says the last year and a half has been slower than usual. The business, which employs a staff of 14, depends heavily on demand for geothermal heat pump (GHP) installation, which makes up 100 percent of business. For this reason, the end of the federal Investment Tax Credit and Residential Energy Efficiency Property Credit for GHP installation is anything but good.
At the end of 2016, Bayliff did experience a sudden spike in business, but it was tied to the Dec. 31, 2016 expiration date of the tax credit, which, at the time, had yet to be extended. “The middle of November, everybody decided they wanted a geothermal system and they wanted it before the end of the year. So in November and December we were just swamped,” Bayliff says.
Now that 2017 has commenced, the GHP tax credit still has not been extended, and business is already being affected. “For a small businessman it’s been really devastating. We have four rigs and two of them are parked. We are fortunate enough that we are keeping the other two going and busy, but we’re not doing a third of the work that we used to do,” Bayliff explains. “I realize it’s only the 17th [of January], but usually our phone is ringing and it’s not.”
Doug Dougherty, president and CEO of the Geothermal Exchange Organization (GEO), says the pain of the ended federal tax credit is being felt by geothermal drilling community members nationwide. He started hearing about the negative impact as far back as summer of 2016. Even though no decision had been made yet on whether the incentive would continue, the lack of certainty surrounding the credit was enough to slow business.
Many architects and builders on the commercial side were interested in having GHPs installed, but since Dougherty could not promise the tax credit would remain effective after Dec. 31, 2016, they turned to traditional heating and cooling options. One of GEO’s board members who deals mostly with commercial clients told Dougherty in November that jobs were usually already booked out a year in advance, but not one had been confirmed for 2017 at that point.
“On the residential side, we actually saw a dramatic increase in sales and installation in November and December because they were trying to beat the end of the year. But my guys are telling me the impact this first year will be a 30 to 40 percent decline in residential sales,” Dougherty says. “If sales drop by a third, everybody’s not going to be employed. … We’ve been asked how many jobs are going to be lost and all we say is thousands across the country.”
The notion of the GHP tax credit ending at the end of 2016 began at the end of 2015, when Congress extended federal incentives for wind and solar technologies, but not for lower profile options that were included with them in the previous bill, like GHPs. GEO was told that it was a mistake. Dougherty says Rep. Kevin Brady, R-Texas; Rep. Nancy Pelosi, D-Calif.; Sen. Harry Reid, D-Nev.; and Sen. Mitch McConnell, R- Ky., all agreed that the leaving out of GHPs from the omnibus bill in December 2015 was the result of some form of unintentional error.
“The cost of that extension was $23.8 billion. So when we went back in January and February , we said, you left us behind and by the way we’re [just] $1.4 billion,” Dougherty says.
He and his team of lobbyists worked hard to build a bipartisan Senate amendment to be placed on the Federal Aviation Administration (FAA) continuing funding tax bill in the first half of 2016. But by the time the amendment was ready to be finalized, Dougherty says word got out that amendments had been added to the FAA bill, turning it into a “tax Christmas tree bill.” Sen. McConnell, who wanted to pass a clean FAA bill, wasn’t having the flood of amendments, including the GHP tax credit extension; GEO lost that opportunity.
So GEO looked ahead and pursued a new opening through Rep. Tom Reed, R-N.Y., who, Dougherty says, had introduced a bill that basically gave the other industries, including GHP, the extensions that wind and solar had received. By November 2016, GEO had successfully gained the support of more than 40 cosponsors for an anticipated omnibus bill during the lame duck session. “Because [President] Trump was elected and the Senate did not flip to Democrat, the House Republicans were still the most in control, so [Rep. Paul] Ryan and Trump agreed that there just be a straight continuing resolution and no omnibus bill,” Dougherty says.
GEO is not quitting though. Dougherty is still working with lobbying firms, and he says the organization has received confirmation that Rep. Reed is going to reintroduce the omnibus bill and GEO is working to get all of the previous cosponsors onboard. “If we can get 100 Republican cosponsors of this bill, it would clearly send a message to Republican leadership in the House that this needs to be fixed,” Dougherty says. “April 27 is our next window of opportunity because there will be several things that have to be decided by then and our hope is that there will be a tax vehicle that needs to be voted on prior to April 27. … I think, to our discussions with Congressman Reed, the bill would contain language that it would be retroactive to Jan. 1, 2017.”
Dougherty says that just as the economy is picking up, the rug has been pulled from under the GHP industry. He explains that the initial tax credit started in 2008, when the recession was kicking off and negatively impacting the industry because commercial and residential building had drastically slowed. But now that things are looking up and more potential clients exist, Dougherty says an extended tax credit could help give the industry a much-needed boost. “Give us five more years and hopefully we’ll have greater market share within five years,” he says.
There were two components to the tax credit incentive for GHP installation: commercial and residential.
On the commercial side, Dougherty says that the Dec. 31, 2016 expiration not only ended a 10 percent investment tax credit, but it also ended a five-year accelerated depreciation and first-year bonus depreciation incentive. He points to an example of an office building he knows of that bid a traditional chiller boiler system and then a commercial GHP system. The price for the traditional HVAC system was $600,000, versus $1 million for the GHP system.
The building owner said he could not afford to put $400,000 more into the building for geothermal heating and cooling, but the mechanical engineer asked if he had run the numbers. The owner said he had not because of the enormous cost differential, which seemed to speak for itself. That’s when the mechanical engineer pointed to an investment tax credit, five-year accelerated depreciation and bonus depreciation for the GHP option. Plus, he noted that the utility company offered a small rebate and that the energy cost per square foot would drop. The owner had the mechanical engineer run the numbers for him.
“The cost differential of $400,000 was paid back in 1.7 years,” Dougherty says. “Then, for the next however long he owns that building, whether it is 10 years or 100 years, the numbers just keep accumulating. … So that’s how we were selling commercial systems. The economics were so in our favor and that all went away Dec. 31.”
On the residential side, a 30 percent income tax credit was offered for the total amount of the system. Dougherty says that the cost of a traditional gas furnace and air conditioner together is about the same as the cost of the cabinet and mechanical internal system that make up a GHP. The difference in cost is tied to the installation of the ground heat exchanger.
“The 30 percent tax credit pretty much took the cost of putting that heat exchanger in out of the equation,” he explains. “So you’re really comparing, cost wise, two systems. … Our system uses probably 50 percent less BTUs for heating, cooling and hot water. So it makes total economic sense to put in a geothermal heat pump if it’s the same cost as a conventional furnace and air conditioner, and gas or electric water heater. And we lost it. It went away Dec. 31. Now we’re going back to old school.”
By “old school,” Dougherty is referring to how the industry sold and marketed GHPs before the federal tax credit existed.
John “Jack” DiEnna Jr., executive director of the Geothermal National & International Initiative (Geo-NII), agrees that geothermal drillers and heat pump installers are going to need to focus on the other benefits of the systems. For now, he says the industry should forget about the federal tax credit and act as if it does not exist when communicating with customers. “I think if we allow it to be a big deal, it will be,” he says. “Let’s face it. The investment tax credit was eventually going to go away. … I think what we’re going to see though is, even if it gets put back in, it’s going to have a life expectancy of maybe three to five years.”
DiEnna says increased creativity in client communication should focus on three key areas.
“First of all, the benefit is, you’re going to be more comfortable. Second, you’re going to use less energy. Third, we’re talking about a system that, the inside portion — the heat pump — lasts about 25 years, but the outside portion of it lasts 50 to 100. So you’re putting in a system that, if this is a generational house, your great grandchildren are going to use. That’s the kind of things we have to talk about. I don’t really believe the investment tax credit was the only sales tool of why people bought.”
He says he notices through his involvement with state organizations — namely Wisconsin, Massachusetts and New York — that, while the federal incentive has at least temporarily ended, individual states are recognizing the value of geothermal heating and cooling technology, and moving forward with their own initiatives, whether they be credits, grants or other programs. Dougherty says South Carolina and Iowa already have state-level tax incentives in place for geothermal heating and cooling. He says New York is hopefully next on the list.
GEO has worked with at least five states to see that the thermal energy from geothermal heat pumps is recognized as “renewable energy.” The organization has also been successful in getting Vermont and Illinois to adapt their definitions of “energy efficiency” to include geothermal energy. Dougherty says it is important to ensure the language used to define “energy efficient” and “renewable energy” includes “geothermal” because that language greatly impacts the extent to which states and utility companies can support GHP technology.
“We’ve had some success,” Dougherty says. “Most notably, ComEd in Chicago announced last year, for the first time in the history of their company, that they are financially supporting geothermal heat pumps at $1,000 per ton, up to six tons.”
In the meantime, Bayliff encourages other geothermal drillers to do their part and contact their congressmen and senators. He reached out to his congressman and both of his senators before the end of 2016, urging them to extend the tax credit, and he is not letting its expiration stop him. “I’ve told them, ‘You’re going to get tired of me calling and sending emails,’ and they’ve said, ‘No, no. You need to do that.’ I send one [email] to each one of them every month.”
As the leader of a national trade association that represents the GHP industry, Dougherty says he is always optimistic; he has to be. He thinks the industry has a very compelling case and that his team has built tremendous support for a federal tax credit extension over the past year. While taking politics out of Congress and the executive branch is impossible, GEO thinks political headwinds have lessened since the 2016 lame duck session. Dougherty has not been told by anyone in leadership that the GHP tax credit extension will never happen and, until he hears something definitive, GEO will “keep working to to fix the wrong.”
DiEnna says that, at the end of the day, whether the GHP installation community thinks it can or thinks it can’t, it’s right. “If we keep thinking, ‘Oh my gosh. What’s going to happen? It’s gone. What are we going to do?’ you’re going to fail. … Everything changes. The only thing constant is change. My question is: How are you going to change to fit the new reality? And the new reality is: How can I sell this?”