In August 2005, the 2005 Energy Policy Act was signed into law. Considered to be among the most sweeping bodies of legislation to affect the nation's energy production and consumption in decades, EPAct 2005 set a host of new product efficiency standards and supported enhancements to the nation's electric grid and generating infrastructure. EPAct 2005 also offered unprecedented new federally-sponsored financial incentives rewarding the use of energy-efficient lighting, HVAC, and other high-efficiency building envelope technologies in both new installations and retrofit applications.
Originally available for eligible technologies placed into service between Jan. 1, 2006 and Dec. 31, 2007, these new financial incentives were offered in the form of tax deductions that provide up to $.60 per square foot on the installation of energy-efficient lighting products that increase a building's energy efficiency by 25 percent to 40 percent or more over the ASHRAE 90.1-2001 standard. Adopted as the commercial building reference standard for state building energy codes, the ASHRAE 90.1-2001 standard was instituted by the American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE), Atlanta. Tax deductions of up to $1.80 per square foot are available on qualifying whole-building upgrades involving technologies that improve a building's energy efficiency by 50 percent or more over the ASHRAE 90.1-2001 standard.
In the 18 months since EPAct was enacted, the commercial buildings marketplace has responded vigorously to the upgrade opportunity, now made even more attractive through the extension of government-sponsored tax incentives. From the government's formal issuance of EPAct tax deduction guidelines in mid-2006, to the market's overall increase in demand for upgrades and the electrical industry's support in converting end user interest into bona fide project activity, EPAct 2005 has helped to channel our nation toward a more energy-efficient future.
EPAct 2005 in Retrospect
In the months immediately following August 2005, the electrical industry raced to bring clarity to EPAct's various elements and provide end users and other beneficiaries with the direction and resources they needed to capitalize on the bill's landmark commercial tax deduction opportunity. This manifested itself in the establishment of a variety of informative Web sites, including www.efficientbuildings.org, www.lightingtaxdeduction.org, and www.energytaxincentives.org, as well as a host of manufacturer-sponsored sites. In the end, the government's extension of financial incentives for qualifying energy-efficient installations spoke for itself.
“Through the availability of the federal tax deduction opportunity, commercial end users have more reason than ever to take actions that were in their best financial interests anyway,” says Rob Colgan, executive director of marketing for the National Electrical Contractors Association (NECA) and chairman of the National Lighting Bureau (NLB). “Lighting upgrades make tremendous economic sense on their own based on the energy savings, quality improvements and productivity enhancements they drive. Tax deductions now enable the market to pursue these activities and enjoy the additional financial benefits of accelerated depreciation.”
Ed Gray, director of energy infrastructure, National Electrical Manufacturers Association (NEMA), Rosslyn, Va., also believes the incentives may increase the quality of the market's upgrade activity. “Tax deductions help shorten project payback periods and increase returns on investment, enabling end users to pursue higher-efficiency upgrades than they might otherwise have considered,” he says.
In response to extensive requests for further clarification, in June 2006 the Internal Revenue Service officially followed up EPAct 2005 by issuing an advance copy of Issue IR-2006-088, Notice 2006-52, detailing the specific procedures by which commercial building owners or leaseholders could qualify for the tax deduction for making their buildings energy efficient. The notice established a process to certify the required energy savings in order to claim the deduction and also announced that the Department of Energy would create and maintain a public list of approved software to be used in calculating energy savings for purposes of providing certification. NEMA responded by publishing a user-friendly document to help communicate and explain the elements of the IRS notice, which can be accessed at www.lightingtaxdeduction.org.
Throughout 2006, the electrical industry lobbied for the extension of the commercial buildings tax deduction (CBTD) opportunity on the premise that the two-year window would not provide enough time for end users to proceed with upgrade plans or complete projects in time to qualify for tax deductions. As a result, by Fall 2006, Congress was host to at least eight separate bills proposing the extension of the Commercial Buildings Tax Deduction from its original Dec. 31, 2007 deadline to anywhere between 2010 and 2014. On Dec. 20, 2006, President Bush signed a bill extending the tax deduction deadline until Dec. 31, 2008, effectively buying building owners an additional year to upgrade a building or pursue legislative improvements such as further extensions.
EPAct in 2007
Following the mid-term elections in November 2006 and the election of a Democratic majority in the Senate, industry experts believe the climate for energy and energy-efficiency issues will be positive in 2007. Says Kyle Pitsor, NEMA vice president of government relations, “There will be less focus on energy sources and more on energy efficiency, conservation, renewables and new technologies. This offers NEMA key opportunities to promote energy-efficient products, investment in advanced technologies for the electrical grid, new technology research and distributed power.”
As a key driver behind the development and passage of large portions of EPAct 2005, NEMA representatives plan to keep leading the charge in 2007-2008, championing such initiatives as proposals for additional energy-efficiency standards based on California Title 20, technical corrections and further extensions to the CBTD, and tax incentives for outdoor lighting, an application which is currently outside the scope of the bill.
Jared Johnson, CLMC, CLEP, and vice president of the energy service company EnerTech Systems Inc., Anaheim, Calif., agrees that the EPAct-sponsored financial incentives have raised awareness of the benefits of electrical product upgrades. “The tax deductions available through EPAct have been an exciting development, because in addition to promoting lighting upgrades in general, they are helping to drive upgrade activity in areas of the country where utility rebates have not been regularly available,” he says.
Johnson is delighted to see upgrade activity in his market increase because of EPAct, but says end users should consider energy-efficient retrofits on their own merits and not just because of the additional financial incentives. “Even if end users are not completely clear on EPAct's tax deduction opportunity today, we encourage them to move forward and not wait to initiate energy-saving projects that make financial sense for their business,” he says. “Customers can prepare their tax documents and benefit from the additional tax incentive at a later time during the window of this opportunity if they need to, but they shouldn't wait to begin realizing the immediate and significant energy savings that upgrade projects can drive all on their own.”
Opportunities for Distributors
The rising costs of energy affect all businesses and the increasing availability of utility rebates on qualifying products help to offset project expenses, so there has never been a better time for the nation's commercial, industrial and institutional facilities to reduce their energy costs, improve the quality of their electrical systems and help the environment. The 2006-2008 commercial tax deductions for eligible upgrades through EPAct 2005 represent an even more compelling reason for end users to pursue an energy-efficient upgrade today.
Their knowledge of these market factors and a solid grasp of financial terms and proposal preparation put distributors in an ideal position to bring added value to their customers and secure their participation in the thriving upgrade market. Electrical distributors should canvass their customer base for upgrade opportunities based on current purchase patterns and familiarize themselves with local utility programs, state subsidies earmarked for energy-efficient activity and financial incentive opportunities through EPAct. As a product and service provider, they shouldn't wait to capitalize on the tremendous financial, environmental and aesthetic benefits an energy-efficient upgrade can offer customers and their bottom line.
Susan Bloom is the manager of public relations for Advance Transformer Co., Rosemont, Ill. She can be reached at (732) 563-3517 or by e-mail at [email protected].
Key Milestones in EPAct 2005 and CBTD
2002 - 2005
The electrical products industry and various trade and environmental associations lobby for the passage of an Energy Policy Act, the first significant legislation of its kind since 1992.
Aug. 8, 2005
EPAct 2005 is signed into law by President Bush.
Fall 2005 - Spring 2006
Numerous trade association and manufacturer-sponsored informational Web sites related to EPAct 2005 go live, including www.efficientbuildings.org, www.lightingtaxdeduction.org, www.energytaxincentives.org and www.energybillinfo.com.
June 2, 2006
The IRS issues Notice IR-2006-088, its official procedures enabling commercial property owners to qualify for energy efficiency deductions. Information describing the contents and qualifications for the certification are listed in Notice 2006-52, “Deduction for Energy Efficient Commercial Buildings,” which can be found at www.irs.gov or at www.lightingtaxdeduction.org.
Oct. 3, 2006
NEMA issues its official “Guidance on Energy Policy Act Commercial Buildings Tax Deduction” document, which helps clarify a number of issues for the engineer and contractor audience as it relates to qualification for tax deduction opportunities and the procedures and templates which, once completed, can be used by a tax accountant to prepare the necessary documentation for the IRS.
Dec. 20, 2006
President Bush signs a bill extending the CBTD for one year. Tax deductions are now available on qualifying lighting technologies placed into service between Jan. 1, 2006 and Dec. 31, 2008, inclusive.
The industry begins lobbying for further extensions to the CBTD as well as additional energy efficiency standards.