Tax Incentives for Combined Heat and Power

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Introduction

Combined Heat and Power (CHP), or cogeneration as it is more commonly referred to, is the simultaneous generation of usable heat and electric power in a single process. In other words, it utilizes the heat produced in electricity generation rather than releasing it wastefully into the atmosphere. These systems, which currently account for approximately seven percent of U.S. electrical generation, produce a fraction of the nitrogen oxides that conventional systems do. As a result of the potential energy efficiency and the greenhouse gas reductions, both the U.S. Department of Energy and the Environmental Protection Agency have the achievable goal of doubling the number of these CHP systems in the United States.

Because CHP is a very energy efficient technology, many building owners and facilities managers would purchase CHP systems if they were fully aware of the total economic benefits related to the technology, including tax incentives that are available to them. Their time has come. As a result of recent Federal tax law changes CHP now has its most favorable tax treatment ever provided for in the U.S. tax system, making 2011 the ideal time to install Combined Heat and Power.

Expanded Tax Incentives for Combined Heat and Power (CHP)

Pursuant to the American Recovery and Reinvestment Act of 2009, there are 10% tax credits available to buildings owners who install CHP systems through January 1, 2017. These systems are normally depreciated on a 5 year MACRS basis, but recent changes to the U.S. tax systems collapse this depreciation down to one year, meaning that building owners who install CHP systems after September 8, 2010 through December 31, 2011 can take 100% tax bonus depreciation. Even if building owners miss this 2011 window, they can enjoy a 50% tax bonus depreciation on equipment placed in service from January 1, 2011 through December 31, 2012.

Further, CHP installations that are eligible for the 10% tax credit from January 1, 2009 can also elect to receive an equivalent cash grant.

See the chart below for an illustration of the potential tax savings available through December 31st, 2011.

Sample Combined Heat and Power Tax Savings from September 9, 2010 through December 31, 2011

heat-power-tax-savings-2011

Combined Heat and Power defined

Combined heat and power refers to the simultaneous production of electricity and heat from a single fuel source, such as natural gas, biomass, biogas, coal, waste heat, or oil. It is not a single technology, but an integrated energy system that can be modified depending upon the needs of the energy end user. However, common throughout all types of CHP systems is onsite generation of electrical power, waste-heat recovery for heating, cooling, dehumidification, or process applications, and the integration of a variety of technologies, thermal applications, and fuel types into existing building infrastructure.

The two most common CHP system configurations use a gas turbine or engine with heat recovery unit or a steam boiler with steam turbine, both of which realize substantial energy savings relative to conventional fossil-fueled power plants. The average efficiency of fossil-fueled power plants in the United States is 33 percent. By using waste heat recovery technology to capture a significant proportion of this wasted heat, CHP systems typically achieve total system efficiencies of 50 to 80 percent for producing electricity and thermal energy. Because CHP is more efficient, less fuel is required to produce a given energy output than with separate heat and power. When the current historically low cost of natural gas is factored into this equation, energy costs are even further driven down.

The Advantages of Combined Heat and Power

The energy lost in the U.S. from wasted heat in the utility sector is greater than the total energy use of Japan. The major advantage of CHP is that it creates on-site energy, so there is no energy lost in the distribution process. In the typical building situation electricity is distributed from generation location, which means that a substantial portion of the energy generated at a remote location is wasted while end users are exposed to price and supply volatility.

CHP system is an independent system that remains operational during power outages. This is helped in part by the fact that CHP offers flexibility in fuel selection and can take advantage of both fossil fuels and locally sourced and renewable fuels like biomass or ethanol. This means that when traditional fuel sources like coal and oil spike in cost, CHP systems offer certainty and insulation from volatility.

Because CHP’s greatest advantage is its maximization of energy efficiency, the best candidates for CHP are high energy-use buildings, large buildings, building complexes/campuses. Ideal users are often universities and colleges, airports , hospitals , data centers , sports stadiums , pharmaceutical complexes , hotels and casinos .

CHP Project Management

In order to immediately spur the development of large-scale CHP projects, the U.S. Environmental Protection Administration has assembled a comprehensive 85-page guide to assist building developers through the installation process from start to finish. This guide is intended to help building owners take advantage of the unique opportunity that CHP presents by walking them through whether they would make a good CHP candidate, procuring financing for the project, selecting a design team/contractor, getting the necessary building permits, and operating and maintaining a CHP system.

After calculating the energy-savings using the guides cost and emissions calculator, it is possible to see the total savings between tax and energy so that users can see just how substantial their overall savings will be. Going one step further, the guide provides recommendations for Energy Star appliances and known CHP contractors.

State and Utility Incentives

The federal tax incentives can be combined local state initiatives in order to realize even greater overall energy and tax savings. Below are just four examples of the kinds of incentives available at the state level in high electrical cost locations:

New York

New York’s ConEdison power company makes funding available for up to $1.65 per project in the New York City metropolitan area, on a first-come, first-served basis to building owners and operators who incorporate CHP systems into new building construction. The incentives are meant to offset up to 75% of the incremental capital costs associated with new energy efficient building construction.

Pennsylvania

The Pennsylvania Department of Community and Economic Development recently renewed its 2008 Alternative and Clean Energy Program, which provides $650M worth of funding to provide support for energy efficient technology installations in new or existing buildings. The state provides 1% loans for energy efficient projects, loan guarantees in the event of a financing default, and cash grants for up to $2M depending on the type of building project.

New Jersey

The New Jersey Clean Energy Solutions Capital Investment program is intended to provide grants and loans for end users that install CHP systems (among other efficient technologies). In order to qualify for assistance, applicants must be New Jersey-based commercial, industrial, or institutional entities.

Eligible projects must have minimum capital equipment costs of at least $1M. So long as they meet certain standards related to social utility, such projects are eligible for zero-interest loans with terms of up to 10 years. Loans are provided for up to 50% of project costs at a maximum of $5 million. A portion of the loan may be issued as a grant, with the grant/loan split based on project's environmental and economic development impact. Grants can be issued for up to $2.5 million, though they may not exceed 80% of the amount requested.

Massachusetts

Among the nation’s leaders in incentivizing energy efficient investments, Massachusetts’ National Grid utility offers energy strategies, technical assistance and financial incentives to customers who are building new facilities, adding capacity for manufacturing, replacing failed equipment or undergoing major renovations. In particular, the state sees the value in encouraging CHP systems installation, as they are currently offering to pay up to 70% of the incremental costs for the high efficiency CHP materials and systems or buy down the incremental investment to a 1.5-year simple payback. Some rebates vary by capacity, building size or efficiency.

Conclusion

Our federal government hopes that CHP installations will double in order to soon support 14% of U.S. electrical generation needs. Understanding the tax opportunities, and particularly the enhanced tax opportunities in 2011, along with utility incentives should help our country achieve this goal.

References

Charles R. Goulding, “Practical Analysis of Division B, Act Sec. 103 of the Emergency Economic Stabilization Act of 2008” Tax Legislation 2008: Emergency Economic Stabilization Act of 2008 Law, Explanation and Analysis, at 205.

Note: The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act provides for 100% tax depreciation bonus for equipment placed in service after September 8th 2010 and through December 31st 2011. For equipment placed in service after December 31st 2011 and through December 31st 2012, the new law provides for 50% tax depreciation bonus.

Environmental Protection Agency, “Combined Heat and Power Partnership” < http://www.epa.gov/chp/basic/index.html>

Environmental Protection Agency, “Combined Heat and Power Partnership: Efficiency Benefits” < http://www.epa.gov/chp/basic/efficiency.html>

Ari J. Officer, “As Oil Explodes, Why Natural Gas Prices Stay Low,” Time Magazine August 27th, 2009 < http://www.time.com/time/business/article/0,8599, 1918674,00.html>

Shipley, et al.,“Combined Heat and Power: Effective Energy Solutions for a Sustainable Future,” U.S. Department of Energy Oak Ridge National Laboratory

Charles R. Goulding, Amelia Aboff, and Taylor Goulding, “The Energy Tax Aspects of Airports,” Corporate Business Taxation Monthly (March 2010), at 9

Charles R. Goulding, Robert Goulding, and Raymond Kumar, “The Energy Tax Aspects of Hospitals,” Corporate Business Taxation Monthly (November 2009), at 16

Charles R. Goulding, Jacob Goldman, and Cassandra Gengler, “The Tax Aspects of Cloud Computing and Data Centers,” Corporate Business Taxation Monthly (December 2010), at 9

Charles R. Goulding, Jacob Goldman, and Taylor Goulding, “National Basketball Association (NBA) and Energy Tax Savings,” Corporate Business Taxation Monthly, at 11

Charles R. Goulding, Amelia Aboff, and Taylor Goulding, “Special Tax Savings Opportunities for Pharmaceutical and Biotech Campuses,” Corporate Business Taxation Monthly (October 2009), at 13

Charles R. Goulding, Jacob Goldman, and Taylor Goulding, “Hotels and Motels Most Favored Energy Policy Act Tax Properties,” Corporate Business Taxation Monthly (March 2009), at 17

Charles Goulding, Jacob Goldman, and Malcolm Thomas, “Commercial Casinos: Energy Policy Act Opportunity,” Corporate Business Taxation Monthly (December 2009), at 13

<http://www.epa.gov/chp/documents/chp_handbook.pdf>

< http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=NY08F&re= 1&ee=1>

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