FFederal Consumer Energy-Efficiency ederal Consumer Energy-Efficiency IncentivesIncentives

James A. WilliamsJames A. Williams

Government Relations Government Relations Representative, APPARepresentative, APPA

2006 Customer Connections 2006 Customer Connections ConferenceConference

Tuesday November 7, 2006Tuesday November 7, 2006

Federal OverviewFederal Overview 2005 Energy Policy Act2005 Energy Policy Act Tax Credits and Tax DeductionsTax Credits and Tax Deductions Residential Energy-Efficiency Property CreditResidential Energy-Efficiency Property Credit Home Energy-Efficiency ImprovementsHome Energy-Efficiency Improvements Business IncentivesBusiness Incentives Business Solar Investment Tax CreditBusiness Solar Investment Tax Credit Energy-Efficient AppliancesEnergy-Efficient Appliances Home Builders Tax CreditHome Builders Tax Credit Alternative Fuel VehiclesAlternative Fuel Vehicles 2006 EXTEND Act2006 EXTEND Act National Action Plan for Energy EfficiencyNational Action Plan for Energy Efficiency Clean Renewable Energy Bond (CREB)Clean Renewable Energy Bond (CREB) Climate ChangeClimate Change Oversight / ImplementationOversight / Implementation

ENERGY POLICY ACT OF 2005ENERGY POLICY ACT OF 2005

The Energy Policy of 2005 provides valuable federal tax credits for consumers The Energy Policy of 2005 provides valuable federal tax credits for consumers (i.e. residential and home improvement)(i.e. residential and home improvement)

EPAct05 provides tax incentives for individual homeowners who invest financial EPAct05 provides tax incentives for individual homeowners who invest financial resources in 2006 and 2007 for installation of specific energy saving devices.resources in 2006 and 2007 for installation of specific energy saving devices.

2006 marked the beginning of a new tax credit for the purchase of some hybrid 2006 marked the beginning of a new tax credit for the purchase of some hybrid vehicles, as well as the purchase of some other, more fuel efficient vehicles.vehicles, as well as the purchase of some other, more fuel efficient vehicles.

Beyond homeowners, businesses will also be eligible to receive tax credits for Beyond homeowners, businesses will also be eligible to receive tax credits for installation of energy saving equipment.installation of energy saving equipment.

Consumers who employ energy-efficient products in their homes or drive fuel-Consumers who employ energy-efficient products in their homes or drive fuel-efficient vehicles enjoy multiple benefits. At home, these benefits include lower efficient vehicles enjoy multiple benefits. At home, these benefits include lower home energy bills, increased indoor comfort, and reduced air pollution. On the home energy bills, increased indoor comfort, and reduced air pollution. On the road, consumers will increase their gas mileage so they lower their gasoline road, consumers will increase their gas mileage so they lower their gasoline costs, and they will dramatically reduce the amount of air pollution from their costs, and they will dramatically reduce the amount of air pollution from their vehicles.vehicles.

Please note: We at APPA are not tax experts and we do not provide tax advice. You Please note: We at APPA are not tax experts and we do not provide tax advice. You should contact a tax professional should contact a tax professional concerning the provisions discussed today.concerning the provisions discussed today.

TAX CREDITS and TAX TAX CREDITS and TAX DEDUCTIONSDEDUCTIONS

What is a tax credit? What is a tax credit? You don’t receive an income tax You don’t receive an income tax credit when you buy the product, like an instant credit when you buy the product, like an instant rebate. You claim the credit on your federal income tax rebate. You claim the credit on your federal income tax form at the end of the year. The credit then increases form at the end of the year. The credit then increases the tax refund you receive or decreases the amount the tax refund you receive or decreases the amount you have to pay.you have to pay.

Tax credits vs. tax deductions: Tax credits vs. tax deductions: In general, a In general, a tax tax credit credit is more valuable than a similar is more valuable than a similar tax deductiontax deduction. A . A tax credit reduces the tax you pay, dollar-for-dollar. tax credit reduces the tax you pay, dollar-for-dollar. Tax deductions – such as those for home mortgages Tax deductions – such as those for home mortgages and charitable giving – lower your taxable income. If and charitable giving – lower your taxable income. If you are in the highest 35-percent tax bracket, the you are in the highest 35-percent tax bracket, the income tax you pay is reduced by 35 percent of the income tax you pay is reduced by 35 percent of the value of a tax deduction. But a tax credit reduces your value of a tax deduction. But a tax credit reduces your federal income tax by 100 percent of the amount of the federal income tax by 100 percent of the amount of the credit.credit.

Residential Energy-Efficient Residential Energy-Efficient Property CreditProperty Credit

This credit provides an incentive to homeowners to convert residential This credit provides an incentive to homeowners to convert residential property to solar energy. There are three ways the credit can be earned, and property to solar energy. There are three ways the credit can be earned, and three separate amounts allowed for doing it. EPAct05 makes available:three separate amounts allowed for doing it. EPAct05 makes available:

A 30 percent credit up to a maximum $2,000 per year for the cost of A 30 percent credit up to a maximum $2,000 per year for the cost of purchasing and installing a residential solar water heatingpurchasing and installing a residential solar water heating

A 30 percent credit up to a maximum $2,000 per year for the cost of A 30 percent credit up to a maximum $2,000 per year for the cost of purchasing and installing photovoltaic equipment for solar-generated purchasing and installing photovoltaic equipment for solar-generated electricityelectricity

$500 for each 0.5 kilowatt-of fuel cell property capacity$500 for each 0.5 kilowatt-of fuel cell property capacity

The $2,000 credits for solar water and electricity applies to any residence, The $2,000 credits for solar water and electricity applies to any residence, including secondary property (i.e. vacation property), while the fuel cell credit including secondary property (i.e. vacation property), while the fuel cell credit is restricted to installation in your principal residence. The credit is available is restricted to installation in your principal residence. The credit is available for equipment put in place after December 31, 2005 and before January 1, for equipment put in place after December 31, 2005 and before January 1, 2008.2008.

The IRS defines “placed in service” as when the products or materials are The IRS defines “placed in service” as when the products or materials are ready and available for use – this would generally refer to the installation, not ready and available for use – this would generally refer to the installation, not the purchase.the purchase.

Home Energy-Efficiency Home Energy-Efficiency ImprovementsImprovements

Individuals can get a one-time income tax credit of up to $500 in total Individuals can get a one-time income tax credit of up to $500 in total for installing efficient new windows, insulation, doors, roofs, and for installing efficient new windows, insulation, doors, roofs, and heating and cooling equipment in their home. heating and cooling equipment in their home. The overall $500 cap The overall $500 cap can be reached in several ways with the purchase and installation of can be reached in several ways with the purchase and installation of energy-efficient products:energy-efficient products:

Exterior windows: Exterior windows: 10 percent of the total cost, up to $200. 10 percent of the total cost, up to $200. Includes skylights and storm windows.Includes skylights and storm windows.

Insulation, exterior doors, or pigmented metal roofs: Insulation, exterior doors, or pigmented metal roofs: 10 10 percent of the cost of the product (but not the installation), up to percent of the cost of the product (but not the installation), up to $500. Includes seals to limit air infiltration, such as caulk, weather $500. Includes seals to limit air infiltration, such as caulk, weather stripping, and foam sealants, as well as storm doors.stripping, and foam sealants, as well as storm doors.

Central air conditioner, heat pump, or water heater: Central air conditioner, heat pump, or water heater: up to up to $300 towards the full purchase price, including installation costs.$300 towards the full purchase price, including installation costs.

Furnace or boiler: Furnace or boiler: up to $150 towards the full purchase price, up to $150 towards the full purchase price, and/or $50 for an efficient air-circulating fan in a furnace, including and/or $50 for an efficient air-circulating fan in a furnace, including installation cost. installation cost.

The home improvement tax credits apply for improvements “placed in The home improvement tax credits apply for improvements “placed in service” from January 1, 2006, through December 31, 2007. They are service” from January 1, 2006, through December 31, 2007. They are not available in 2005. not available in 2005.

Sample Tax and Energy Sample Tax and Energy SavingsSavings

PurchasePurchase Tax SavingsTax Savings Annual Energy Annual Energy SavingsSavings

NotesNotes

Hybrid carHybrid car $3,150$3,150 $820$820 For a Toyota Prius For a Toyota Prius (estimated credit)(estimated credit)

Central air Central air conditionerconditioner

$300$300 $270$270 In Houston / In Houston / TexasTexas

Furnace or boilerFurnace or boiler $150$150 $570$570 In Chicago / In Chicago / IllinoisIllinois

WindowsWindows $200$200 $270$270 Replace all Replace all windows (single-windows (single-

pane) with Energy pane) with Energy Star windows in Star windows in

the Midwestthe Midwest

InsulationInsulation $100$100 $760$760 Add insulation to Add insulation to ceiling and un-ceiling and un-

insulated insulated basement in basement in

ChicagoChicago

Here are examples of how much you might save if you took advantage of these tax credits. They are illustrative only, as exact energy and tax savings will vary for each taxpayer:

In some areas of the country, consumers also will be eligible for utility or state rebates or state tax incentives for the same homes, vehicles, and equipment. Contact your state energy office or local utility for more information.

Business IncentivesBusiness Incentives

Deduction for Energy- Efficient Commercial PropertyDeduction for Energy- Efficient Commercial Property

Proprietors of commercial buildings are eligible to deduct the costs of improving the Proprietors of commercial buildings are eligible to deduct the costs of improving the property’s energy efficiency. The maximum deduction is $1.80 per square foot and property’s energy efficiency. The maximum deduction is $1.80 per square foot and requires the following criteria be met:requires the following criteria be met:

The property for which costs are claimed must be depreciable (or amortizable)The property for which costs are claimed must be depreciable (or amortizable)property, installed in a domestic building, and within the scope of qualified property, installed in a domestic building, and within the scope of qualified building standards;building standards;

The property must be installed as part of the building’s interior lighting system,The property must be installed as part of the building’s interior lighting system,heating and cooling ventilation, hot water systems, or the building envelope; heating and cooling ventilation, hot water systems, or the building envelope;

The property must be installed based on a plan to reduce total annual energy andThe property must be installed based on a plan to reduce total annual energy andpower costs by 50 percent or more when referenced against a building meetingpower costs by 50 percent or more when referenced against a building meetingcertain minimum requirements. (The IRS has been instructed to issue rules to certain minimum requirements. (The IRS has been instructed to issue rules to allow aallow a reduced deduction if specific energy-efficiency targets are met but the reduced deduction if specific energy-efficiency targets are met but the 50-percent mark is not reached).50-percent mark is not reached).

All deductions must be taken for expenditures made between January 1, 2006 andAll deductions must be taken for expenditures made between January 1, 2006 and December 31, 2007.December 31, 2007.

Business Solar Investment Business Solar Investment Tax CreditTax Credit

Under the EPAct05, the business investment Under the EPAct05, the business investment credit for solar energycredit for solar energy

Property is increased from 10 percent to 30 Property is increased from 10 percent to 30 percent. percent.

The increased credit applies to (1) equipment which The increased credit applies to (1) equipment which uses solar energy to generate electricity, to heat or uses solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or cool (or provide hot water for use in) a structure, or to provide solar process heat, and (2) equipment to provide solar process heat, and (2) equipment which uses solar energy to illuminate the inside of a which uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight. structure using fiber-optic distributed sunlight.

This credit applies to expenditures made after This credit applies to expenditures made after December 31, 2005 and before January 1, 2008.December 31, 2005 and before January 1, 2008.

New Credit for Manufacturing New Credit for Manufacturing Energy-Efficient AppliancesEnergy-Efficient Appliances

EPAct05 adds a new tax credit for the EPAct05 adds a new tax credit for the manufacture of energy efficient manufacture of energy efficient appliances such as dishwashers, clothes appliances such as dishwashers, clothes washers and refrigerators. washers and refrigerators.

The credit is part of the general business The credit is part of the general business credit and applies to appliances credit and applies to appliances manufactured between January 1, 2006 manufactured between January 1, 2006 and December 31, 2007.and December 31, 2007.

Homebuilder's Credit for New Homebuilder's Credit for New Energy-Efficient HomesEnergy-Efficient Homes

An eligible contractor may claim a tax credit of $1,000 or An eligible contractor may claim a tax credit of $1,000 or $2,000 for a qualified new energy-efficient home that a $2,000 for a qualified new energy-efficient home that a person acquires from the contractor during 2006 and 2007 person acquires from the contractor during 2006 and 2007 for use as a residence during the tax year. for use as a residence during the tax year.

An eligible contractor is a person who constructs a new An eligible contractor is a person who constructs a new energy efficient home or a manufacturer that produces a energy efficient home or a manufacturer that produces a qualified new energy-efficient manufactured home. qualified new energy-efficient manufactured home.

The credit applies to new homes and those substantially The credit applies to new homes and those substantially reconstructed. reconstructed.

While the contractor, rather than the homeowner, gets the While the contractor, rather than the homeowner, gets the credit, the purchasers may benefit from a price reduction credit, the purchasers may benefit from a price reduction since the contractor's net costs are less if the credit is since the contractor's net costs are less if the credit is factored in.factored in.

Alternative Fueled VehiclesAlternative Fueled Vehicles

New tax credits are available for hybrid, fuel cell, New tax credits are available for hybrid, fuel cell, advanced lean burn diesel and other alternative advanced lean burn diesel and other alternative power vehicles.power vehicles.

The credits are collectively claimed under the title The credits are collectively claimed under the title of the "Alternative Motor Vehicle Credit." This of the "Alternative Motor Vehicle Credit." This credit is equal to the sum of the four separate credit is equal to the sum of the four separate credit components:credit components:

1. New qualified fuel cell motor vehicle credit;1. New qualified fuel cell motor vehicle credit;2. New advanced lean burn technology motor vehicle credit;2. New advanced lean burn technology motor vehicle credit;3. New qualified hybrid motor vehicle credit;3. New qualified hybrid motor vehicle credit;4. New qualified alternative fuel motor vehicle credit.4. New qualified alternative fuel motor vehicle credit.

Alternative Fuel Vehicle Alternative Fuel Vehicle Credits (Continued)Credits (Continued)

The qualified hybrid-vehicle will be the dominant credit for The qualified hybrid-vehicle will be the dominant credit for consumers, considering these vehicles are the most common in mass consumers, considering these vehicles are the most common in mass production by automakers. production by automakers.

Unlike the rules for 2005 however, a qualified hybrid motor vehicle Unlike the rules for 2005 however, a qualified hybrid motor vehicle no longer includes many heavy SUVs. Nor does it include many no longer includes many heavy SUVs. Nor does it include many high-performance hybrids that do not appreciably decrease fuel high-performance hybrids that do not appreciably decrease fuel consumption from their smaller-engine gasoline counterparts. consumption from their smaller-engine gasoline counterparts.

Also, unlike the 2005 hybrid deduction, the new credit is available Also, unlike the 2005 hybrid deduction, the new credit is available whether you buy or lease.whether you buy or lease.

The amount of the credit for a hybrid vehicle is based upon the The amount of the credit for a hybrid vehicle is based upon the percentage increase in fuel economy from an all-gasoline model, and percentage increase in fuel economy from an all-gasoline model, and varies from $400 to $2,400 based-on fuel savings ranging from 125 varies from $400 to $2,400 based-on fuel savings ranging from 125 to 250 percent of a base amount. to 250 percent of a base amount.

An additional conservation credit is awarded to hybrid vehicles with An additional conservation credit is awarded to hybrid vehicles with certain lifetime fuel savings ratings, ranging from $250 to $1,000.certain lifetime fuel savings ratings, ranging from $250 to $1,000.

Alternative Fuel Vehicle Alternative Fuel Vehicle (Continued)(Continued)

H.R. 6203, the Alternative Energy H.R. 6203, the Alternative Energy Research and Development ActResearch and Development Act

H.R. 5538, the Plug-In Hybrid H.R. 5538, the Plug-In Hybrid Electric Vehicle Act of 2006Electric Vehicle Act of 2006

Funding and Authorization Funding and Authorization

(S. 3628) 2006 EXTEND Act(S. 3628) 2006 EXTEND Act

Provide consumers and businesses relief from high energy prices by extending Provide consumers and businesses relief from high energy prices by extending energy-efficiency and solar energy tax incentives enacted by the Energy Policy Act energy-efficiency and solar energy tax incentives enacted by the Energy Policy Act of 2005 (EPAct).of 2005 (EPAct).

Extends the EPAct tax credit for retrofits to existing homes to 2009 so thatExtends the EPAct tax credit for retrofits to existing homes to 2009 so thathomeowners who make energy-efficient improvements to their homes, such ashomeowners who make energy-efficient improvements to their homes, such asadding insulation, can receive as much as $500 off their taxes. adding insulation, can receive as much as $500 off their taxes.

Establishes a new tax credit for home retrofits that save energy. The credit starts atEstablishes a new tax credit for home retrofits that save energy. The credit starts at$800 for homes that are certified as saving 20% and increases on a sliding scale$800 for homes that are certified as saving 20% and increases on a sliding scaledepending on the amount of savings up to $2,000 for homes that save 50%. Homesdepending on the amount of savings up to $2,000 for homes that save 50%. Homesoccupied by owners or renters can qualify for the credit.occupied by owners or renters can qualify for the credit.

Extends through 2011 the EPAct tax deduction for energy efficiency property thatExtends through 2011 the EPAct tax deduction for energy efficiency property thatis installed in commercial buildings. is installed in commercial buildings.

Allows property that is certified by 2011, but not placed in service until 2013, to alsoAllows property that is certified by 2011, but not placed in service until 2013, to alsoreceive the deduction. The bill increases the amount of the deduction from $1.80receive the deduction. The bill increases the amount of the deduction from $1.80per square foot to $2.25 per square foot.per square foot to $2.25 per square foot.

Extends the EPAct tax credit for energy efficient new homes to 2010. Extends the EPAct tax credit for energy efficient new homes to 2010.

National Action Plan for National Action Plan for Energy EfficiencyEnergy Efficiency

Recognize energy efficiency as a high-priority energy Recognize energy efficiency as a high-priority energy resource.resource.

Make a strong, long-term commitment to implement cost-Make a strong, long-term commitment to implement cost-

effective energy efficiency as a resource. effective energy efficiency as a resource.

Broadly communicate the benefits of and opportunities for Broadly communicate the benefits of and opportunities for energy efficiencyenergy efficiency

Promote sufficient, timely, stable program funding to Promote sufficient, timely, stable program funding to deliver energy efficiency where cost-effectivedeliver energy efficiency where cost-effective

Review and adopt policies to align utility incentives with Review and adopt policies to align utility incentives with the delivery of cost-effective energy efficiency and modify the delivery of cost-effective energy efficiency and modify ratemaking practices to promote energy efficiency ratemaking practices to promote energy efficiency investments. investments.

Clean Renewable Energy BondClean Renewable Energy Bond

Until recently, only for-profit investor-owned utilities were Until recently, only for-profit investor-owned utilities were eligible to receive a tax incentive for producing electricity from eligible to receive a tax incentive for producing electricity from renewable energy sources.renewable energy sources.

The Clean Renewable Energy Bond (CREB) program allows The Clean Renewable Energy Bond (CREB) program allows consumer-owned utilities to receive tax incentives for investing in consumer-owned utilities to receive tax incentives for investing in new renewable electricity generation facilities. new renewable electricity generation facilities.

Qualified facilities under the CREBs program as listed in section Qualified facilities under the CREBs program as listed in section 45 of the U.S. Tax Code include: 45 of the U.S. Tax Code include:

windwind closed-loop biomass (including agricultural livestock waste nutrients)closed-loop biomass (including agricultural livestock waste nutrients) geothermal energy geothermal energy solar energy solar energy small irrigation power facilitiessmall irrigation power facilities landfill gaslandfill gas trash combustion trash combustion qualified hydropower facilitiesqualified hydropower facilities

Clean Renewable Energy Bond Clean Renewable Energy Bond (Continued)(Continued)

The CREBs program contains a national The CREBs program contains a national limitation of $800 million that the Secretary limitation of $800 million that the Secretary may allocate, in the aggregate, to qualified may allocate, in the aggregate, to qualified projects.projects.

The CREBs program expires December 31st The CREBs program expires December 31st 2007.2007.

Because the program does expire at the end of Because the program does expire at the end of 2007, APPA supports legislation to reauthorize 2007, APPA supports legislation to reauthorize and expand the CREBs program, including the and expand the CREBs program, including the raising or the removal of the $800 million cap.raising or the removal of the $800 million cap.

Climate ChangeClimate Change Lots of debate, some activityLots of debate, some activity

Senate Energy & Natural Resources Committee held forum on Senate Energy & Natural Resources Committee held forum on proposed cap-and-trade regime for capping GHG emissions earlier proposed cap-and-trade regime for capping GHG emissions earlier this yearthis year

Closed-door forum in Senate Environment & Public Works Closed-door forum in Senate Environment & Public Works CommitteeCommittee

Rider added to House Interior Appropriations bill in committee to Rider added to House Interior Appropriations bill in committee to correspond to correspond to

Sense of the Senate included in EPAct05, but stripped out on House Sense of the Senate included in EPAct05, but stripped out on House floor on procedural grounds (no legislating on an appropriations bill)floor on procedural grounds (no legislating on an appropriations bill)

More debate/action expectedMore debate/action expected

APPA Blue Ribbon Task Force on Climate Change announced in June APPA Blue Ribbon Task Force on Climate Change announced in June – first meeting October 16-17– first meeting October 16-17

Oversight/Implementation of Oversight/Implementation of EPAct of 2005EPAct of 2005

Dozens of new rules and programs Dozens of new rules and programs to be developed and implemented by to be developed and implemented by agencies- including DOE, FERC, agencies- including DOE, FERC, Treasury- per the Act’s requirementsTreasury- per the Act’s requirements

Congressional committees will Congressional committees will continue oversight hearingscontinue oversight hearings

Congressional ScheduleCongressional Schedule

For More Information…For More Information…

Energy Bill: Energy Bill: www.ase.orgwww.ase.org (Under Policy Makers) (Under Policy Makers)

Tax Incentives:Tax Incentives: Consumer tax credits: Consumer tax credits: www.ase.org/taxcreditswww.ase.org/taxcredits All efficiency incentives: All efficiency incentives:

www.energytaxincentives.orgwww.energytaxincentives.org Tax rules and forms: Tax rules and forms: www.irs.govwww.irs.gov