The Advanced Energy Tax Incentive Act of 2010 (S. 3935)

On Sept. 29th, 2010 Senators Jeff Bingaman (D-N.M.) and Olympia Snowe (R-Maine) introduced the Advanced Energy Tax Incentives Act of 2010 (S. 3935). This bill, which was referred to the Finance Committee, is designed to encourage investment in energy efficiency and related technologies through a variety of tax credits. Several provisions are similar or identical to past bills introduced by Bingaman and Snowe. Shortly after introduction, the Senate adjourned for recess preceding the midterm elections. After going out, Snowe and Bingaman released a separate bill draft that would modify and extend the home improvements tax credit. The Finance Committee may choose to take up some or all of these incentives during the lame duck session this year.

Code references below refer to Title 26 of the US Code: The Internal Revenue Code.

Title I: Industrial and Building Efficiency

This title contains an array of efficiency provisions. The first subtitle would modify, expand, and create new tax credits pertaining to building efficiency. Subtitle B targets efficiency in the industrial sector. The last subtitle, C, would increase tax incentives pertaining to thermal energy.

Subtitle A – Expansion of Building Efficiency Incentives

Section 101: Increase in, and Extension of, New Energy Efficient Home Credit

This section would increase the values of the new energy efficient home credit (section 45L of the tax code), for builders and manufacturers, and extend its availability. Several different categories of credit would exist, with different credit values and expiration dates.

• The existing credit (for new homes whose heating and cooling consumption is at least 50% below the standards set by the 2004 supplement to 2003 International Energy Conservation Code (IECC), with at least 1/5 of that reduction coming from building envelope components, and whose heating and cooling equipment meet minimum appliance efficiency levels), would remain, with its existing $2000 credit, but would be extended through 2012.
• A similar new credit would be created for new homes whose energy consumption from heating, cooling, water heating, lighting, and appliance energy use is 50% better than would be required by the 2004 IECC, with at least 1/5 of that reduction being met with building envelope improvements. It would be worth $5,000 and would be available through 2013.
• The existing credit for energy efficient manufactured homes ($2,000 for manufactured homes that meet the requirements of the home credit listed first, above, or $1,000 for Energy Star manufactured homes or homes that achieve 30% savings, as well as certain safety standards, through 2010) would be extended through 2013, consisting of three parts:
  • A $1500 credit would be available for Energy Star manufactured homes and for manufactured homes whose heating and cooling consumption is at least 30% below the 2004 IECC, for which 1/3 of the savings come from envelope components.
  • A $2000 credit would be available for manufactured homes that meet the requirements of the first new homes bullet above.
  • A $2500 credit would be available for those manufactured homes that meet the requirements of the second new homes bullet above.

Certain low-income housing projects would be eligible for an increased credit worth 150% of the values above.

Section 102: Modification of Deduction for Energy Efficient Commercial Buildings

Currently, new or renovated commercial buildings that save 50 percent compared to the ASHRAE Standard 90.1-2001 in building envelope, lighting, and HVAC systems are eligible for a tax deduction of up to $1.80 per square foot, or a partial deduction of 60 cents per square foot for equivalent savings from each of the three aforementioned components. This provision would increase the deduction to $3 per square foot and the partial deduction to $1 per square foot. There would also be a second partial credit, worth $2.20 per square foot, for buildings that met the requirements for both lighting and HVAC, but not envelope. It would be made easier for real estate investment trusts to claim this credit.

Section 103: Energy Ratings of Non-Business Property

This provision would create a $200 tax credit for homeowners to undertake a qualified home energy rating from an auditor certified by the Building Performance Institute (BPI), the Residential Energy Services Network (RESNET), or an equivalent system, enabling homeowners better to identify energy efficiency opportunities in their home.

Section 104: Credit for Home Performance Auditor Certifications

This provision would create a tax credit of up to $500 to cover the training expenses of those who become qualified home performance auditors under the previous section. It could be claimed either by the auditor or the employer of the auditor who paid for the training expenses. Currently, many parts of the country – especially rural areas – have a shortage of qualified energy raters.

Section 105: Performance Based Energy Improvements for Non-Business Property

This would establish a performance-based tax credit for whole-home retrofits that achieve energy savings. The credit would be worth 50 percent of incurred costs up to the caps below. Costs of audits would be included.

The maximum allowable credit would be calculated as follows, but cannot exceed $8000:

• For homes built prior to 1940, up to a $3000 credit would be given for achieving a HERS (Home Energy Rating) Index score of 100, equivalent to a home that meets the 2006 IECC, plus an additional $1000 for a score equivalent to the IECC of the current calendar year, and $500 for every 5 points achieved beyond the code.
• Homes built during or after 1940 would be eligible for a $2000 tax credit for achieving the HERS Index equivalent to the current calendar year IECC, and an additional $500 for each 5 points achieved beyond the code.

Expenses for renewable energy systems would receive a 30% rather than 50% credit. A taxpayer could not claim both this credit and the 25C non-business energy property credit.

Subtitle B – Expansion of Industrial Energy Efficiency Incentives

Section 111: Qualifying Efficient Industrial Process Water Use Project Credit

This credit to encourage greater efficiency in water use would be worth up to $10 million per site. Eligible projects require the reduction of process water withdrawals by not less than 20% and discharge by not less than 10%—or water withdrawals by no less than 10% and water discharge by no less than 20%. The credit value is determined using a sliding percentage, from 10% for projects that achieve energy consumption of less than 3,000 kWh per million gallons of water to 30% for projects that achieve energy consumption of less than 1,000 kWh per million gallons. The credit would be available through 2014.

Section 112: Motor Efficiency Improvement Tax Credit

For efficient motors utilizing variable speed operation and certain other advanced technologies, and installed through 2013, a credit of $120 per horsepower would be available to the manufacturer of new equipment or owner of upgraded equipment, up to a maximum of $2 million per taxpayer. It would be available through 2013.

Section 113: Credit for Replacement of CFC Refrigerant Chiller

In order to speed the retirement of older CFC-based chiller units manufactured between 1980 and 1993, which contribute to ozone depletion and are inefficient, the bill would create a credit of $150 per ton of the chiller system being replaced. An additional $100 credit would be available to the taxpayer for each ton by which the new unit was downsized relative to the one being replaced, if the new unit also uses variable frequency drives.  The new unit would have to meet certain efficiency standards. The building would also have to receive an energy audit to identify ways in which energy consumption generally and cooling load specifically could be reduced. In the case of a non-profit entity, this credit could be claimed by the seller of the new unit if the seller reduced the price of such a chiller unit by the amount of the credit. The credit would be available through 2012.

Section 114: Modifications in Credit for Combined Heat and Power System Property

Currently, combined heat and power systems are eligible for a tax credit on the first 15 megawatts (or 20,000 horsepower) of system capacity for systems which do not exceed 50 megawatts. This provision would increase the credit’s applicability to the first 25 megawatts (or 34,000 horsepower) of capacity, and remove the 50 megawatt cap.

Subtitle C – Thermal Energy Efficiency

Section 121: Bonus Depreciation for Qualifying Energy Property

This provision seeks to incentivize business investment in a high efficiency natural gas boiler or furnace, or biomass heating appliance, to replace a heating system that uses fuel oil. It would do so by permitting bonus depreciation for qualifying property installed before 2012, which would enable business taxpayers to write off half the cost of the qualifying property and depreciate the remaining balance over the cost-recovery period of the investment.

Section 122: Extension of Reduced Depreciation Period for Natural Gas Distribution Facilities

This section would extend a program that allows faster depreciation for investments in natural gas distribution facilities.

Title II: Vehicle Efficiency

Section 201: Idling Reduction Tax Credit

This provision provides a 30 to 50 percent tax credit, with varying caps up to $5,000, for the purchase of idling reduction units, which are alternative power sources (including small efficient engines or batteries) used to reduce main engine idling. In order to run heating, cooling, and electricity services in commercial trucks, drivers generally must leave the engine running. During long rest stops this can consume a great deal of fuel.

Title III: Promotion of Domestic Manufacturing

Title III seeks to drive efficiency investment in domestic manufacturing through two competitively-awarded credit programs.  This title would provide additional funds for 48C credits, which target advanced energy manufacturing, and create a new 48F credit for improving the efficiency of existing facilities.

Section 301: Expansion and Modification of Qualifying Advanced Energy Project Credit

The current Advanced Energy Manufacturing Tax Credit, created under the American Recovery and Reinvestment Act, provides a 30% credit for investments in new, expanded, or re-equipped advanced energy manufacturing projects. Credits are awarded on a competitive basis by the Departments of Energy and the Treasury. This program has exhausted its funds, having awarded $2.3 billion in tax credits to 183 projects in 43 states. Recipient projects include solar, wind, vehicle, nuclear, energy storage, smart grid, energy efficiency and biofuel projects. This provision would add an additional $2.5 billion in credit allocation authority to the program.

Section 302: Qualifying Industrial Energy Efficiency Project Credit

This provision would establish a competitively awarded credit for increasing the overall energy efficiency of existing manufacturing facilities, modeled on the 48C credit that would be extended in the preceding section.  The credit would be worth up to 30% of expenditures, and $1 billion in tax credit authority would be allocated for this purpose.

Additional Titles

Title IV: Grid Efficiency and Reliability

Title IV seeks to improve the reliability of the national grid and promote renewable generation. It would create tax credits for investment in onsite storage technologies for both large scale and residential projects. Additionally, net metering payments and renewable energy credits of up to $2,000 per year awarded to utility customers for energy conservation measures would be exempt from federal income tax. Title IV also includes a provision to extend existing production tax credits for offshore wind projects.

Title V: Carbon Capture and Sequestration

Title V would expand current 45Q tax credits for carbon capture and sequestration. It would raise the per-ton credit from $20 to $35, and increase the total annual allowable credits from 75 million to 100 million. Further, it would create a pre-certification system to give firms certainty as to whether their project will receive tax credits, and make other modifications to the program.

Title VI: Promotion of Clean Domestic Fuels

Title VI would allow algae-based fuels to be eligible for the existing cellulosic biofuel tax credit.