Energy Deficient

Energy Deficient

Congress is divided over a national energy policy. Here’s a look at what facilities will lose if the energy bill dies. By Mike Lobash

After two years of building momentum -- pushed along by energy problems in the West, the election of a president from an energy-producing state and rising natural gas and electricity prices across the country -- energy has lost its charge. As Congress debates the most significant energy policy to come down the legislative pike since the 1970s, the nation is consumed with stories about corporate accounting tricks, a war on terrorism and a foundering economy.

Meanwhile, the president’s once-ballyhooed National Energy Policy Act has faded into the hands of Congressional conferees. Those conferees -- 44 representatives and 16 senators -- are attempting to create a compromise bill that could bring billions of dollars in tax incentives to facility executives, energy suppliers and technology manufacturers. Unfortunately, the political reality is that the Senate and House passed such different versions of the bill that the odds of seeing those incentives come to fruition are shrinking.

“I would say the chances of getting a bill this session are less than 50-50,” says Jeff Genzer, a Washington attorney who has tracked progress on the energy bill since its inception. “The problem with this bill is that there are no tradable issues. Absent any great inducement to get it done, it’s not likely to pass.”

Although the outlook for the bill is glum, there are reasons why facility executives should be aware of issues the energy bill raises. First, there is still a chance that a bill could pass, making upwards of more than a half-billion dollars available to facilities. Second, even if the overall bill doesn’t get through, specific provisions are likely to resurface next session when an energy bill is reintroduced. Finally, if the bill dies, it would be a chance for facility executives to have those issues not addressed in the current proposal covered in future legislation.

Falling Short

The rub for some involved with formulating energy proposals is that few are happy with what resulted from the 18 months spent proposing, drafting and approving the legislation that is serving as the foundation for the conferees’ debate. Despite the multitude of tax credits and deductions that such a bill might bring to facility executives, observers say the bill in its present state falls well short of what could have been accomplished.

“The bills from both houses are somewhat disappointing in that they don’t address energy efficiency,” says Rep. Mark Udall, D-Colo., a member of the House Resources Committee who opposed his chamber’s bill. “There are some big gaps between what the House and Senate did.”

As the House and Senate bills worked their way through the legislative process, there were watershed points at which efficiency and on-site power provisions might have worked their way into the bill.

Rep. Joe Barton, R-Texas, for example, introduced an amendment that would have made it easier — and less expensive — for facilities to interconnect generation systems with utility grids. The same amendment would have also directed the Federal Energy Regulatory Commission to implement price-responsive energy programs, allowing facility executives to take further advantage of time-of-use rates and market conditions. Through those energy-response programs, the bill called for a 5% reduction in energy use nationwide by 2004.

Although the House defeated that amendment, there is still a chance that portions of it could work their way into the conference bill. House Republicans are using Barton’s proposals as the foundation of their position in the conference debate. Unfortunately for those wanting the tax incentives that hinge on the bill’s passage, Barton also is pushing for federal eminent domain for the purpose of siting electric transmission lines. And that’s an issue that is unlikely to win support.

“States would rather die than give that right to the federal government,” Genzer says.

For facility executives, the differences between the House and Senate versions of the bill, known as Securing America’s Future Energy Act in the House and the Energy Policy Act in the Senate, center on funding levels for energy efficiency research and development, measures to lower emission levels attributable to building energy use, and steps to implement real-time pricing and distributed generation technologies. Other differences include incentive levels for installing fuel cells and highly efficient appliances.

Common Ground

Despite those differences, facility executives can feel reasonably sure that certain energy efficiency incentives are likely to survive the conference debate. There’s a simple rule used in Washington to help observers predict the winners: Those provisions contained in both the House and Senate versions are likely to emerge in some form. Those with support from only one chamber will likely fail.

For commercial facilities, the most significant agreement between the two bills is a provision allowing a $2.25-per- square-foot tax deduction on the cost of creating energy-efficient buildings. To qualify for the deduction, total building energy use must exceed ASHRAE 90.1-1999 energy efficiency standards by 50%. The deduction applies to both new and retrofit construction projects and can be used to cover capital expenses and labor costs associated with lighting, HVAC, building envelope and hot water systems.

“The way to reach the 50% target is through integrated design approaches,” says Jeff Johnson, executive director of the New Buildings Institute, a not-for-profit organization based in White Salmon, Wash. “It’s going to require more than just piling on efficiency measures.”

At the same time, Johnson says, the 50% requirement is not impossible to achieve. Estimates indicate that 3 to 4% of buildings have already achieved that standard. What’s more, buildings in California, Minnesota and the New England region — states with aggressive energy efficiency programs and codes programs — routinely exceed the ASHRAE standard by 30%.

Although no facility executive is likely to refuse help, the amount of the deduction isn’t likely to prompt facilities into undertaking energy efficiency projects. But the deduction might lead facilities to specify better-performing equipment that carries a higher capital cost, says Lindsay Audin, president of the New York-based consulting firm EnergyWiz.

“It’s a nice chunk of change for projects that are already in the works or for projects where you want to use more efficient equipment,” he says.

Stretching Dollars

The deduction might also prompt some facility executives to expand the scope of an already planned upgrade, says Shirley Hansen, principal of the Gig Harbor, Wash.-based consulting firm Hansen Associates. Whereas facilities might have been satisfied with upgrading one building system without the deduction, they could use the deduction to offset the costs of improving other systems.

“There are a lot of energy service companies that would be willing to do work for that amount,” she says, referring to the help that is available to facility executives that decide to outsource upgrades. “Having that $2.25 deduction will help reduce the risk that is associated with energy projects.”

The deduction could pay for some low-cost retrofits, such as lighting. To have an impact on other building retrofits, such as chillers, the deduction would have to be about $5 per square foot, Audin says.

Neither the House nor the Senate bill restricts the type of equipment that can be used in the upgrade. In fact, the provision specifically mentions that improving natural ventilation and using daylighting, automatic lighting controls and evaporative cooling to improve energy performance qualify for the deduction. The provision also covers energy performance increases resulting from building envelope improvements, from increased fan system efficiencies and from using semi-conditioned spaces that provide adequate comfort without using air conditioning or heating units.

Although the House provision requires that buildings exceed the ASHRAE standard by 50% before taking the deduction, it is possible that a final bill would allow facility executives to get part of that deduction for lighting retrofits.

Johnson says conferees have discussed including a lighting-only credit starting at 35 cents per square foot for projects that exceed ASHRAE’s Lighting Power Density requirement by 25%. The proposal also calls for a 75-cent-per-square-foot deduction for projects that exceed the ASHRAE standard by 40%.

A second measure likely to survive the conference debate would give facilities a 10% tax credit for installing combined heat and power systems of 50 kilowatts or larger. To qualify, at least 20% of the system’s total useful energy must be in the form of thermal energy and at least 20% in the form of electrical or mechanical energy or both. The system also must have a minimum efficiency of 60% unless it is larger than 50 megawatts; the latter systems are required to have a 70% efficiency rating.

The bill requires facilities taking advantage of the tax credit to depreciate the capital equipment over at least 22 years. For industrial facilities, which can depreciate capital equipment over 10 or 15 years under current law, that’s bad news. Extending the write-off period essentially consumes any credit those facilities would have gained.

For commercial office, retail and corporate facilities, the depreciation clause will have no impact. Tax rules already require those facilities to depreciate combined heat and power equipment over 39 years; that won’t change under the new law. They will still, however, receive the 10% credit on the purchase of equipment.

“The provision is going to be a big boon for most building owners,” says Neal Elliott, industrial program director for the American Council for an Energy Efficient Economy.

In addition to industrial buildings, the only other facility type that won’t be able to take advantage of the tax credit is data centers, says Elliott. Equipment that is used to support computer assets -- such as a generator connected to a chiller used to cool computer equipment -- is already allowed to depreciate equipment over a 5-year period. In most cases, data centers would be better off to forgo the 10% tax credit and avoid the extended depreciation requirement.

Despite the billions of dollars of incentives and funding, there are significant issues the bill ignores, says Dave Hamilton, policy director for the Alliance to Save Energy. Neither the House nor the Senate version establishes a public benefits fund to prompt utilities to implement or expand rebate programs for energy efficient equipment. Only about half of the states currently have such programs in place.

There also is no House provision requiring utilities to implement real-time pricing infrastructure or to increase efficiency of fossil-fueled generation plants. And the Senate only asks states to consider measures to improve generation plant efficiency and to establish real-time pricing.

“On demand-side management, both the House and the Senate completely punted, and in some instances made matters worse,” says Hamilton.

Art of Compromise

Quite a bit of compromise will have to happen if a bill is to pass during this Congressional session. Most observers and Congressmen place the chances of passage at 50%. Several factors are working against the bill.

First, Congress is facing high-profile issues that will usurp the time it could dedicate to an energy bill. The Department of Homeland Security, the corporate accounting scandals and the federal budget could very well take most of the 17 working days scheduled following the August recess.

Second, both representatives and senators will likely vote against extending the congressional session, scheduled to end Oct. 4. Most are anxious to get home to begin campaigning for the November election.

Still, the chance of passage is a step up from where many placed it just a few months ago. At that time, the energy bills contained the controversial proposal to allow oil exploration in the Arctic National Wildlife Refuge in Alaska. With that lightning rod issue removed, Democrats are more likely to accept many of the Republican-driven provisions in the House bill.

Also, there is a sense in Congress that something needs to be accomplished on the energy front. Since the president’s inauguration in 2001, energy has been on the legislative plate. Few relish the thought of ending the session without passing a bill and then starting the process again next year after freshmen senators and representatives take their seats.

If an energy bill doesn’t pass this session, however, efficiency proponents hope the recent brush with an energy crisis and rising prices will push building owners toward improving energy performance even without legislation. In fact, many of the points contained in the president’s original energy policy require no legislative action to be implemented. But having a bill would give many the peace of mind that some key energy-saving initiatives -- such as the Energy Star programs -- have been funded. It also would set straight what many feel has been largely ignored over the past two decades.

“If we don’t come up with a new energy policy in this Congress, we’re basically going to have to continue with the current policy, which is a hodge-podge of policies,” says Udall.