Expiring Geothermal Tax Credits: What Will the Industry Do?

Posted on:

July 29, 2016

The Geothermal residential tax incentive is a 30 percent installation credit afforded to a residential energy-efficient property. Currently, it allows consumers to spread this credit out over the course of several years, but systems installed in 2016 will have one year to use up the credits. This credit allowed the use of this technology to thrive during the 2008 recession, but is now set to expire December 31, 2016. While other areas in renewable energy, such as solar, have already received an extension to this tax credit until 2020, the geothermal industry, at this time, has not.

This is, in part, due to the haste with which the tax extenders package was put together. The House of Representatives Ways and Means Committee failed to account for geothermal in their bill. Though promises have been made to ACCA to rectify this issue, no tax vehicles have moved to allow for its inclusion.

This begs the question: if this incentive is not renewed, what does this mean for the geothermal industry and what will the industry do next?

It is important to understand that this credit given to the geothermal industry in 2008 came at a time of a significant national recession. This tax credit helped the industry keep afloat during a time when construction was at a dramatic low, but the industry was not able to use it as optimally as it was intended to be used. Now that the economy is starting to turn around, the geothermal industry has the opportunity to receive the fully intended impact of the tax incentive.

Tim Litton, director of marketing communications at WaterFurnace Intl. in Fort Wayne, IN, states, “The tax credit allowed us to maintain sales during a challenging environment – but it didn’t expand the market. That’s why we’re pushing for an extension to the credit, in the hopes that the credit will help us grow the market in a strengthening economy.”

What Do The Experts Believe?
Even though some are quite confident in the renewal or extension of this tax credit (and some lobbyists are continuously working to make this happen), not everyone believes a renewal or extension will occur. While Litton remains “cautiously optimistic the tax credit can still be extended,” Jeff Persons, owner of Geo Source One in Dublin, OH, does not think the credit will renew, because “the people in Congress are focused on solar resources. When the 2008 renewal happened, it was behind closed doors and many things were cut from the credit. Lobbyists from the geothermal industry were not able to attend.”

Along with depressed profits, companies within the geothermal industry could experience some other immediate effects in its workforce and business structures. Persons indicates that “when the credits go away, installation crews will be laid off or go parttime. Manufacturers will cut back to single or partial shifts, which translate to layoffs. Once the credits are gone, that market disappears until something happens in the energy cycle to re-stimulate the industry and sales.”

While the expectation would be a drop in sales of geothermal products if the credit is allowed to expire, there are some industry experts that predict that the geothermal market would rebound within an average of two years, as has been historically the case in areas similarly affected within this industry.

Litton notes that there may be a significant benefit to its expiration as well, as it would allow the industry to re-establish a higher level of integrity. “So many contractors started offering geothermal heat pumps in response to the incentive,” he says. “Unfortunately, a number of them did not take the time to receive proper training and left their customers with problem installations. Many homeowners blamed the technology when it was more often installation issues. If the incentive expires, the industry will balance itself and weed out the contractors that were simply trying to pick low-hanging fruit. This market correction should effectively increase market shares for the dedicated contractors who are committed to the technology.”

Even though the industry would see dips in profits and would have to find ways to sustain upon the incentive’s expiration, the market will likely rebound for this technology. The long term effects can prove valuable, too, in allowing the consumer to better see and understand the value of this technology and to be better served with product reliability.

There are also some industry experts who believe it may be time to phase out the credits, as it falsely stimulates consumer purchase. Consumers are holding off on purchasing until they know the credits will remain in effect. This can create a large fluctuation in consumer activity, which can have a destabilizing effect in this market, since it is still developing. Plus, these tax credits will likely end at some point, which has some wondering if it is it better for the industry in the long run to end them now or in four years from now?

Still, it is preferable to many to renew this tax credit, so contractors can take better advantage of a strengthening economy in casting a much wider net in their consumer base and in expanding the exposure and use of this technology.

And If The Credits Do Expire?
Even if there is Congressional appetite to renew this credit, experts within the geothermal industry and manufacturing are already making preparations in the event that this tax credit does expire at year’s end. Litton says, “Our plan is to provide our dealers with everything they need to succeed without an incentive. This includes new, innovative products that are attractive to consumers; a range of easy financing options; business and sales training for our customers; national advertising support; and top notch 24/7 technical support.”

Litton goes on to say, “The technology makes sense with, or without, a credit. That being said, we are also expanding our products to areas not so affected by tax credits –commercial and industrial markets. We are assessing technologies that reach outside geothermal heat pumps, but align with our unique skills and expertise.”

While some companies may revert back to working with more conventional systems, some others may find that they need to consider merging with another company to reduce their costs and optimize their resources to remain competitive in the geothermal industry. Persons says that some companies should “look into what other companies you can merge with. Merging companies will reduce overhead costs while making better use of existing assets.”

Thinking About The Way Ahead
Though the technology is incredible, the geothermal industry has had to contend ith some significant hurdles to industry development and sales continuity. Persons says, “Survival post-2016 will once again need to focus on service until an economic/energy price differential occurs to provide the needed market incentive to make a change. That is where I anticipate things will start to head post-2020, once the Fracking Surplus is substantially reduced.”

When considering all the benefits geothermal provides, the longevity and strength of the industry’s outlook remains high. Litton indicates that WaterFurnace is confident the industry will “eventually rebound due to the numerous benefits of geothermal that have nothing to do with a tax credit. Many of WaterFurnace’s fastest growing years occurred just before the tax incentive was implemented.”

However, with the sense of urgency currently surrounding subject matter experts in the geothermal industry as it pertains to these credits, it is worth investigating deeper who should focus on incentive development. Meaning, does the decision making power for the biggest benefits of this tax credit have to remain at the Federal level, or can a credit of some sort be negotiated or re-negotiated at the state level to offset the costs associated with not having any incentive at all?

Most states already have incentives and/or rebates in place for renewable energies. An “at a glance” look can be found on the Database of State Incentives for Renewables and Efficiency website, at www.dsireusa.org, along with when the incentive or rebate was last updated.

If the states, themselves, would be willing to work further with manufacturers, research and development teams, and other industry-affiliated companies to greater incentivize the industry beyond what it is now, the effects may not be as grand as 30 percent at first, but they could be longer lasting and co-beneficial.

ACCA is closely watching the geothermal tax credit and working to get it extended. However, there is no guarantee that this will happen prior to their expiration, as the industry has seen this happen many times before with other tax credits.

If you have questions about the geothermal tax credit please contact Barton James, ACCA’s senior vice president of government affairs at barton.james@acca.org.