By Kurt Padavano, RPA, CPM, FMA, SMA
Published in the November 2006 issue of Today’s Facility Manager
On August 8, 2005, President Bush signed a sweeping energy policy into law. The $11 billion measure included a deduction for energy efficient retrofits in commercial buildings. While the cost and the duration of the program were scaled back to fit Congress’ budget parameters, a significant tax deduction remains for upgrades to commercial buildings that meet performance criteria.
On June 2, 2006, almost a year after the law was passed, the Internal Revenue Service (IRS) issued the long awaited Notice 2006-52. This notice outlined criteria for the Energy Efficient Commercial Buildings Tax Deduction.
However, time is running out, since the program expires on December 31, 2007. Without an extension enacted, building owners and managers have less than 14 months to plan and implement energy upgrades.
Newspapers and other media regularly report on the vulnerability of energy sources. It is impossible to ignore the fact that international and domestic events impact the energy supply chain. The reliability of these supplies is one of the challenges facing the United States today. Facility professionals must focus on the need to maintain a steady and dependable supply of energy to properties under their management, particularly in structures where disruptions could affect occupants’ health and safety.
Informed professionals recognize they are not passive bystanders when it comes to potential energy supply challenges. These managers know that some of the power is in their hands, and they are taking effective action to help ensure reliability.
Based on the experiences of thousands of facility managers around the United States, here are four proven strategies designed to maximize energy dependability.
Distributed Energy And Cogeneration
Facility managers can protect properties from energy supply disruptions by investing in on-site power generation systems such as diesel fuel or natural gas powered engine generators. These purchasing decisions are crucial in ensuring reliability. On-site power generation systems help to maintain continuity with minimal disruption to operations. These power supply systems include emergency generation, backup or standby generation for critical loads, or generation systems that are used for peak load demand reduction.
In addition, facility professionals can further address facility energy requirements by installing cogeneration systems. These systems produce electricity and convert the waste heat that is usually exhausted to the environment into energy for use in the facility or production processes.
Cogeneration can move a facility toward energy self sufficiency while offering potential monetary savings by offsetting heating requirements. This is accomplished through recovery of thermal energy that, in conventional electric production applications, goes up the stack.
Demand And Peak Load Management
In most states, energy grid operators offer incentives and cash payments to facilities that agree to reduce electric demand usage during peak load periods or other times when the system load nears the limit of available electric supply. Participating sites and institutions—typically those equipped with distributive energy capabilities—can agree in advance to reduce demand on the power grid when called upon to do so.
Under some voluntary demand reduction programs, facility managers can also participate without using on-site generation by curtailing energy consumption through such means as restricting elevator usage, raising air conditioning temperatures, and reducing nonessential lighting through control systems.
Also, some utility companies encourage consumers through financial incentives to reduce loads permanently by implementing energy savings projects such as replacing inefficient lighting or equipment with state of the art, energy efficient equipment.
In structures large and small, equipment maintenance is the most cost-effective way to ensure energy reliability.
For example, the owner of a new car must adhere to a schedule of tuneups and oil changes to ensure long-term operation. Without these basic maintenance measures, the new car will run inefficiently and may suffer a costly and premature death. Failure to maintain a new auto forces the buyer to face the prospect of purchasing new cars frequently as well as dealing with the hassle of breakdowns and the inconvenience of unavailability.
The same rule applies to the equipment that comprises a building’s energy infrastructure.
Professionals must maintain equipment so it operates at maximum efficiency. They need to become knowledgeable about how to service their facilities and energy related operations properly. And they should effectively articulate to corporate management that the best way to protect investments in new equipment is to invest in ongoing maintenance of that equipment.
Too many times, maintenance is treated as an afterthought. Businesses of all kinds fail to incorporate maintenance and upgrade costs in their annual budgets.
All facility professionals should conduct an“energy supply maintenance audit” of every major piece of energy related equipment in their buildings. Through proper maintenance, expensive equipment will function well through the full course of its anticipated life span.
An audit can also detect reliability challenges that might be addressed with nominal expense. For example, professionals may discover vulnerabilities associated with sensitive loads unable to handle voltage reductions. Or, they might learn of potential vulnerabilities at their facilities that may be triggered by energy use practices of a neighboring tenant on their local electric grid.
Partner With A Consultant
Professionals can help keep the juice flowing by contracting with a reputable energy services provider.
Consultants, such as energy services companies, help managers plan a long-term energy reliability strategy. They know the marketplace and can identify a checklist of rebates and incentives that enhance the cost effectiveness of energy related investments. Consultants can research local peak load incentives and pinpoint programs best suited for a property.
Energy experts can also help managers build a case for energy investment to ensure that corporate management dedicates adequate resources to this challenge. For example, consultants can calculate payback periods associated with various energy investments and analyze the application of cogeneration and other energy investment opportunities. Building owners rely upon facility professionals to maintain a steady supply of energy.
By implementing these four strategies, facility managers can protect facilities by erecting the strongest possible shield against supply disruptions.
How It Works
The new regulation provides for an accelerated tax deduction that is equal to the cost of installing energy efficient commercial property or $1.80 per square foot, whichever is the lesser of the two. As defined in the law, energy efficient commercial property is:
With respect to depreciation (or amortization in lieu of depreciation) allowances;
Installed on or in any building located in the United States and within the scope of American Society of Heating, Refrigerating, and Air-Conditioning (ASHRAE) Standard 90.1-2001 (this standard provides the minimum requirements for the design of energy efficient buildings);
Installed as part of the interior lighting systems; the heating, cooling, ventilation, and hot water systems; or the building envelope; and
Is certified as being installed as part of a plan designed to reduce the total annual energy and power costs of the above systems by 50% or more in comparison to a reference building which meets the minimum requirements of Standard 90.1-2001.
Energy costs refer exclusively to heating, cooling, lighting, and water heating, since only these uses are within the scope of the ASHRAE Standard and are under the control of the building designer or operator.
Partial credit for individual systems is also provided in the new law. A deduction of up to 60¢ per square foot will be available for upgrades to each of the three systems that consume energy—the lighting systems; the heating, cooling, ventilation, and water heating systems; and the building envelope (adding up to the full $1.80 per square foot that is available for new construction if qualifying retrofits are made to each of the three subsystems).
It is important to note that this is an accelerated deduction, not a credit. A tax credit is a direct dollar-for-dollar reduction of tax liability. A tax deduction is a certain amount subtracted from adjusted gross income when calculating taxable income.
Building owners have always been able to write off the cost of a capital investment like energy efficient lighting—capitalizing and depreciating or amortizing it over time. With the new law in place, building owners may now be able to write off the entire cost in a single tax year.
For privately owned commercial buildings, the owner of the asset is entitled to receive the tax deduction. In some cases, the building tenant may be eligible to claim the accelerated deduction. For tax purposes, the owner is considered the party that possesses the energy efficient equipment put into service.
In public or government buildings, the person primarily responsible for designing the property may claim the deduction. If an energy services company, however, owns the energy efficient property, then that company would be qualified.
IRS Notice 2006-52 sets forth interim guidance awaiting the issuance of regulations. While it is still unclear when the final regulations will be promulgated, the notice does indicate that the IRS and Treasury Department expect that the rules set forth in the June 2 notice will be incorporated into the final regulations.
Building owners and managers are encouraged to begin retrofits immediately if they wish to take advantage of the tax deduction. The interim guidance should prove sufficient for moving forward.
In order to claim the deduction, the taxpayer must obtain certification from a qualified individual. This intermediary will certify that required energy savings have been, or will be, achieved. A qualified individual is defined as a person who is not related (not an employee of the building or company); is an engineer or contractor that is properly licensed in the building’s jurisdiction; and has represented to the taxpayer that he or she can prove the qualifications necessary to perform the inspection and testing.
The IRS notice also prescribes the content of the certification. In addition to several other statements that the qualified individual must provide for the taxpayer’s records, he or she must include a statement that the energy efficient property incorporated into the building will reduce the total annual energy and power costs in accordance with the ASHRAE standard.
For a building retrofitting any one of the three subsystems, the taxpayer can provide a statement showing that property or upgrades incorporated into the building reduce the total annual energy and power costs by 16 2/3% (1/3 of the 50% reduction) or more as compared to a Reference Building that meets the minimum requirements of the standard.
Finally, the notice also announces that the Department of Energy (DOE) is in the process of creating and maintaining a public list of software programs that must be used to calculate energy savings for purposes of providing the certification. It also outlines the process that software developers must use if they want to have their software included in that directory. A partial list is posted on the DOE Web site at www.eere.energy.gov/buildings/info/qualified_software/.
A copy of the IRS notice can be found on the BOMA International Web site at www.boma.org/advocacy.
Interim Lighting Rules
In the case of lighting system retrofits, the legislation specifically outlines the interim rules. Under these regulations, an energy savings target for the lighting system can be met by a reduction in lighting power density of 40% (50% in the case of a warehouse) of the minimum requirements in Table 22.214.171.124 or Table 126.96.36.199 of ASHRAE/ IESNA (The Illuminating Engineering Society of North America) Standard 90.1-2001.
For a lighting system that reduces power density by 25%, a partial deduction of 30¢ per square foot is allowed. A pro-rated partial deduction is allowed in the case of a lighting system that reduces power density between 25% and 40%. Certain lighting level and control requirements must also be met in order to qualify for the partial lighting deductions.
Legislative Efforts Underway
During the 109th Congress, several bills were introduced to extend the measure for a few additional years. However, since the provision does not expire until the end of 2007, it has proved difficult to engage any action on this issue in 2006. Efforts will begin anew when the 110th Congress convenes in January 2007.
In the meantime, building owners should take advantage of these deductions by making changes in accordance with the interim rules. This is about more than just money, however; these tax deductions will hopefully make future decisions about energy efficiency and sustainability more financially feasible for all facility managers and building owners.
Padavano, RPA, CPM, FMA, SMA is chairman and chief elected officer of the Building Owners and Managers Association (BOMA) International, headquartered in Washington, DC, and chief operating officer of Advance Realty Group of Bedminister, NJ. Questions about this article can be sent to [email protected].