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Webinar hosted by the Tennessee Energy Education Initiative with presentations including: - Monetizing Energy Solutions: The Road to Funding Christopher Russell, Visiting Fellow, American Council for an Energy-Efficient Economy; Principal, Energy Pathfinder Management Consulting LLC - Guide to Tax Incentives for Commercial Business CJ Aberin, CCSP, shareholder at KBKG, a specialty tax firm focused on securing energy tax incentives, will summarize the benefits of the Energy-Efficient Commercial Buildings (179D) federal tax deduction and other related tax strategies, explain the process, and share information about ideal candidates and eligible projects so you know how to get started.
Citation preview
Getting Your Money’s Worth Out of Energy Efficiency
September 30, 201312:00 – 1:30 PM ET
www.TnEnergy.org
Agenda:
12:00-12:05 Welcome & Introductions
12:05-12:25 Monetizing Energy Solutions: The Road to Funding
Christopher Russell, ACEEE & Energy Pathfinder Management Consulting
12:25-12:50 The Tax Incentive Environment for Energy Efficiency
CJ Alberin, KBKG
12:50-1:00 Q&A and Adjourn
Monetizing Energy Solutions:
The Road to Funding
Christopher Russell
ACEEE Visiting FellowPrincipal, Energy Pathfinder
Consultingwww.TnEnergy.org
MONETIZING ENERGY SOLUTIONS:
The Road to Funding
Christopher Russell,PrincipalEnergy PathFINDER .com
About Christopher Russell, C.E.M., C.R.M. Principal, Energy Pathfinder
Visiting Fellow, American Council for an Energy Efficient Economy, 2012+
Energy Manager, Howard County, MD, 2010-2012
Director of Industrial Programs, Alliance to Save Energy, 1999-2006
MBA, M.A., University of MD; B.A., McGill University
5 ©2013 Energy PathFINDER.com
About Christopher Russell
TAKE-AWAYS FOR TODAY:
6 ©2013 Energy PathFINDER.com
•Connect the dots between energy solutions and business performance
•Monetize energy solutions
•What’s in it for YOU? …your business, your career?
Facility Manager?
To Whom Does Energy Provide Value?
Project Engineer?
Machine Operator?
Corporate Officer?
Each has a different definition of VALUE.
7©2013 Energy PathFINDER .com
Energy is a Small Portion of Costs?
YES, relative to the annual budget.
8
NO Relative to total
cost of asset ownership
Capital (2%)
Energy (97%)
Maintenance(1%)
TOTAL COST OF OWNERSHIP
©2013 Energy PathFINDER .com
Energy is a Small Portion of Costs?
9
TODAY’S2-YEAR
PAYBACK“PROJECT”
ENERGY CONSUMPTION & LIABILITIES FOR YEARS OR DECADES TO
COME
©2013 Energy PathFINDER .com
Energy + Business:A FORCED MARRIAGE
No ENERGY means…No PRODUCTION…and no REVENUE.
End of story.
10 ©2013 Energy PathFINDER.com
ENERGY EXPENSE
ENERGYEXPENSE
$
FACILITIES: A COST TO MINIMIZE…
…OR A CASH FLOW ATM MACHINE?
13 ©2013 Energy PathFINDER.com
ENERGY IS ALWAYS IN MOTION.Energy that doesn’t create wealth destroys it.
WEALTH DESTROYED
HEAT, FRICTION, &CHEMICAL REACTIONS
DESTROY PLANT & EQUIPMENT,CREATE LIABILITIES
WEALTH CREATED
TRANSFORMATIONOF INPUTS INTOFINAL PRODUCTS HEAT,
PRESSURE, & MOTIVE
POWER
FUGITIVE ENERGY
COMMITTED ENERGY
FUEL &ELECTRICITY
14©2013 Energy PathFINDER.com
(c)2009 Energy Pathfinder Mangement Consulting, LLC
www.energypathfinder.com15
MONEYMONEY FUEL &ELECTRICITY
HEAT, PRESSURE& MOTIVE POWER
PRODUCTS TO SELL
ACCOUNTS
PURCHASE ORDERS
INVOICES
BUDGETS
EXPENSE REPORTS
RECEIVABLES
RECEIPTS
DEPOSITS
DIVIDENDS
PAYABLES
KILOWATT-HRS.
THERMS
STEAM- LBS./HR
HORSEPOWER
CUBIC FEET/MIN.
DEGREES FARENHEIT
WE TRACK MONEY.WHY NOT ENERGY?
LABOR HRS & RATES
EPS
PSIG/PSIA
15©2013 Energy PathFINDER.com
EXPENSES,INTEREST,
ORINFLATION
CAPITAL IS ALWAYS IN MOTION
ECONOMY(opportunity)
PLACE OF LOW
RETURNS
PLACE OF HIGHRETURNS
CAPITAL IS NEVER AT REST
16 ©2013 Energy PathFINDER.com
A BUSINESS FACILITY IS A MICRO ECONOMY
FACILITY(opportunity)
WEALTH INPUTS
WEALTHCREATED
EXPENSES,INTEREST,
ORINFLATION
Who will get superior returns from your facility assets?YOUR BUSINESS or the UTILITY COMPANY?
17 ©2013 Energy PathFINDER.com
PURSUING ECONOMIC OPPORTUNITY
1. Benchmark current capital performance2. Perceive opportunities for superior performance3. Estimate investment risk/return 4. Reinvest capital5. Continuous improvement. See Step 1.
For the ECONOMY…For the FACILITY…
DYNAMICS ARE THE SAME18 ©2013 Energy PathFINDER.com
BAD ECONOMY?You can delay investment decisions…
But your CAPITAL is still in motion.
You still need to actively decide its velocity and destination.
FREE CASH FLOW?
RATE OF RETURN?
COST OF DOING NOTHING?
20©2013 Energy PathFINDER .com
What do executives need to know?
Think INVESTMENT, Not PROJECT
• PROJECTS:– Cost money– Take up time– Distract from operating goals & procedures
• INVESTMENTS: – Produce a cash flow– Earn a rate of return– Grow the business, create wealth
21 ©2013 Energy PathFINDER.com
$0.925926INPUTS
$1.00REVENUE
Example: 8% Rate of Return22
Your Business = Your Investment BenchmarkA MONEY-MAKING MACHINE
(Over simplified)
©2013 Energy PathFINDER .com
EXAMPLE: You want a 2-YR Payback
23
ENERGY IMPROVEMENT COST: $1,000,000ANNUAL ENERGY SAVINGS: $250,000AMT FINANCED: $500,000/8%/25YRSMARGINAL INCOME TAX: 35% ECONOMIC LIFE: 25 YRS
SIMPLE PAYBACK: 4 YRS pre tax8 YRS post tax
©2013 Energy PathFINDER.com
REJECT?
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
RATE
OF
RETU
RN (
No
Com
poun
ding
)
SIMPLE PAYBACK (Years)
INVESTMENTDEAD BAND
24 ©2013 Energy PathFINDER.com
0% -
20% -
25
ENERGY PROPOSAL IRR = 12% POST-TAX & FINANCE
ENERGY PROPOSAL IRR = 25% PRE-TAX
MUTUAL FUNDS = 3%COST TO BORROW = 4%
CURRENT RoR ON INVESTED CAPITAL = 8%
IRR = -12.6% REJECT PROJECT, NEGATIVE CASH FLOW
10% -
TWO-YEAR PAYBACK = 50%
©2013 Energy PathFINDER.com
30% -
40% -
-10% -
50% - Ex: 8-YR PAYBACK POST-TAXCost: $1 million
Savings: $250,000/YR 25-YR Economic Life
50% -
You cannot “walk away” from an energy efficiency investment
26
Purchased Energy
COMMITTEDENERGY VOLUMEAN
NU
AL E
NER
GY
CON
SUM
PTIO
N
CURRENT ALTERNATIVE
ENERGYWASTED
ENERGY AVOIDED
VOLUME AT-RISK:PAY FOR IT EITHER WAY.
©2013 Energy PathFINDER.com
Monetize Energy Solutions:KNOW YOUR INVESTMENT OUTCOMES
27 ©2013 Energy PathFINDER.com
REJECT ACCEPT
GET Satisfaction of no capital expenditure? Gross energy savings
GIVE UP
Total cost of doing nothing Amortized project cost
-PENALTY +FREE CASH FLOW
Facilities Management 1.0• Facilities = cost center• “Cost of doing business”• Do more with less• That’s the way we’ve always
done it• Budget hoarding• Success = “don’t get noticed”
28©2013 Energy PathFINDER .com
CHANGE
CHANGE…RISK or OPPORTUNITY?
• Energy price volatility• Smart grid technologies• Evolving emissions &
safety standards• Green & sustainable
markets
29©2012 Energy PathFINDER .com
Facilities Management 2.0
• Facilities = a profit center• Monetize your energy position• No more energy audits
collecting dust…• Success = show value created• Contribution to cash flow and
growthFUTURE-PROOF YOUR BUSINESS PERFORMANCE…and your job.
30©2013 Energy PathFINDER .com
Keep pushing the same buttons….
Keep getting the same results!31 ©2013 Energy PathFINDER.com
Energy PathFINDER .c
omChristopher Russell
@ENERGYpathfndr
THANK YOU!
The State of the Tax Incentive
Environment for Energy Efficiency
CJ Alberin
Shareholder, KBKGwww.TnEnergy.org
SOLUTIONS FOR TAX PROFESSIONALS AND BUSINESSESTAX CREDITS • INCENTIVES • COST RECOVERY
PRESENTED BY:
CJ Aberin, CCSPShareholder
Energy Efficiency Tax Incentives – Insight into the § 179D Tax Deduction & Other Opportunities
NATIONWIDE SERVICE Tax Credits · Incentives · Cost Recovery
© KBKG inc 2013
The Problem = Buildings are responsible for almost half of all US energy consumption Buildings consume
77% of all electricity Large contributor of
carbon dioxide
*Source:
Architecture 2030
49%
28%
23% BUILDINGS
TRANSPORTATION
INDUSTRY
Energy Consumption (2011)
NATIONWIDE SERVICE Tax Credits · Incentives · Cost Recovery
© KBKG inc 2013
275 billion sf of buildings as of 2010
Every year: 1.75 billion sf torn
down 5 billion sf renovated 5 billion sf newly
constructed By 2035, ~70%
new or renovated
*Source: Architecture 2030
0
200
400
600
0
200
400
600
0
200
400
600
0
200
400
600
0
200
400
600
As of 2010, the US building stock is 275 billion sf
By 2035:
44 billion sf will be demolished
125 billion sf will be remodeled
125 billion sf will be new construction
Therefore, by the year 2035, ~70% of the building stock will be new or renovated
Bill
ion
Sq
uar
e F
eet
(sf)
So
urc
e: E
ner
gy
Info
rmat
ion
Ad
min
istr
atio
n
Opportunity to Solve Problem
NATIONWIDE SERVICE Tax Credits · Incentives · Cost Recovery
© KBKG inc 2013
§ IRC 45L – Energy Efficient Dwelling Tax Credit ($2,000 per Unit)
§ IRC 179D – Energy Efficient Commercial Building Deduction (up to $1.80/sf)
§ IRC 48 – 10-30% Tax Credit for Renewable Energy Property
Other State and Local Incentives
Green Building
Tax Incentive
s
§ IRC 179D
§ IRC 45L
§ IRC 48
Local & State
Federal Tax Incentives
NATIONWIDE SERVICE Tax Credits · Incentives · Cost Recovery
© KBKG inc 2013
179D Timeline
2006 2007 2008 2009 2010 2011 2013
Rev Proc 2011-14
Form 3115 for 179D
IRS revises 179D rules
IRS revises guidance
179D extend thru 2013
2005 EPACT goes into
effect
IRS issues initial
guidance
2012
179D Will Sunset at
End of 2013; Future
Extension in Works
NATIONWIDE SERVICE Tax Credits · Incentives · Cost Recovery
© KBKG inc 2013
Increased 179D Benefits for 2014 & Later Obama’s Better Buildings Initiative aims to transform
§179D Deduction into a larger tax deduction Trying to make permanent
Future Outlook
NATIONWIDE SERVICE Tax Credits · Incentives · Cost Recovery
© KBKG inc 2013
IRC Section 179D allows for an immediate deduction of up to $1.80/sf for “commercial buildings” that achieve a 50% reduction in total energy and power costs for lighting, HVAC & hot water systems in comparison to 2001 energy standards. Building Envelope HVAC & Hot Water Interior Lighting
§179D Tax Deduction Energy Efficient Commercial Building
NATIONWIDE SERVICE Tax Credits · Incentives · Cost Recovery
© KBKG inc 2013
Whoever makes investment and places in service for first use Building owner or landlord Tenant
ORDesigners for government buildings
§179D Tax DeductionWho Benefits?
NATIONWIDE SERVICE Tax Credits · Incentives · Cost Recovery
© KBKG inc 2013
“Commercial Buildings” includes Public & government buildings (i.e
schools, prisons, etc…) Typical commercial buildings (i.e.
office, retail, industrial, etc…) Housing that is 4 stories or higher
Must be located in the United States
§179D Tax Deduction - What Building Types are Eligible?
NATIONWIDE SERVICE Tax Credits · Incentives · Cost Recovery
© KBKG inc 2013
Ground up constructionRenovations and retrofitsApplies to affected square footages
(rate x sf)PIS between 2006 through 2013
§179D Tax Deduction - What’s Type of Construction is Eligible?
NATIONWIDE SERVICE Tax Credits · Incentives · Cost Recovery
© KBKG inc 2013
§179D Tax Deduction - Various Ways to Achieve Deduction
Fully Qualifyi
ng Propert
y
Partially Qualifying Property
Envelope
HVAC Lighting (Permanent Rule)
Interim Lighting Rule(PIS before publication of final 179D regs)
1/1/06 to 12/31/08: Energy Cost Savings*
50%
16-2/3%or
10%
16-2/3%
or20%
16-2/3%or
20% 25% to 40% LPD Reduction (50% LPD Reduction for Warehouse) + other factors
1/1/09 to 3/11/12:Energy Cost Savings*
10% 20% 20%
3/12/12 to 12/31/13:Energy Cost Savings*
10%20%or
15%
20%or
25%
Tax Deduction $1.80/sf
$0.60/sf
$0.60/sf
$0.60/sf $0.30 to $0.60/sf (using applicable % from 2006-52)
* Compared to a Reference Building that meets 2001 energy standards.
NATIONWIDE SERVICE Tax Credits · Incentives · Cost Recovery
© KBKG inc 2013
Assume Federal Tax Rate = 35%** Discount Rate = 8%
1 system$0.60 / sf
2 systems$1.20 / sf
3 systems$1.80 / sf
Tax Deduction $60,000 $120,000 $180,000
NPV Benefit**(Owners) $14,348 $28,696 $43,044
§179D Tax Deduction - Benefit Example of 100,000 sf Building
NATIONWIDE SERVICE Tax Credits · Incentives · Cost Recovery
© KBKG inc 2013
Envelope Better insulation & windows Cool roof
HVAC More efficient HVAC
equipment & controls Geothermal systems and
heat pumps Right sized
Lighting More efficient luminaries,
ballasts, and lamps Bi-level switching Lighting retrofit project can
range from $0.60 to $2.00/sf
And more…HVAC
Envelope
Lighting
§179D Tax Deduction Design Strategies
NATIONWIDE SERVICE Tax Credits · Incentives · Cost Recovery
© KBKG inc 2013
Warehouse Retailer in MD Tax Deduction = $261,000
145,000 sf * $1.80 per sf Whole Building Qualified
53.2% Reduction in power cost
Envelope primarily concrete block
Mechanical Systems Rooftop A/C’s with EER
ranging from 10 to 15 80% AFUE Gas Heat
Lighting consists of T-8 Fluorescent & Metal
Halides Skylights & Daylighting
Systems
§179D Tax Deduction Example – Big Box Retailer
NATIONWIDE SERVICE Tax Credits · Incentives · Cost Recovery
© KBKG inc 2013
Student Housing in CA Tax Deduction = $151,200
84,000 sf * $1.80 per sf Whole Building Qualified
53.3% Reduction in power cost
Envelope R-30 Roof R-13 Walls Double paned Low-E
windows Mechanical Systems
8.0 HSPF / 13 SEER Split Heat Pump
Gas Fired Boiler 85% AFUE - DHW
Energy efficient lighting – CFL’s
§179D Tax Deduction Example – Student Housing
NATIONWIDE SERVICE Tax Credits · Incentives · Cost Recovery
© KBKG inc 2013
Parking Garage in TX Tax Deduction = $180,000
300,000 sf * $0.60 per sf 1 system Qualified
Interior Lighting Systems 44% Lighting Power
Reduction 48” T8 2-tube Fluorescent
Lighting throughout
§179D Tax Deduction Example – Parking Garage
NATIONWIDE SERVICE Tax Credits · Incentives · Cost Recovery
© KBKG inc 2013
Building typeBuilding size & number of storiesPhysical orientationClimate ZoneUtility Rates
§179D Tax Deduction Key Variables
NATIONWIDE SERVICE Tax Credits · Incentives · Cost Recovery
© KBKG inc 2013
Process: Obtain certification package No special form required
Reported on the “Other Deduction” line with a description of “Section 179D Deduction
Considerations: Deduction can reduce AMTI Can either amend or file Form 3115 to retroactively
claim deduction Deduction limited to amount invested in energy
efficient property ***Potential for additional deductions on
retrofits***
§179D Tax Deduction Tax Process & Considerations
NATIONWIDE SERVICE Tax Credits · Incentives · Cost Recovery
© KBKG inc 2013
Analysis of drawings & as-built specifications
Energy simulation modeling or lighting analysis using DOE-approved software
Onsite verificationSigned certification by qualified third
party that meets all IRS requirements
§179D Tax Deduction Certification Process
NATIONWIDE SERVICE Tax Credits · Incentives · Cost Recovery
© KBKG inc 2013
Minimum Criteria Large square footages (50,000 sf+ ideal) Improvements placed in service in 2006 or later
Other Factors That Help LEED Certified / Energy Star / high performance
helps but not required Stringent state or local energy codes
§179D Tax Deduction Identifying Good Opportunities
NATIONWIDE SERVICE Tax Credits · Incentives · Cost Recovery
© KBKG inc 2013
Other State & Local Incentives
Rebate from utility energy-efficiency program Rebate from city or county Expedited permits Marketing/publicity awards State income tax credit Property or sales tax rebates or abatements Density bonus Access loans/loan funds Full or partial refunds for development fees 1,064+ Financial incentives for renewable
energy 1,430+ Financial incentives for energy
efficiency
NATIONWIDE SERVICE Tax Credits · Incentives · Cost Recovery
© KBKG inc 2013
CJ Aberin, CCSP, Electrical Engineer
Shareholder877-525-4462 [email protected]
KBKG SERVICES
R&D Tax Credits Asset Retirement Green Tax Incentives Hiring Tax Credits Cost Segregation Fixed Asset Review Repair v. Capitalization Property Tax Sales & Use Tax Expense Recovery
QUESTIONS & ANSWERS
Questions?
www.TnEnergy.org
www.TnEnergy.org