President Biden introduced his historic $2 trillion infrastructure plan two weeks ago. While the plan addresses many aspects of infrastructure, including fixing roads, bridges and broadband, it also seeks to accelerate the country’s fight against climate change. We recently hosted a conversation between Vincent Barnes, SVP of Policy and Research at Alliance to Save Energy (ASE) and Metrus CEO Bob Hinkle on the many energy efficiency related policy implications on the bill.
The infrastructure bill that is being discussed is ambitious and has a big price tag to go with it. This begs the question – will the impact of this bill live up to its $2 trillion cost?
Hinkle: Yes, the dollar amount is huge, but the magnitude of the proposal is right given the challenges we face. We also need to look at this plan within the context of the costs we already pay because of climate change. I live in California, so I think immediately of wildfires. Last year, the Federal government spent $2.3 billion on fighting fires – and that’s only for fires. Over the last five years, the U.S. has experienced more than $500 billion in losses from climate-fueled weather disasters. On top of this, you can add things like the economic damages of what just happened in Texas. Once you start to add all of that up, $2 trillion looks pretty reasonable.
Barnes: The package must be viewed as investments spread over several years to fund projects and economic development to drive the economy for decades— and to a large degree better ensure the U.S. is more globally competitive. For the Alliance to Save Energy, investments in the future of energy are critical to the objectives of reducing carbon emissions and addressing climate change, which includes significant investments in transforming the electricity grid. For the grid itself to operate more efficiently as new energy resources come online, and to ensure our grid and distribution infrastructure facilitates utilization of advanced energy efficiency technologies, it is critical that these investments are made today. If we fail to do so, new energy technologies including energy efficiency will be slowed in their deployment, efforts to mitigate climate change will be frustrated, and projected energy savings for consumers will not be realized. The Alliance is engaging with the White House, Congress, and relevant agencies to help ensure that our key energy efficiency policy priorities are part of what might come out of a final package, including proposals reflective of access and equity.
Tax incentives for energy efficiency and clean energy will likely be a key part of an infrastructure package. What reforms are you tracking and what benefits could they bring?
Hinkle: When the tax code was originally written, energy efficiency was never thought of as its own asset class. Any efficiency equipment, be it a lightbulb or a boiler, is treated no differently than the bricks and mortar that make-up a building itself and is depreciated over a 39-year period. This creates a disincentive to invest since the depreciation period is longer than the term of a project (and the useful life of equipment) which can result in a negative after-tax cash flow. The 2017 Tax Cuts and Job Act (TCJA) temporarily resolved this for Qualified Improvement Property (QIP) which is largely thought of as something to help the retail industry but it also has a massive impact on energy efficiency investments. Although TCJA wasn’t focused on efficiency, it shortened the depreciation period for new building “QIP equipment” and provided for bonus depreciation. The benefits of QIP expire at the end of 2022, so a longer-term solution is needed. With this in mind, there are two actions to take: (1) extend bonus depreciation under the TCJA for an additional 5-years, 2) pass the Energy Efficient Qualified Improvement Property Act (the “E-QUIP Act”) that has uniform 10-year accelerated depreciation for energy efficiency assets. These two items should be thought of together and we should do both, not one or the other.
Barnes: The tax code has been a traditional tool to drive incentives across multiple sectors of the economy— however, for energy efficiency the tax code while useful has achieved somewhat anemic results. This is primarily because relevant energy efficiency tax incentives are either outdated or have been allowed to expire. This is unfortunate because energy efficiency is critical to addressing climate change. In fact, as the first solution to addressing climate change, energy efficiency has the potential to reduce carbon emissions by over 50% by 2050.
One primary area where the tax code could be particularly effective in driving energy efficiency is in homes and buildings, which account for about 40% of U.S. carbon emissions. In 2020, the Alliance was successful in achieving permanency of the 179D tax deduction for commercial buildings, which allows building owners making energy efficiency improvements to receive up to $1.80 per square foot in deductions for qualifying projects. The Alliance will be working with Congress and others to now increase that deduction to up to $3.00 per square foot and make the performance requirement a little less stringent to stimulate more investment.
We’re also working to extend the 25C homeowner credit through at least 2027, and increase the value of the credit to a maximum of $2,400, in addition to increase the maximum incentive up to 30% of eligible expenses. The incentive currently provides a 10% credit and a $500 lifetime cap, which is likely not a substantive incentive. We’re additionally seeking to extend the 45L homebuilders credit through 2027. Developers would receive a Tier 1 credit of $2,500 for new homes meeting identified ENERGY STAR certification, and a Tier 2 credit of $5,000 for new homes that meet DOE Zero Energy Home requirements.
Hinkle: One item I’d add on to Vincent’s comments is that we’d like a change to 179d that allows a third-party financier and owner of energy efficiency retrofits at a private sector building to receive the deduction. 179d allows this for public sector projects but not for private sector projects. This should be changed.
On the financing front, there is talk of creating a Federal Green Bank. How do you see that working and what areas of support are most needed to speed project implementation?
Hinkle: This could be really helpful if it’s created in a way that’s additive and doesn’t crowd out private sector funding sources that are eagerly looking for energy efficiency and renewable energy investments. The experience with Green Banks at the state level has been mixed. You’ve seen some success in New York where the New York Green Bank funded projects or programs that would have otherwise had difficulty accessing financing. I’ve seen other examples where Green Banks have essentially offered what is already available from private sources but carry more restrictions on how funds are used which actually slows projects. The Clean Energy and Sustainability Accelerator Act that was introduced earlier this year has some interesting elements to it, including reserving 40% of its funds for communities affected by environmental pollution, climate-change or loss of jobs. If the intent is to fund projects, the Federal Green Bank should focus on opportunities where the project term, technology, contractor and customer risk are outside what private financing can do.
Barnes: We continue to study Green Banks, and appreciate the value the construct brings as an accelerator for investments, including development and deployment of advanced energy efficiency technologies on both sides of the meter. That said, there are genuine concerns about how or whether Green Banks will compete with private financing, and we further need to better understand secondary markets and relative implications.
The Open Back Better bill is something the Alliance has been actively engaged in supporting. Can you both highlight some areas of particular importance you see in this bill?
Barnes: Open Back Better, re-introduced by Senator Tina Smith (D-Minn.) in the Senate and Congresswoman Lisa Blunt Rochester (D-Del.) in the House, authorizes increased appropriations of $18 billion over five years to retrofit U.S. public buildings, including hospitals, military facilities, schools, municipal buildings, and others. The legislation also prioritizes 40% of relevant authorization to environmental justice and low-income communities. If passed, it would stimulate investments in critical building infrastructure and generate substantive jobs growth in energy efficiency. The Alliance will be working diligently with Congress and the administration to move this legislation forward.
Hinkle: The Alliance and NAESCO have both done great work on this bill which focuses on improving the resilience and efficiency of public sector facilities. It is estimated that there is over $1 trillion in deferred maintenance needs within public sector facilities. Under this bill, the federal government would provide over $20 billion in funding over five years that would be matched on a 4 to 1 basis by private investment. Leveraging the private sector and thinking about public-private partnership is a key part of this bill.
Bipartisanship is a rare commodity these days, where do you see areas for cooperation across the aisle as part of this upcoming bill?
Hinkle: Energy efficiency is really just the elimination of waste which shouldn’t be a controversial sell. Look at the business community – over 25% of the Fortune 500 have already set net zero targets. Look at the names that are signed on to the America is All In coalition. The political reality is unfortunately more complicated. Vincent will have more to say on this than me – but I’d see the creation of jobs and funding of projects that are resiliency driven as areas for bi-partisan action. The QIP incentive within the 2017 tax act I mentioned is an example I go back to: Republicans can view it [QIP provision] as supporting private sector retail expansion, Democrats can view it as job creation and environmental protection. I think there are a lot more examples like that out there.
Barnes: As a former Hill energy staffer, I will tell you— generally energy has tended to be a bipartisan issue, and the committees in both chambers are known for following regular order and negotiating substantive legislative solutions. This was demonstrated in 2020 when Congress passed the most comprehensive energy legislative action in nearly a decade— and it was purely bi-partisan. This means there were priorities not achieved by the Republican Caucus, and proposals not realized by the Democratic Caucus. In the end, what resulted was a significant investment in the future of energy, including needed research and development to spur innovation for the creation of energy technologies that don’t yet exist. This is not to suggest there are no major party differences, but it is worth noting that in a year likely defined as one of the most partisan in recent memory, energy was bipartisan—particularly when it came to passing transformative industry legislation. So, when it comes to energy bipartisanship, I tend to think of the glass as mostly full, and I anticipate additional bipartisanship on energy issues in the future, and this is especially true as we think about energy efficiency.
Crystal ball time: how and when does the infrastructure package come together?
Hinkle: I’d like to think this could be done over the summer with the required 10 or more Republican votes but that might be too optimistic. Vincent?
Barnes: If I were to temper my comments on bipartisanship, particularly as we think about the future of energy, it would be because of how I might anticipate an infrastructure package developing. Some have concerns about how the White House proposal will be paid for, which curiously, I believe is the lowest hurdle to passage. The infrastructure package in its scope is transformative, and represents a national investment that would ensure American competitiveness for decades to come. It has been a while since we’ve seen something like this. The challenge is whether it gets across the finish line. There are real differences in the various caucuses about how far or how fast transformation should go— and quite possibly, if the majority is unable to achieve a 60-vote threshold in the Senate, that transformation will occur through reconciliation, particularly if relevant issues are adequately addressed that resolve concerns of both moderate and progressive parts of the majority. In terms of timing, I believe we’re on a late summer early fall calendar if reconciliation is the vehicle.