Will Expiring Tax Credits Ground GHPs?

HVAC contractors plan for life without the long-standing 30 percent federal tax credit

**WELL RUN DRY:** Without a tax incentive, Daryl Pater, owner, Mainstream Heating & Cooling, Clarksville, Tennessee, believes geothermal will become much less financially viable for homeowners. *Photo Courtesy of Dan Frisch*

JUST IN CASE: If demand for geothermal systems tapers off, contractor Daryl Pater plans to concentrate more on inverter-driven air-source heat pumps and VRF systems. Photo Courtesy of Dan Frisch — **JUST IN CASE:** If demand for geothermal systems tapers off, contractor Daryl Pater plans to concentrate more on inverter-driven air-source heat pumps and VRF systems. *Photo Courtesy of Dan Frisch*

Barring an act of Congress, the 30 percent federal tax credit for residential geothermal heat pump (GHP) systems will expire at the end of 2016. Since the tax credit went into effect in 2008, many contractors have seen a significant boost in their geothermal businesses, and now that it may be coming to an end, they are worried about what that means for the future.

Daryl Pater, owner, Mainstream Heating & Cooling, Clarksville, Tennessee, is one of several contractors concerned about the expiration of the tax credits. “It’s a big deal. Right now, the tax credit makes geothermal at least reasonably affordable for homeowners. Once the tax credit is gone, geothermal will only be an option for the very, very wealthy. Lack of a tax credit will kill the geothermal market for the average homeowner.”

UNCERTAIN FUTURE

Pater first started installing geothermal systems in 2008, and he, along with many other contractors, saw a big boost in business once the federal tax credits took effect. The number of systems he installs each year has fluctuated between five and 160, and he is hoping for a surge in sales before the incentives end next year. “But, I’m not really expecting it because I think geothermal sales are much less impulsive than the $1,500 tax credit sales were in 2010. With those tax credits, we saw 40 percent more sales the year before they expired. There’s a little more planning that goes on with geothermal, so I don’t think sales will be anywhere near what they were then.”

Jeff Caplan, owner, Cappy Heating, Livonia, Michigan, also saw his geothermal sales jump after the tax credits went into effect, and he currently installs between 35 and 50 systems a year. “We saw quite a big increase in business, particularly on the new construction side. Lately, we’ve started advertising for the replacement market because we have some rural areas that use propane and fuel oil. Geothermal has a really good payback when compared to those systems.”

Even though Caplan is optimistic about the replacement market, he is concerned about the expiration of the tax credits.

“It’s going to affect our business greatly, because it’s been a good driver, especially on the new construction side. But, you can’t forget what propane has done to people here in the past with prices getting up to almost $6 per gallon. When you put geothermal against some of those bills, we can show a pretty good payback, although that will be longer without the tax credits.”

Dale Jackson, owner and vice president of sales, Jackson Air, LaGrange, Georgia, also believes the lack of tax credits will hamper sales. “I think the market will be substantially smaller, because spending $30,000 on a loop field is a hard pill to swallow, especially if you don’t have a 30 percent tax credit to counter that.” Jackson’s father installed one of the first geothermal systems in the area about 30 years ago, and he currently installs between 15 and 20 geothermal systems a year.

However, the lack of federal tax credits is not the only problem facing the geothermal market, said Jackson, who thinks now is the time for manufacturers to step up their game. “Geothermal technology has not had a major advancement in a very long time, and I think it’s because manufacturers have relied on their unfair advantage with the federal tax credit. Just look at the technology and cost of the loop — that technology is 30 years old. Granted, it’s come a long way, but they’ve got to come up with a new technology to reduce the cost of installing the loops.”

SILVER LINING

Some contractors worried about a possible geothermal drop-off are looking at the introduction of inverter-driven air-source heat pumps, which offer good efficiency ratings without the high cost of installation. “A lot of customers want to be energy efficient, but only have a certain amount of money to spend,” said Pater.

In addition to inverter-driven units, Pater believes variable refrigerant flow (VRF) systems will help him through any post-tax credit slump.

“I don’t really care what people buy, as long as they buy it from me. We’ve got VRF skills in-house, and we’re up-to-speed on inverter-based products. We will still offer geothermal; there will always be a client base that buys it, because it makes a lot of sense. But I think without the tax credits, the lower end of the geothermal market is going to get pushed out.”

Jackson also plans to continue offering geothermal systems after the tax credits expire, but he is focusing more on inverter-driven air-source heat pumps. “We’re not going to shift away from geothermal, but we’re preparing for it to be in less demand, and I’m not real happy about it, because I am a huge fan of geothermal.”

Inverter-driven air-source heat pumps are also becoming more popular with customers who have geothermal systems that were not installed correctly in the first place. “Poorly executed installations have really given geothermal a bad name. Homeowners won’t even let us talk to them about fixing their systems — they’re going straight to the inverter heat pump,” said Jackson. “We recently had a customer who had three geothermal systems that were nine years old, and, we changed them all out and put in inverter-driven heat pumps. We see that a lot.”

Without the tax credits, geothermal will definitely be more difficult to sell, said Caplan, but there are always those who are willing to pay for it. “We have
the city of Ann Arbor [Michigan] close by, and people who live there don’t seem to mind spending the money to be green. We need to promote it that way and show that it’s still going to be worthwhile because it will help the environment. But, we’re going to see a big drop-off, particularly on the big, custom home work, because the ROI [return on investment] will not be as favorable without the tax credits.”

Even with a less favorable ROI, there will still be homeowners who are interested in investing in energy-efficient geothermal systems, which is why most contractors who offer them now will still find there is a market for them even after the tax credits expire.

Publication date: 7/27/2015

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Joanna Turpin is a Senior Editor at The ACHR NEWS. She can be contacted at 248-786-1707 or joannaturpin@achrnews.com. Joanna has been with BNP Media since 1991, first heading up the company’s technical book division before moving over to The ACHR NEWS, where she frequently writes about refrigerants and commercial refrigeration. She obtained her bachelor’s degree in English from the University of Washington and worked on her master’s degree in technical communication at Eastern Michigan University.