It’s not unusual for one to wake up with a headache on Jan. 1, but the headache that greeted the geothermal industry on Jan. 1, 2017, wasn’t caused by excessive late-night celebration. On that date, geothermal systems lost their 10 percent investment tax credit under Section 48 of the Internal Revenue Code (which covers energy tax credits). In addition, when geothermal lost its tax credit under Section 48, it also lost five-year accelerated depreciation and 50 percent first-year bonus depreciation under Section 168, meaning that when doing a payback analysis, commercial geothermal equipment is now amortized over 39 ½ years.

This led to a “triple whammy” of tax breaks that were taken away from geothermal commercial installations at the beginning of 2017 but were left in place for solar and wind, said Doug Dougherty, president and CEO of the Geothermal Exchange Organization (GEO), a nonprofit trade association that promotes the manufacture, design, and installation of geothermal systems.

“The definition of energy property in Section 168 of the Internal Revenue Code cites those energy properties that are defined in Section 48,” Dougherty said. “So, we had a triple whammy when we lost Section 48. The 10 percent was nice, but the five-year accelerated depreciation and the 50 percent first-year bonus depreciation was far more beneficial. We lost everything, and right now, on the commercial side, we have absolutely no tax benefit to offer. None. Meanwhile, a commercial solar project gets a 30 percent income tax credit, five-year accelerated depreciation, and 50 percent first-year bonus depreciation. We can’t compete with that. Congress screwed up. They picked winners and losers.”

Dougherty said he and others are working hard to remedy the situation, and bills in the House (HR 1090) and the Senate (S 1409) are designed to level the playing field. However, movement on those bills has been frustratingly slow.

“We’ve had hundreds and hundreds of meetings on the Hill,” Dougherty told The NEWS. “And we keep hearing, ‘We’re going to take care of it,’ but although we have support from many congressmen on both sides of the aisle, we’re finding that the coalition of the willing is huge, and the coalition of the committed is extremely small.”

Dougherty said tax reform may offer the best hope for a level playing field, and GEO would be willing to support radical reform to allow geothermal to match up with other energy choices based on its merits.  

“We’re an advocate of total tax reform,” Dougherty said. “Get rid of all subsidies for any energy, including fossil fuels. Level the playing field, and let the free market decide.”

Despite his frustration with the tax credit situation, Dougherty noted that geothermal still is maintaining some momentum in the institutional market and among building owners who are willing to take a long-term view.

“There are some businessmen who, regardless of cost and length of payback, want to go as much off the grid as they can. They’re probably looking at doing solar or geothermal,” he said. “And even without a tax credit, they may still choose geothermal. It’s tough right now, but there are a few positives.”

ALWAYS AVAILABLE

Garen Ewbank, president of the board of directors of the International Ground Source Heat Pump Association (IGSHPA), agreed with Dougherty that the lack of tax credits for ground-source systems effectively served to pick winners and losers.

“Ground-source systems were big losers, particularly in the residential market,” Ewbank said. “Because ground-source units require a ground heat exchanger rather than a power or fuel source, they have higher first cost to the consumer. The remedy is to shift the cost to a third party just like the gas fields and power plants. Some very aggressive players are coming to this need.”

Ewbank noted that space heating and cooling and heating domestic hot water are the largest needs for commercial applications. With a ground-source heat exchanger (GHEX), the Btu are moved at zero marginal cost, 24/7.

“A GHEX is always available,” he said. “Many see that beneficial electrification and grid stability occurs only when coupled with a GHEX to spontaneously move heat.”

SOME STRONG MARKETS

Brian Urlaub, commercial sales manager, Enertech Global, said with or without tax credits, the trend over the past 10 years hasn’t changed that much: The public sector, including schools, universities, institutions, and government buildings, is the strongest market for geothermal. That’s because that sector can look at a 50-year life cycle cost and often has access to low-interest loans for energy-related investments.

“We’re not seeing a huge increase in public sector investments, but it certainly hasn’t died off like some of the private sector projects without the tax credits,” Urlaub said.

However, not all the news is bad in the private sector. Urlaub noted that an increasing number of large corporations are seeking to project a “green” image and are investing in geothermal for positive press and good public perception as much as for energy savings.

Steve Smith, Enertech’s president and CEO, told The NEWS a challenge the commercial geothermal industry faces is that mechanical engineers don’t always promote geothermal to building owners — even those whose buildings would be good candidates for it. 

“In many cases, we lose the opportunity to talk about the advantages of a geothermal system right out of the chute,” he said.

Smith also lamented the tendency for building owners to select geothermal but then to “race to the bottom” seeking the lowest price. Unfortunately, the lowest price typically means the lowest efficiency.

“My analogy is someone ordering a Cadillac but then specifying they want a model with no options,” Smith said. “In many cases, just a few hundred dollars in upgraded equipment could make a difference of two to four points in EER over the life of the product. That obviously makes it a much better investment. The lowest price on the job doesn’t provide the lowest long-term cost to the building owner.”

Both Smith and Urlaub advised geothermal contractors that a solid system design is the best way to ensure the highest value to building owners who invest in geothermal.

“You can’t overstate the importance of proper design,” Urlaub said.

Smith said oversizing of the geothermal loop and the pumps are two of the most common design flaws.

“There’s often a ‘fear factor’ that leads to oversizing of the loop,” he said. “We have so much knowledge today about thermal conductivity and how the loop will behave that there is no reason for that fear,” he said.

The same holds true for pumps, particularly in smaller commercial buildings.

“We see many cases in which a pump is so oversized that the cost of pumping is as high as the cost of operating the geothermal unit,” Smith said. “We’ve done forensic work on some buildings and saved building owners thousands of dollars a year on pumping. That goes back to the design. A properly sized loop and pumps will provide the best combination value of installed cost and operating cost.”

EMISSIONS REGULATIONS, CODES A PLUS FOR GEO

Gonçalo Costa, director of the air conditioning regional business unit for Bosch Thermotechnology Corp., said the commercial geothermal market is being helped by stricter emissions requirements that states and cities are putting forward as well as local building codes that are requiring builders and developers to be more aggressive in terms of energy efficiency.

“Geothermal technology is a perfect component of reaching those stricter emissions and energy requirements,” Costa said. “It sits extremely well in those environments and supports those goals.”

Costa added that the lack of federal tax credits is not as much of a factor in the commercial market as the residential market and noted that innovative ways to fund geothermal projects are cropping up more often. That sentiment was shared by Kyle Murray, director of marketing, Bosch Thermotechnology Corp., who cited a large new residential housing project outside of Austin, Texas, as an example.

The Whisper Valley project will encompass roughly 5,000 new homes over 2,000 acres of residential neighborhoods and commercial business districts. The entire community will be geothermal and will incorporate photovoltaic solar panels, making all the homes zero-energy capable. According to Murray, the project’s developer, Taurus Investment Holdings LLC, is acting as the utility to aid in the financing of the community-wide geothermal systems.

“The developer has put in the geothermal loops and then will lease them back to the homeowners and building owners within the community,” Murray explained. “The owners will pay a monthly fee that enables them to finance the geothermal loop and equipment over 25 years. That, in effect, takes the tax credit issue out of the equation.”

From a technology perspective, Costa said geothermal is benefitting from more connected products as well as emerging technologies at the drilling level that have the potential to dramatically reduce the time and costs associated with drilling.

“With new drilling technologies and more companies getting into the drilling field, it’s likely that the economies of the economics of scale will soon begin to drive down the upfront costs,” he said.

In the meantime, Costa advised contractors to overcome building owners’ concerns about upfront costs by focusing on the benefits that accrue to the end users.

“Meeting the local community’s emissions and energy usage requirements and building codes is an important benefit to discuss, but the long-term efficiency benefits, the comfort that a geothermal application provides, and the predictability that geothermal brings to an end user in terms of how much he or she will be spending on energy are very strong sales points for contractors,” Costa said.

STAY CONNECTED TO CUSTOMERS

Joe Parsons, president, EarthLinked Technologies, said that EarthLinked’s focus is primarily residential and light commercial. However, midway through 2016, the company was impacted — along with the rest of the geothermal industry — when commercial geothermal specifiers learned they could not assure their clients that the federal incentives would be in place by the time projects were completed. That led the company to seek projects that were not tied to a tax credit and accelerated depreciation, such as not-for-profit organizations, municipal and government projects, and the hospitality industry.

“My advice for HVAC contractors who have experience on the commercial side is to remain engaged with prior customers, get more involved with commercial service, and be prepared to provide replacement equipment when required,” Parsons said. “Also, stay the course in hope of the return of incentives and continue to let your elected officials know that the extension of federal incentives are vital to the health of the geothermal heat pump industry.”

SEEKING FINANCING ALTERNATIVES

Despite the loss of the tax incentives, Philip Johnston, product general manager of applied terminal systems, Daikin Applied, said government agencies, utilities, or third-party financers may be able to step in and develop programs to help offset the loop costs for geothermal systems. In addition, commercial customers who are thinking long term instead of short term still find geothermal attractive.

“Creative ways to offset the short-term, upfront loop costs could help drive certain behaviors,” Johnston said. “I think there are ways for geothermal to grow given the greater population and the growth among certain types of customers. There’s definitely a new generation that is concerned with environmental sustainability as well as energy security, and the fact is these systems greatly reduce both energy consumption and greenhouse gas emissions. Those things can definitely help the market.”

Alan Youker, product manager of water-source heat pumps and unit ventilators, applied terminal systems, Daikin Applied, added that schools — particularly K-12 — remain a strong market for geothermal.

Johnston agreed, noting that those customers are often able to think long term.

“K-12 schools tend to have budgets that are set annually and often have access to funding for the upfront costs,” he said. “They like the lower operating costs and the simplicity of operation and maintenance of decentralized geothermal units.”

Youker and Johnston said several established and emerging technology trends also will help to sustain geothermal and position it for growth in the future. These include:

• Water-side economizer options to provide free cooling;
• Options in heat-transfer components, such as microchannel coils and brazed-plate heat exchangers;
• Geothermal units being coupled with dedicated outside air systems to process fresh air, which allows for precise control of discharge temperature and humidity;
• Installation of loop water pumps on the units, instead of one centralized pump;
• Hybrid systems utilize a smaller geothermal well field and add a boiler or cooling tower to supplement the loop capacity, which reduces the overall first cost of the system; and
• Intelligent controls that allow monitoring and analysis of operational data in real time.

“The loss of the tax incentives unquestionably hurt the residential market, but commercial customers will still invest in geothermal systems because of the payback and life cycle costs,” Youker said. “Even without the tax programs, geothermal is still a viable solution.”

VARIABLE SPEED IS A GAME CHANGER

Variable-speed compressor technology represents the future of most HVAC technologies, and geothermal is no exception, said Jason Bose, vice president of commercial sales, WaterFurnace Intl. Inc.

“Variable speed gives us all kinds of advantages over other kinds of HVAC systems,” Bose said. “The efficiencies at part-load conditions are outstanding, and it provides a variety of application flexibility advantages as well. For example, you can set up multiple zones with a single unit, which compares very favorably to variable refrigerant  flow (VRF) systems. Variable-speed compressor technology is going to open up the marketplace for us in areas that may have been closed to us before.”

As far as the current lack of federal tax credits, Bose said geothermal heat pump systems stood on their own feet long before any incentives existed, and they still do.

“We just have to remind people that there is still value and a heck of a rate of return on their investment with geothermal systems with or without any kind of subsidies or tax credits,” he said.

Bose added that government, institutional buildings, and schools still represent a very strong market for geothermal, and new opportunities are presented by the growing number of building owners who are interested in sustainable energy systems.

“We’ve always had the highest efficiencies, and now with variable-speed compressors and multi-zone capability, we’ve certainly got a story to tell out there in the marketplace,” he said. 

Publication date: 10/9/2017