Getting Your Moneys Worth Out of Energy Efficiency

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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.

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  • The calculator provides three groups of metrics. The first are the “simple” metrics, grouped together because they don’t involve discounted cash flow. This group includes simple payback, accounting rate of return, and life-cycle cost. These are metrics that are most often used by staff at the facility level.
  • Getting Your Moneys Worth Out of Energy Efficiency

    1. 1. Getting Your Money’s Worth Out of Energy Efficiency September 30, 2013 12:00 – 1:30 PM ET www.TnEnergy.org
    2. 2. 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
    3. 3. Monetizing Energy Solutions: The Road to Funding Christopher Russell ACEEE Visiting Fellow Principal, Energy Pathfinder Consulting www.TnEnergy.org
    4. 4. MONETIZING ENERGY SOLUTIONS: The Road to Funding Christopher Russell, Principal Energy
    5. 5. 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
    6. 6. 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?
    7. 7. 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
    8. 8. 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
    9. 9. Energy is a Small Portion of Costs? 9 TODAY’S 2-YEAR PAYBACK “PROJECT” ENERGY CONSUMPTION & LIABILITIES FOR YEARS OR DECADES TO COME ©2013 Energy PathFINDER .com
    10. 10. Energy + Business: A FORCED MARRIAGE No ENERGY means… No PRODUCTION… and no REVENUE. End of story. 10©2013 Energy PathFINDER.com
    11. 11. ENERGY EXPENSE
    12. 12. ENERGY EXPENSE
    13. 13. FACILITIES: A COST TO MINIMIZE… …OR A CASH FLOW ATM MACHINE? 13©2013 Energy PathFINDER.com
    14. 14. 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 TRANSFORMATION OF INPUTS INTO FINAL PRODUCTS HEAT, PRESSURE, & MOTIVE POWER FUGITIVE ENERGY COMMITTED ENERGY FUEL & ELECTRICITY 14©2013 Energy PathFINDER.com
    15. 15. (c)2009 Energy Pathfinder Mangement Consulting, LLC www.energypathfinder.com 15 MONEYMONEY FUEL & ELECTRICITY HEAT, PRESSURE & MOTIVE POWER PRODUCTS TO SELL WE TRACK MONEY. WHY NOT ENERGY? 15 ©2013 Energy PathFINDER.com
    16. 16. EXPENSES, INTEREST, OR INFLATION CAPITAL IS ALWAYS IN MOTION ECONOMY (opportunity) PLACE OF LOW RETURNS PLACE OF HIGH RETURNS CAPITAL IS NEVER AT REST 16©2013 Energy PathFINDER.com
    17. 17. A BUSINESS FACILITY IS A MICRO ECONOMY FACILITY (opportunity) WEALTH INPUTS WEALTH CREATED EXPENSES, INTEREST, OR INFLATION Who will get superior returns from your facility assets? YOUR BUSINESS or the UTILITY COMPANY? 17©2013 Energy PathFINDER.com
    18. 18. PURSUING ECONOMIC OPPORTUNITY 1. Benchmark current capital performance 2. Perceive opportunities for superior performance 3. Estimate investment risk/return 4. Reinvest capital 5. Continuous improvement. See Step 1. For the ECONOMY… For the FACILITY… DYNAMICS ARE THE SAME 18©2013 Energy PathFINDER.com
    19. 19. BAD ECONOMY? You can delay investment decisions… But your CAPITAL is still in motion. You still need to actively decide its velocity and destination.
    20. 20. FREE CASH FLOW? RATE OF RETURN? COST OF DOING NOTHING? 20©2013 Energy PathFINDER .com What do executives need to know?
    21. 21. 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
    22. 22. $0.925926 INPUTS $1.00 REVENUE Example: 8% Rate of Return 22 Your Business = Your Investment Benchmark A MONEY-MAKING MACHINE (Over simplified) ©2013 Energy PathFINDER .com
    23. 23. EXAMPLE: You want a 2-YR Payback 23 ENERGY IMPROVEMENT COST: $1,000,000 ANNUAL ENERGY SAVINGS: $250,000 AMT FINANCED: $500,000/8%/25YRS MARGINAL INCOME TAX: 35% ECONOMIC LIFE: 25 YRS SIMPLE PAYBACK: 4 YRS pre tax 8 YRS post tax ©2013 Energy PathFINDER.com
    24. 24. 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 RATEOFRETURN(NoCompounding) SIMPLE PAYBACK (Years) INVESTMENT DEAD BAND 24©2013 Energy PathFINDER.com
    25. 25. 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-TAX Cost: $1 million Savings: $250,000/YR 25-YR Economic Life 50% -
    26. 26. You cannot “walk away” from an energy efficiency investment 26 Purchased Energy COMMITTED ENERGY VOLUME ANNUALENERGY CONSUMPTION CURRENT ALTERNATIVE ENERGY WASTED ENERGY AVOIDED VOLUME AT-RISK: PAY FOR IT EITHER WAY. ©2013 Energy PathFINDER.com
    27. 27. 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
    28. 28. 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
    29. 29. CHANGE… RISK or OPPORTUNITY? • Energy price volatility • Smart grid technologies • Evolving emissions & safety standards • Green & sustainable markets 29©2012 Energy PathFINDER .com
    30. 30. 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 growth FUTURE-PROOF YOUR BUSINESS PERFORMANCE …and your job. 30©2013 Energy PathFINDER .com
    31. 31. Keep pushing the same buttons…. Keep getting the same results! 31©2013 Energy PathFINDER.com
    32. 32. Energy PathFINDER .com Christopher Russell @ENERGYpathfndr THANK YOU!
    33. 33. The State of the Tax Incentive Environment for Energy Efficiency CJ Alberin Shareholder, KBKG www.TnEnergy.org
    34. 34. SOLUTIONS FOR TAX PROFESSIONALS AND BUSINESSES TAX CREDITS • INCENTIVES • COST RECOVERY PRESENTED BY: CJ Aberin, CCSP Shareholder Energy Efficiency Tax Incentives – Insight into the § 179D Tax Deduction & Other Opportunities
    35. 35. 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)
    36. 36. 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 0 100 200 300 400 500 600 0 100 200 300 400 500 600 0 100 200 300 400 500 600 0 100 200 300 400 500 600 0 100 200 300 400 500 600 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 BillionSquareFeet(sf) Source:EnergyInformationAdministration Opportunity to Solve Problem
    37. 37. 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 Federal Tax Incentives
    38. 38. 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
    39. 39. 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
    40. 40. 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
    41. 41. 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 OR  Designers for government buildings §179D Tax Deduction Who Benefits?
    42. 42. 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?
    43. 43. NATIONWIDE SERVICE Tax Credits · Incentives · Cost Recovery © KBKG inc 2013  Ground up construction  Renovations and retrofits  Applies to affected square footages (rate x sf)  PIS between 2006 through 2013 §179D Tax Deduction - What’s Type of Construction is Eligible?
    44. 44. NATIONWIDE SERVICE Tax Credits · Incentives · Cost Recovery © KBKG inc 2013 §179D Tax Deduction - Various Ways to Achieve Deduction Fully Qualifying Property 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% or 20% 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.
    45. 45. 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
    46. 46. 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
    47. 47. 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
    48. 48. 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
    49. 49. 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
    50. 50. NATIONWIDE SERVICE Tax Credits · Incentives · Cost Recovery © KBKG inc 2013  Building type  Building size & number of stories  Physical orientation  Climate Zone  Utility Rates §179D Tax Deduction Key Variables
    51. 51. 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
    52. 52. 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 verification  Signed certification by qualified third party that meets all IRS requirements §179D Tax Deduction Certification Process
    53. 53. 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
    54. 54. 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
    55. 55. NATIONWIDE SERVICE Tax Credits · Incentives · Cost Recovery © KBKG inc 2013 CJ Aberin, CCSP, Electrical Engineer Shareholder 877-525-4462 x148 cj@kbkg.com 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
    56. 56. Questions? www.TnEnergy.org
    57. 57. www.TnEnergy.org

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