Intuitively, green is good. What is not to like about reduced electricity and natural gas consumption, saving potable water, renewable and environmentally friendly building materials, and waste minimization? Nothing! However, green can be environmentally and financially friendly.
Driven by government mandates initially, green now has gained mainstream momentum. However, to sustain mainstream status long term, the economics of green must be appealing.
The simple cash-on-cash payback method often no longer adequately portrays the financial picture of green investment. It is not sufficient to merely compare the upfront cost of an HVAC upgrade to the utilities saved. It requires a more sophisticated approach to paint the entire picture. In addition to immediate utility savings, consideration now must be given to long-term utility rates and rebates, federal and state income-tax incentives, the time value of money and other factors.
• Utility cost savings – Savings in reduced usage of electricity and natural gas can be significant. In many cases, however, the reduction in regional peak kW demand can be very significant also. Demand charges are often a large component of a total utility bill. Efficient, green technology can help reduce these charges significantly. Consider also potential increase in utility rates over the long term; conventional wisdom has utility rates on a continuous rise.
• Utility rebate programs – Utility companies don’t want to build more power-generation assets and pay customers to lessen demand. However, several rebate restrictions apply, and the majority are “prescriptive” in nature. Most rebates apply only to retrofits. For instance, E-ON’s Commercial Retrofit Rebate Program will pay the utility customer a fixed amount per fixture to replace certain low-efficiency light fixtures with energy-efficient ones. These programs require approved application, implementation and verification. Some utilities pay for a reduction in demand. The trend in utility rebates may be toward performance-based versus prescriptive-based incentives.
• Tax incentives for energy saving projects – A maximum current-year federal income tax deduction of up to $1.80/s.f. is available. Because these deductions are current-year versus normal 39-year depreciable assets, the time value of these deductions can be significant. This applies to new and retrofit construction. Project energy efficiency is compared to the American Society of Heating, Refrigerating and Air-Conditioning Engineers standards in ASHRAE 90.1 2001 – a 50 percent increase in efficiency is required for the full deduction.
The building envelope, HVAC and lighting components are analyzed using IRS-approved software by a competent party. Independent certification is required.
Each of the three building components (envelope, HVAC and lighting) also may be analyzed independently, with each yielding a maximum $.60/s.f. In some cases, partial deductions are available for lighting; warehouse lighting is an example of a component appropriate for this deduction. An additional tool for retrofits is cost segregation. This technique can identify the current-year tax basis of assets so that, upon disposal, a non-cash income tax deduction may be taken. This normally adds to the time value of financial aspects of going green.
In new and retrofit government-owned buildings, this income tax deduction is available for the designated “primary designer” of the project. The designation is made by the government body owning the property.
Certain “energy property” (geothermal, solar and wind equipment) has been designated to qualify for a 10-30 percent federal income tax credit. Tax credits are more valuable than tax deductions and can be significant on large projects.
These property costs are also placed on a five-year depreciation schedule, versus the normal 39-year basis for building property. This greatly enhances the time value of these investments.
Many states also have initiated income-tax credit incentives. In January 2009, Kentucky adopted significant legislation that provides green commercial investors a number of income tax credit incentives.
• Consider the total financial picture – The environmental and financial paybacks may be a pleasant surprise. A comprehensive look at the beginning of the project is most advantageous in establishing the total financial picture of green investments.