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Residential builders who embrace green energy technology and commit to energy conservation measures may be able to take advantage of increasing support offered by agencies and organizations on the federal and state levels.[1] In Oregon, solar and wind energy producers have long been exempted from regulations that afford utilities a monopoly on power provision within specified territories throughout the state.[2] Specific support for development of small-scale renewables has come more recently though, since the 2007 legislature declared community-based renewable energy projects "an essential element of Oregon's energy future" and set a goal that small-scale renewable projects[3] produce a minimum of 8% of the state’s retail electricity load by 2025.[4] Perhaps most significantly, the same legislature also established a policy through which the Energy Trust of Oregon (ETO)[5] was vested with the authority to administer the 19% of annually collected public purpose charges which are solely dedicated to funding small-scale renewables projects.[6] Motivated by such state and similar federal legislation, homebuilders, subdivision developers, planned-unit developers, and even homeowners associations, should be able to combine and maximize various incentives in order to realize substantial economic gains.
On a state level, homebuilders who construct homes according to Oregon High Performance Home (HPH) standards and/or who include certain renewable energy features in the homes they construct, may be eligible for a state-funded Business Energy Tax Credit (BETC). Unless extenuating circumstances apply, a homebuilder must apply for a Preliminary Certificate from the Oregon Department of Energy (ODOE) prior to financially committing to system installation. If and when certification is approved, a builder is then obligated to inform the homebuyer that he/she is precluded from applying for a Residential Energy Tax Credit for the same installed features for which the BETC was granted. The specific amount of a BETC—$3,000 for the building shell and mechanical systems and up to $9,000 for the renewable energy system(s)—will depend on the types of systems installed, but once received, a credit may be applied against state taxes owed by the homebuilder or held and carried forward for up to eight years before expiring. An additional option available to the homebuilder is to transfer the tax credit to a "pass-through" partner in exchange for a lump-sum cash payment.[7]
To qualify as an HPH, a home must be certified through the Northwest ENERGY STAR(R) Homes program and an ODOE-certified third-party inspector must be utilized for verification purposes.[8] Furthermore, an HPH credit will not be granted to a homebuilder in the absence of a Homebuilder-Installed Renewable Energy Facility tax credit (to be discussed below). A variety of additional requirements must be satisfied in order for a home to qualify as an HPH, and a majority of these essential requirements are listed below:[9]
Physical Area/Element | Requirements |
Ceilings | R-49 attic |
Walls (above grade) | R-21 plus R-3 foam, Insulated Concrete Form, Structural Insulated Panel |
Walls (below grade) | R-21 |
Floors (above grade) | R-38 batt/blanket insulation between floor joists 16" o.c. over vented crawl |
Floors (on grade) | [slab edge] Perimeter R-15 min. 2 feet vertical or combined vertical/horizontal – heated slab also requires R-10 foam board under slab |
Windows & Glass Doors | U≤0.32 (weighted average) |
Glazing Area | Glazing to floor area ratio ≤16% |
Shell Tightness | 5% ACH50 Pa |
Water Heating System | ENERGY STAR(R) Homes Northwest specifications |
HVAC | Incorporate into conditioned space or eliminate forced-air ductwork |
At least one: |
(a) Certification through ODOE recognized Green Building program; |
| (b) Use of heat or energy recovery ventilator, but efficiency shall be >50% at 32ºF and EUI shall be < 1.5 W/cfm; or |
| (c) Use of a gas or propane water heater with a minimum EF of .80 for primary water heating |
In addition to the HPH tax credit, there is also a $9,000 maximum credit available in Oregon for eligible Homebuilder-Installed Renewable Energy Facility (HIREF) installations. According to guidelines, eligible facilities must meet specifications as follows:[10]
Facility/System | Requirements | Credit Amount |
Photovoltaic (PV) | Total Solar Resource Fraction (TSRV) ≥ 75% | $3/watt of installed capacity |
Solar Domestic Water Heating | TSRV ≥ 75% and provide at least 25% but not more than 70% of the annual domestic water heating load; installations must be OG-300 certified | $0.60/kWh saved (as determined by ODOE yield table) |
Active Solar Space Heating | Whole-building annual energy savings ≥ 15% (if space and domestic water heating are combined, only 50% of domestic water heating savings will count towards load reduction) | $0.60/kWh saved (ODOE approved calculation method) |
Passive Solar | Whole-building annual energy savings ≥ 20% | $600/home plus $0.60/sq.ft. heated floor space |
Ground Source Heat Pump | Performance coefficient ≥ 3.5 | $0.60/kWh saved |
Other HIREFs (e.g. wind turbines or fuel cells) | Evaluated on case-by-case basis | $0.60/kWh saved |
In addition to state incentives, a homebuilder can obtain additional incentives at the federal level.[11] Homebuilders are eligible for a $2,000 tax credit for new energy efficient homes that achieve 50% energy savings for heating and cooling over a comparable home meeting the 2004 International Energy Conservation Code. This tax credit applies only to new homes located in the United States whose construction was substantially complete after August 8, 2005 and was or will be acquired from the eligible contractor for residential use sometime between January 1, 2006 and December 31, 2008.[12]
Beyond specific challenges associated with meeting HPH and HIREF requirements, a variety of broader issues may affect the feasibility of implementing certain energy conservation measures or installing small-scale renewables projects, particularly in the context of a subdivision build-out or other similarly sizeable development. For example, relative to solar PV installations, based on the rated capacity of the solar panels installed, the ETO offers a cash incentive to homebuilders of $2.25/watt (PGE territory) and $2.00/watt (Pacific Power territory) up to $10,000.[13] However, the ETO has indicated some concern over whether and how these commercial incentives would apply to a 50-100 home subdivision development project. The ETO has also indicated concern over issues related to the transfer/assignment of various credits acquired (e.g. Renewable Energy Credits or "green tags"), if and when project ownership changes prior to the value/benefit of a credit having been fully realized. Specifically with regard to subdivision "build-out" times, the ETO is concerned about the period over which its money would be committed. In addition, unlike the tax deductions and credits, payment of a cash incentive from the ETO constitutes revenue to the project in the year during which it is/was received. As such, consideration ought to be given to impacts of the changed nature of the tax advantage, despite that the accelerated depreciation of the Modified Accelerated Cost Recovery System (MACRS) could offset such revenue. Giving some additional concern to issues of economies of scale and "copy exactly" modeling may also be relevant.
Regarding wind energy projects for subdivisions, the ETO has indicated that similar to wind projects constructed on a larger scale, the need to self-wheel can be potentially problematic. Self-wheeling problems can develop where a wind energy facility is some distance from where the power is actually needed, thus requiring transmission over sometimes significant distances. As such, difficulty finding "space" on existing transmission systems, and foot-dragging by transmission system owners in making the network upgrades typically needed to accommodate additional capacity, can cause significant delay and additional expense. Procuring services—shaping and firming services—needed to overcome imbalance issues inherent in wind projects may also prove especially challenging and costly. Because the amount of energy produced by a wind project may differ unpredictably over the course of a day, services are needed to ensure that energy needs will be consistently met, and that transmission capacity reserved will not go unused.
In addition to issues already mentioned, developers and homebuilders who are building out whole subdivisions and investing in renewables may want to give careful consideration to entity form choice (e.g. LLC, LLP, etc.). Homeowners associations may also want to consider issues related to the MACRS and CC&Rs. Finally, as regulatory regimes are consistently changing, developers and homebuilders should always be mindful of the possible creation or elimination of certain cash incentives and tax advantages.
For further information, please contact Steven R. Schell or Caroline E.K. MacLaren.
[1] While the scope of this article is limited to focusing on the incentives and support offered by the State of Oregon, Oregon-based non-government organizations, and the U.S. Department of Energy, the author also wishes to call attention to an especially unique tool that is under development by the California Energy Commission—the Subdivision Energy Analysis Tool (SEAT). See further http://www.energy.ca.gov/pier/seat/index.html.
[3] A "small-scale" renewable energy project is one with a generating capacity of 20 megawatts or less.
[5] See further Energy Trust of Oregon, http://www.energytrust.org/.
[6] ORS 757.612(3)(b)(B). Oregon mandates that its two largest investor-owned utilities, Pacific Gas & Electric and Pacific Power, collect from their customers a 3% public-purpose charge that funds a grant given to Energy Trust of Oregon, Inc. ("Energy Trust"), a nonprofit organization. Energy Trust administers programs that grant cash incentives for improvements to residential, commercial and new buildings, and retrofits, as well as in other areas.
[7] In taking advantage of the pass-through option, an applicant will have to comply with certain additional requirements such as completing and filing a Pass-through Option Application, and ensuring that the ODOE is informed of the identity of the Pass-through Partner once one has been identified. Further applicable requirements may govern the amount of the lump-sum payment and the post-transfer value of the BETC. See OAR 330-090-0130 & OAR 330-090-0140. Important tax implications may also flow from use of the pass-through option and additional advice in this area should be sought.
[8] See further Northwest ENERGY STAR, http://www.northwestenergystar.com/.
[10] Refer to the ODOE’s "Business Energy Tax Credits Technical Requirements" for a comprehensive list of minimum HIREF requirements and exceptions, as well as for information about the specific method of calculating the applicable amount of the credit to be received. See id.
[11] See further Energy Efficiency and Renewable Energy, U.S. Dept. of Energy, http://www1.eere.energy.gov/buildings/tax_residential.html.
[12] See further Federal Tax Credits for Energy Efficiency, ENERGY STAR, http://www.energystar.gov/index.cfm?c=products.pr_tax_credits#s6.
[13] See Energy Trust of Oregon, http://energytrust.org/RR/PV/provide.html.
For more information:
Steven R. Schell, Attorney
503.224.5560