Companies are setting increasingly ambitious goals in their environmental efforts. It is a shift driven by investor and stakeholder demands for environmental sustainability and social responsibility, as well as governmental regulations and environmental taxes. Conventional wisdom has been that environmental efforts increase the cost of doing business. In reality, the sources of funding are increasing, along with diverse types of financial incentives, giving organizations worldwide opportunities to offset the cost and increase the ROI of sustainability strategies.
Incentives are varied. Depending on the nature of the investment, they may take the form of grants; tax abatements or deductions; or utility discounts or rebates. Governments are taking a strong interest in environmentally sustainable economic development. Increasingly, agencies and tax authorities are offering incentives for organizations to invest in sustainable projects and technologies. Similarly, utility providers offer energy efficiency incentives to lower production demand and alleviate stress on the grid.
Federal Tax Incentives
Recent congressional action has extended a wide range of energy efficiency tax credits and deductions. One such incentive is the Internal Revenue Code (IRC) Section 179D deduction for energy-efficient commercial buildings. The Bipartisan Budget Act of 2018 (signed Feb. 9, 2018) extended the law to apply to eligible property placed in service from Jan. 1, 2006, through Dec. 31, 2017. Under Section 179D, owners of commercial buildings can take a deduction for the cost of making certain energy-saving improvements. These may involve interior lighting; heating, ventilation, and cooling systems; hot water systems; or the building envelope (the “shell” separating indoors from outdoors). The deduction varies, from $0.30 to $1.80 per square foot of the building, up to the total cost of the property placed in service.
The Bipartisan Budget Act also extended many of the tax credits provided by IRC Section 48. Section 48 provides a tax credit of either 30 percent or 10 percent of the eligible basis in a project’s first year for investment in qualifying renewable energy projects. Qualifying facilities include solar, geothermal, fuel cells, biomass, microturbines, combined heat and power systems, small wind, large wind, and geothermal heat pumps. These tax credits have been extended to qualifying property that is under construction before Jan, 1, 2022. The Section 48 investment tax credit presents taxpayers with an opportunity for significant up-front cost savings on capital-intensive projects that lead to reduced expenses in future years as a result of energy reduction and/or renewable energy generation.
In recent years, many utilities have been required to offer expansive energy efficiency or renewable energy incentives with each rate increase negotiation. Incentives may be negotiated, prescriptive, or performance-based, depending on the utility provider and state.
Increasingly, agencies and tax authorities are offering incentives for organizations to invest in sustainable projects and technologies.
Certain utilities allow customers to negotiate utility rates surrounding energy-efficient installations, construction, or building upgrades. For example, a customer may negotiate for a reduced set cost for the natural gas used by a cogeneration (combined heat and power) system within a facility. In addition, utilities may provide incentives-related demand response, whereby reduced rates or cash payments may be provided to customers who are willing to curtail their usage of electricity when there is particularly high demand.
Under a prescriptive incentive program, a utility company offers rebates to customers for the use of specified energy-efficient equipment (e.g., efficient lighting, retro-commissioning, refrigeration, HVAC units, compressed air systems, data center equipment, lab equipment, and food service equipment). For example, AEP Ohio offers rebates of $0.31 per watt reduced when upgrading an area with Energy Star or LED lighting. Also, Savings by Design, a program offered by several California utilities — PG&E, SCE, SDG&E, SoCal Gas, and the Sacramento Municipal Utility District (SMUD) — authorizes building owners with financial incentives to offer incentives to business owners (up to $150,000 per project) and professional design assistance.
A performance-based program requires the utility company to reimburse or credit a customer for meeting certain energy-efficiency or renewable-energy targets. For example, under its solar program, New Mexico energy provider PNM will purchase Renewable Energy Credits (RECs) produced by a customer’s PV system at a rate of $0.0025 per kilowatt hour (kWh). The REC payment is credited against the customer’s utility bill.
Generally, utility incentives are prospective and must be secured before a project begins. It is important to identify and evaluate available incentives and submit the necessary applications in advance of the project.
In addition to government and utility incentives, businesses can make use of the framework provided by Leadership in Energy and Environmental Design (LEED) to achieve specific environmental sustainability metrics in the construction of buildings. The LEED rating system is a voluntary, consensus-based national standard for high-performance, sustainable buildings. LEED-related sustainability efforts help reduce energy consumption with new construction and retrofits of existing buildings to meet certification standards. Organizations can use various incentives at the local, state, and federal levels to help offset the costs of obtaining LEED certification. These benefits can significantly decrease the cost of financing a project and can yield tax savings.
With sustainability as well as cost-reduction strategies being such an important issue for company stakeholders, financial incentives must be well integrated into a company’s sustainability blueprint.
The Nevada Governor’s Office of Energy administers the Green Building Tax Abatement Program, offering abatements of 25 percent –35 percent with terms from 5–10 years for buildings with LEED or Green Globes certifications. The amount and duration of the abatement is dependent on the level of certification achieved as well as the energy efficiency of the building.
Local jurisdictions also offer significant property tax incentives for green buildings. For example, Cincinnati offers 75 percent tax abatements for 8–15 years for commercial new construction and renovations. Similarly, Baltimore, Carroll, Howard, and Montgomery counties in Maryland offer property tax credits for investments in LEED-certified buildings. For instance, Montgomery County grants a tax credit of up to 75 percent of the property tax assessed on a LEED-certified platinum building for up to five years.
Collaboration Is Key
With sustainability as well as cost-reduction strategies being such an important issue for company stakeholders, financial incentives must be well integrated into a company’s sustainability blueprint. By stacking incentives offered by utilities and federal, state, and local governments, companies can drive down the upfront costs of sustainable building strategies and improve the overall return on investment.
To secure these valuable financial incentives, companies must coordinate across finance, tax, real estate, and sustainability departments when considering sustainability initiatives or large-scale capital projects. For any organization, “going green” can make strong business sense in terms of the financial benefits.
The views expressed are those of the authors and do not necessarily reflect the views of Ernst & Young LLP or any member firm of the global EY organization.