Whether you are motivated by economics or the environment, opportunities to save energy exist like never before. And a key enabler is a provision tucked away in the Inflation Reduction Act (IRA), a difference-maker that incentivizes consumers to invest in energy-saving technologies.
This little-known provision is Section 179D of the Internal Revenue Code, which allows building owners to claim a tax deduction for installing qualifying, energy efficient systems.
The 179D tax deduction has been in effect since January 1, 2006 and is now a permanent program enacted as part of the Consolidated Appropriations Act of 2021. At its core, Section 179D is a tax incentive intended to encourage commercial building owners to install energy efficient systems. The IRA made some important changes to 179D, in particular it lowered the minimum energy and power savings requirement from 50% to 25%.
Lowering the threshold to qualify for tax deductions will likely motivate more building owners and managers, developers, contractors, architects, engineers, and anyone else planning any sort of construction or retrofit to install systems that reduce energy consumption and operating costs.
This move could take U.S. towards a set of minimum standards for buildings that may even lead to such standards also being applied in other areas. The country could roll out better standards for energy efficient cooling, heating, ventilation, pumps and fans, and energy efficient appliances, such as IT equipment, fridges, freezers, and washing machines. All of these examples represent opportunities for buildings and businesses to align themselves with the necessary threshold for the 179D incentive.
It may also take the U.S. another step towards setting specific targets for energy efficiency in buildings including renovation rates. By setting building energy codes for new buildings and retrofits, this will accelerate the much-needed transition to zero carbon-ready buildings.
The route towards efficient, green buildings can also be found through a combination of simple practices and smart technologies that curb emissions significantly. Firstly, and most simply, building managers and businesses with U.S. sites – Danfoss included – could do more to monitor and adjust energy use according to need. It sounds almost too obvious, but it’s a much-needed action point for buildings across the U.S..
Measures such as electronic thermostats, model predictive controls, and hydronic balancing can also reduce energy consumption significantly, while at the same time improving climate conditions inside the building. We should also move towards replacing fossil fuel boilers with high-efficiency electric heat pumps; this would reduce energy use by up to 75%, taking a building well beyond the minimum 25% saving threshold for the 179D incentive.
These measures, fueled by the powerful incentives provided by the new bill, are a large step in the right direction. However, the future of Section 179D is not guaranteed, and the fate of the incentive still hangs in the balance. When Section 179D was passed, it came with the caveat that a specific “reference standard” used for calculating energy efficiency must be affirmed by the Secretary of the Treasury in consultation with the Secretary of Energy. In other words, the Treasury and the Department of Energy need to agree on a common reference point to measure the scale of efficiency to determine how the tax deduction will be applied.
As of now, the two aforementioned parties have not made a determination, leaving Section 179D in limbo. We are hopeful a decision will be forthcoming soon, and they agree to affirm this reference standard. Section 179D is a crucial provision of the IRA that will accelerate the installation of energy efficient systems, save energy, reduce emissions, and lower operating costs.
Now is the time to thoroughly examine how we use energy and give thoughtful consideration to efficient and cost saving enhancements and alternatives. Of course, the greenest energy is the energy we don’t use, but wasted energy is a money pit, and society can no longer afford to waste money while expecting a different result. It is vitally important to continue incentivizing consumers to make smart choices, and one of the surest ways to do this is to preserve Section 179D.
But it’s not just about saving dollars from the money pit. The new and improved 179D will serve as a building block for a new, more energy efficient nation, which in turn will help the U.S. on its way to slashing greenhouse gas emissions on a large scale. In fact, the American Council for an Energy Efficiency Economy predicts that by scaling up government policy programs that support energy efficiency, the U.S. could slash its greenhouse gas emissions by 50% in 2050 and save the American economy approximately $700 billion in the process. We already have the technology available to make this all a reality, so what are we waiting for?
About the Author: Eric Alström is president of Danfoss Power Solutions.