Getting Your Moneys Worth Out of Energy Efficiency

Getting Your Money’s Worth Out
of Energy Efficiency
September 30, 2013
12:00 – 1:30 PM ET
www.TnEnergy.org

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

Monetizing Energy Solutions:
The Road to Funding
Christopher Russell
ACEEE Visiting Fellow
Principal, Energy Pathfinder Consulting
www.TnEnergy.org

MONETIZING
ENERGY SOLUTIONS:
The Road to Funding
Christopher Russell,
Principal
Energy

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

TAKE-AWAYS FOR TODAY:
•Connect the dots between
energy solutions and business
performance
•Monetize energy solutions
•What’s in it for YOU?
…your business, your career?

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

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

Energy is a Small Portion of Costs?
9
TODAY’S
2-YEAR
PAYBACK
“PROJECT”
ENERGY
CONSUMPTION
& LIABILITIES
FOR YEARS OR
DECADES TO
COME

Energy + Business:
A FORCED MARRIAGE
No ENERGY means…
No PRODUCTION…
and no REVENUE.
End of story.

FACILITIES: A COST TO MINIMIZE…
…OR A CASH FLOW ATM MACHINE?

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

(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

EXPENSES,
INTEREST,
OR
INFLATION
CAPITAL IS ALWAYS IN MOTION
ECONOMY
(opportunity)
PLACE
OF LOW
RETURNS
PLACE
OF HIGH
RETURNS
CAPITAL IS NEVER AT REST

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?

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

BAD ECONOMY?
You can delay investment decisions…
But your CAPITAL is still in motion.
You still need to actively decide its
velocity and destination.

FREE CASH FLOW?
RATE OF RETURN?
COST OF
DOING NOTHING?
What do executives need to know?

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

$0.925926
INPUTS
$1.00
REVENUE
Example: 8% Rate of Return
22
Your Business = Your Investment Benchmark
A MONEY-MAKING MACHINE
(Over simplified)

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

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

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%
30% -
40% -
-10% -
50% -
Ex: 8-YR PAYBACK POST-TAX
Cost: $1 million
Savings: $250,000/YR
25-YR Economic Life
50% -

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.

Monetize Energy Solutions:
KNOW YOUR INVESTMENT OUTCOMES
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

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”
CHANGE

CHANGE…
RISK or OPPORTUNITY?
• Energy price volatility
• Smart grid technologies
• Evolving emissions &
safety standards
• Green & sustainable
markets

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.

Keep pushing the same buttons….
Keep getting the same results!

Energy
PathFINDER
.com
Christopher Russell
@ENERGYpathfndr
THANK YOU!

The State of the Tax Incentive
Environment for Energy Efficiency
CJ Alberin
Shareholder, KBKG
www.TnEnergy.org

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

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)

© 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
remodeled
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

© 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

© 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

© 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

© 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

© 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?

© 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?

© 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?

© 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.

© 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

© 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
Design Strategies

© 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
Example – Big Box Retailer

© KBKG inc 2013
 Student Housing in CA
 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
Example – Student Housing

© KBKG inc 2013
 Parking Garage in TX
 300,000 sf * $0.60 per sf
 1 system Qualified
 Interior Lighting Systems
 44% Lighting Power Reduction
 48” T8 2-tube Fluorescent
Lighting throughout
Example – Parking Garage

© KBKG inc 2013
 Building type
 Building size & number of stories
 Physical orientation
 Climate Zone
 Utility Rates
Key Variables

© 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***
Tax Process & Considerations

© 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
Certification Process

© 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
Identifying Good Opportunities

© 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

© 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

Getting Your Moneys Worth Out of Energy Efficiency

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