Federal Overview

1. Federal Consumer Energy-Efficiency IncentivesJames A. WilliamsGovernment Relations Representative, APPA2006 Customer Connections ConferenceTuesday November 7, 2006

2. Federal Overview • 2005 Energy Policy Act • Tax Credits and Tax Deductions • Residential Energy-Efficiency Property Credit • Home Energy-Efficiency Improvements • Business Incentives • Business Solar Investment Tax Credit • Energy-Efficient Appliances • Home Builders Tax Credit • Alternative Fuel Vehicles • 2006 EXTEND Act • National Action Plan for Energy Efficiency • Clean Renewable Energy Bond (CREB) • Climate Change • Oversight / Implementation

3. ENERGY POLICY ACT OF 2005 • The Energy Policy of 2005 provides valuable federal tax credits for consumers (i.e. residential and home improvement) • EPAct05 provides tax incentives for individual homeowners who invest financial resources in 2006 and 2007 for installation of specific energy saving devices. • 2006 marked the beginning of a new tax credit for the purchase of some hybrid vehicles, as well as the purchase of some other, more fuel efficient vehicles. • Beyond homeowners, businesses will also be eligible to receive tax credits for installation of energy saving equipment. • Consumers who employ energy-efficient products in their homes or drive fuel-efficient vehicles enjoy multiple benefits. At home, these benefits include lower home energy bills, increased indoor comfort, and reduced air pollution. On the road, consumers will increase their gas mileage so they lower their gasoline costs, and they will dramatically reduce the amount of air pollution from their vehicles. Please note: We at APPA are not tax experts and we do not provide tax advice. You should contact a tax professional concerning the provisions discussed today.

4. TAX CREDITS and TAX DEDUCTIONS • What is a tax credit? You don’t receive an income tax credit when you buy the product, like an instant rebate. You claim the credit on your federal income tax form at the end of the year. The credit then increases the tax refund you receive or decreases the amount you have to pay. • Tax credits vs. tax deductions: In general, a tax credit is more valuable than a similar tax deduction. A tax credit reduces the tax you pay, dollar-for-dollar. Tax deductions – such as those for home mortgages and charitable giving – lower your taxable income. If you are in the highest 35-percent tax bracket, the income tax you pay is reduced by 35 percent of the value of a tax deduction. But a tax credit reduces your federal income tax by 100 percent of the amount of the credit.

5. Residential Energy-Efficient Property Credit • This credit provides an incentive to homeowners to convert residential property to solar energy. There are three ways the credit can be earned, and three separate amounts allowed for doing it. EPAct05 makes available: • A 30 percent credit up to a maximum $2,000 per year for the cost of purchasing and installing a residential solar water heating • A 30 percent credit up to a maximum $2,000 per year for the cost of purchasing and installing photovoltaic equipment for solar-generated electricity • $500 for each 0.5 kilowatt-of fuel cell property capacity • The $2,000 credits for solar water and electricity applies to any residence, including secondary property (i.e. vacation property), while the fuel cell credit is restricted to installation in your principal residence. The credit is available for equipment put in place after December 31, 2005 and before January 1, 2008. • The IRS defines “placed in service” as when the products or materials are ready and available for use – this would generally refer to the installation, not the purchase.

6. Home Energy-Efficiency Improvements • Individuals can get a one-time income tax credit of up to $500 in total for installing efficient new windows, insulation, doors, roofs, and heating and cooling equipment in their home. The overall $500 cap can be reached in several ways with the purchase and installation of energy-efficient products: • Exterior windows: 10 percent of the total cost, up to $200. Includes skylights and storm windows. • Insulation, exterior doors, or pigmented metal roofs: 10 percent of the cost of the product (but not the installation), up to $500. Includes seals to limit air infiltration, such as caulk, weather stripping, and foam sealants, as well as storm doors. • Central air conditioner, heat pump, or water heater: up to $300 towards the full purchase price, including installation costs. • Furnace or boiler: up to $150 towards the full purchase price, and/or $50 for an efficient air-circulating fan in a furnace, including installation cost. • The home improvement tax credits apply for improvements “placed in service” from January 1, 2006, through December 31, 2007. They are not available in 2005.

7. Sample Tax and Energy Savings Here are examples of how much you might save if you took advantage of these tax credits. They are illustrative only, as exact energy and tax savings will vary for each taxpayer: In some areas of the country, consumers also will be eligible for utility or state rebates or state tax incentives for the same homes, vehicles, and equipment. Contact your state energy office or local utility for more information.

8. Business Incentives Deduction for Energy- Efficient Commercial Property Proprietors of commercial buildings are eligible to deduct the costs of improving the property’s energy efficiency. The maximum deduction is $1.80 per square foot and requires the following criteria be met: • The property for which costs are claimed must be depreciable (or amortizable) property, installed in a domestic building, and within the scope of qualified building standards; • The property must be installed as part of the building’s interior lighting system, heating and cooling ventilation, hot water systems, or the building envelope; • The property must be installed based on a plan to reduce total annual energy and power costs by 50 percent or more when referenced against a building meeting certain minimum requirements. (The IRS has been instructed to issue rules to allow a reduced deduction if specific energy-efficiency targets are met but the 50-percent mark is not reached). • All deductions must be taken for expenditures made between January 1, 2006 and December 31, 2007.

9. Business Solar Investment Tax Credit • Under the EPAct05, the business investment credit for solar energy • Property is increased from 10 percent to 30 percent. • The increased credit applies to (1) equipment which uses solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat, and (2) equipment which uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight. • This credit applies to expenditures made after December 31, 2005 and before January 1, 2008.

10. New Credit for Manufacturing Energy-Efficient Appliances • EPAct05 adds a new tax credit for the manufacture of energy efficient appliances such as dishwashers, clothes washers and refrigerators. • The credit is part of the general business credit and applies to appliances manufactured between January 1, 2006 and December 31, 2007.

11. Homebuilder's Credit for New Energy-Efficient Homes • An eligible contractor may claim a tax credit of $1,000 or $2,000 for a qualified new energy-efficient home that a person acquires from the contractor during 2006 and 2007 for use as a residence during the tax year. • An eligible contractor is a person who constructs a new energy efficient home or a manufacturer that produces a qualified new energy-efficient manufactured home. • The credit applies to new homes and those substantially reconstructed. • While the contractor, rather than the homeowner, gets the credit, the purchasers may benefit from a price reduction since the contractor's net costs are less if the credit is factored in.

12. Alternative Fueled Vehicles • New tax credits are available for hybrid, fuel cell, advanced lean burn diesel and other alternative power vehicles. • The credits are collectively claimed under the title of the "Alternative Motor Vehicle Credit." This credit is equal to the sum of the four separate credit components: 1. New qualified fuel cell motor vehicle credit; 2. New advanced lean burn technology motor vehicle credit; 3. New qualified hybrid motor vehicle credit; 4. New qualified alternative fuel motor vehicle credit.

13. Alternative Fuel Vehicle Credits (Continued) • The qualified hybrid-vehicle will be the dominant credit for consumers, considering these vehicles are the most common in mass production by automakers. • Unlike the rules for 2005 however, a qualified hybrid motor vehicle no longer includes many heavy SUVs. Nor does it include many high-performance hybrids that do not appreciably decrease fuel consumption from their smaller-engine gasoline counterparts. • Also, unlike the 2005 hybrid deduction, the new credit is available whether you buy or lease. • The amount of the credit for a hybrid vehicle is based upon the percentage increase in fuel economy from an all-gasoline model, and varies from $400 to $2,400 based-on fuel savings ranging from 125 to 250 percent of a base amount. • An additional conservation credit is awarded to hybrid vehicles with certain lifetime fuel savings ratings, ranging from $250 to $1,000.

14. Alternative Fuel Vehicle (Continued) • H.R. 6203, the Alternative Energy Research and Development Act • H.R. 5538, the Plug-In Hybrid Electric Vehicle Act of 2006 • Funding and Authorization

15. (S. 3628) 2006 EXTEND Act • Provide consumers and businesses relief from high energy prices by extending energy-efficiency and solar energy tax incentives enacted by the Energy Policy Act of 2005 (EPAct). • Extends the EPAct tax credit for retrofits to existing homes to 2009 so that homeowners who make energy-efficient improvements to their homes, such as adding insulation, can receive as much as $500 off their taxes. • Establishes a new tax credit for home retrofits that save energy. The credit starts at $800 for homes that are certified as saving 20% and increases on a sliding scale depending on the amount of savings up to $2,000 for homes that save 50%. Homes occupied by owners or renters can qualify for the credit. • Extends through 2011 the EPAct tax deduction for energy efficiency property that is installed in commercial buildings. • Allows property that is certified by 2011, but not placed in service until 2013, to also receive the deduction. The bill increases the amount of the deduction from $1.80 per square foot to $2.25 per square foot. • Extends the EPAct tax credit for energy efficient new homes to 2010.

16. National Action Plan for Energy Efficiency • Recognize energy efficiency as a high-priority energy resource. • Make a strong, long-term commitment to implement cost-effective energy efficiency as a resource. • Broadly communicate the benefits of and opportunities for energy efficiency • Promote sufficient, timely, stable program funding to deliver energy efficiency where cost-effective • Review and adopt policies to align utility incentives with the delivery of cost-effective energy efficiency and modify ratemaking practices to promote energy efficiency investments.

17. Clean Renewable Energy Bond • Until recently, only for-profit investor-owned utilities were eligible to receive a tax incentive for producing electricity from renewable energy sources. • The Clean Renewable Energy Bond (CREB) program allows consumer-owned utilities to receive tax incentives for investing in new renewable electricity generation facilities. • Qualified facilities under the CREBs program as listed in section 45 of the U.S. Tax Code include: • wind • closed-loop biomass (including agricultural livestock waste nutrients) • geothermal energy • solar energy • small irrigation power facilities • landfill gas • trash combustion • qualified hydropower facilities

18. Clean Renewable Energy Bond (Continued) • The CREBs program contains a national limitation of $800 million that the Secretary may allocate, in the aggregate, to qualified projects. • The CREBs program expires December 31st 2007. • Because the program does expire at the end of 2007, APPA supports legislation to reauthorize and expand the CREBs program, including the raising or the removal of the $800 million cap.

19. Climate Change • Lots of debate, some activity • Senate Energy & Natural Resources Committee held forum on proposed cap-and-trade regime for capping GHG emissions earlier this year • Closed-door forum in Senate Environment & Public Works Committee • Rider added to House Interior Appropriations bill in committee to correspond to • Sense of the Senate included in EPAct05, but stripped out on House floor on procedural grounds (no legislating on an appropriations bill) • More debate/action expected • APPA Blue Ribbon Task Force on Climate Change announced in June – first meeting October 16-17

20. Oversight/Implementation of EPAct of 2005 • Dozens of new rules and programs to be developed and implemented by agencies- including DOE, FERC, Treasury- per the Act’s requirements • Congressional committees will continue oversight hearings • Congressional Schedule

21. For More Information… • Energy Bill: www.ase.org (Under Policy Makers) • Tax Incentives: • Consumer tax credits: www.ase.org/taxcredits • All efficiency incentives: www.energytaxincentives.org • Tax rules and forms: www.irs.gov