Bipartisan Senate bill would promote highly efficient commercial building retrofits, new construction

Commercial buildings account for about 20 percent of energy used in the US and represent a huge opportunity to cut wasted energy, saving businesses money and reducing pollution. Approximately 70-80 percent of the buildings that will be standing in 20 years already exist today, making these existing buildings a gold mine for energy savings.  Unfortunately, these savings are trapped by several persistent barriers, including a lack of upfront capital and a disconnect between the owner of energy using equipment and the person who actually pays the energy bills.

That’s why we are so pleased to see the introduction of the Commercial Building Modernization Act by Senators Snowe, Bingaman, Feinstein and Cardin, which will revamp and extend the Energy Efficient Commercial Buildings Tax Deduction. The bill makes changes to the deduction that will better gear it to encourage retrofits of existing buildings, in addition to updating the code baseline for new buildings and raising the dollar amount of the deduction.

The Energy Efficient Commercial Buildings Tax Deduction, known generally by its tax-code section name 179D, currently offers building owners a deduction of up to $1.80 per square foot for new buildings or renovations designed to use 50 percent less energy than the 2001 ASHRAE building code. 179D also includes a partial deduction of up to 60 cents per square foot for improvements within the envelope, HVAC or lighting systems.

The existing deduction has not been used to the extent originally anticipated, leaving many energy savings opportunities on the table. The Commercial Buildings Modernization Act would improve on the current deduction by:

• Changing the baseline for retrofits.  Instead of the ASHRAE code baseline, existing buildings could use their prior energy use as a baseline. In order to qualify for the deduction, a professional engineer would develop a plan for a retrofit that would save 20 to 50 percent over this baseline.
• Paying for energy savings from retrofits. The bill pays for savings in two ways. The first is with a sliding scale deduction which ranges from $1/SF to $4/SF  depending  on the percentage energy savings beyond the baseline that the building achieves. This way, the more energy you save the more money you get (and in NRDC’s opinion, this scale should be weighted even more heavily towards the top end to avoid paying too much for retrofits on the low end and running up the cost to the Treasury). The second way the bill pays for savings is by tying a portion of the deduction to realized energy savings: a taxpayer could claim 60 percent of the deduction in the year measures are installed based on modeled savings, but has to wait two years to get the second 40 percent, which is based on demonstrated energy savings (normalized for things like weather and occupancy). This will incentivize owners and occupants to operate buildings well, which can have a large impact on energy use.
• Incentivizing the right people. The current deduction can only be claimed by the owner of the building (except in the case of publicly-owned buildings for which the deduction is assignable and has consequently been better utilized). This is challenging both for ownership structures that have no tax liability (such as Real Estate Investment Trusts) and buildings where both the owner and the tenant have influence over the building's energy use (for example, an owner is likely to make decisions about a building's HVAC systems, but is not likely to have control over lighting in a tenant's space). The Commercial Building Modernization Act fixes this issue by allowing anyone involved with the project (such as the architect or tenant) to claim the deduction.
• For new construction, the bill updates the code baseline, increases the dollar amount to $3/SF, and simplifies the calculations needed to show compliance.

According to a report by the Political Economy Research Institute, retrofits encouraged by a revamped 179D could save building owners $1.4 billion year on their energy bills and create 77,000 jobs. Furthermore, since energy costs are tax deductable as a business expense, improvements in energy efficiency benefit the Treasury as well as the building owner. 

Like any bill, there are still kinks to work out and since the current deduction doesn’t expire until the end of 2013,  this is likely just the beginning of the conversation, but nevertheless the introduction of the Commercial Buildings Modernization Act is one step forward towards a country with more highly efficient commercial buildings. And something both Democrats and Republicans can agree on is good news.