While supply-side energy management is popular with many companies, the actual savings produced is relatively small, and temporary in nature. The other side of the coin is demand-side energy management, by which you can permanently reduce a building’s cost by reducing its energy consumption. Demand-side management (DSM) pays for itself by generating utility savings, provides the owner with an attractive return on investment (ROI), and provides a positive net present value (NPV) as a pure investment. A bonus to the owner is how the improved cash flow of the building also contributes to asset appreciation by a multiplier of 10 or more. A DSM energy efficiency or control project that saves $100,000 per year actually increases the value of the building by $1 million. In very simple terms, this is why owners like energy management and, specifically, DSM projects.
At first glance, it may seem strange that utility companies not only support DSM projects, they also will help pay for them. It’s in a utility company’s best interest to reduce its electricity, natural gas, or water peak system load. This reduction in system load helps utility companies avoid or delay tens of millions (and, sometimes, billions) of dollars in capital improvements. To make DSM even more valuable as an investment to utility companies, you need to consider the poor ROI of building a new power plant for $2 million, and only getting full use of it for a couple of weeks per year when their system is at a peak load. This same concept covers generation, transmission, and distribution systems.
In many states, the traditional utility-based DSM rebate programs have been shifted to the state energy offices. The utility companies are required to charge a kWh tax (additional fee) and send the funds to the state energy office. The state energy office then offers DSM rebates for lighting, HVAC, controls, renewable energy, and custom DSM programs. Some state energy offices also have low-interest loan programs to help property owners fund their DSM programs.
Surprisingly, there are little-known DSM rebate programs from some federal agencies, like the U.S. Department of Agriculture (USDA). The USDA has DSM rebates and low-interest loans programs for rural businesses, farms, and agri-businesses.
An electric company in Florida invested $230 million in DSM rebates that would appear to be a “gift” from the utility to its customers. This investment in DSM produced a 228 GWh consumption reduction, and, more importantly, a 117 MW summer load reduction, and 143 MW summer load reduction. The value of this load reduction was the avoidance or delay of about $2 billion in capital investment in its system.
The Energy Policy Act of 2005 (EPAct) included tax incentives for DSM projects that outperformed the minimum energy code, such as ASHRAE 90.1-2001. In a nutshell, you can take advantage of the “immediate expense election” under IRS Code 179D if your energy-efficiency project exceeded the energy code standards by certain percentages. While not covered in this article, the EPAct could be worth as much as $1.60 per square foot for your building. Lighting retrofits are the most popular EPAct task target in part because the IRS provided “interim rules” on the method to justify the section 179D claim. The EPAct permits a licensed contractor or tax professional to prepare the engineering study to back up your one-line section 179D (immediate expense election – other). Consider using a tax professional (a CPA or a tax attorney) who also employs energy engineers to run the calculations. There are a few CPA firms in the United States that employ engineers specifically to help their clients with EPAct tax. The tax incentives under the EPAct were recently extended through 2013.