Sales Tax and Utility Rebates Can Yield Massive Savings

Oct. 10, 2011

Beyond the federal tax benefits available, consultants and engineers often overlook the avoided sales tax (and other fees) that exist when energy saving projects are implemented.  I would like to demonstrate this via a case study on a lighting project that was recently approved in a geographic area that is known for having the some of the lowest electricity costs in the USA. 

Beyond the federal tax benefits available, consultants and engineers often overlook the avoided sales tax (and other fees) that exist when energy saving projects are implemented.  I would like to demonstrate this via a case study on a lighting project that was recently approved in a geographic area that is known for having the some of the lowest electricity costs in the USA.

What is interesting is that after looking at the client’s new utility rate structure, we found the demand and kWh costs had each increased by 30% from 2010 to 2011.  This was compelling, but I was also surprised that the sales taxes and other utility fees amounted to about 15% of additional cost beyond the raw electrical costs!  We also applied for rebates from the local utility, which were not easy to find on the utility’s website.

By calculating all these savings, the project’s cost-effectiveness improved and we were able to meet the client’s financial criteria for approval.  The point is that without these savings and financial justification, the project would not have been approved and zero energy would be saved.

Case Study:

Citizens National Bank had an old lighting system with acrylic lenses and the T-12 lamps were being phased out by the Energy Policy Act.  Thus, they wanted to replace the 2 x 2 lighting systems, not only because procuring T-12 lamps would be difficult, but also finding rare parts (for an old lighting system) was becoming expensive. 

Several replacement options were installed as samples to see what the occupants preferred and finally a replacement T-5 fixture “kit” was chosen.  This kit can be installed easily and uses part of the existing fixture housing, while removing the lens and installing a new backing within the existing fixture box… the visual effect is the appearance of a completely new fixture and the light levels increased about 10% at the desk level, which is another benefit as the existing lighting was a little insufficient. 

This is not “rocket science”, but I still find it amazing that you can take a fixture that consumes 72 watts (or more as measured in this case) and replace it with new technology that consumes 32.2 watts (1.15 ballast factor and 14w T-5 lamps), while increasing the lighting levels.

The economics of the project were slightly insufficient to meet the client’s financial criteria for approval.  This was partly because the retrofit kits were more expensive and there were some additional re-circuitry and facility upgrades that would be included in the project to make it operate correctly. 

If I did nothing more, the project likely would have “stalled” in the development phase, so I went back and looked more closely at the calculations.  When I analyzed the actual utility bill, we found that utility surcharges and local sales taxes on energy represented a 15% extra cost per kWh.  After the new lighting system is installed, there will be less kWh consumed and the client would not pay taxes on these avoided kWh. When these avoided costs were included in the annual savings (basically an additional 15%), the payback was reduced by about 1.2 years

After some time searching on the utility website and several phone calls, we were able to identify that there was a rebate available which equaled about $6 per fixture.  When the utility rebate was incorporated, the payback was reduced by about 2 years!

There were likely additional savings that could have been included.  Perhaps air-conditioning savings as well as avoided costs on labor, material and disposal would have been appropriate.  However, most of these savings were balanced out by additional material costs (T-5 lamps are more expensive than T-8 or T-12 lamps).  One strategy that was effective was bulk purchasing of materials, which reduced the installation cost significantly.

Eric A. Woodroof, Ph.D., is the Chairman of the Board for the Certified Carbon Reduction Manager (CRM) program and he has been a board member of the Certified Energy Manager (CEM) Program since 1999. His clients include government agencies, airports, utilities, cities, universities and foreign governments. Private clients include IBM, Pepsi, GM, Verizon, Hertz, Visteon, JP Morgan-Chase, and Lockheed Martin.

As mentioned in September’s article, we looked into applying for federal rebates via EPACT, as the savings was well over 50% from the baseline.  However, this client was an S-Corporation and its profits are passed on to its shareholders and partners.  With this type of structure, the client technically does not pay federal taxes, so federal tax rebates were not possible.

Other possible savings or benefits via state and local grants may also be available.  For example, I just read that some states are offering grants to assist with energy efficiency projects over $50,000 and you can apply for funds to cover 50% of the project’s cost. The effective impact on a project would be to cut the simple payback in half!

Finally, as I have mentioned before in previous articles, if the economics of a project’s upfront investment look daunting, you can consider financing the project and avoid the upfront investment.  Often, you can get very low interest rates (especially now) from the bank or even from special local energy programs (see www.dsireusa.org).  If you can borrow the money at any percentage rate (say 10%) that is below the internal rate of return for your project (say 30%), you will be better off by financing the project.  In other words, the Net Present Value of the project may be higher by financing.  For more information about NPV, feel free to watch a free webinar on the subject here: http://profitablegreensolutions.com/?q=resources/npv-webinar

In conclusion, I just want to propose that when looking for savings or benefits… “leave no rock unturned”… one small idea can make the difference between approval and denial.  To give you an example of how we worded the executive summary for this case study, please take a look below… I hope it helps you sell more projects and save more energy!

Executive Summary from this Case Study:

Citizens National Bank - (“Client”) has existing lighting systems that are inefficient and wasting energy, while utility costs have risen 30% from 2010 to 2011.  The existing T-12 lighting systems are being phased-out, may contain PCBs (a hazardous waste) and should be removed safely to avoid legal risk. This proposal’s objective is to update the lighting systems and save money at two branches. This retrofit design was developed over 3 months and approved by CNB staff.  The solution will reduce lighting energy expenses by over 60% while increasing lighting levels by 10%.  The new lights will save $12,241 per year in energy, material and maintenance costs, (additional air-conditioning related savings are possible).  This project will yield a 5.5 year simple payback or 17% Return on Investment, with an NPV4,20 = $ 166,349Implementing this project will be equivalent to reducing your carbon footprint by 8,708 gallons of gasoline per year!

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