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Key Takeaways
- Credits available up to 50% of eligible costs.
- Cash payments available for exempt organizations.
The Inflation Reduction Act of 2022 (IRA) incentivizes clean energy and other climate-friendly initiatives. Independent estimates suggest more than $1 trillion will be distributed to entities that implement any of a long list of green technologies over the next ten years. One of the biggest beneficiaries is Geothermal Heating & Cooling.
What is Geothermal Heating & Cooling?
Geothermal, also known as “ground source,” heating & cooling is an energy efficient type of HVAC system that takes advantage of the relatively constant year-round temperatures beneath the earth’s surface.
A conventional HVAC system typically burns fossil fuels to heat buildings, while using electricity to provide 100% of the buildings’ cooling needs. A geothermal system uses the ground, or ground water, to provide much of the heat exchange necessary to heat and cool the buildings served by the system.
How Does Geothermal Work
To tap into this natural source of energy, a series of wells are drilled in the ground. The depth of the wells depends on the heating and cooling requirements of the buildings connected to the geothermal system. For smaller spaces, the entire loop may be buried in a single trench several feet deep. For a large system, wells may extend hundreds of feet deep into the earth.
A piping loop is constructed and routed through these wells, then surrounded with a special grout compound designed to efficiently conduct heat from the piping to the ground (or ground water) source.
From there, the piping loop is connected to specially designed water-source heat pumps located throughout the building. These operate much like other indoor HVAC units, with fans to circulate air and controls to regulate their operation.
The piping loop is filled with a mix of water and antifreeze to facilitate heat transfer. In the summer, heat is transferred from the building to the piping loop. The heat is then absorbed by the ground as the fluid circulates through the loop. In the winter, this process works in reverse – the heat is transferred from the ground to the building via the same piping loop.
In general, a geothermal system can save 50-70% on heating and cooling energy costs when compared to a conventional HVAC system.
Why Haven’t I Heard More About Geothermal?
Geothermal has been around for decades. However, the geological work, the piping, and the well drilling add significantly to the initial cost of a geothermal system. This is often enough to dissuade a building owner from investing in this technology, as it usually takes many years of energy savings to pay for the additional upfront cost.
What’s Different Now?
The IRA offers substantial financial benefits for clean energy investments, including geothermal heating & cooling systems. Key incentives include the Investment Tax Credit (ITC), allowing organizations to claim a dollar-for-dollar credit on eligible system costs. Recent updates, such as the direct pay option, enable tax-exempt entities like nonprofits and government agencies to receive cash equal to an amount from 6% up to 50-60% of their investment in geothermal systems. In many cases, a geothermal system’s cost becomes less than that of a conventional HVAC system.
When energy savings are factored in, geothermal heating & cooling is often the most economical option for a building.
Investment Tax Credit Rates
The IRA created a tiered rate structure consisting of base credits and stackable bonus credits. When combined, these credits can result in a total benefit of up to 50% of eligible costs.
The base credit rate under the ITC is 6%; however, a base credit rate of 30% can be achieved in three different ways:
- Adhere to the prevailing wage rules, generally defined by the Davis Bacon Act of 1931 (apart from weekly certifications), and to the apprenticeship rules;
- Have a maximum net output of less than 1 megawatt of electrical or thermal energy; or
- Construction on the project began prior to January 29, 2023.
The domestic content bonus credit can further add 10% to a 30% base credit. To qualify, all structural steel and iron in the system — and a specified minimum of all manufactured components — must be produced in the United States (through 2024, the minimum for manufactured products is 40%). Meeting these requirements requires close collaboration with and documentation from the manufacturers of the geothermal system’s various components.
If your geothermal project is in an energy community (designated census tracts determined by a few different criteria), another 10% bonus credit is available. The Department of Energy maintains an energy community map where addresses can be searched to determine whether they fall within an eligible tract.
Direct pay for Tax Exempt Organizations
Typically, tax-exempt organizations do not benefit from tax credit incentives because they do not have a tax obligation to offset with the credit. However, the IRA allows exempt organizations to benefit from clean energy credits by receiving the equivalent credit amount as a direct payment. With direct pay (also known as elective pay), applicable entities can receive financial incentives by investing in eligible energy property or participating in eligible clean energy production activities.
These new potential financial incentives may encourage exempt organizations to explore clean energy options that may not have been previously considered.
What Parts of the Project are Eligible for the Tax Credit?
Eligibility for the ITC extends broadly to include all components deemed functionally interdependent with geothermal HVAC systems. This encompasses everything from drilling costs and equipment purchases to installation expenses and even pre-project feasibility studies. In addition, if the majority of the heating and cooling for a building is provided by a geothermal system, items downstream of the geothermal-specific components – including ductwork, grilles, and temperature controls – can also be pulled into the creditable costs. The inclusion of bonus credits based on project specifics, such as project size and domestic content requirements, further enhances the financial attractiveness of geothermal investments.
Strategic Implementation and Expertise
Navigating the complexities of ITC compliance requires specialized knowledge and expertise. Tax advisors and engineering professionals play a crucial role in maximizing these incentives while ensuring compliance with regulatory requirements. Collaboration with manufacturers to meet domestic content thresholds and adherence to prevailing wage standards is pivotal in optimizing financial benefits under the IRA.
Looking Ahead: Opportunities and Challenges
As technology continues to evolve and awareness of environmental benefits grows, geothermal HVAC systems are poised for continued expansion. Overcoming limitations related to geological suitability and initial capital costs remains a challenge, albeit one increasingly mitigated by advancing technology and favorable regulatory frameworks.
Conclusion
Geothermal heating and cooling represent a cornerstone of sustainable building practices, offering substantial long-term savings and environmental benefits. With robust financial incentives under the IRA driving adoption across diverse sectors, from educational institutions to large-scale commercial developments, geothermal technology is at the forefront of the clean energy transition. Embracing these advancements not only enhances operational efficiency but also reinforces commitments to carbon reduction goals, paving the way for a greener, more resilient future.
How We Can Help
Eide Bailly provides a holistic approach in helping you make the right decisions for your buildings. Our team of clean energy tax experts, professional engineers, energy modelers, and site evaluators stands ready to assist organizations in navigating the complexities of geothermal investments. Whether evaluating feasibility, calculating tax benefits, or ensuring compliance with IRS guidelines, we empower clients to leverage the full potential of geothermal HVAC systems in achieving their sustainability objectives. Discover how your organization can benefit from these transformative technologies and contribute to a cleaner, more sustainable future.