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Kentucky Resources Council, PO Box 1070, Frankfort, KY 40602 Phone [502] 875-2428

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PO Box 1070, Frankfort, KY 40602  Phone 502.875.2428, Fax 502.875.2845

Energy Issues Update Was Topic of November 18 Seminar  Posted: December 1, 2008
Environmental Law Brown Bag CLE Seminar
November 18, 2008
Tom FitzGerald, Director
Kentucky Resources Council, Inc.

UPDATE ON ENERGY ISSUES IN THE 2008 AND 2009 SESSIONS

Kentucky House Bill 2

Created New Kentucky State Individual Income Tax and Corporate Income Tax Credits For Energy Efficiency And Renewable Energy

The following credits are available for the installed costs of systems and certain products installed after January 1, 2009:

TAX CREDITS FOR ENERGY EFFICIENCY ON RESIDENTIAL PROPERTY

- 30% of the installed costs of upgraded insulation, up to $100.

- 30% of the installed cost of energy efficient windows and doors, up to $250.

- 30% of the installed cost of “qualified energy property,” up to $250.

“Qualified energy property” is defined the same as the in the federal tax credits for energy efficiency (26 U.S.C. 25C as it existed 12/31/07) and includes: 1) an electric heat pump water heater; 2) an electric heat pump; 3) a closed loop geothermal heat pump; 4) an open loop geothermal heat pump; 5) a direct expansion (DX) geothermal heat pump; 6) a central air conditioner; 7) a natural gas, propane, or oil furnace or hot water heater; 8) a hot water boiler including outdoor wood-fired boiler units; or 9) an advanced main air circulating fan.

LIMITATIONS: The combined tax credit cannot exceed $500 per taxpayer.

WHAT PROPERTIES QUALIFY? A dwelling unit located in Kentucky that is owned and used by the taxpayer as the taxpayer’s principal residence, and single family or multi-family residential rental units.

- Credits under this section can be carried forward for one year if they cannot be taken in full in the year of installation.

TAX CREDITS FOR ENERGY EFFICIENCY ON COMMERCIAL PROPERTY

- 30% of the installed cost of an energy efficient interior lighting system, up to $500.

- 30% of the installed cost of an energy efficient heating, cooling, ventilation, or hot water system, up to $500.

LIMITATIONS: The combined amount of credit cannot exceed $1000 per taxpayer.

QUALIFYING PROPERTY: Property located in Kentucky that is owned and used by the taxpayer as commercial property.

- Credits under this section can be carried forward for one year if they cannot be taken in full in the year of installation.

TAX CREDITS FOR RENEWABLE ENERGY ON RESIDENTIAL AND COMMERCIAL PROPERTY

30% of the installed cost of:

- An active or passive solar space heating systems;

- A combined active solar space-heating and water-heating system;

- A solar water heating system; and

- A wind turbine or wind machine; or

- Three dollars ($3) per watt direct current (DC) of rated capacity of a solar photovoltaic system up to 100% of the cost.

LIMITATIONS: No individual limits, but the combined credit cannot exceed

- $500 per taxpayer if installed on a single family residential rental unit or taxpayer’s principal residence

- $1000 per taxpayer if installed on a multifamily residential rental unit or commercial property.

QUALIFYING PROPERTY: A dwelling unit located in Kentucky, or property located in Kentucky that is owned and used by the taxpayer as commercial property.

- Tax credits under this section can be carried forward for one year if they cannot be taken in full in the year of installation.

TAX CREDITS FOR “ENERGY STAR” HOMES

- $800 if the taxpayer builds an Energy Star home located in Kentucky as a principal place of residence

- $400 if the taxpayer sells an Energy Star manufactured home to a buyer who uses that home as a principal place of residence in Kentucky

- QUALIFYING PROPERTY: An “Energy Star” home is any single-family residence that qualifies for and receives the Energy Star Label under the Energy Star Program administered by the U.S. Environmental Protection Agency.

LIMITATIONS: The tax credit will not apply if the credit has previously been taken by another taxpayer on the same Energy Star home or Energy Star manufactured home, or if the taxpayer has taken the energy efficiency tax credits (above). The credit must be taken in the year in which the taxpayer completes construction of the “Energy Star” home or sells the “Energy Star” manufactured home.

A legal challenge has been filed in the Franklin Circuit Court challenging whether House Bill 2 and a number of other bills passed late on the last day of the session, are valid. As a result, the Finance and Administration Cabinet has not adopted regulations establishing the guidelines and technical requirements to be met to qualify for the renewable energy credits. Please contact Regina Ritchey at regina.ritchey@ky.gov or (502) 564-7256 to determine if your project will qualify for incentives under HB 2.

OTHER STATE INCENTIVES AVAILABLE IN KENTUCKY

Low Interest Loans for Solar Hot Water Heaters

Residents and businesses in Eastern Kentucky within a 51 county area are eligible for a fixed 6% interest rate loan to cover the full installation and equipment cost for solar hot water heater systems. The loan is repayable in monthly installments over 6 years and available through a partnership between the Kentucky Solar Partnership and the Mountain Association for Community and Economic Justice. Visit www.kysolar.org for more information.

Incentives and Programs Through Local Utilities

Depending on your electric utility, you may be eligible to purchase green power, participate in programs focused on energy efficiency, including loan programs and rebate programs, or receive production credits for using renewable energy. Contact your utility for information on the programs they offer.

Federal Tax Incentives for Renewable Energy and Energy Efficiency for Residential Property Extended

On October 3, 2008, the Energy Improvement and Extension Act (Public Law No. 110-343) extended existing tax credits for renewable energy and created some new tax credits. Below is an outline of available federal incentives.

LONG TERM EXTENSION OF INVESTMENT TAX CREDITS THROUGH TAX YEAR 2016

- 30% investment tax credit for qualified fuel cell property, up to $1500 per one-half kilowatt of capacity.

- 30% investment tax credit for qualified solar energy property.

- 10% investment tax credit for qualified small wind energy property (less than 100 kilowatt capacity). - 10% investment tax credit on combined heat and power system property.

- 10% investment tax credit on geothermal heat pump systems.

- The credits for solar and wind have been extended from the original credits and are currently applicable.

- The increased cap on the credit for fuel cell property, and the credits for combined heat and power systems and geothermal, will apply beginning in tax year 2009.

- The above credits can be applied against the Alternative Minimum Tax.

TAX CREDITS FOR RESIDENTIAL ENERGY EFFICIENT PROPERTY EXTENDED AND MODIFIED

- 30% tax credit for residential solar property with no maximum cap.

- 30% tax credit for qualified residential small wind property. Credit is limited to $500 for each one-half kilowatt capacity, to a maximum of $4000.

- 30% tax credit for geothermal heat pumps, up to $2000

- The above credits can be applied beginning in tax year 2009.

- The above credits can be applied against the Alternative Minimum Tax.

TAX CREDITS FOR QUALIFIED PLUG-IN ELECTRIC HYBRIDS

- Purchasers of plug-in electric hybrids for personal use may claim a credit of between $2500 to $7500 for passenger vehicles and light trucks.

- The credit will be phased out over time based on the number of vehicles sold.

- The credit can be applied against the Alternative Minimum Tax.

Guidelines In Net Metering Case Close To Final

SB 83 expanded the availability of Net Metering to include eligible customer-generators to include electricity generated using solar energy, wind energy, biomass or biogas energy, or hydro energy; by distributed units having a rated capacity of not greater than thirty (30) kilowatts, located on the customer’s premises and owned and operated by the customer.

There is a cumulative capacity cap of 1% of the Company’s single hour peak load in Kentucky during the previous year.

In response to the bill, the Public Service Commission opened Case No. 2008-00169, and after several Informal Conferences and significant negotiations, the parties have all but agreed to a set of mandatory yet flexible guidelines which each regulated utility will be required to incorporate into their tariffs.

Without too much detail, since it is not yet final, there are two “Levels” of application, the first being designed to accommodate invert-based plug in type systems; the second, a more detailed application for non-standard systems.

HB 3?

House Bill 1, enacted during the 2007 Second Extraordinary Session, provided incentives for an array of energy-related expenditures. While publicly castigated as the “Peabody Bill” because of incentives for coal gasification and liquefaction plants, the bill also contained a number of sections addressing carbon issues and energy diversification, including:

Section 50 of the Act directed the Public Service Commission to make recommendations to the LRC by July 1, 2008 concerning actions needed to:

- eliminate impediments to requiring utilities to adopt demand management strategies prior to Commission consideration of any proposal to increase generating capacity,

- encourage diversification of energy portfolios through use of renewables and distributed generation;

- incorporate full-cost accounting that considers life-cycle energy, economic, health and environmental costs of various strategies for meeting future energy demand; and

- modify rate structures and cost recovery to better align utility interests with consumer interests in efficiency and lowest life-cycle costs.

In response, the Commission produced a report captioned Electric Utility Regulation and Energy Policy in Kentucky which responded to 39 recommendations from a wide array of stakeholders addressing the four issues posed by the General Assembly.

Section 51 requested LRC staff to report on energy efficiency building and construction practices, including review of current building practices, and a study on improving tax incentives to encourage improvements in energy efficient building methods and components. The study is to be completed by November 2008.

Section 52 recognizes the importance of “proactively addressing the issue of carbon management in existing coal-fired power plants and carbon emissions in general.” The Act directed an interagency report by November 20, 2007 regarding current research on carbon management, the types of incentives or government support that would help develop technologies to reduce carbon emissions at existing coal-fired power plants and from other sources, and a range of other issues associated with carbon management. Two reports were prepared in response to this mandate, and are available from the Energy and Environment Cabinet.

The bill also directed the establishment of the Center for Renewable Energy Research and Environmental Stewardship in Section 55 and created a student loan forgiveness program.

As we discussed, HB 2 created an array of tax credits for investments in energy efficiency and renewable energy.

In light of HB 1 and 2, what might HB 3 include?

- A renewable / energy efficiency portfolio standard

Adopting a mandatory requirement in Kentucky for a state RPS will make us less dependent on coal and other fossil fuels, with a negligible impact on utility rates. Renewables Portfolio Standards in the United States: A Status Report with Data Through 2007, April 2008. A Renewable Portfolio Standard with an energy efficiency component will help to create a stable demand to attract capital for expansion of renewable energy, and diversifying supply sources through investment in renewables will help blunt the impact of the coming carbon mandate on low and fixed-income consumers; failing to do so will create a far greater burden.

- A proposal for a “Clean Energy Corps” patterned after the national blueprint http://www.greenforall.org/resources/clean-energy-corps, combining a workforce in need of meaningful employment opportunities, a housing construction sector facing significant hurdles to new construction, an economy reeling from energy volatility, and an atmosphere desperately in need of a reduction in carbon loading, into a comprehensive program to retrofit housing stock across the commonwealth for efficiency and clean energy. Patterned after the Clean Energy Corps proposal developed by the Clean Energy Corps Working Group, the General Assembly and Beshear Administration could develop as a key component of the Kentucky Energy Strategy, a program that would leverage state financing, university support, and job creation and training programs and attract private investment to spur a statewide effort to retrofit existing housing stock for efficiency and renewables. It would be paid for by an on-bill recapture of a portion of the energy saved.

We spend millions each year to fund emergency heating programs, and countless hundreds of thousands of volunteer hours doing stopgap weatherization for many of the over 465,000 rental occupied housing units in this state. Low-income households spend about 8% of their income on electricity, and very low-income households (at 50% or below the poverty level) spend up to 23%. In contrast, the average household spends 2% of their income. Targeted retrofitting of housing stock could yield significant system wide benefits will creating good jobs and deferring the need for new coal-fired capacity.

- A mandate for demand management and efficiency investments as a prerequisite to any additional proposal for new generation

- A “system benefit fund.” Stable and sufficient funding for means-tested energy efficiency programs through adoption of a public benefits fund is essential to any real investment in such programs. A per kilowatt hour fee dedicated to low-income efficiency efforts and housing retrofits would generate a significant fund, at a nominal cost per year per customer, saving that customer far more in avoided “poverty costs” and in avoided power generation costs.


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