Tax Incentives Effectively Promote Combined Heat and Power Systems

November 7, 2001

WASHINGTON, D.C. — An investment tax credit (ITC) or shortened depreciation period can be equally effective in encouraging faster adoption of combined heat and power (CHP) systems. The American Council for an Energy-Efficient Economy's (ACEEE) new report, Federal Tax Strategies to Encourage the Adoption of Combined Heat and Power, reviews the history of energy tax incentives and analyzes the impacts of the current tax code on various CHP tax incentivation strategies currently under consideration in the U.S. Congress. Six bills that have been introduced in the 107th Congress provide an ITC for CHP, with one also providing a shortened depreciation period for CHP assets. However, some tax experts in the Senate have expressed greater interest in using shortened depreciation.

"While the choice of tax strategy appears to be largely a political decision in the current political environment, an ITC appears to be the most viable strategy," said Neal Elliott, the report's author and ACEEE's Industry Program Director. Because of the current structure of the tax code, an ITC can provide incentives to a broad range of potential CHP systems at a lower cost than an adjustment to the depreciation period. The tax situation of a particular taxpayer and the nature of the facility affect how much benefit is received from a particular incentive. In addition, different facilities may benefit differently from an incentive depending upon their particular tax circumstances.

This report explains in detail the CHP tax incentives, which were ranked as most effective investment of federal tax dollars (along with commercial building tax credits) in another new ACEEE report, Tax Incentives for Innovative Energy-Efficient Technologies (Updated). "CHP tax incentives leverage significant private dollars, which will provide substantial cost-effective energy savings and economic benefits," said Steven Nadel, ACEEE's Executive Director.

CHP systems, also known as cogeneration, generate electricity and thermal energy in a single, integrated system. CHP systems are more energy efficient than separate generation of electricity and thermal energy because heat that is normally wasted in conventional power generation is recovered as useful energy for satisfying an existing thermal demand. CHP systems can be employed in many commercial and industrial facilities.