New Tax Credit Possible For Cogenerators

New Tax Credit Possible For Cogenerators

September 01, 1998 | By Keith Martin in Washington, DC

The Clinton administration released details in mid-September of a new energy tax credit it wants Congress to enact as part of a package of measures to deal with global warming.

Bills have been introduced in both the House and Senate to implement the proposal. They are unlikely to be acted on during the current Congress, but will be on the agenda for next year. Global warming is a high priority with Vice President Gore.

The new energy credit would work like the old investment tax credit. Taxpayers investing in a list of projects that the government wants to encourage would be given a tax credit for 10% of the cost in most cases. The list of projects that qualifies includes the following:


Credits could be claimed on equipment that uses sunlight to generate electricity or heat or cool buildings or provide hot water. The credit would be set initially at 15% for projects that use photovoltaics or provide hot water. There would be an annual cap of $2,000 per “item of photovoltaic property” and $1,000 per “item of solar hot water property.” There are no caps for other solar projects. The IRS has taken the position in the past that solar equipment that serves a dual role as part of the structure for a building does not qualify for energy credits. The bills make clear so-called dual-use property will qualify in future.


Credits could be claimed on equipment that provides, distributes or uses energy from geothermal deposits, but only for the portion of a geothermal power plant up to the electrical transmission stage.


Equipment that is part of a “combined heat and power system” would qualify. However, at least 20% of the output must be in the form of useful thermal energy. This compares to the 5% threshold to be a “qualifying facility” under the Public Utility Regulatory Policies Act, or PURPA. In addition, the project must have an energy conversion ratio greater than 70%, in the case of projects that exceed 50 megawatts, and 60% in smaller projects. The energy conversion ratio is the Btu content of the output divided by the Btu content of the fuel that went into the power plant.

Circuit Breakers

Credits could be claimed for replacing any dual-pressure circuit breakers that went into service before 1986 and contain sulfur hexafloride (SF6). They must have a capacity of at least 115 kilovolts. The power company must certify that it promptly destroyed any circuit breakers that it replaced.

Fuel Cells

Fuel cells that use an electrochemical process to generate heat and electricity would qualify for a 20% credit, but they must have an “electricity-only generation efficiency greater than 35%” and a minimum generating capacity of at least 50 kilowatts. Annual credits for fuel cells would be capped at $500 for each kw of capacity.

The administration is proposing that tax credits for cogeneration, replacing old circuit breakers and fuel cells last only five years through 2003. The solar and geothermal credits would be permanent.

Only new equipment would qualify. The bills would not allow credits to be transferred to another company through lease financing, at least as currently drafted. Any power company that is subject to rate of return regulation would not be able to claim the credits unless the regulators allow the credits to be retained by the power company rather than passed through to ratepayers.

The bills would require that cogeneration facilities that use biomass and waste fuels be depreciated over a longer period than under current law.

Keith Martin