New tax credit could tip balance toward modern, efficient pellet heaters

Solar panels have long enjoyed a 30%
federal tax credit. This Act could
provide some high efficiency wood
and pellet appliances the same support

A 75% efficiency threshold would help innovative stove and boiler manufacturers, set others back

Members of Congress unveiled a discussion draft for a wide range of energy tax credits from solar PV, geothermal and electric cars – to high efficiency wood and pellet heaters.  The tax breaks are part of  the Growing Renewable Energy and Efficiency Now (GREEN) Act.  The core tax breaks are in three areas - renewable energy production and storage, energy efficiency, and electric vehicles. Most of these provisions renew and or modify existing tax breaks and a few are new incentives meant to spur energy innovation.

Dec. 2020 update: Congress passed legislation, signed by the President, granting a 26% tax credit to stoves and boilers at 75% efficiency or higher.  The credit is reduced to 22% in 2023 and expires on Dec. 31, 2023, unless it is extended.

The provision for wood and pellet heaters is partially an extension of a pre-existing credit, but it vastly narrows which appliances would qualify and increases the amount of the credit to 30% of purchase and installation costs.  By setting a 75% threshold at the higher heating value (HHV), the credit would overwhelming favor pellet stoves and boilers, because pellet appliances tend to be much more efficient – and much cleaner.  On the other hand, the traditional wood stove that relies on the consumer to adjust the airflow, would be almost entirely shut out of the credit.

“This tax credit is exactly what is needed to modernize residential wood and pellet heating and tip the balance of government support toward pellet heating,” said John Ackerly, President of the Alliance for Green Heat. “Unlike Germany, Austria and Italy, the United States has never had federal policies to shift toward pellet appliances, which is necessary for this sector to help drive down fossil heating fuels.  In addition, this is an important step to using premium pellets in high efficiency, small-scale heating in the United States instead of shipping industrial pellets to Europe for low-efficiency power plants that just make electricity,” Ackerly said.

The increase in the value of the credit, from $300 in 2017 to 30% of costs if this provision were to become law, is the result of strong Congressional support from House and Senate delegations from New England, where efforts to move toward pellet heating have been the strongest.  The 30% credit proposal was in the BTU Act, part of which was rolled into the new GREEN Act.   The coalition of mainstream energy efficiency organizations such as American Council for an Energy Efficiency Economy (ACEEE), Alliance to Save Energy (ASE) and others had proposed an initial 73% efficiency threshold that later moved to 75%.  Ironically, the BTU Act, championed by an industry association, the Biomass Thermal Energy Council (BTEC), has always supported the higher limit of 75% efficient.  BTEC, breaking from other industry organizations, made a strategic decision nearly a decade ago, with input from the Alliance for Green Heat (AGH), that the future of small-scale biomass heating needed to focus on highly efficient, modern technology.  Over time, other industry groups supported BTEC’s position.

Timeline

As currently written, the Act provides for the residential non-solar energy technology investment tax credit for seven years with the full 30% credit for 5 years, and reduced ones for 2025 and 2026.  The timing of this tax credit coincides with stricter EPA emission standards that take effect on May 15, 2020, resulting in stoves, boilers and furnaces that will be far cleaner than those sold over the last 30 years.  The new EPA regulations also require all stoves and central heaters to be tested for efficiency, giving all heaters consistent efficiency ratings. 

Credits under the Green Act last for 7 years, providing certainty to the marketplace.

One major impetus for the Green Act is that solar tax credits are set to
go down to 26% in 2020 and in 2022 they would expire for residential installs.

Tax credits and demographics

Because this is a tax credit, consumers must pay the full price up front and wait until the following calendar year to claim the credit.  This limits the impact of the credit to consumers and families who can afford the higher up-front cost for high efficiency units and wait to deduct it the following year.  If someone owed no taxes, they could get the credit back as a refund.  Thus, the tax credit is not an effective vehicle for helping lower income families afford higher efficiency appliances.  Higher efficiency appliances and professional installation is often in the $3,500 - $5,000 range, far less than solar panels or electric cars and thus accessible to middle class  families, something that is likely appealing to both republicans and democrats. In addition, stoves and boilers are far more popular in rural and semi-rural areas and constitute a way for the Green Act to reach constituencies that may not be as easily reached with other technologies.

The credit is likely to drive more consumers toward pellet appliances and over the years, it will help tens of thousands of families afford the most efficient appliances that will enable them to reduce their fossil heating fuel consumption. The highest efficiency wood and pellet stoves and boilers tend to be the more expensive ones that are sold by specialty hearth retailers, not big box stores.  

Many new stove installs replace older uncertified stoves, a practice often touted by industry as a main benefit of selling more new stoves.  However, the more beneficial practice from an air quality perspective is moving from an old wood stove to a new pellet stove.  This transition from wood to pellet stoves would likely be hastened by this tax credit.

Impact on heater technologies 

Modern pellet stoves are
up to 87% efficiency

Of the 178 stoves that are 2020 certified by the EPA, 79 models are 75% efficient or higher, based on the EPA’s database of wood heaters.  Of those 79 models, 44 are pellet stoves.  Pellet stoves have made rapid advances as innovation in the US and Europe has driven down emissions.  

Of the 35 models that burn cordwood, 31 of them are catalytic or hybrid stoves. Catalytic and hybrid stoves have been a niche with less than 20% of overall cord wood stove sales, a percentage that would likely grow if this new credit were to become law. 

The category of wood stoves that is almost shut out of the tax credit is the popular, traditional non-catalytic stove.  It is very difficult for non-catalytic stoves to achieve 75% efficiency.  Only 5 non-cat models are 75% efficient or over and all of those are higher priced models sold by specialty hearth stores.  Of the 130 certified central heaters currently on the market, only 5 are 75% HHV efficiency or higher and compliant with the stricter EPA 2020 emission standard. 

One condensing pellet
boiler is at 90% efficiency

 

Masonry heaters do not have a certification pathway, and it may not be possible for them to take advantage of this credit.  Washington State and Colorado both have maintained list of approved masonry heaters.  However, those lists only cite PM emissions and not efficiency.  The well-known factory-built line of masonry heaters from Tulikivi may be able to get an alternative test protocol approved by the EPA and be certified.  Given the $10,000 - $20,000 price tag for masonry heaters, the tax credit would surely be a significant consideration by those interested in installing one.

Installation costs

Under this tax credit, labor and installation costs are also covered by the 30% credit.  IRS guidance states: "When calculating the § 25D credit, a taxpayer may include the expenditures for labor costs properly allocable to the onsite preparation, assembly, or original installation of the qualified property and for piping or wiring to interconnect the qualifying property to the home."  This presumes, but may not require, professional installation of the system.  Traditional wood stoves sold at big box stores that are under 75% efficient are the ones most often installed by consumers, often leading to safety problems.  Including installation costs in the amount covered by the 30% tax credit helps assure safe, professional installation as well as building out the network of NFI and CSIA certified professional needed to properly sustain this industry.

Impact on state incentives

If the federal government were to provide this tax credit, it may undermine the need and justification for certain state incentive programs.  However, an important function of stove and boiler change-out programs is getting old devices out of circulation.  Change out programs may be able to offer smaller amounts to achieve their goals and increase their targets for removals of old stoves.  Bounty programs may become more popular as a complement to the tax credit.

Impact on carbon reductions

Higher efficiency applications tilt the carbon benefits clearly in favor of using wood or pellets for heating.  From the pivotal Manomet study onwards, scientists have questioned burning biomass at 20 – 30% efficiency to make electricity, but high efficiency heating applications triple the energy from the fuel and triple and amount of fossil fuels that are displaced.  

There is also a distinctly different business model for companies making pellets to export to electric power plants in Europe and those who make premium pellets for domestic heating.  Companies that export pellets rely far more on cutting down whole trees whereas the domestic heating pellet market has always relied far more on procuring sawdust from lumberyards.  

The downside of residential wood heat has been the particulate matter emissions from traditional wood stoves and outdoor wood boilers, not the carbon equation from high efficiency wood and pellet heating.

Impact on industry

The main trade association representing stove, boiler and furnace manufacturers, Hearth, Patio & Barbecue Association (HPBA), supports the tax credit but some individual manufacturers and retailers are worried that it may tilt sales away from the product lines they make or carry.

Companies making central heaters may have a hard time competing in the marketplace without a unit that is 75% HHV or higher.  The companies that made big names selling outdoor wood boilers currently do not have any products to sell in 2020, much less ones that could meet a 75% efficiency threshold.  Of the 5 central units that would qualify, all but one is made in Europe, though some are assembled in the US.  Consumers buying higher priced central heaters that can cost anywhere from $8,000 - $20,000 will most likely base their decision on whether the unit is eligible for the tax credit.  

For companies making only pellet or only catalytic or hybrid stoves stand to benefit the most.  Many manufacturers make both wood and pellet stoves, and some may have both wood and pellet units that are 75% efficient or higher.  Companies that don’t have any units in excess of 75% may experience fewer sales.  Companies that make cordwood stoves for high volume sales at big box stores and the internet market, will likely have no models that qualifies for the credit. 

Unlike with the previous tax credit, where manufacturers used a variety of ways to claim that their products qualified at 75% efficient, this credit specifies 75% HHV and all 2020 compliant heaters have EPA approved HHV efficiency values.  Rachel Feinstein, Senior Manager for Government Affairs at HPBA, provided a statement that said “We are especially happy to see that the language specifies higher heating value (HHV) of the fuel as the efficiency measure. This more specific language will make it easier for the public to determine which products qualify for the tax credit.”

What comes next

The Green Act, or large parts of it, could be absorbed into other legislation that passes both houses of Congress this year.  Almost all the elements of the Green Act have been in play for some time and there is not much new there for Washington energy insiders.  Congress just passed a one month stop-gap funding measure, giving them until December 20^th to get real legislation passed. Stay tuned.