Designed to capture and employ the heat that is normally lost during the production of electricity, Combined Heat and Power (CHP) is recognized by the federal government as a sustainable energy solution. To encourage its adoption, Congress included—in its Bipartisan Budget Act of 2018—an extension through January 1, 2022 of the CHP federal tax credit.
On the eligible basis (cost) of a CHP system that a property owner puts into use, the Internal Revenue Code (IRC) Section 48 federal investment tax credit (ITC) grants an energy credit of 10 percent. Some facility owners and managers may not know that the tax credit applies both to new systems and to capital improvements on existing eligible systems.
IRC section 48 generally defines an eligible CHP system as “…a property comprising a system that uses the same energy source for the simultaneous or sequential generation of electrical power, mechanical shaft power, or both, in combination with the generation of steam or other forms of useful thermal energy (including heating and cooling applications).”
Beyond meeting this definition, the systems must meet additional eligibility factors listed in the IRC. Construction on the CHP system must begin before January 1, 2022. The system must also:
- Attain an energy efficiency percentage exceeding 60 percent (unless the system uses biomass).
- Generate at least 20 percent of its useful energy total in the form of thermal energy which isn’t used to generate mechanical or electrical power (or combination thereof).
- Generate at least 20 percent of its useful energy total in the form of mechanical or electrical power (or combination thereof).
The Rules of Recapture
IRC section 48 also includes recapture rules that discourage the investment in an ITC-eligible project by a taxpayer who claims the ITC and then quickly exits the investment. Generally speaking, the rules state that the taxpayer must keep the CHP project investment for five years from the date when the project is placed in service. If a recapture event happens during that period, the ITC is recaptured, with the total amount reduced by 20 percent during each of those five years. Qualifying recapture events include:
- The CHP system ceases to operate permanently;
- The taxpayer sells the CHP system or an interest in the CHP-owning entity;
- The CHP system is used or owned by tax-exempts such as governmental agencies (though some exceptions exist).
To Own or Not to Own
The owner of the facility where the CHP system is installed may not always want to retain ownership of the system itself. In such cases, if the developer of the CHP system has taxable income, they can retain ownership and claim the ITC themselves. In other cases, the developer can create a joint venture with a third-party tax equity investor who may qualify to claim the ITC.
Navigating the Options
The IRC section 48 is just one incentive that encourages the adoption of CHP. Various federal, state and local incentives are also available. As a recognized CHP partner with the U.S. Environmental Protection Agency (EPA), we’re experts on understanding and applying the available incentives to every customer’s project.
Also, through our Shared Savings Program, we can design, install, operate and retain ownership of the CHP system at no capital or maintenance cost to the facility, who benefits from the lowered emissions and boosted energy savings. The facility has the option to purchase the equipment at a decreasing cost at any time during the agreement’s life.
If you have questions about IRC section 48, CHP or your facility’s needs and eligibility, contact us today. We’ve installed over 1,000 CHP systems across the country. Talk with one of our CHP specialists to start your free energy analysis.