Transforming Wood Heat in America:
C. Federal Programs
The Federal Government has very few programs addressing residential wood heat compared to other types of renewable energy. The EPA office of Air Quality Planning sets emission limits and educates consumers, but their underfunded efforts are more focused on regulating appliances such as non-EPA qualified outdoor wood boilers that tend to be the most polluting rather than developing ever cleaner indoor boilers. The Department of Energy tracks some data on wood heating but has no programs to incentivize it as they do for other end uses of biomass. The U.S. Department of Agriculture is the sector’s most natural home and has considerable expertise and understanding, but most funds still go to biofuels (primarily transportation fuels derived from biomass). The only significant federal residential wood heat incentive program came from Congress in the form of an individual tax credit up to $1,500 for the purchase of an efficient heating appliance in 2009 and 2010. Today that credit is capped at $300.
Not only can federal incentives spur the creation of state programs, but they can also complement the programs as well; increasing the efficacy of both. A 2009 study on solar incentives found “a strong participation response to incentives in many states after 2006, when the federal investment tax credit was reinstated for residential installations and was increased for non-residential installations. Recent participation, therefore, is attributable to the combination of the state and federal incentives.” 1
Individual Tax Credit (Tax Code Section 25c)
High-efficiency wood stoves have had a tax credit since 2008, although it has been lowered as of December 31, 2010. The $858 billion Tax Cut Compromise Package of 2010 reduced the biomass heater tax credit to 10% with a $300 cap. Congress also removed the lower heating value measurement and will only allow the credit to go towards the purchase price but not for installation. The $500 tax credit (only $300 allowed for heating appliances) is a lifetime maximum, meaning that if a homeowner has used this credit anytime since 2005, it cannot be used again.
The original intent of the 25C tax credit was to advance home energy-efficient appliances and upgrades to existing homes by providing a modest tax credit. As part of the 2010 amendments, Congress tightened the specifications for oil furnaces and boilers and gas boilers to 95% efficiency, up from the 90% efficiency.
The tax credits for biomass stoves are included as a Residential Energy Efficiency Tax Credit, all of which are capped at $500, instead of a Residential Renewable Energy Tax Credit, which are uncapped. Even though the EPA and DOE accept biomass as a carbon neutral fuel, biomass is not yet considered a top tier renewable.
Table 12: Tax Code Section 25c Timeline
2005- Non-business Energy Property Tax Credit (25c) was added to the Internal Revenue Code by the Energy Policy Act of 2005 with a 10% credit not to exceed $300 for any item of energy-efficiency improvements (defined as any energy efficient building envelope component meeting the criteria set by the 2000 International Energy Conservation Code) and a total credit capped at $500.
2007- Section 25c expired.
2008- Section 25c was revived by the Energy Improvement and Extension Act (EIEA), a part of the Emergency Economic Stabilization Act (EESA) rescue package by President Bush. EIEA clarified the original act by specifically including biomass stoves and boilers under energy-efficient building property.
2009- American Recovery and Reinvestment Act of 2009, expanded the scope of the earlier 25c and increased the credit up to 30%, and capped it at $1,500. The efficiency standard for biomass boilers was defined as over 75% efficient appliances as measured using a lower heating value.
2010- Section 25c was extended for one year by re-instating the credit as it existed before 2009, which lowered the credit to 10% capped at $300. Biomass stoves and boilers remained in the bill but the lower-heating value measurement was removed.
Strengths
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National Recognition: This program was the first federal program recognizing wood/pellet stoves in a national energy efficiency incentive program.
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Significant Incentive: The $1500 tax credit in 2009-2010 could be a significant incentive for a $4,500 system.
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Long Time Frame: The $1,500 tax credit was at least a two year program which gave the industry more time to take full advantage of it, and promote it.
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Clear Requirements: Simple and straightforward requirements made it easy for people to claim the credit and understand the program.
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Weaknesses
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Weak Incentive for Some Consumers: As with all appliance incentives, 25c might not have provided an actual incentive to buy the appliance, but just altered the timing of the purchase by people who were already interested. Additionally, as a tax credit, many low income households were unable to take advantage of it.
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Lacked Air Quality Measures: There was no change out component. It did not exclude using the credit to install wood stoves in urban, non-attainment areas. Phase II outdoor wood boilers were allowed to be installed in states that lacked appropriate regulations such as property setbacks or stack height requirements.
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Did not Drive the Market: The Tax credit did not incentivize the top percentage of the market in efficiency or in PM emissions, rather virtually all new EPA certified stoves were eligible under the 75% efficiency rule, using lower heating value.
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Lack of Enforcement: Non-EPA phase II outdoor wood boilers were sometimes claimed under the credit.
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Drawbacks of the 2011 Tax Credit Program
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The 2011 version of 25c is a lifetime credit, which limits people who took the credit before for windows (for example) from purchasing a stove.
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Removed the explanation of what heating value measurement should be used to calculate the efficiency of the stove. Removing the clarification of lower heating value could result in confusion between manufacturers and the IRS.
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Recommendations
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High efficiency wood and pellet appliances should be included in Section 25D, the renewable energy technologies tax code section. This would provide a 30% uncapped tax for eligible technologies.
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Defining a selective subset comprised of the cleanest and most efficient appliances for eligibility would help to steer the market toward these units.
Low Income Energy Assistance Program
The Low Income Energy Assistance Program (LIHEAP) is a federally funded block grant program that is implemented and administered at the State and Tribal levels. LIHEAP has been operating since 1982 and its stated purpose is "to assist low-income households, particularly those with the lowest incomes, that pay a high proportion of household income for home energy, primarily in meeting their immediate home energy needs.” The program considers wood and pellets among the eligible fuel sources and will also provide funds to repair or replace wood stoves.2
The Department of Health and Human Services that oversees LIHEAP funds has an opportunity through the Sustainable Communities initiative and other programs, to direct and urge states to use LIHEAP funds to help families use less fossil fuel. The State of Montana undertook a study that demonstrated states can save funds by providing efficient wood stoves to replace older, inefficient ones since the new stoves require less fuel and use the cheapest fuel available: wood. If more families used this renewable fuel efficiently, the state could harness this savings and apply LIHEAP dollars to more families.
Strengths
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Stove Repair Component: This is one of the only programs that provides funds to repair or replace stoves in low-income households. Providing funding to repair old stoves can improve safety, enhance efficiency and reduce emissions and is less costly than replacing the unit.
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Protects Low-income Families: Families who cannot afford even relatively inexpensive cordwood, and cannot harvest their own (due to location, physical or time constraints) will have a social safety net that includes wood stoves.
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Weaknesses
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Administrative Burden for Small Scale Wood Suppliers: Individuals and small businesses that sell wood and pellets are not as well equipped to handle the administrative and fiscal hurdles as large fossil fuel suppliers are.
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Uncertain Federal Funding: The LIHEAP funds were raised due to the American Recovery and Reinvestment act, and over the years, demand for the program has increased. Unfortunately, the funding was severely cut in 2011. The variability of this funding source can have a very negative impact on families who have come to rely on this financial assistance for heating their homes, only to have it unexpectedly disappear.
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Recommendations
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States should more aggressively use LIHEAP funds to provide new, EPA certified stoves to any family receiving LIHEAP funds who uses a stove as a primary or secondary heating source. The state of Montana served as an example that states can cut costs by providing high efficiency stoves to anyone who uses wood as a primary heating source, rather than providing higher, prolonged assistance to heat with a low efficiency stove. 3
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States should also consider biomass appliance incentive programs targeted at rural families who heat with the most expensive fuels (electricity, propane and oil) and who are on energy assistance. A generous rebate could lead to more energy self-sufficiency and lower costs if the family collects wood themselves.
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States should calculate benefits in a way that encourages, not discourages, families to use lower costs fuels like wood and pellets. States that provide benefits based on cost of fuel, such as New Hampshire, give larger benefits to less efficient forms of heating. The oil heat industry becomes the major beneficiary of this method of calculation. This could push thousands of families to choose funding for oil, rather than a wood since there is little motivation to choose the latter.
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State and local officials, and the hearth industry, should do more to advertize the availability of LIHEAP funds to be used for wood or pellet stove repair.
Property-Assessed Clean Energy Loans
Property-Assessed Clean Energy (PACE) loans were promoted by the DOE and many states were passing enabling legislation until federal housing loan agencies put a stop to the programs. Property-Assessed Clean Energy financing loans were a series of local government initiatives that allowed property owners to finance renewable and energy efficiency projects in residential and commercial structures. This financing, which would have funded projects as diverse as insulation, energy efficient boilers (including biomass), new windows, and solar installations were to be repaid over a 20 year period via property tax assessments. This enabled the costs of an energy efficiency project to be spread out over a longer period of time, and it also allowed for repayment obligations to be transferred to new property owners in the case of the property changing hands. Municipalities that adopted PACE like legislation were free to setup their own guidelines for financing. The twenty five States adopted legislation that enabled PACE programs included CA, CO, DC, FL, GA, IL, LA, MA, ME, MD, MI, MN, MO, NV, NH, NM, NY, NC, OH, OK, OR, TX, VT, VA and WI. Out of those twenty five states, nine specifically mentioned biomass as eligible for PACE financing: CO, FL, LA, ME, MO, NV, NH, OH and VT.
PACE was pioneered in Berkeley, CA in 2008 and was quickly adopted by a number of states with support of the Obama Administration and the Department of Energy. The program was unfortunately shutdown, as announced in a Federal Housing Finance Agency (FHFA) Statement in June of that year, after protests by the government-chartered agencies Fannie Mae and Freddie Mac. These firms, responsible for buying and selling home mortgages, claimed that said mortgages would be put at risk due to the nature of PACE financing. Their concerns were derived from the question of who would be responsible for the senior lien in the case of a default on the mortgage (PACE is notable for the loan being attached to a property as opposed to an individual). They argued that taxpayers would be footing the bill for irresponsible homeowners, leading to an order by the FHFA to no longer underwrite mortgages on PACE assessed properties, effectively killing the program.
Despite this setback, there was originally some optimism that the program could be restarted. Litigation was filed by Sonoma County, California and Babylon, New York among others attempting to reaffirm the right of local and state governments to define public purpose. It also would have required that PACE assessments be treated no differently than any other assessments, however this legislation failed to accomplish its goals. There was also a discussion of PACE being reintroduced in the first quarter of 2011 with bipartisan support in Congress, but the heated climate on the hill has apparently stalled this effort. No other efforts aimed at reviving PACE are currently being discussed.
Strengths
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Attached loan payments to the property tax, loan remained with the home when sold.
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Weaknesses
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Fannie Mae and Freddie Mac did not want an energy-related lien to be senior to a mortgage.
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Recommendations
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PACE loans would be ideal to fund larger, whole house biomass heating systems, but some of the regulatory infrastructure was not in place for biomass systems in the initial program. If either PACE, or a similar program, re-emerges states should specifically identify which biomass systems are eligible and which are not. Since the EPA exempted biomass boilers from regulation, PACE loans might have funded low efficiency high emission equipment rather than just the top-performing, efficient units. Traditional, non-qualified outdoor wood boilers might have been funded in states with no property set-back, or stack height limits.
Home Star
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Home Star is another major federal program that could have provided a boost to residential wood heating but was not approved, and appears increasingly unlikely to be in the foreseeable future. Nevertheless, its components provide an important starting place for discussing potential federal incentive programs. The Home Star Energy Retrofit Act of 2010 (H.R. 5019), authorized the creation of a national energy retrofit program for American homeowners. This bill was introduced by Representative Peter Welch of Vermont and was passed by the house May 6, 2010, but later failed to pass in the senate.
Home Star was intended to provide rebates on energy efficiency measures, including high efficiency biomass heaters. The bill would have given a $1,000 rebate for stoves with 75% thermal efficiency that could meet 75% of a home’s heating needs and emit less than 3 grams of particulates per hour. For a wood stove to qualify, the homeowner would have had to trade in an existing wood stove, but a pellet stove would have qualified without any changeout requirement. A lower $500 rebate would have applied to stoves that could not meet 75% of a home’s heating needs. Boilers were eligible for the $1,000 rebate as well as long as they fulfilled 80% of home heating needs. Only some of the EPA-qualified Phase II outdoor boilers would have met these criteria based on the third party efficiency numbers. All biomass appliances were also required to have a heat distribution system of some kind, such as vents, fans or blowers.
Strengths
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National Changeout: This would have been the first national changeout program and could have taken tens of thousands of older, dirty wood stoves out of circulation and replaced them with stoves that have a much greater capacity to reduce fossil fuel use and save homeowners money.
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Attractive to Consumers: It was designed as a point-of-sale rebate program, which is far more attractive to consumers and particularly to lower income consumers than tax credits or other incentives.
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Weaknesses
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Complicated: The program had many requirements and sought to achieve many policy goals. It was likely to be somewhat confusing for consumers. The requirement of a heat distribution system was confusing for many in the wood stove industry.
1 Sarzynski, A. The Impact of Solar incentive Programs in Ten States. George Washington Institute of Public Policy. November 2009.
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2 CSD LIHEAP/DOE Weatherization Programs
3 Quenemoen, K. Montana Low Income Wood Stove Changeouts Study Project. Montana Department of Energy. February 2010