LED Rebates, Incentives, and Tax Benefits

There are an increasing number of incentives for energy efficiency measures, and LED lighting is often considered eligible.  If you are considering a LED rollout in multiple locations, we can leverage our knowledge of what’s available to map out a phased strategy that captures the most incentive dollars early in the rollout.  We’re not promising to make the rollout self-funding, but we can certainly phase it in such a way to improve the overall IRR.

Below we break these incentives into three broad categories:  Rebates, Grants & Financing, and Tax Benefits.

Rebates

The website www.dsireusa.org is regarded as the most complete and up-to-date online resource for researching energy efficiency incentives in the United States.  Most, though not all, of the programs listed are utility rebates, and we’ve noticed a relative paucity of LED-related rebates, with the exception of exit signs and—to a lesser extent—traffic lights.

We’re not discouraged by this, for two reasons:  
First, LEDs in exit signs and traffic lights have been around much longer than “white light” LED, so utilities are naturally more comfortable with the former.  As white light LED makes inroads, you can expect to see the listed utility rebates proliferate.

Second, and unbeknownst to many, several utilities already offer “unlisted” LED rebates on a case-by-case basis.  We know of several instances where large end-users negotiated very favorable rebates when they were able to effectively document for the utilities the electricity savings that would occur by switching to LED.    

Grants & Financing

The www.dsireusa.org site is also a good source of grant information.   There are many city, county, and state-level energy-efficiency programs providing grants and/or below-market rate loans.  At the Federal level, we describe below in the Tax Benefits section the most commonly-used incentives for which LED lighting is eligible.

For those small businesses and/or agricultural producers in areas the U.S. Department of Agriculture considers “rural” (here’s the map - there are some surprises: http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do), you may be eligible for their “Rural Energy for America” program, or “REAP”.  If structured properly, the end-user would need to come up with just 25% down for a LED lighting project, with another 25% paid in the form of a grant and the remaining 50% a bank loan backstopped with a government guarantee.  In our discussions with the administrators of the REAP program at the state levels, they are desperate for more deal flow, and LED lighting—both retrofits and new construction—is eligible.

Private sector loans and leases are also available.  We don’t have a “favorite” provider per se because the terms and conditions fluctuate from deal to deal, but we can certainly offer some suggestions and we would prepare for you the projected savings spreadsheet on which the financing would be based.

With interest rates at historic lows, virtually everyone is predicting that rates will eventually rise, so the “cost of waiting” needs to be factored into your decision process.  That is, if you expect LED lights to continue to drop substantially in price, consider two things:

  1)    Those diodes and materials used in their manufacture are not just high-demand items in commercial LED lighting, but in handsets, TVs, automobiles, and a growing multitude of other uses.
 

  2)    When—not if—rates do rise, what will the additional cost be to fund that LED lighting project, versus whatever savings you might enjoy if in fact LED prices had dropped in the interim?  In other words, today we are seeing paybacks of one to three years on both financed and all-cash LED deals.  When rates rise 100-200 basis points, how much will LED prices need to have dropped for you to not regret having pulled the trigger when you could? 

Finally, if you have publicly-traded investment-grade debt, there are institutional buyers who offer project financing by creating off-balance sheet vehicles that are funded from the projected savings stream.  Minimum deal sizes apply.  Contact us for more information.

Tax Benefits

Section 179-D of the Internal Revenue Code pertains to the energy-efficient commercial buildings deduction, also referred to as the “EPACT” deduction after the Energy Policy Act of 2005.   Take a look at the following link to learn more: http://www.efficientbuildings.org/about_the_provision.html.  For eligible lighting projects, tax deductions of up to $.60 per square foot are achievable.

There are a couple of accounting issues we’d like to raise, based on research from a large accounting firm done in the first quarter of 2011, but please:  do not let us have the last word on accounting advice – consult your own advisor.

First, historically, there was no question that light bulbs were expensable items.  The question we had was:  If a LED bulb has a stated useful life of 5, 7, or even 10 years (based on 50,000 hours, or even more), would it still be considered expensable?  

The response we received from the accounting firm was that they could find no specific reference that a LED bulb should be considered a fixed asset, so their conclusion was that the client should act consistent with their own capitalization policy.  In other words, if you have historically expensed light bulbs, and there is nothing new in the Internal Revenue Code to suggest otherwise, then continue to expense light bulbs.

Second, the Tax Relief Act of 2010, signed into law December 17, 2010, provides for 100% bonus depreciation for qualified improvements made before 12-31-11. The accounting firm believes that new LED light fixtures, which normally would be depreciable over a five to seven year period, would qualify for the 100% depreciation.  

Our takeaway from these two accounting items is that businesses have a historically unique window in which both retrofit and new fixture items can pass through their P&L as expense items in 2011.