the tables above are not necessarily unique, nor are they necessarily the least-cost options for obtaining the goal of the tax credit proposal. Furthermore, there is considerable uncertainty in the estimates of the costs of meeting the CCTI efficiency requirements. It is possible that, for some specific locations, costs could be much lower than portrayed here.

Equipment efficiencies are given in SEER (Seasonal Energy Efficiency Rating) and HSPF (Heating Seasonal Performance Factor) for heat pumps and as AFUE (Annual Fuel Utilization Efficiency) and SEER for gas furnaces and central air conditioners. "All costs given in 1998 dollars.

Sources: Cost data from Ernest Orlando Lawrence Berkeley National Laboratory, Energy Data Sourcebook for the U.S. Residential Sector (September 1997), and Energy Information Administration, Technology Forecast Updates: Residential and Commercial Building Technologies-Reference Case, prepared by Arthur D. Little, Inc. (Washington, DC, September 1998).

Equipment efficiencies are given in SEER (Seasonal Energy Efficiency Rating) and HSPF (Heating Seasonal Performance Factor) for heat pumps and as AFUE (Annual Fuel Utilization Efficiency) and SEER for gas fumaces and central air conditioners. All costs given in 1998 dollars.

Sources: Cost data from Emest Orlando Lawrence Berkeley National Laboratory, Energy Data Sourcebook for the U.S. Residential Sector (September 1997), and Energy Information Administration, Technology Forecast Updates: Residential and Commercial Building Technologies-Reference Case, prepared by Arthur D. Little, Inc. (Washington, DC, September 1998).

1

To determine the attractiveness of each investment, a spreadsheet model was developed using a cash flow and payback analysis as the means to evaluate the investment. The following assumptions were used in the analysis:

• Homes receiving the tax credit were assumed to be mortgaged at 7.5 percent for 30 years, with a 10-percent down payment. Thus, if the incremental costs of the energy-efficient home were $2,500, an up-front cost of $250 would occur in the down payment, and mortgage payments would increase by $191 per year.

• The penetration of energy-efficient homes was assumed to be a function of the number of years it would take to achieve a positive cumulative cash flow given the estimated costs and savings and assumed mortgage provisions. The concept of number of years to positive cash flow is similar to, but distinct from, the commonly computed simple payback period.

• In the reference case, Energy Star homes are built at an increasing rate, with the starting point closely tied to recent results from the program.23 For the years 2000 and 2001, during which a $1,000 tax credit applies, it was assumed that Energy Star homes would receive this credit. New homes achieving the 40- and 50-percent energy savings levels were assumed to reduce the baseline of Energy Star homes, which would not be eligible for the tax credits, by 50 percent after 2001. It was assumed that 50 percent of the new homes built in the reference case would be upgraded to receive the tax credit in the CCTI case. Although this is only an assumption, the incremental savings for upgrades to shell efficiency beyond the 30-percent level generally offer rapid returns with the tax credits in place, and some conversions should be expected.

• In the first 3 years of the program, only homes achieving 30- and 40-percent savings over MEC95 would be built. In the last 2 years of the program, homes achieving 50-percent savings over MEC95 would be built. This assumption represents an increase in the efficiency of homes built as the program matures.

The results are as follows:

• Approximately 222,000 additional energy-efficient homes would be built in the CCTI case during the 2000-2004 period. A total of just under 300,000 homes would receive tax credits averaging nearly $1,800. The total reduction in projected tax revenues would approach $540 million.

• Given the length of time that buildings remain in the housing stock, most of the benefits of energy and carbon savings would continue for 50 years or more, although such long-term savings are not illustrated here.

• Energy savings for electricity and natural gas and total reductions in carbon emissions would be as shown in Table 6.

Table 6. Projected Energy Savings and Carbon Emissions Reductions in the CCTI Analysis Case for Energy-Efficient New Homes

Source: Energy Information Administration, Office of Integrated Analysis and Forecasting. Assumes constant energy prices.

"The U.S. Environmental Protection Agency web site describes the Energy Star Homes program, including results for the past 12 months. See web site http://yosemite.epa.gov/appd/eshomes/eshomes.nsf.

Tax Credits for Rooftop Solar Equipment

Background

The CCTI tax incentive for rooftop solar equipment is aimed at encouraging individuals and businesses to adopt systems that provide heat and electricity without producing greenhouse gases. The credit, equal to 15 percent of the investment cost, applies to rooftop photovoltaic (PV) systems and solar water heating systems located on or adjacent to a building and used exclusively for purposes other than heating swimming pools. Solar water heating systems placed in service during the 5-year period from 2000 through 2004 are eligible up to a maximum credit of $1,000. Rooftop PV systems placed in service during the 7-year period from 2000 through 2006 are eligible for the 15-percent tax credit up to a maximum of $2,000.

Currently, a 10-percent business energy tax credit (BETC) is provided to private businesses for qualifying equipment that uses solar energy to generate electricity, to heat or cool, to provide hot water for use in a structure, or to provide solar process heat. The allowable tax credit for any one year is limited to $25,000 plus 25 percent of remaining taxes after the credit is taken. Credits not allowable in one year may be taken in other tax years. Equipment that uses both solar and non-solar energy must not use more than 25 percent of its total annual energy input from non-solar sources to qualify. Passive solar systems and those owned by public utilities are not eligible. Thus, commercial taxpayers would have to choose between the present tax credit and the proposed CCTI credit for each qualifying investment. For systems that qualify for both credits, only small systems would benefit more from the 15-percent CCTI proposal because of the $1,000 and $2,000 caps. The solar technology costs and tax credits used in the analysis of the proposed CCTI tax credit for rooftop solar systems are shown in Table 7.

*System costs could vary depending on climate, collector quality and type of system. Sources: Solar thermal costs are based on Energy Information Administration, Technology Forecast Updates: Residential and Commercial Building Technologies-Reference Case, prepared by Arthur D. Little, Inc. (Washington, DC, September 1998). PV costs are based on U.S. Department of Energy, Office of Building Technologies, Building Integrated Photovoltaics (BIPV), Analysis and U.S. Market Potential (Washington, DC, February 1995). Tax credits from Department of the Treasury, "General Explanations of the Administration's Revenue Proposals" (February 1999). Costs are given in 1998 real dollars. The tax credit is assumed to apply to the purchase price, including installation costs.

Tax credits have been used in the past to create a niche market for solar water heaters. In the early 1980s, shipments of medium-temperature solar thermal collectors (the type used for water heaters) peaked at just under 12 million square feet (enough for roughly 300,000 units) per year. After the Federal 40-percent residential and 15-percent business energy tax credits expired at the end of 1985, shipments fell to less than 1 million square feet per year, and

they have never recovered.24 The business energy tax credit was reinstated at 15 percent for 1986 and phased down to 10 percent by 1992, with the Energy Policy Act of 1992 (EPACT) providing a permanent extension of the BETC.

The credit reinstatement and increasing oil prices after 1986 did not seem to create a rebound of the solar industry. Today, most solar collector shipments (85 percent) are used for heating swimming pool water, which is excluded from the tax credit. In 1997, EIA estimates that roughly 460,000 households (0.5 percent) used solar water heaters to provide some of the energy required to heat the annual load of hot water.25 Currently, about 9 percent of solar thermal collector shipments are destined for the commercial sector. Only 0.5 percent of all solar thermal collector shipments purchased by the commercial sector are for uses other than heating swimming pools, even with the existing energy tax credit available.

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Residential rooftop PV systems are uncommon. Some are used for remote power generation, where connection to the electrical grid would be prohibitively expensive. PV systems are also rare in the commercial sector, used primarily for power generation and communications. The 10-percent BETC is generally not enough to make PV systems economically attractive to the commercial sector, where purchased electricity is readily available. There are Federal, State, and local programs and incentives to encourage use of solar technologies. Locally, under the PV Pioneer I program, the Sacramento Municipal Utility District (SMUD) has created a small market for solar photovoltaics by installing the equipment on residential rooftops for $4 per month for 10 years. The homeowner is. however, obligated to pay SMUD's current rate for electricity. Since 1993, more than 450 homes have participated in the program. SMUD has recently launched PV Pioneer II, which allows homeowners to purchase their own PV systems and participate in net metering, generating their own electricity at no cost and paying for the electricity needed from the electrical grid. Any excess electricity generated from the PV system is sold back to the grid for future credit.27 With energy prices expected to remain stable in real terms, it is likely that substantial subsidization or technological breakthroughs leading to large price reductions would be required to foster increased penetration of residential PV systems.

The reference case for this analysis includes the current 10-percent BETC for both solar thermal water heaters and PV systems. Installations for DOE's Million Solar Roofs (MSR) program (see Chapter 3) are also included in the reference case. The analysis does not include consideration of any State or local incentives.

Results

A negligible change from reference case results was seen when the CCTI tax incentive for rooftop solar equipment was included in the NEMS residential and commercial modules. It should be noted that many of the units completed under the MSR program could be eligible for the solar tax credit. Approximately 400,000 units—of which 66,000 are included in the reference case—are planned to be constructed under the program from 2000 through 2004, the period for which revenue impacts are estimated.28 Any such units qualified to receive the tax credits during this interval probably would be unintended beneficiaries, because the MSR program pre-dates the CCTI tax incentives. The proposed tax credit is modest in comparison with the 40-percent residential credit available in the past. Niche markets with local incentives in place and electricity rates much higher than the national average could create a

**Energy Information Administration, Solar Collector Manufacturing Activity 1993, DOE/EIA-017(93) (Washington, DC, August 1994). 25 Energy Information Administration, Housing Characteristics 1997, DOE/EIA-0314(97), available on the EIA web site at www.eia.doe.gov/emeu.

Energy Information Administration, Renewable Energy Annual 1996, DOE/EIA-0603(96) (Washington DC, March 1997), and Renewable Energy Annual 1998, DOE/EIA-0603(98) (Washington DC, December 1998).

For more information on SMUD's PV Ploneer programs, see web site www.smud.org/home/pv_pioneer/index.html.
Interpolation of estimated units from web site www.eren.doe.gov/millionroofs/benchmark.html.

situation in which the CCTI tax incentive would make solar technologies economically attractive; however, the Census Division resolution of NEMS dilutes the ability to capture such instances.

Industry
Background

The CCTI proposal includes a new investment tax credit for the installation of combined heat and power systems (CHP) that meet specified energy efficiency targets. The reduction in capital cost resulting from the tax credit is intended to induce additional investments in CHP. For this analysis, the NEMS industrial demand module was modified to estimate the likely incremental impacts of the CHP tax credit on energy consumption and carbon emissions. Other potential benefits of the CHP tax credit (such as reduction of other pollutants) were not analyzed.

This analysis did not address district energy systems. The NEMS commercial model incorporates consumption of district energy services, but central district energy plants are not modeled explicitly in NEMS. To the extent that district energy plants are owned by governmental entities, however, an investment tax credit is likely to have little impact on expanding district energy systems. There are also significant lead times for site approval, construction, and operating permits for district energy systems. These lead times could cause otherwise qualifying district energy systems to miss the tax credit window.

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The analysis did not include the potential effects of removing institutional barriers to CHP and merchant power plants. Elimination or reduction of barriers due to, for example, standby rates, exit fees, establishing uniform interconnection standards, or reform of environmental permitting policies could lead to a substantially larger CHP Increase than is likely with the CHP investment tax credit alone. The Administration currently has in place the CHP Challenge Program, which may address some of these barriers. One analysis has concluded that institutional barriers to CHP systems represent a significant impediment to greater deployment of the technology. The study estimated that addressing four types of institutional barriers could lead to an additional 50 gigawatts of CHP by 2010. The specific measures advocated were expedited permitting for CHP systems; output-based air pollution regulations: removal of a variety of "utility-driven" barriers; and establishing a standard depreciation period of 7 years for all new CHP systems.

The analysis specifically did not include any existing, ongoing programs, such as Industries of the Future, the Advanced Turbine System Program, research and development programs, or voluntary programs. The likely energy impacts of those programs are regularly assessed by DOE and are not reviewed here.33

29 While this analysis does not explicitly include district energy systems, there is some indication that the economics of retrofitting existing systems with CHP are not very favorable. See M. Spurr, District Energy Systems Integrated with Combined Heat and Power, prepared by International District Energy Association for the U.S. Environmental Protection Agency (March 1999), p. 75.

30M. Spurr, District Energy Systems Integrated with Combined Heat and Power, prepared by International District Energy Association for the U.S. Environmental Protection Agency (March 1999), p. 43.

"While the Administration has not presented a detailed discussion of its intentions in this area, a list of possibilities can be found in T.R. Kasten. Turning Off the Heat (New York, NY: Prometheus Books, 1998).

"American Council for an Energy-Efficient Economy. Approaching the Kyoto Targets: Five Key Strategies for the U.S. (Washington, DC. August 1998).

"U.S. Department of Energy. Office of Energy Efficiency and Renewable Energy, Office of Industrial Technologies: Summary of Program Results, DOE/EE-0184 (Washington, DC, January 1999).