The Energy Efficiency Tax Credit: Is it Worth It? - Part 2

How it Works: Windows & Water

To see how the credit works, let's look at an example of a modest starter home: a single-story 3-bedroom 1750 sq. foot home built in 2008 on the Gulf Coast.

Replacing old-style single-pane aluminum framed windows with energy efficient windows with good air seals can save money. Upgrading windows on our little starter home to triple-pane insulating low-E, argon gas wood-framed windows can save $69 per year (note: windows and skylights installed after June 1 require a U-factor and SHH Coefficient of .30 or less). Factor in the tax credit for $1600 and you can deduct $480 from your 2009 taxes. Your total cash layout for the windows comes to $1120 (excluding installation labor). Even though adding in the energy savings brings the return to $549, that might not seem a big return on the first year. But the energy cost savings are immediate. Over the windows' 30 year lifetime, this becomes an energy savings of $2070.

Heating water in your home accounts for 17% of annual energy costs. That's $221 of Energy Star's annual cost of $1,300. Most of the water heater's time will be spent keeping the water heated for when it is eventually used. Putting a water heater blanket around it will help some, but you are still paying for this "stand-by heat" whether you use the water or not.

In our example home, the 40 gallon electric water heater's tank is warranted for 6 years. he average lifespan of any electric or gas home water heater tank averages about 8 to 12 years depending on local water quality. The water heater tank will eventually degrade from deposits of calcite and corrosion and then leak; forcing us to purchase and install a new one. So we have several options: install a comparable electric model, install an equal capacity high efficiency Energy Star heater, or install a tank-less water heating system.

Generally speaking, electric models make better use of energy, primarily because gas water heaters lose some of their energy up the exhaust vent. A comparable non-efficient replacement may cost $370 (without installation labor). A new Energy Star gas water heater, meanwhile, transfers 98% of the heat to the water, leaving exhaust fumes so cooled that they are vented to the chimney by a fan. Such extra-efficient gas water heaters cost more than a baseline electric heater; or about $550 (without installation labor). By installing this kind of water heater, we would save $30 annually compared to the baseline electric version and receive a $165 tax credit. That's about $195 recouped the first year.

Installing a tank-less water heating system breaks the expensive cycle of replacing leaking water heaters. Both electric and gas-fired tank-less systems do not store water, so they do not need to continually heat the water. They heating water only on-demand; that is, only when the water is running through the pipe. Not only are they over 80% energy efficient, you can achieve even greater energy savings of 27%–50%. Add to this the expected 20-year life-span and the return on investment ranges between 48% and 97%.

However, tank-less systems are by no means cheap; a whole house system runs around $1,200. But when you consider our little example house, the annual cost of $221 for hot water drops $106 to about $115. We also get a 2009 tax credit of $360. That adds up to $466 for a return on the first year. Of course, there's the amenity of never-ending hot water adding value to the house at sale time.

How it Works: Insulating & Taking the Tax Credit

Heating and air conditioning account for 50 to 70% of the energy used in the average American home. While air sealing and duct work sealing can improve performance, neither of these is going to compensate for insufficient insulation for the whole house. Throughout most of the country, the US DOE recommends at least R30 (about 1 foot of blown cellulose or fiberglass) for attic insulation and a minimum of a R13 (a bit more than 3 inches of blown cellulose or fiberglass) in the walls. Most new houses are built with R13 in the walls but few have R30 in the attic.

Let's say that our sample starter home has R13 in the attic of settled blown cellulose insulation. To bring it up to at least R30, we need to add a further 17 R-value's of insulation to the attic. The easiest way to do this is to either apply another 5 inches of blown cellulose or put down un-faced R19 fiberglass batts (about 6 inches thick).

The cost for blown cellulose to cover the 1750 sq. ft of attic space with 5 inches (or .416 feet) is 46 (16 cu ft) bags @ $7.50 each or $345. Some home centers may include the free rental of their blowing equipment as an incentive. Others may not and rental fees could be as high as $100/day. To make the insulation work effectively, it must be kept out of ventilation soffits and spread evenly throughout the attic at a consistent density so that no thin spots or hollows are formed.

The cost of unfaced fiberglass batts is 15 batts @ $50 each is $750. (Our sample house insulation is being added on top of other insulation there is no need for paper craft facing.) While more expensive than the blown cellulose, fiberglass batts are convenient sizes that can be positioned tightly in place.

The energy savings are evident right away. Your home will require less energy to maintain at a comfortable temperature. Typical heating and cooling costs are cut by 10% (although as high as 30% when combined with air sealing and duct improvement). Assuming you've done a great job as well as air sealed, that first year energy cost savings could be nearly $400. Factoring in the tax credit depends on the price of the insulation. Assuming the blower rental is free, the credit from the blown cellulose is $103.50. If we go with fiberglass batts, it's $225.

So following an initial outlay of $345 to $750 (without installation labor), there's a first year return of $500 to $625. Adding insulation also evens out the temperature from room to room; your home is more comfortable.

Let's say now that it's tax time and we've gotten together our receipts, Manufacturer's Certification Statements, and our 2009 IRS Form 5695. Let's also say we've fixed up our little example home with triple-pane insulating low-E, argon gas wood-framed windows ($1600), a tank-less water heater ($1200), and added fiberglass insulation to our attic ($750). Let's also figure that we've air sealed the house and that we installed the windows and insulation ourselves but left the tank-less water heater to an experienced plumber ($1200). This leaves a total expenditure of $4750. This means we qualify for a 2009 tax credit of $1425. This also leaves us with $250 of worth (recall that $5000 limit) of Tax Credit improvement purchases to qualify for in 2010.

Meanwhile, we have also recouped $575 from our energy costs or a savings of about 56%. Add in the tax credit and that comes to $2000 as a return on a $4750 investment. That's nearly a 43% return. Not even a yacht full of Wall Street CEO's could wrangle a deal like that.

What's even better is that Energy Star improvements like these will continue to keep energy costs low for years to come and keep money in your pocket, no matter the age of your home or how long you plan to keep it. Your home's value will improve, too. And while it might not have a precise financial return, your home will be more comfortable.

Conclusion --Becoming Energy Self-Sufficient

There is a higher tier for energy efficiency some homeowners might be interested in. These complex yet more costly improvements will receive a credit of 30% of their total cost but have until 2016 to be placed in service. They lead not only to greater energy efficiency but to significant cost reductions and energy independence:

Geothermal heat pumps are similar to conventional heat-pump systems with the exception that they use the ground instead of outside air to produce heating, air conditioning, and even hot water. By relying on the warmth of the Earth's stable ground temperature, they are one of the most efficient HVAC technologies available.

Solar water heaters have many different configurations but all involve passing water through a glass-topped heavily-insulated reservoir (either a tank or a tubing) and letting the sun heat it up. Some configurations can heat water on a cloudy day or when temperatures even reach –40° F.

Solar panels or photovoltaics (PV) directly convert sunshine into electricity. These are the same kind of technology that has been around since the Apollo missions to the moon in the early 1970s. Many homes in Europe have solar panels mounted on the southern aspect of their roofs to produce electricity for the home. Some big-box stores in the US have huge roof arrays that power most of the building. Though the components are expensive, the technology is evolving quickly and becoming more affordable.

Residential fuel cells combine hydrogen fuel and oxygen from the air in a electrochemical device to produce electricity, heat, and water. Operating without combustion, and therefore virtually pollution free, the fuel is converted to electricity. Fuel cells produce electricity more efficiently from the same amount of fuel than internal combustion-type generators. They have no moving parts to wear out and are quiet. Heat released by the system can be used to make hot water for home use. This gives them an energy efficiency rating of 80%. Propane-fueled versions have been shown to work in cold climates such as Alaska.

Small wind turbines generate electricity by wind power. Available in a range of sizes ("nameplate capacity") from 1 kilowatt ones mounted on your roof or chimney (about $7,000) all the way up to 100 kilowatt turbines mounted on their own tower (about $80,000).

There is also an energy tax credit for cars:

Hybrids purchased or placed into service after December 31, 2005 may be eligible for a federal income tax credit of up to $3,400. There is a 60,000 vehicle limit per manufacturer before a phase-out period begins. Toyota and Honda have already been phased out. Credit is still available for Ford, GM and Nissan.

Effective January 1, 2009. The first 250,000 Plug-in hybrid electric vehicles sold get the full tax credit, $2,500–$7,500. Like the hybrid vehicle tax credits, there is a 60,000 vehicle limit per manufacturer before a phase-out period begins.

So, to put it bluntly: Yes, the Energy Tax Credit is worth it because an energy efficiency improvement will save energy and money and make your home more comfortable. As you can see there are many, many ways to capitalize on energy efficiency improvements to your home; from the weekend with a caulking gun to a four week wind turbine adventure with a 60 foot crane. However, you know your circumstances and finances best. You'll need to decide what you can do yourself and what you need a professional to do. So, get informed. The Energy Star website has wealth of information as well as links to other government websites with information about all the improvements mentioned here. Remember: These are all improvements that keep saving you money each year. Some can be improved on further, one step at a time.

You might even become so energy efficient you'll be energy self-sufficient.