[Senate Hearing 112-814]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 112-814

 
                 TAX REFORM AND FEDERAL ENERGY POLICY:
                INCENTIVES TO PROMOTE ENERGY EFFICIENCY

=======================================================================

                                HEARING

                               before the

     SUBCOMMITTEE ON ENERGY, NATURAL RESOURCES, AND INFRASTRUCTURE

                                 of the

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                           DECEMBER 12, 2012

                               __________

                                     
                                     

            Printed for the use of the Committee on Finance



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                          COMMITTEE ON FINANCE

                     MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West         ORRIN G. HATCH, Utah
Virginia                             CHUCK GRASSLEY, Iowa
KENT CONRAD, North Dakota            OLYMPIA J. SNOWE, Maine
JEFF BINGAMAN, New Mexico            JON KYL, Arizona
JOHN F. KERRY, Massachusetts         MIKE CRAPO, Idaho
RON WYDEN, Oregon                    PAT ROBERTS, Kansas
CHARLES E. SCHUMER, New York         MICHAEL B. ENZI, Wyoming
DEBBIE STABENOW, Michigan            JOHN CORNYN, Texas
MARIA CANTWELL, Washington           TOM COBURN, Oklahoma
BILL NELSON, Florida                 JOHN THUNE, South Dakota
ROBERT MENENDEZ, New Jersey          RICHARD BURR, North Carolina
THOMAS R. CARPER, Delaware
BENJAMIN L. CARDIN, Maryland

                    Russell Sullivan, Staff Director

               Chris Campbell, Republican Staff Director

                                 ______

     Subcommittee on Energy, Natural Resources, and Infrastructure

                  JEFF BINGAMAN, New Mexico, Chairman

JOHN D. ROCKEFELLER IV, West         JOHN CORNYN, Texas
Virginia                             CHUCK GRASSLEY, Iowa
KENT CONRAD, North Dakota            PAT ROBERTS, Kansas
JOHN F. KERRY, Massachusetts         MICHAEL B. ENZI, Wyoming
MARIA CANTWELL, Washington           JOHN THUNE, South Dakota
BILL NELSON, Florida                 RICHARD BURR, North Carolina
THOMAS R. CARPER, Delaware

                                  (ii)


                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page
Bingaman, Hon. Jeff, a U.S. Senator from New Mexico, chairman, 
  Subcommittee on Energy, Natural Resources, and Infrastructure, 
  Committee on Finance...........................................     1
Wyden, Hon. Ron, a U.S. Senator from Oregon......................     2

                                WITNESSES

Arvizu, Dr. Dan, Director, National Renewable Energy Laboratory, 
  Golden, CO.....................................................     3
Nadel, Steve, executive director, American Council for an Energy-
  Efficient Economy, Washington, DC..............................     5
Wagner, Mark F., vice president, government relations, Johnson 
  Controls, Inc., Washington, DC.................................     8
Golden, Matt, principal, Efficiency.org, and policy chair, 
  Efficiency First, San Francisco, CA............................     9

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Arvizu, Dr. Dan:
    Testimony....................................................     3
    Prepared statement...........................................    27
    Responses to questions from subcommittee members.............    35
Bingaman, Hon. Jeff:
    Opening statement............................................     1
    Prepared statement...........................................    38
Golden, Matt:
    Testimony....................................................     9
    Prepared statement...........................................    40
    Responses to questions from subcommittee members.............    50
Nadel, Steve:
    Testimony....................................................     5
    Prepared statement...........................................    61
    Responses to questions from subcommittee members, with 
      attachment.................................................    77
Wagner, Mark F.:
    Testimony....................................................     8
    Prepared statement...........................................    92
    Response to a question from Senator Bingaman.................    97
Wyden, Hon. Ron:
    Opening statement............................................     2

                             Communications

Ace Electric, Inc................................................    99
alliantgroup.....................................................   102
ASHRAE, et al....................................................   107
Bedford Strategies and Solutions.................................   113
Cambridge Engineering, Inc.......................................   118
Center for Fiscal Equity.........................................   121
Concord Engineering..............................................   126
Council of the North American Insulation Manufacturers 
  Association....................................................   129
Energy Concepts and Solutions, Inc...............................   132
Energy Tax Savers, Inc...........................................   136
Ernst and Morris Consulting Group, Inc...........................   140
Federal Business Centers.........................................   143
Green Light National.............................................   146
Grundfos Pumps Corporation.......................................   151
Hauppauge Industrial Association (HIA)...........................   155
International Association of Heat and Frost Insulators and Allied 
  Workers........................................................   157
National Association of Home Builders............................   159
National Multi Housing Council and National Apartment Association   166
National Propane Gas Association (NPGA)..........................   170
National Roofing Contractors Association (NRCA)..................   174
Polyisocyanurate Insulation Manufacturers Association (PIMA).....   179
Sheet Metal and Air Conditioning Contractors' National 
  Association....................................................   187
Solis Partners, Inc..............................................   190
Trio Electric and Trio Energy....................................   194
Walker Parking Consultants.......................................   198
Worldwide Energy.................................................   202
ZDS Design/Consulting Services...................................   205


                         TAX REFORM AND FEDERAL
                       ENERGY POLICY: INCENTIVES
                      TO PROMOTE ENERGY EFFICIENCY

                              ----------                              


                      WEDNESDAY, DECEMBER 12, 2012

                           U.S. Senate,    
                Subcommittee on Energy, Natural    
                     Resources, and Infrastructure,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 10:03 
a.m., in room SD-215, Dirksen Senate Office Building, Hon. Jeff 
Bingaman (chairman of the subcommittee) presiding.
    Present: Senators Wyden, Carper, Cardin, and Thune.
    Also present: Ryan Martel, Staff Director, Finance 
Subcommittee on Energy, Natural Resources, and Infrastructure.

 OPENING STATEMENT OF HON. JEFF BINGAMAN, A U.S. SENATOR FROM 
     NEW MEXICO, CHAIRMAN, SUBCOMMITTEE ON ENERGY, NATURAL 
      RESOURCES, AND INFRASTRUCTURE, COMMITTEE ON FINANCE

    Senator Bingaman. Why don't we go ahead and get started, if 
everybody could find a chair. Good morning. Today's hearing 
examines tax reform and Federal energy policy and considers 
some proposals to promote efficient use of energy resources.
    The tax code has long served as a way to promote energy 
policy goals. For most of this time, the code only offered 
incentives for the production of energy, first from mineral 
resources and then from oil and gas. Recent years have brought 
important incentives for renewable energy resources, though 
unfortunately many of those still remain temporary and 
uncertain.
    Even more recently, Congress has decided to reintroduce 
certain tax incentives that promote the efficient use of 
energy, recognizing the value in preserving our domestic 
resources by developing technologies that use less energy to 
accomplish the same task.
    However, with the possibility of comprehensive tax reform 
in the next Congress, and within the context of a contentious 
debate on how to close the Federal deficit, we need to assess 
the existing policies to determine if their goals are worth the 
cost to the taxpayer, and, if they are--and I believe that 
energy efficiency is a worthy policy goal--then we need to 
examine the best, least-cost ways of achieving that goal.
    At today's hearing we have a panel of expert witnesses who 
will help us consider these three issues: first, to understand 
the opportunities that are presented to our economy, our energy 
infrastructure, and to the environment that can result from the 
more efficient use of our resources; second, to consider if 
creating incentives through the tax code is a sensible and 
efficient way of promoting energy efficiency investments; and, 
if so, then the third question is to examine how we can improve 
our existing incentives and make them more effective, easier to 
use, and less expensive to the Federal Government.
    Over the past two Congresses, Senator Snowe and I, along 
with Senator Feinstein and others--Senator Cardin has been very 
involved--have worked to develop reforms to our existing 
efficiency incentives. Whenever possible, we have adhered to 
general principles that we believe to be consistent with the 
goals of tax reform. We have striven to provide technology-
neutral structures that offer incentives based on performance 
and not just the cost of putting in the particular energy-
saving technology. We have worked to ensure that the efficiency 
savings are able to be measured and verified and that fraud is 
minimized to the greatest extent possible.
    Finally, we have sought to ensure that innovative, new 
efficiency technologies can utilize existing policies. The 
results of this work is three bills that have been introduced 
in this Congress: one focusing on the commercial buildings 
deduction; one focusing on tax credits for homeowners; and one 
that promotes efficiency in the industrial sector. I hope we 
can examine how these bills fit into the discussion that I have 
outlined above. I welcome an honest assessment of the bills and 
encourage any thoughts on how they can be improved.
    [The prepared statement of Senator Bingaman appears in the 
appendix.]
    Senator Bingaman. This morning's hearing will consist of 
one panel of very distinguished witnesses. Let me just 
introduce them briefly. Dr. Dan Arvizu is Director of the 
National Renewable Energy Laboratory, of course in Golden, CO. 
We claim him in New Mexico since he used to be at Sandia. Next 
is Steve Nadel, who is the executive director of the American 
Council for an Energy-
Efficient Economy. Then we have Mark Wagner, who is the vice 
president for government relations with Johnson Controls. 
Finally, we welcome Mr. Matt Golden, who is a principle at 
Efficiency.org, and the policy chair at Efficiency First.
    Before I call on our witnesses, my colleague Ron Wyden, who 
is soon to be the chair of the Energy Committee as well as a 
distinguished member of this Finance Committee and who has been 
very interested in these issues, let me defer to him and thank 
him for being here.

             OPENING STATEMENT OF HON. RON WYDEN, 
                   A U.S. SENATOR FROM OREGON

    Senator Wyden. Thank you very much, Mr. Chairman. Mr. 
Chairman, as you know, there is not a whole lot certain about 
what goes on here in the U.S. Senate, including when in fact 
the Senate session may wrap up for this year. But I just want 
to note that there is one certainty for everybody who works in 
the energy field, and that is these debates are going to be 
less thoughtful and they are going to be less informed because 
you will not be part of these debates.
    I think people are going to understand, when voices get 
raised and the debate gets shrill, just how valuable those 
particular attributes were, the fact that you always brought us 
back to policy and sort of Planet Reality when the debates 
seemed to move in a different direction.
    I just want to note that, while this may be the last energy 
hearing for the year--and maybe that remains to be seen as 
well, given the schedule--there are a lot of us who are going 
to make sure that the cell phone connections between 
Washington, DC and New Mexico are operating so that we can 
continue to have your wise counsel and your thoughtful approach 
on these issues. Thank you for giving me a chance to say that.
    If the crowd wants to break into a big round of applause, I 
will not have any particular problem. [Laughter.]
    Senator Bingaman. Thank you. Well, thanks for your very 
kind words. I am sure, as soon as I get out of town, you can 
solve all these problems. [Laughter.]
    So I am trying to hasten that day. But thank you very much 
for your kind comments.
    Why don't we start and just go across the table. We will 
have everybody take 5 or 6 minutes, or however long you think 
is necessary, to make the comments you think we ought to be 
aware of on these subjects, and we will try to shed some light 
on the issue of using the tax code to achieve some of these 
objectives.
    Dr. Arvizu, go right ahead.

   STATEMENT OF DR. DAN ARVIZU, DIRECTOR, NATIONAL RENEWABLE 
                 ENERGY LABORATORY, GOLDEN, CO

    Dr. Arvizu. Thank you, Chairman Bingaman, Senator Wyden, 
and other members of the committee. Thank you for this 
opportunity to discuss how energy efficiency concepts and 
technologies can strengthen our energy security, our 
environment, and our economic growth. I will submit, with your 
approval, my written testimony for the record.
    Senator Bingaman. Yes. We will include everyone's written 
testimony as if it were read.
    [The prepared statement of Dr. Arvizu appears in the 
appendix.]
    Dr. Arvizu. So I am Dan Arvizu, the Director of the 
National Renewable Laboratory, the Department of Energy's 
primary laboratory for research and development of energy 
efficiency and other clean energy technologies. Research into 
new, more efficient ways to construct, modernize, and operate 
our homes and commercial buildings and businesses is an 
important part of our mission.
    While we do not take positions on legislation and policy, I 
will speak this morning about the advancements that have been 
achieved from Federal investments in energy efficiency and the 
proven benefits that these bring to our Nation.
    I also serve on the Alliance to Save Energy's Commission on 
National Energy Efficiency Policy, and, when released next 
year, the Commission's recommendations will be comprehensive 
and a road map to meet our Nation's energy future.
    At NREL we have learned that energy efficiency is 
fundamental. The megawatts that are not used are just as 
important as the megawatts that are. That realization has been 
confirmed repeatedly on the national scale. Three years ago, 
McKinsey produced a landmark analysis that showed that, by 
2020, the U.S. could reduce non-transport energy consumption by 
a quarter.
    That would cost $520 billion but would pay back $1.2 
trillion in energy cost savings. In 2010, the National Academy 
of Engineering and Science's report also found that the Nation 
could save money by cutting energy consumption by 30 percent 
and produce the same amount of goods and services.
    At our institution, NREL, we have calculated that hundreds 
of peer-reviewed energy-saving measures that are currently 
available could reduce energy consumption by one-half by 2030, 
and the cost savings would be twice the dollar amount invested. 
These reports all imply and suggest that, to realize this 
potential, public policy is still necessary.
    A leading example of the R&D successes achieved in recent 
years is the Commercial Building Partnership, sponsored by the 
Department of Energy. It partners with building owners and 
operators on a number of new buildings and retrofits, with 
compelling results. One project we participated in with Target 
stores in Colorado cut energy consumption by 35 percent, and 
they are now busy replicating that enterprise-wide.
    The Research Support Facility at NREL--where I currently 
have my office--is another example of how much can be 
accomplished when energy efficiency is a fundamental attribute 
in building design. At the RSF, which is the world's largest 
net-zero-energy office building, energy consumption is one-half 
of a building built to code in our region, and it is cost-
competitive, including the solar panels on the roof. I invite 
you to come out and take a look for yourself.
    Private residences, which comprise a little more than half 
of the energy used by buildings in the U.S., provide equally 
large opportunities for savings. The DOE's Building America 
program has demonstrated that homes can have a 40-percent 
energy reduction at no additional cost in almost every U.S. 
climate zone. A Habitat for Humanity home built under this 
program likewise proved that ambitious energy efficiency 
targets and goals can be accomplished with very tight cost 
constraints.
    Simulation tools like DOE's Energy Plus package and the 
building optimization program are continually being refined so 
that businesses, consumers, utilities, government agencies, and 
policymakers have the most accurate energy insights and can 
make the best efficiency decisions possible.
    Industrial energy efficiency is one area where our new 
technology can dramatically improve performance. An example is 
the fast-growing data center industry. Set to open next year, 
NREL's new peta-scale high-performance computing system is the 
leading edge, both in computing and also in energy efficiency. 
A comparable existing standard data center today would be 13 
times more energy-consuming than the NREL system.
    So recently I have been reminded of just how susceptible 
our buildings and energy systems are to natural disasters. As a 
member of New York Governor Cuomo's NYS2100 Infrastructure 
Commission, we will consider the related advantages and energy 
initiatives and how these can strengthen residential commercial 
building resiliency against all types of peril.
    In conclusion, I commend the committee for considering 
initiatives for improving energy productivity in our Nation. My 
many years in energy research convince me that few solutions 
could be as fruitful. Putting these great strides that we have 
made in energy efficiency to productive use on a national scale 
is admirable. So, thank you very much for this opportunity to 
share our insights. I look forward to answering your questions.
    Senator Bingaman. Thank you very much.
    Mr. Nadel, go right ahead.

STATEMENT OF STEVE NADEL, EXECUTIVE DIRECTOR, AMERICAN COUNCIL 
        FOR AN ENERGY-EFFICIENT ECONOMY, WASHINGTON, DC

    Mr. Nadel. Thank you, Mr. Chairman, and other members of 
the committee. First, I wanted to second Senator Wyden's 
comments. Thank you very much, Senator Bingaman, for your many 
years of service in the Senate. You have really been a real 
leader for the Energy and Finance Committees, and we very much 
appreciate all that you have done for energy efficiency over 
your many years here.
    I also wanted to briefly acknowledge Senator Snowe, who is 
also retiring. I see her aide here. She was not able to make 
it, but she has also worked tirelessly, often with you, Senator 
Bingaman, in introducing energy efficiency legislation. We 
appreciate both of your efforts.
    Now, in your opening remarks, Senator, you talked about 
three questions. Dr. Arvizu basically addressed your first 
question, and I will concentrate on the next two. You asked if 
the tax code is an appropriate vehicle for promoting energy 
efficiency investments. You also asked us to discuss the best 
structures for tax incentives that could generate the greatest 
efficiency gains.
    Regarding the first question, based on our research and 
analysis, we concluded that the tax code can be an appropriate 
vehicle for promoting energy efficiency investments. I say 
``can'' because it depends on how the tax incentives are 
structured.
    In our research we have found that the tax incentives that 
were enacted in the 1980s were not very effective in spurring 
substantial energy savings, as these credits promoted tried-
and-true energy efficiency measures that many consumers and 
businesses were installing on their own. Most of the 
participants were what we call ``free riders.'' They took the 
money but would have taken the same actions even without the 
incentives. Furthermore, the amount of the tax credit in the 
1980s was too small to spur many additional investments.
    On the other hand, tax incentives enacted in 2005 were more 
targeted. They emphasized advanced technologies and paid higher 
incentives. Our review of the experience with these has found 
that the tax incentives for new homes and appliances, in 
particular, were very effective in growing the market for 
qualifying homes and appliances and that the incentives for 
residential heating and cooling equipment, and also hybrid 
heavy-duty vehicles, were also very successful in encouraging 
development of new products and purchases of the most efficient 
products.
    Based on these experiences--I am turning now to your second 
question--we concluded that the most useful tax incentives 
target long-term structural changes in the market using 
temporary Federal assistance to build the market for energy-
efficient products so the tax incentives can be phased out.
    At this point, the market can continue to grow, supported 
by other energy efficiency programs and policies such as 
EnergyStar, utility energy efficiency programs, building codes, 
and equipment efficiency standards.
    We have labeled this process the ``Market Transformation'' 
approach. We use tax incentives to help establish a sustained 
long-term market. Using such an approach, we should target 
advanced technologies and practices that currently have a low 
market share, but with Federal support over a defined period of 
time, maybe 5 years or so, that market share can grow and they 
can better prosper on their own after the tax incentives end.
    Advanced products and services should be specified in terms 
of performance, leaving it to manufacturers and service 
providers to decide which technologies to use to reach the 
specified performance levels. By focusing on products with 
efficiency levels that currently have a very small market 
share, we can keep costs down and minimize the number of free 
riders.
    A Federal role is particularly useful in the early stages 
of market development, because the Federal Government can 
provide a national market with uniform qualifying criteria and 
incentives, making it more likely that manufacturers and 
contractors will make the investments to develop market-
qualifying energy-saving technologies and service. It will be 
much harder to transform markets without Federal involvement.
    I would note that the same market transformation approach 
can be used for other advanced energy technologies, not just 
energy efficiency. You could do market transformation for 
modular nuclear power plants, advanced renewable energy 
sources, and new oil and gas drilling and exploration 
techniques. But once these technologies become established in 
the market, Federal incentives can be phased out.
    Returning to energy efficiency, our organization has 
analyzed the cost and savings of 5-year Federal tax incentives 
for several high-efficiency products and services. We found 
that all of the products that we analyzed were highly cost-
effective. Our analysis is summarized in my written testimony.
    The average cost to the Treasury for all of these credits 
was only 28 cents per million Btu saved. This is less than a 
tenth of what the average energy cost is, making them highly 
cost-effective. We found that the most cost-effective options 
include tax incentives for commercial buildings, energy-
efficient new homes, heating and cooling equipment and 
appliances, and combined heat and power systems. We also found 
that whole-house energy-saving retrofits and replacing old 
chillers were also very cost-effective.
    The next two witnesses will be talking about commercial 
buildings and residential buildings, so I will not talk further 
about those. I will, therefore, concentrate on some of the 
other provisions.
    First, incentives for energy-efficient new homes, heating 
and cooling equipment, and appliances were among the most cost-
effective in our analysis. These products are subject to 
recently expired Federal tax incentives. We recommend that the 
energy efficiency requirements in these provisions be updated.
    The market has moved. The levels need to be strengthened, 
but, with that strengthening, we believe it is appropriate to 
reinstate these provisions and continue to offer them for the 
next 5 years or so, based on these updated qualification 
levels.
    I would also note that combined heat and power (CHP) 
systems are poised to make substantial strides, as utilities 
and their customers look to replace old, dirty power plants 
that are now being retired. A tax incentive will spur more 
combined heat and power systems during this critical period.
    The provision in the bill that you have introduced, 
Senator, with others, modestly expands an existing CHP 
incentive now on the books to address some issues with the 
previous incentive that will help make it more workable. We did 
find this to be one of the most cost-effective provisions we 
examined.
    I also wanted to briefly note that the chiller provision in 
S. 3352 is also very timely. It will provide a credit to 
encourage replacing old, inefficient chillers that contain CFC 
refrigerants. CFCs, as you probably all know, harm the ozone 
layer and have not been permitted in new chillers for many 
years. However, some of the old chillers remain, leaking CFCs 
and using excessive amounts of energy.
    Building owners are reluctant to replace these chillers due 
to the up-front costs. The proposed incentive will cover part 
of these costs but would be available for only 3 years. 
Therefore, building owners would have a limited window to take 
advantage of the incentive. That provision also contains some 
innovative provisions to reduce chiller loads and encourage 
smaller chillers, increasing the amount of energy saved. Those 
chiller down-sizing techniques will be very useful from a 
market transformation perspective.
    Finally, I wanted to note that in my written testimony--I 
will not go into it here--I discuss some problems with 
depreciation periods, particularly for commercial and CHP 
systems. We recommend that, as part of tax reform, Congress 
should revise these depreciation periods so they are based on 
the average service life of this equipment as opposed to the 
current, more political hodgepodge.
    So, in conclusion, we recognize that, with tax reform, the 
number of incentives and their costs need to be substantially 
reduced. Based on our analysis, as part of any tax reform 
legislation, we recommend that limited funding be set aside for 
provisions with the largest energy savings per Federal dollar 
invested.
    These are provisions that have a large multiplier effect 
and where incentives can be ended or revised after about 5 
years. We would be happy to work with you and the committee 
going forward to help design incentives with the most bang per 
buck. Thank you.
    Senator Bingaman. Thank you very much.
    [The prepared statement of Mr. Nadel appears in the 
appendix.]
    Senator Bingaman. Mr. Wagner, go right ahead.

    STATEMENT OF MARK F. WAGNER, VICE PRESIDENT, GOVERNMENT 
       RELATIONS, JOHNSON CONTROLS, INC., WASHINGTON, DC

    Mr. Wagner. Thank you, Mr. Chairman and members of the 
committee. My name is Mark Wagner, from Johnson Controls. We 
are an energy services company. For years, companies like ours 
have been in the business of saving energy for our customers by 
renovating and upgrading their buildings with energy-efficient 
equipment. This includes public sector buildings for the 
Federal, State, and local government, as well as private-sector 
commercial buildings.
    The 179D Federal tax deduction for commercial buildings has 
been a valuable tool to help finance these types of energy 
efficiency upgrades, particularly in the public sector where we 
have done a large number of projects.
    Let me give you two examples where projects have been 
certified for the tax deduction. In Maryland, seven Caroline 
County Public Schools and the Kent County Courthouse and 
Government Center are more efficient with the help of this tax 
credit. In San Antonio, TX, we made energy efficiency upgrades 
at the convention center, airport, and The Alamo Dome.
    But the use of 179D for private-sector buildings lags 
behind. Despite the large potential market opportunity for 
commercial buildings, shopping malls, and multi-family housing, 
the tax deduction is significantly under-utilized.
    There are a number of basic reasons why. Let me touch upon 
a couple. First, many private-sector buildings change 
ownerships frequently, unlike public-sector buildings, which 
limits the time in which an energy efficiency investment can 
pay back. Second, many private buildings have debt or are 
individually incorporated and have no credit rating, making it 
more difficult to finance projects. Thirdly, there is often 
misalignment between owner and tenant in commercial buildings 
between who has to make the investment and who gets the 
benefit.
    Let me mention that every year Johnson Controls conducts a 
survey of executives, executive decision-makers who are 
responsible for making investments in energy efficiency. In our 
2012 survey of over 1,100 U.S. executives, we have had three 
findings that are significant to our discussion today. First, 
we found a 20-percent increase from the year before from those 
executives who saw energy management as ``significant'' or 
``very significant'' to their operations. Second, they listed 
access to capital as the largest barrier to financing energy 
efficiency projects. Third, tax incentives were deemed by far 
the most important tool. Forty-two percent of the executives 
found them to be the highest priority for public policy action.
    S. 3591, which you sponsored, the Commercial Building 
Modernization Act, addresses many of the unique challenges 
facing financing energy-efficient projects for the commercial 
building sector.
    First, it is technology-neutral. It gives building owners 
and contractors the flexibility and freedom to install 
traditional, as well as state-of-the-art, technologies to meet 
a variety of operational and tenant needs.
    Second, it is performance-based and rewards the building 
owner: the deeper the retrofit, the larger the deduction per 
square foot.
    Third, it provides verification of energy savings by giving 
60 percent of the deduction for the design and 40 percent after 
calculation of actual savings.
    Fourth, it changes and improves the measuring stick. 
Current law requires a retrofit of 50-percent savings against 
American Society of Heating, Refrigerating, and Air-
conditioning Engineeers, or ASHRAE, code. This would be changed 
to a sliding scale of options for energy savings benchmarked 
against the building's actual energy consumption for the 
previous years.
    Now, let me explain why this one is important. Mr. 
Chairman, you are very familiar with the energy efficiency 
upgrades Johnson Controls recently completed at the Empire 
State Building. Well, under current law that project does not 
qualify for a 179D tax deduction, even though we are projecting 
a 38-percent energy savings as compared to the building's 
previous performance.
    But under S. 3591, the Empire State Building project would 
qualify because savings are compared to the building's own 
energy consumption. Finally, the legislation provides a better 
incentive for real estate investment trusts and certain limited 
liability partnerships to participate.
    In conclusion, 179D will expire at the end of 2013. We 
joined with 47 other organizations from the real estate, 
construction, lending, manufacturing, supply, and efficiency 
communities in supporting the extension of 179D and the 
modifications that you have proposed in S. 3591.
    As we look to the new Congress, we hope the Senate 
considers a combination of policies and programs that create 
market demand and provide commercial building owners with 
enhanced incentives, standardized processes, and financial 
models that attract private-sector funding. We can make a large 
impact with only a modest investment.
    Mr. Chairman, thank you for the opportunity to testify, 
and, more importantly, thank you for your years of leadership 
in the Senate, particularly with respect to energy efficiency.
    Senator Bingaman. Well, thank you very much.
    [The prepared statement of Mr. Wagner appears in the 
appendix.]
    Senator Bingaman. Mr. Golden, go right ahead.

STATEMENT OF MATT GOLDEN, PRINCIPAL, EFFICIENCY.ORG, AND POLICY 
           CHAIR, EFFICIENCY FIRST, SAN FRANCISCO, CA

    Mr. Golden. Thank you, Chairman Bingaman and the 
distinguished members of the subcommittee, for this opportunity 
to offer my perspective on the role of tax incentives to 
promote energy efficiency. I come to this committee as both an 
advocate working to bring investors and the capital to the 
energy efficiency market, and as a licensed contractor and 
board member of Efficiency First, a trade association that 
represents over 1,000 small businesses in all 50 States.
    Efficiency First is a strong supporter of Senate bill 1914, 
the Cut Energy Bills at Home Act, also known as 25E, which puts 
in place the first performance-based tax incentives for 
existing homes. We thank Senators Bingaman, Snowe, and 
Feinstein for their leadership on this issue.
    Energy efficiency incentives remain smart tax policy that 
will stimulate private investment and job creation while 
driving savings directly to American homeowners. The average 
American family spends over $1,800 per year on energy for their 
homes, which equates to a $200-billion drain on household 
budgets every single year. This represents 22 percent of all 
U.S. energy consumption, which is a third more energy than used 
in passenger trucks and cars combined.
    Retrofitting these inefficient homes will create thousands 
of U.S. jobs in some of the hardest-hit industries, including 
construction and manufacturing. These are jobs on Main Street 
and small businesses that cannot be outsourced, using materials 
that are 90 percent made in the USA. We are putting energy 
savings back into the wallets of American families and into our 
communities.
    Energy efficiency is unique in that it creates its own cash 
flow. Simply put: it pays for itself. However, there are 
significant market barriers that prevent this vital resource 
from being harvested more effectively. One of the key steps 
towards a solution is to begin to account for energy savings as 
a resource. Reducing demand on the grid through energy 
efficiency is akin to building power plants, only cheaper, 100-
percent domestic, and completely clean. We know how to finance 
power plants.
    Power plants supply predictable amounts of energy into 
established markets, and utilities can easily raise capital to 
make these investments in energy supply. However, we lack the 
same capital sources and markets for energy efficiency, even 
though it is widely understood to be the most cost-effective 
resource for meeting our energy needs.
    In fact, the energy we have saved through energy efficiency 
efforts in the last 40 years equates to a resource that is 
greater than any other single energy source in the country: 
greater than nuclear, natural gas, or coal.
    S. 1914 is a great example of tax policy that can help move 
the market towards valuing energy savings as a resource. This 
legislation provides a financial incentive to homeowners to 
increase the energy performance of their homes: the greater the 
savings, the higher the incentive.
    Transitioning to a performance-based incentive allows for 
technology and business model neutrality and creates a system 
that is flexible and rewards innovation. The good news is that 
the marketing systems we need to make this industry 
economically sustainable over the long haul are already here, 
just not yet to scale.
    The contracting industry is actively moving towards 
performance-based models, with dedicated home performance 
companies growing in markets across the country and leading 
HVAC contractors, national manufacturers, and trade 
associations beginning to invest heavily in training and 
resources to move from single measures to whole-house 
solutions.
    In addition, investments in energy efficiency have 
dramatically increased at the State level. This includes 
Recovery Act investments in workforce training, quality 
assurance, and program infrastructure that have resulted in 
home performance projects increasing by 300 percent over the 
last 3 years.
    Utility investments have also increased dramatically, 
averaging nearly a 20-percent year-over-year growth since 2005, 
substantially faster than the economy at large. We are also 
seeing private investment beginning to ramp up. Private capital 
markets are on the verge of the first-ever securitization for 
residential energy efficiency lending. This step forward 
promises access to senior capital markets and eventually much 
lower cost to capital.
    Homeowners will soon be able to access loans designed 
specifically for residential energy efficiency at lower rates 
and better terms. Simply put, we now know that energy 
efficiency loans are more likely to get paid off. We believe 
that tax incentives play a critical role in helping scale this 
early-stage market. Tax credits directly benefit homeowners 
without adding layers of bureaucracy and will create consistent 
national markets that will make getting to scale vastly easier 
for all involved.
    We believe that, with a combination of smart national tax 
policy and local infrastructure, we can enable a transformation 
in residential energy efficiency that will engage markets and 
drive private capital. Senate bill 1914, combined with an 
improved 25C, is a first critical step in this direction.
    Creating markets is important, but let us all remember the 
small businesses, construction workers, and homeowners that we 
will be helping through these incentives. The energy efficiency 
industry puts people to work in ways that are both positive for 
their communities and the environment, and perhaps most 
importantly helps American homeowners make ends meet in homes 
that are more comfortable, healthier, and longer-lasting.
    This is truly a unique opportunity to support small 
businesses in America and homeowners, all while helping the 
country meet its climate and energy goals. We appreciate the 
ongoing efforts of this subcommittee and look forward to 
continuing to support your important work advancing energy 
efficiency through smart tax credits.
    Thank you for this opportunity to share our views, and I 
look forward to questions.
    [The prepared statement of Mr. Golden appears in the 
appendix.]
    Senator Bingaman. Thank you very much. Thanks to all of you 
for your statements. Let me start with a few questions and then 
defer to Senator Wyden and Senator Cardin.
    One obvious issue, Mr. Nadel: let me ask you about this 
market transformation approach. You are talking about a 5-year 
kind of putting in place of incentives that phase out at the 
end of 5 years. If in fact we have all of these benefits to be 
realized in the area of residential and commercial buildings, 
why does it not make sense to look at longer-term incentives in 
the tax code for construction and retrofit of commercial and 
residential buildings in an energy efficiency way?
    Mr. Nadel. Thank you. Yes. We advocate initial incentives 
for 5 years, but then taking stock of the market and how it is 
doing. Has the market sufficiently transformed? Does the 
program need to be tuned or modified? Is it working well in 
certain areas and not working well in other areas as opposed to 
just something blanket? We think too many of the tax incentives 
have been on the books and have never been really reviewed.
    But some of the incentives, we think, should continue 
afterwards, but you should make that judgment call afterwards, 
just like some of the existing incentives such as the appliance 
credit. We have revised the qualification levels twice as we 
have extended it, so there probably would be some refinements 
that would be needed.
    In my written testimony I also suggest the option of 
repayable tax incentives in order to support certain retrofits, 
for example. If the cost starts getting too high, repayable tax 
incentives provide a way to continue to support the market even 
without as much cost to the Federal Government. So I am not 
saying end it absolutely, but let us look carefully at it after 
5 years.
    Senator Bingaman. Let me ask Mr. Wagner, and any of the 
rest of you who want to comment, about, in the last several 
years we have talked seriously about trying to adopt something 
like the HOME STAR proposal around here as another way to get 
more investment in energy efficiency. That is a different 
avenue. But how does it compare with the kinds of tax 
incentives that we are talking about here? Would it make more 
sense to be trying to do this through that kind of a program, 
through HOME STAR, or should we do both; should we do neither?
    Mr. Wagner. Well, I think you have a couple of different 
approaches. One is certainly a HOME STAR and a Building STAR 
approach where that was more a rebate on a specific type of 
equipment out there, and a lot of that was being talked about 
to try to stimulate that type of approach.
    I think the benefit of the tax incentive is one in which it 
really helps--because of the level you have to reach in terms 
of the efficiency, it helps really drive larger projects that 
reach a deeper energy efficiency goal. That is the beauty of 
the tax incentive, I think.
    You are looking at that yardstick and saying, can I meet 
this goal on this project, so you are striving to make more 
efficient projects, if you will, that drive more energy 
savings. So that is, I think, the true benefit of doing it from 
the tax side.
    Senator Bingaman. Let me just ask about--I think what I 
understood you to say, Mr. Wagner, in your testimony, is that 
property owned by real estate investment trusts--which is a lot 
of property, obviously; a lot of the commercial property in the 
country--those properties are not eligible to qualify for the 
existing commercial building incentive. Could you elaborate on 
that, if I am understanding that correctly, and why that is the 
case? Obviously that is a major problem in the current law.
    Mr. Wagner. Yes, and it is one that certainly is addressed 
by the proposed legislation. Currently, many of these 
commercial buildings belong to the large real estate owners 
with legal ownership structured as an LLC, as you pointed out. 
Many of them are non-credit rated, meaning there is no credit 
history that they have and no assets which can be held as 
security against the mortgage. So this fact kind of makes banks 
wary of making energy-efficiency loans in this area, so that is 
why I think it is an important provision that is in the 
proposed legislation to address this.
    Senator Bingaman. My time is up.
    Senator Wyden?
    Senator Wyden. Thank you. Thank you very much.
    This has been an excellent panel. Let me get your sense 
with respect to where I think we are at this point in the 
debate. We are, of course, debating the intersection between 
energy policy and tax policy. The Senate Finance Committee, 
earlier this year, I think made the correct call in terms of 
trying to start this debate.
    What we recognized is that you ought to extend the current 
tax provisions, at least for a relatively short period of time, 
a year or thereabouts, and that was what was done with respect 
to the production tax credit for renewable energy and for the 
25C residential energy efficiency credit, so that we would not 
be pulling the rug out from under these important programs, and 
you all have touched on that.
    The question is then, what happens from this point on? 
There are a number of us who sit on both this committee and the 
Energy Committee, and I think it is going to be important to 
try to lay out some principles early on with respect to what we 
ought to be working for.
    I want to ask your reaction specifically to making a 
bedrock principle of fundamental tax reform a more level 
playing field between the various energy sources, because what 
we have seen over the years--and I have sat next to Senator 
Bingaman for more than a decade on both of these committees--is 
a lot of the programs that you all correctly identify as so 
important, the renewable programs, the energy efficiency 
programs, they are essentially on a temporary status. And a lot 
of the other programs, the more traditional programs, have been 
imbedded in the tax code for years, in effect have acquired a 
more permanent kind of status.
    I do not see how we improve, number one, the investment 
climate for the kinds of important programs you are talking 
about if we do not have a more permanent and level kind of 
playing field, nor do I think you really get at the all-of-the-
above kind of approach that every Senator says they are for. I 
often kid and say it is not an energy speech unless you say you 
are for all of the above three or four times. I do not see how 
you really can be for that without a more level playing field.
    So I would just be interested in your reaction to that 
being a bedrock principle of tax reform as we start these more 
extensive discussions next year, and we can just go down the 
row.
    Dr. Arvizu. Senator Wyden, that is a great question and one 
that I think deserves a considerable amount of attention. This 
is a complex area, clearly. The one thing I would say is that 
we should be making decisions based on the best information and 
the best analytics that are available, and some of those are 
woefully inadequate.
    So I would say that there is a lot of opportunity to do 
some analysis that allows there to be more thoughtful policy 
built on very quantifiable trends that we see in the 
marketplace. It is difficult to know what is going to happen 5 
years from now. It is difficult to know even more so what is 
going to happen 10 years from now. We will miss some important 
market dynamics if we do not have good analytics.
    So the first thing I would offer is that the tools and the 
simulation and modeling types of programs are getting more 
sophisticated. They are not the end-all. They depend on the 
assumptions that you make in order to understand what the 
outcomes are. But those tools should be transparent.
    One of the things that we should focus on is the true cost 
of energy and the true cost of all of the things that relate to 
the societal benefits that we expect out of our energy system. 
We are expecting a transformation to occur, and we are 
expecting it to occur over some period of time. As we make 
incremental improvements toward that end point, we need to 
measure, how well are we doing?
    One of the things that I would offer is that the portfolio 
will shift in terms of mix, so as a practical matter I think it 
is great that we have natural gas and an expectation that the 
costs will be low for some period of time. But it is part of a 
portfolio. It is part of a portfolio in the future.
    We will have a very different profile than the one we have 
today, and we need to be deliberate about what that end point 
needs to look like and move toward that end point again with 
strong understanding of what our policies are yielding in terms 
of change in that portfolio and at what pace.
    Senator Wyden. Level playing field. I think I have time for 
one more, and maybe I will ask you to do it in writing.
    Go ahead, Mr. Nadel.
    Mr. Nadel. Yes. I agree that we do need a level playing 
field as a bedrock principle. I agree with you that it is a 
problem that efficiency and renewable energy have temporary 
breaks, while some other energy sources have permanent ones. I 
would advocate that everybody should be put on this 5-year 
schedule, sort of like the farm bill.
    I am not saying get rid of the incentives, but every 5 
years we look at them and say, ``What makes the most sense 
going forward?'' But, if you have long-term permanent 
incentives, I think we get a lot more waste, where money is 
being spent on things where maybe it is not needed.
    Senator Wyden. Let us do this. My time is up. Mr. Wagner, 
if you and Mr. Golden would furnish your answer in writing on 
this point with respect to the level playing field. I would 
also ask just if you would, Mr. Golden, in writing, also give 
us your views with respect to how the whole-home credit being 
combined with the 25C proposal could advance this idea of the 
more level playing field.
    Mr. Golden. Absolutely. Thank you.
    Senator Wyden. My colleagues are all waiting to ask 
questions, so, if we could have those comments, I want you to 
know I am going to read them personally.
    Mr. Wagner. Thank you.
    Mr. Golden. Thank you.
    Senator Wyden. Mr. Chairman, thank you.
    Senator Bingaman. Thank you.
    The order here, based on arrival, would be: Senator Cardin, 
then Senator Thune, then Senator Carper.
    So go right ahead. Senator Cardin has been a co-sponsor of 
this legislation that Senator Snowe and I have developed, and 
we would appreciate his strong support.
    Senator Cardin. Senator Bingaman, first of all, thank you 
for your leadership, not just on this committee but on the 
Energy Committee. You have really, I think, provided the 
directive for our country that a sound energy policy is 
critically important for our national security. It is important 
for our environment and, done right, will create more jobs in 
our communities.
    So, I thank you for your leadership. You are going to be 
sorely missed, not just on this committee but in the U.S. 
Senate. We are going to try to follow in your footsteps, but it 
is going to be difficult. So, thank you very much for 
everything that you have done.
    The reforms and extension of section 179D are very 
important. I particularly note the two provisions that would 
measure the performance based upon the existing building 
baseline. The example given by Mr. Wagner on the Empire State 
Building, I think, is well taken. The allocation to the tax-
exempt entities to allow allocations to the designers of 
buildings, I think all that makes sense so that it becomes 
effectively used.
    I might point out, there are other bills that are pending 
in this committee. I am working with Senator Crapo on the Cool 
Roofs bill that gives us a more realistic depreciation schedule 
in buildings and developers who use cool roofs, and then the 
Historic Tax Credit with Senator Snowe that gives a reward for 
using historic retrofits for energy efficiencies.
    I think all of those are performance-based types of ways 
that we can improve our respect for energy consumption in our 
environment and our economy. I just want to follow up quickly 
on the chairman's point about the 5 years or longer, et cetera. 
I fully appreciate the need to evaluate programs.
    There is no question that, as we have done that, we have 
been able to find ways to fine-tune or to reform or to 
eliminate those provisions that do not work, and we should 
always preserve that opportunity to do it. I am concerned, 
though, that we have gotten into a habit here on extenders that 
has very little to do with evaluating programs and has a lot to 
do with the uncertainty in the market on the use of these 
available tools, and we pay a price for that.
    So I want to get the time limit right here, but I also want 
to understand the impact of congressional short-term extensions 
of credits as to how it would impact on the usefulness of these 
tax provisions. We get criticized that they do not do very 
much, but, if they are so short-term, we understand why they 
may not. Does anyone wish to comment on that, the short-term 
dangers here?
    Mr. Wagner. I will take a shot. I think it is critical. In 
our business, if you do a project on a commercial building, it 
may take quite some time to do. It may take a year or more to 
just design the effort even before the construction period. If 
you see the end of the tax period where it may have to be in 
place and working at that point, if you are not sure you can 
get there, there is that uncertainty to say, we do not know if 
we can factor this in to the economics of the project because 
we do not know if we can get there before this tax incentive, 
whichever it might be, expires out there, and then we are not 
sure whether it will be reinstated or not.
    So I think that uncertainty for the business community, as 
well as the design and the construction of these long-term 
projects, really puts a kind of chilling effect on it if you 
are not at the beginning of the program.
    Senator Cardin. Well, that is certainly true in production 
tax credits. We have seen that now on solar. Even though the 
expiration date is several years out, it is already affecting 
decisions being made. So, Mr. Chairman, I would just point out, 
if we were to extend the program for 5 years, everybody thinks 
you are safe for 5 years. You are not. You might be safe for a 
few years, but then the uncertainty creeps in, and the planning 
process and all the hurdles you have to jump in order to get 
the project completed to meet the standards required by the 
code, may have a pretty chilling effect or a cost effect.
    Could we just talk one minute about the job implication 
here? We all know we have high unemployment in the construction 
industry. Does anyone here have some help for us as to what 
impact this could have on our economy and getting people back 
to work?
    Mr. Nadel. I can comment briefly on it, without getting 
into the exact analysis of these particular bills. But in 
general, energy efficiency is very labor-intensive and tends to 
create a lot more jobs than, say, investments in mining, 
drilling, new power plants, et cetera.
    So we have always found that, for each $1 million you 
invest in energy efficiency, you typically create about--I 
think it is about seven net jobs, meaning seven more jobs than 
if you invested it in other energy resources. So these bills 
will be, I think, powerful job creators.
    Senator Cardin. Mr. Golden, very quickly?
    Mr. Golden. Yes. I just wanted to add that we also find 
that this goes to the whole supply chain. There has been a 
study that the Home Performance Resource Center conducted in 
the last couple of years that showed that over 90 percent of 
the materials used in the residential sector are domestically 
produced. These are big materials, and so it is not just 
construction jobs, but we are also seeing it reflected in the 
manufacturing community.
    Senator Cardin. I think that is very important.
    Mr. Wagner. If I could add, Senator. The Political Economy 
Research Institute, along with the U.S. Green Buildings 
Council, Real Estate Roundtable, and NRDC, did a report last 
year in June, and the proposed revision, just for 179D, would 
create over 77,000 new jobs according to the report.
    Senator Cardin. Thank you.
    Thank you, Mr. Chairman.
    Senator Bingaman. Thank you.
    Senator Thune?
    Senator Thune. Thank you, Mr. Chairman. I want to 
congratulate you on your distinguished service in the U.S. 
Senate, and also for your great work over the years on energy 
issues. Your leadership is going to be missed around here. I am 
pleased that we have the opportunity to do one last energy-
related hearing before you leave.
    I agree with the assumption that has been made that 
comprehensive tax reform is going to be the opportunity to 
seriously examine how the Federal Government conducts energy 
policy through the tax code, and I am hopeful that any deal to 
address the fiscal cliff will at least include a pathway for us 
to get to comprehensive tax reform sometime next year.
    You have all, I think, commented already to some degree on 
whether or not that is the way in which we ought to be doing 
this through the tax code, having IRS administer these policies 
as opposed to having them done through other agencies that 
would be more appropriate and more fitting.
    But I also want to drill down a little bit on the question 
of the temporary nature of many of the tax incentives that we 
have, many of the energy tax incentives that we have in the 
code today.
    A lot of these things get under-utilized, as has already 
been noted, by the sector that they are supposed to benefit, 
simply because they have this on-again/off-again nature. I am 
wondering what your thoughts are with regard to whether we 
would be better off, instead of having numerous targeted 
incentives that expire periodically, moving toward instead a 
limited number of longer-term technology-neutral incentives. I 
know, Mr. Wagner, you mentioned in your testimony the 179D tax 
deduction and how that falls in this category of being under-
utilized because of this temporary nature.
    But anyway, your thoughts about technology-neutral 
incentives applied over a longer period of time so you address 
the economic certainty issue that has been raised and gets 
raised so many times over and over again as opposed to these 
little niche, boutique-type approaches that we have in terms of 
policy today.
    Mr. Golden. I thank you for that question. I think that the 
duration and creating certainty for small businesses and 
projects is really a critical aspect of the effectiveness of 
any tax policy. In an industry like the home performance 
industry, where companies are also making investments and 
ramping up their own businesses, these are longer pay-back 
periods, and so uncertainty really plays a role as the business 
community is evaluating and making these investments to 
actually transition their businesses.
    We also strongly support performance-based incentives that 
are technology- and business model-neutral so that we do not 
have to continually be revisiting the tax code and making 
adjustments to individual technologies. Quite frankly, none of 
us can really predict what technologies are going to emerge or 
what makes the most sense for any individual building, so it 
becomes the great equalizer.
    Fundamentally, whether it is residential, commercial, or 
renewables for that matter, we are talking about valuing either 
the production or the savings as a resource, and fundamentally 
that is about what emerges at the meter, not the individual 
technologies that get us there.
    Mr. Nadel. I would add that we need to be very careful. If 
we make the incentives too broad, they basically just tend to 
encourage free riders, people who are already going to do 
things anyway. If you were to try to make it very broad, you 
have to be very careful that you really are promoting the 
advanced technologies and not business as usual, and that can 
get very challenging.
    It is probably a little easier in the residential and 
commercial sectors. We have two bills here that are 
performance-based, based on the baseline for the current home. 
But for investments in industry and heating and cooling 
equipment, the baselines regularly change, and you need to 
allow for that or else you are just going to get high cost, 
high free riders, without a lot of impact.
    Senator Thune. Anybody else?
    Mr. Wagner. The keys are to be technology-neutral, 
performance-based, and then having, particularly for commercial 
buildings, a process where you verify the savings. I think 
those are really key to show that the savings are real.
    Dr. Arvizu. I agree with my colleagues. The only thing I 
would add is, I think there is some merit in this discussion, 
and I would very much encourage that we fully understand what 
objectives we are trying to accomplish. More importantly, I 
think there is an opportunity to aggregate lots of what I would 
call distributed and smaller types of improvements that, when 
aggregated, allow the private sector to make investments that 
can ensure some reasonable returns on investment. Those would 
be then the ingredients for success. So it really is about 
unleashing the market capital in a way that can move that 
marketplace.
    Senator Thune. One more question, Mr. Chairman?
    Senator Bingaman. Go right ahead.
    Senator Thune. If I could just, as sort of a follow-up to 
that, ask if you have any ideas about how Congress could better 
design incentives that could be phased out once they have 
helped to create a market. What we do right now is, we will do 
this. We will do an extension for 2 years, 3 years, maybe even 
5 years. Although the analogy to writing a farm bill might make 
some sense, for somebody who serves on the Agriculture 
Committee and has to write a farm bill every 5 years, I am not 
sure you guys want to be in that kind of mess sometimes either.
    But is there a way that, when you create these things, you 
could phase them down at the inception or creation of them as 
opposed to kind of going through this annual exercise that we 
do of having to do extensions and then just creating, really in 
a lot of ways, more uncertainty because you have such a short 
window? Does anybody want to take a stab at that?
    Dr. Arvizu. Well, I think we can take a lesson from maybe 
some of the things that other countries have done in a variety 
of things. Again, I think it comes back to, what does it take 
for the financial community to make those decisions in a 
positive manner?
    On the general side, one of the important market mechanisms 
is the power purchase agreement. The power purchase agreement 
typically runs for 20 years. That allows enough certainty that 
I can make a serious investment and, even though my margins are 
going to be thin for a while, I can recoup that investment over 
some period of time. That is enough certainty to allow me to 
make an investment.
    So I think whatever is designed needs to be fully cognizant 
of how the money flows and how the investors make decisions. To 
the degree that that instrument allows them to make a decision 
that they would not otherwise make because of uncertainty, then 
I think you have a successful mechanism.
    Senator Thune. All right.
    Mr. Nadel. I would add 2 suggestions here. One, building on 
your first comment, when it comes to equipment, you could do a 
longer-term incentive but then delegate to the Department of 
Energy to periodically revise the qualification levels based on 
criteria that Congress has established so that it does not get 
out of date but it could continue long-term and still have a 
lot of impact.
    The other thing you could do if you have 5-year incentives 
is, you have 5 years and then a 3-year phase-down. Yes, you can 
continue to modify and extend them further, but at least you 
know you have an orderly phase-out as opposed to a cliff if 
Congress does not act in a timely fashion.
    Senator Thune. Yes. Which is the normal experience.
    My time has expired, Mr. Chairman. Thank you. Thank you all 
very much.
    Senator Bingaman. Thank you.
    Senator Carper?
    Senator Carper. Thanks. Before Senator Thune leaves, I just 
want to come back, if I could, to the question you just asked 
of the panel: how do we structure these tax incentives to make 
sure that we do not just have them expire and extend them 
endlessly?
    One of the provisions that Senator Snowe and I have worked 
on is an investment tax credit for offshore wind. The 
production tax credit for offshore wind just does not help; we 
need an investment tax credit. If you only have a production 
tax credit, we will never build an offshore windmill farm.
    What we have crafted as legislation says that, for the 
first 3,000 megawatts of generating capacity that is deployed 
off of our coasts, those would be eligible for a 30-percent tax 
credit, and, after that, it is gone. I actually think that is a 
pretty good approach. We will see if it passes muster in 
whatever we put together next year.
    I also want to applaud our colleague and our chairman here, 
Senator Bingaman, for not just holding this hearing, but really 
for being our leader in so many ways on energy, and energy 
efficiency in particular. So, thank you. You know we are going 
to miss you. I will say it every day until you are gone, and we 
will just talk about you when you are gone.
    I want to say to our panel, thanks. Thanks a whole lot for 
being with us today. I sometimes say that the cleanest, most 
affordable form of energy is the energy we never use. My first 
question is, who actually said that first? I think I did. 
[Laughter.]
    Mr. Golden. We all agree, sir.
    Senator Carper. As our Nation grapples with air quality 
concerns and higher energy product prices--although in some 
places energy prices are coming down. I bought some gas for 
about $3.30 per gallon, and natural gas being abundant has 
helped us on some other fronts. But still, we need to save 
energy and try to figure out how we can incentivize energy 
efficiencies in this country.
    I often hear from a company back in Delaware that 
manufactures windows that the 25C energy efficiency tax credit 
has been, in this recession, a significant lifeline. I have 
heard that the credit has been easy for consumers to really get 
their heads around, too. Therefore, it has been pretty 
successful.
    As we all know, 25C expired at the beginning of this year 
and has been extended in this committee's package of extenders 
that we passed back in August, but has languished since.
    I realize that a number of you here would like to make some 
changes to 25C, but how important is continuing this tax credit 
for energy efficiency, at least in the near term as we move 
into talks next year about broader reforms? Mr. Golden?
    Mr. Golden. I can speak to that. Efficiency First supports 
25C, but we do recommend some improvements. Without getting 
into the absolute specifics, at the current levels, as we 
understand it from our members, it is not driving a lot of new 
action, so there is a concern that, at the level that we are 
currently at, it is a lot of additionality where people would 
have already maybe perhaps taken these actions.
    While that seems a little bit in juxtaposition with the 
fact that we need to control costs as well, we think that ties 
into some of the comments that Mr. Nadel brought to the table 
around standards, so making sure that we are in fact 
incentivizing higher efficiency equipment that is more likely 
to be an upgrade from what somebody might have done otherwise.
    So we also believe that 25C should be coupled, just like 
for example in the HOME STAR legislation where we had a more 
prescriptive path that addresses where industry is today and 
where most consumer transactions are occurring today, coupled 
with what ends up being a much less expensive performance track 
that helps enable this transformation and brings in more 
private capital into the industry. But obviously it is a 
balance of these standards to make sure that this package makes 
sense from a fiscal standpoint in the context of tax reform.
    Senator Carper. All right. Would any of the other panelists 
agree with anything he said?
    Mr. Nadel. Yes, I agree. Just to add one point: the 
qualification levels really need to be revised. You mentioned 
windows. Something like 85 percent of the windows now being 
sold qualify. This no longer differentiates the best from run-
of-the-mill. But, if you really identify the very most 
efficient products, yes, we would support 25C. In our analysis, 
it does perform quite well if you have a performance tier that 
really differentiates.
    Senator Carper. Thank you.
    Gentlemen, does anyone else want to comment?
    Mr. Wagner. I just want to agree with your statement 
earlier about efficiency. Taking another twist on it, I have 
often heard efficiency referred to as the fifth fuel. I always 
like to refer to it as the first option, because it is easier 
and more cost-effective to save a unit of energy than it is to 
produce a new one.
    Senator Carper. All right. Good. Thank you.
    Dr. Arvizu. And I just want to applaud your efforts on 
offshore wind. I think one of the things that is important is 
that it is an 
early-stage technology and it does need some help to get us 
back into a leadership position.
    Senator Carper. Good. Thanks so much.
    Mr. Chairman, my time has expired. Would you like me to 
stop?
    Senator Bingaman. Go right ahead.
    Senator Carper. All right. Thank you. You may regret that. 
[Laughter.]
    I am going to just stick with this for just a moment. In 
some of our tax hearings earlier, we heard about the need to 
make the tax code simpler. In fact, that is one of the themes 
that we always come back to. We do not do a very good job at 
it, but we certainly talk a good game. But is there a way to 
consolidate residential and business energy efficiency tax 
credits into one credit that would be as successful as maybe 
the separate credits? Anybody? Yes?
    Mr. Golden. I think personally that there is enough 
difference between the two sectors that they deserve separate 
tax credits. However, from a philosophical standpoint, from a 
design standpoint, I think there are a lot of parallels between 
the performance tax credit that occurs in the commercial sector 
and 25E-style performance tax credits for residential as well. 
I think the arbiter there, the common denominator, is 
performance rather than specifying specific materials and 
equipment that we continually have to update.
    Senator Carper. All right. Does anyone have a different 
view? [No response].
    Could I ask one more? Thanks very much.
    Mr. Nadel and Dr. Arvizu, let me focus, if I could for a 
minute, on industrial energy efficiency. Dr. Arvizu, I believe 
you mentioned in your testimony--I think it was you--that 
industry represents about 30 percent of energy consumption in 
this country.
    There is a huge potential for energy savings in this 
sector. As we know, manufacturing has picked up considerably 
over the last 2 or 3 years in this country. Many companies are 
modernizing their plants and trying to keep up with demand, 
which is a good thing.
    However, I have been told by industry that energy 
efficiency projects have a huge up-front cost, despite the 
long-range energy savings, which usually or oftentimes prevents 
industry from making the investments that are needed in 
efficiency.
    At the same time, our utilities are modernizing our energy 
fleets to keep up with clean air regulations, to keep up with 
energy demand. However, utilities are much more focused on 
energy production rather than finding energy savings, for 
obvious reasons.
    My question is, why are utilities not partnering with 
industry more to implement large-scale industrial efficiency 
projects for energy savings, and does it make sense to 
incentivize these partnerships?
    Dr. Arvizu. That is a very astute observation, and one I 
think that is one of the critical barriers. It really has to do 
more with what incentivizes utilities, and typically investor-
owned utilities, have to focus more on the generation side than 
on the efficiency side. It typically is structural features of 
the business model.
    To the degree that States have taken on some of that 
responsibility to just begin to change that business model so 
that they are incentivized to save energy as opposed to just 
generate energy, then I think you will see those wholesale 
changes.
    Clearly that partnership between the consumer, the 
customer, in the case of the industry, as well as the 
generators, is an important aspect of helping change that 
business model. So these are what I call market structure 
barriers that do need, in fact, some serious attention. We have 
a whole host of regulatory dynamics that are driving that 
entire system.
    So we need to really take a step back, understand what it 
is that we are incenting and why, and then, I think, move more 
expeditiously to get to the transformation we need. I think 
there is really great opportunity in the fact that we have 
essentially some new generation sources that offer us great 
economic benefit, but only if done properly, only if structured 
in a way that the government's enabling of those market forces 
leads us to the ultimate objective of getting a much more 
sustainable energy system in the end-point.
    Senator Carper. All right.
    Mr. Nadel, do you want to add or take away from that?
    Mr. Nadel. Yes. I agree there are enormous opportunities to 
save energy in industry, and we can, and should, do a lot more 
to promote these opportunities. In some of the bills that 
Senator Bingaman has introduced, we have some targeted 
incentives, such as for CHP and chiller systems. Perhaps more 
could be done. Industry is very diverse, so what you do in a 
paper plant is going to be very different from a steel plant, 
from an aluminum plant, et cetera. It is hard to have a one-
size-fits-all approach in industry.
    That said, there may be some things that could be done. You 
mentioned utilities. Some utilities are doing a very good job 
of promoting industrial energy savings, primarily by getting 
involved with industrial processes. I would say most utility 
programs are not there yet. If they have an industrial program, 
they do a commercial program and then add ``and I'' at the end 
of it without making any other changes, and that does not work.
    Is there something the Federal Government can do to 
encourage better utility programs? Utility programs are an area 
covered primarily by State and not Federal regulation. Perhaps 
the Federal Government could add a little extra bonus or 
something, that would be possible.
    We are also investigating the idea of how to encourage 
increases in capital investment by industry. When industry 
invests capital, most of the time it is in more efficient 
processes, because they have to be competitive.
    So how do you reward not just any investment, because there 
are trillions of dollars of investment annually, but how do you 
reward increases in that investment? If we can get more of that 
investment, we can get more jobs here and we can also get more 
energy savings. So we are looking at that now, trying to figure 
out what the cost would be, because we recognize that money 
will be tight here in Washington, and we are trying to come up 
with something that looks cost-effective.
    Senator Carper. All right. Thank you. Thank you all very 
much.
    Senator Bingaman, just let the record show you have always 
been so generous with giving me all the time I want. No one 
else ever does that. [Laughter.]
    Senator Bingaman. Well, if you would like to stay for 
another round of questions, we will be glad to oblige you with 
that, too.
    Senator Carper. That is great. Thanks so much.
    Senator Bingaman. All right. Let me just ask a couple of 
questions that have occurred to me listening to other Senators 
asking questions here.
    It seems to me we have sort of three different issues, and 
maybe more than three. This idea of putting a 5-year limit on 
these credits and all, I think the mind-set that leads to that, 
at least with regard to some of these incentives, is that we 
are trying to support new technologies or emerging technologies 
or early-stage technologies--and we want to support them--but 
we want them to be able to progress to a point where they can 
stand on their own after a certain period of time and compete 
in the marketplace. So that makes sense, to have a tax credit 
or a tax provision to encourage the use of that technology for 
a period and then phase it out, so I think that is one thing.
    It seems to me, though, that many of the other things we 
are talking about here really are not of that type. For 
example, Mr. Wagner, you talk about the idea of being sure that 
you have a tax incentive so that a person who owns a commercial 
building, like the Empire State Building, anytime they can do a 
retrofit of that building and save 38 percent of their energy 
from what they previously had been using, we ought to be 
encouraging that.
    That should not be something that we just do for 3 years or 
5 years. That could be a permanent part of the tax incentives, 
it seems to me. So I do not know that phasing that out makes a 
lot of sense.
    Then also, if we could properly design a regime for 
improved efficiency in appliances and equipment and that sort 
of thing along the lines I think Mr. Nadel was talking about, 
where you have an ability to upgrade the standards or the 
qualification criteria periodically, there is no reason to my 
mind why that needs to expire either.
    Now, one example is this Top Runner program that they have 
in Japan, which I became aware of a few years ago over there, 
where they basically, as I understand it--and maybe some of you 
know better than I do exactly how it works--basically, in a lot 
of the different appliances--heating equipment, cooling 
equipment, and all that they have in the market--they, every 3 
years or so, will determine who is providing the most efficient 
equipment, and then they will set that as the standard and say, 
a few years down the road that is what we are going to be 
requiring of everyone, so everyone has to step up to that new 
achievable standard which this company, the front-runner, the 
top runner, has demonstrated is achievable. So it is another 
way of doing what Mr. Nadel is talking about.
    He was suggesting that the Department of Energy be able to 
upgrade the qualifications, and that might be a way. But it 
seems to me that some of these incentives, it does not make 
sense to terminate after a short period of time. There are 
others that maybe are appropriate to terminate or phase out 
after a reasonably short period of time.
    Do any of you have comments on that? Mr. Wagner?
    Mr. Wagner. Well, Senator, I think you are exactly right. 
You almost have to ask yourself, what is the goal here? If the 
goal is to retrofit a certain number of buildings, and that 
will take X number of years, then that is what you want to do. 
But I think there are a vast amount, a tremendous amount of 
commercial buildings and residential buildings out there that 
can be renovated under these programs. I guess I do not want to 
be trite, but my answer might be, let us phase out the tax 
credit when we are done.
    Senator Bingaman. Once we got them all innovated?
    Mr. Wagner. That is right.
    Senator Bingaman. Right.
    Yes, Mr. Nadel?
    Mr. Nadel. Right. As the proponent of a 5-year incentive, I 
would be fine to keep them going if the money is there, 
particularly for both the residential and commercial building 
incentives. It will be a question of how much money is there 
available at one point in time. But if we can make them 
permanent, great, but we should continue to review them and 
revise them.
    In terms of the products, such as appliances, I would say, 
rather than the absolute top runner, there probably should 
either be some flexibility in criteria or maybe some slightly 
different criteria, like the top 5 percent. I say that because, 
for some products, manufacturers have what are called trophy 
products.
    Yes, they are out there, but they do it for bragging 
rights, not really to sell them. So, if you were to do it for 
air conditioners, I think the trophy products now have a SEER 
rating of 23. Virtually none of them are being sold. You would 
probably want to go a bit lower if you want to actually have an 
impact.
    Senator Bingaman. All right.
    Does anybody else have a comment? Dr. Arvizu?
    Dr. Arvizu. You have hit on something that I think is very 
important. That is to categorize the various types of 
incentives based on the objectives that you are trying to 
achieve.
    If I think back to the Academy reports and the McKinsey 
studies, the things that I mentioned in my testimony, there is 
a tremendous amount of opportunity. The question is, how much 
of that do we want to capture and who will ultimately both 
provide the means for getting over the barriers, and also reap 
the benefits?
    So I think all of these things have merit, primarily based 
on the fact that this is a very complicated system and we need 
to think about it from a systems perspective. I do think the 
opportunity for having a transformation of our energy system 
depends, for a large part, on how efficient we get. I have 
frequently said it makes no sense to shove a bunch of green 
electrons into a very inefficient system.
    I think we really need to work on the inefficient system 
piece first, and then the portfolio will be optimized in a much 
better way. So we should have some additional priorities. I 
know it is not very glamorous to do some of the blocking and 
tackling that relates to efficiency, but it should not be 
underestimated how valuable it is to the ultimate goal of an 
energy system that has a lot of attributes that we all aspire 
to.
    So, as we think through that, I think the objectives, such 
as grabbing all of that inefficiency in the system and 
squeezing that out, that needs to be thought through. I think 
the private sector does have the wherewithal to do that with 
government support and government enabling, and to essentially 
make the necessary investments. But it is not simple, and it 
may be that it is better done with targeted approaches rather 
than as some sort of uniform approach.
    Senator Bingaman. Senator Carper, did you have additional 
questions?
    Senator Carper. I do have one.
    Senator Bingaman. Go right ahead.
    Senator Carper. This is sort of a broad, general question. 
I want to just ask your parting advice as we prepare to move 
from this Congress into the next one, especially as we move 
into tax reform in the next Congress. Aside from cloning 
Senator Bingaman, what other advice would you have for us as we 
look to the future, the near future? This can be fairly broad. 
Yes?
    Mr. Golden. I think, to be broad, and in the spirit of kind 
of the last conversation that we just had, we are asking 
consumers in the form of 25E, and also in the commercial sector 
as well, to make investments that obviously have benefits to 
themselves in terms of lower bills and healthier homes and the 
like, but they also have public benefits. They have benefits in 
terms of clean, green capacity that we are driving to the grid, 
and other environmental benefits and job creation, that are not 
currently being monetized in that equation.
    So I think that, as we think about these incentives and how 
they change and evolve over time, there is a role for public 
investment in this space to make up kind of the gap between the 
private benefits and the public benefits, but I do think it is 
really important to focus on how private capital markets, 
capacity markets, can start to fill that space.
    So, as we create data that makes energy efficiency a much 
more reliable resource that utilities can begin to count on to 
actually displace potentially new power plants, by creating tax 
credits that evolve over time and potentially on a consistent 
basis--and consistency is really the key from a private sector 
standpoint--tax incentives can begin to decrease as we start 
seeing these private investments increase over time to fill 
that gap. I think that is how we will create something that is 
economically sustainable and also drives the kind of 
transformation that we need to see in the industry.
    Senator Carper. All right. Thanks. Thanks, Mr. Golden.
    Mr. Wagner. I think one of the things that--we all know 
that efficiency projects can have a great return on the 
investment. I would hope that Congress would look at ways to 
stimulate, to unleash, a lot of private sector capital that is 
sitting on the sidelines right now. How do you do that? How can 
you prime that pump to really get the financing flowing in the 
private sector? What are the keys to doing that? Whether it is 
back-stopping, guaranteeing, doing things that may not cost a 
lot for the Federal Government, you do not have to pay for the 
whole project to say we have unlocked the door, we have primed 
the pump to really flow those private sector dollars that are, 
again, sitting out there on the sidelines.
    Senator Carper. All right. Thanks.
    Mr. Nadel?
    Mr. Nadel. I guess I would suggest you do some analysis. 
Use analysis to help guide these decisions, what approaches 
will give the most bang, if you will, per Federal buck, and not 
just have decisions rely on politics. There are all sorts of 
tax incentive ideas out there, so I would recommend 
establishing a budget and then challenging people to say, 
within this budget, what would you do that would give us the 
most bang?
    Senator Carper. Good. Thanks.
    Dr. Arvizu. I agree with my colleagues. Very thoughtful. I 
will be a bit more philosophical perhaps. The thing that I 
would say is, I would be heartened if the tone of the dialogue 
for energy efficiency and the things that relate to that was 
less political and more in terms of, how do we move forward? I 
think this is not really a political issue from the perspective 
of partisanship.
    I think it really is an opportunity to do something that is 
quite compelling for the country, so I know I speak for a lot 
of folks in the community who would think that some progress in 
this arena is long overdue, and we would welcome some 
sophisticated dialogue to move us in that direction.
    Senator Carper. As my mother would say, from your lips to 
God's ears. [Laughter.]
    I do not know if it is just a coincidence or not, but, Dr. 
Arvizu, do you live in Golden, CO?
    Dr. Arvizu. I actually live in Littleton, but the 
laboratory is in Golden, yes.
    Senator Carper. All right. And we have a Mr. Golden here.
    Mr. Golden. It is not a coincidence. [Laughter.]
    Senator Carper. All right. So great of you guys to come by 
and share your thoughts with us. You do good work, and we 
appreciate you trying to help us do better work.
    Mr. Chairman, thank you.
    Senator Bingaman. Well, thank you very much, Senator 
Carper, for your involvement in this issue.
    Thank you all very much. I think it has been useful 
testimony. We will adjourn the hearing.
    [Whereupon, at 11:23 a.m., the hearing was adjourned.]


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