Engineering

The Inflation Reduction Act and Health Care

Changing how to build medical facilities

BY Mark Bradby, PE

One of the biggest shifts the IRA brings to health care is, for the first time, tax credits for renewable energy are refundable for tax-exempt entities, an umbrella category that includes many health care organizations. This change means that tax-exempt hospitals and other such medical entities can receive the value of the tax credit as direct payment—making investment in high-performance, low- or zero-carbon medical buildings and hospitals far more financially feasible. Before the IRA, the payback period—the time it takes for an organization to recoup the cost of investment—for green building technology—might have been up to 20 years. With these new incentives, the payback period of a project such as the installation of the photovoltaic system or a geothermal heat pump can be as short as eight years.

Because of code requirements, health care guidelines, and best practices, health care buildings can consume a lot of energy. In fact, according to “Practice Greenhealth,” hospitals make up close to 10 percent of total energy consumption by U.S. commercial buildings. Higher rates of air filtration, tighter temperature and humidity tolerances and 24/7 occupancy are a few of the reasons hospitals consume more energy than the typical building. While a high standard of patient care is non-negotiable, there are strategies that can significantly lower the energy consumption of a hospital.

Medical entities can receive the value of the tax credit as direct payment.

Building Strategies the IRA Can Fund

The IRA bridges the cost gap between the desire and need for green building technologies and the action required to implement those and the action required to implement those technologies. It makes options such as geothermal and solar energy more affordable, and in some cases, the most cost-effective energy option.

There is a cascading hierarchy of strategies that health care facilities can use to reduce their energy consumption. Each reinforces the others, and attention must be paid to each of them since they can also compromise each other if not implemented correctly. A savvy consulting engineering team with expertise in green building technologies is an invaluable partner to health care organizations. What follows is a look at some of the array of options to consider.

Building Highly insulated building brings down the initial energy consumption before any systems are designed.

Reduced infiltration A blower door test can ensure your building isn’t leaking heat and cool air to the environment, which increases energy consumption.

Energy recovery Hospitals require significant ventilation and exhaust. Recovering heating or cooling from waste air results in large energy savings.

Lighting Changing to LEDs and correctly selecting lighting both reduces electrical consumption and also reduces the heat load in the building in the summer.

Geothermal (ground source) heat pumps Geothermal heat pumps use the relatively constant temperature of the ground in the zone from 10 to about 300 feet below the earth’s surface. They can therefore exchange heat with the earth in a more efficient manner than above-ground equipment like cooling towers. Since geothermal systems have fewer moving parts than a traditional boiler/ chiller/ cooling tower system, they require less maintenance and upkeep. Health care has been slower to implement geothermal systems than other markets. However, as engineers become more experienced in designing these systems and controls get more effective, geothermal systems have been shown to be just as effective at heating and cooling hospitals as traditional boiler/ chiller systems. Geothermal can reduce a typical hospital’s energy consumption by 20-30 percent if designed correctly.

Solar Photovoltaic (PV) When the energy consumption of a building is minimized by applying the strategies above, PV solar arrays can then be designed to further reduce the building’s energy usage. A net-zero building would install enough PV solar to offset all the building’s energy usage over the course of a year.

Considering Solar

Solar photovoltaic panels have come down in cost considerably over the last decade, even as their design becomes more efficient and reliable. There are multiple options for providing solar energy, including owning panels on your site, having another entity own panels on your site and sell power to the facility, or having solar panels off site, which is known as a solar farm.

The IRA offers two tax credits for businesses and nonprofit entities that purchase and install solar energy systems. The first, the Investment Tax Credit (ITC), reduces an entity’s federal income tax liability for a percentage of the cost of a system installed during the tax year. For a system that meets labor requirements (all wages paid at the prevailing rate and a certain percentage of labor hours performed by an apprentice, starting at 10 percent in 2023) and is installed between 2023 and 2033, the base credit is 30 percent.

The second credit is the Production Tax Credit (PTC), a per-kilowatt-hour tax credit for electricity generated by a solar system for the first 10 years of the system’s operation. The base credit for a system installed between 2023 and 2033 that meets labor requirements is 2.75 cents per kWh.

Generally, an organization cannot take both credits, so decision-makers at healthcare facilities will want to talk to their tax advisors about which option makes the most sense for their organization. For example, a health care facility in a sunny place might choose the PTC, while a facility in a location that has high installation costs might get a better return by taking the ITC.

More on Geothermal

Health care clients often understand the appeal of geothermal systems, which bring many benefits: No boilers mean less carbon. Less space is required for equipment. The operating cost savings are significant, and the system’s lift expectancy is more than 50 years. Plus, geothermal systems are about 30+ percent more efficient than traditional heating options.

To incentivize organizations’ investments in geothermal heat pump systems, the IRA offers similar tax credits to those for investment in solar energy: The ITC is 30 percent of the cost of the system if the prevailing-wage and apprenticeship requirements are met, unless the geothermal system is less than 1 MW of thermal output. The geothermal field also must supply more than 75 percent of the BTU heating and cooling load for the building over the course of the year to qualify for the credit.

Hospitals make up close to 10 percent of total energy consumption by U.S. commercial buildings.

Stackable Bonus Credits

In addition to these initial tax credits, the IRA offers stackable bonus credits for projects that meet additional criteria. The Domestic Content Bonus—available for both geothermal and solar-panel projects—offers an additional credit of up to 10 percent if 100 percent of the steel and iron used in the hard goods are manufactured in the United States. And 40 percent of the other goods must be manufactured in the U.S. through 2024, scaling up by 5 percent to 55 percent of goods by 2027.

The Energy Community Tax Credit Bonus, also applicable to both geothermal and solar projects, applies a bonus of up to 10 percent for projects, facilities, and technologies located in “energy communities”--which the IRA defines as a brownfield site (generally defined as land that’s unused or underused because of pollution from industrial use); areas of higher-than-average unemployment or local economies dependent on coal, oil, or natural gas; or areas where a coal mine has been closed after 1999 or a coal-fired generating unit has been retired after 2009.

And finally, the IRA offers the Low-Income Bonus of up to 20 percent for solar projects in low-income communities. A close consultation with a tax advisor can help organizations identify if they qualify for any of these “adder” bonuses in their projects.

Best Energy Practice

While the incentives from the IRA are available for geothermal or solar projects that are in design or even construction, the best time to incorporate IRA qualifying strategies is during planning or the pre-design phase. Like many tax credits, the IRA has specific requirements for qualifying projects, and structuring a construction project’s bid form such that qualifying systems are bid as separate line items can expedite the work of a cost segregation study. The IRA requires a cost segregation audit to be conducted by an independent accounting firm to verify that the components and systems qualify for the IRA and that their costs are correct. Many project managers will hire an independent accounting firm to audit large construction projects so this shouldn’t be a barrier to pursuing the IRA—the firm may have additional checks or forms to fill out.

It is also important to consider the total cost of ownership when evaluating high-performance mechanical and electrical systems. While high-performance mechanical systems may save energy in the long run, their upfront cost is often higher than traditional systems. When comparing a geothermal system to a standard chiller boiler system, the upfront cost can be 10 to 20+ percent higher. However, over the lifespan of the building, lower energy and maintenance costs can mean that over 20 years of operation, the geothermal system has a lower total cost of ownership. At the planning stage when there is the greatest ability to make design changes, it is important to evaluate how much energy various systems will consume. In early case studies, it has been found that a geothermal system achieving the 30 percent IRA tax credit (or direct payment) can have the lowest first cost in addition to being the most efficient system long term. After one year of operation, the building may apply for the IRA rebate to verify energy consumption. After the first year of operation and submission of the appropriate application, the rebate can reduce the cost of the mechanical system by a significant amount.

In Summary

The Inflation Reduction Act provides a bridge for healthcare facilities to overcome first-cost barriers to install systems that will lower their energy consumption. Geothermal heat pump systems also lower overall maintenance costs of their facilities. A good first step for a building owner is to understand the energy usage intensity (EUI) of their current buildings and compare them to similar buildings in the same climate zone to discern if the buildings use more energy than their peers. When the time comes to construct new buildings or renovate older ones, consider high-performance systems, and find trade partners—including architects, engineers, and contractors—who can provide up-front information about how the Inflation Reduction Act could help finance high-performance systems. Whether the goal is reducing long-term costs, decarbonization, or improving the planet, the Inflation Reduction Act is one pathway to the next generation of high-performance health care facilities—and the results are good for health care systems, providers, the patients they serve, and the planet.

Mark Bradby, PE, is  the Minneapolis director of operations and a mechanical engineer at CMTA.