Federal Tax Credits Extended For Business-Scale Biomass Combined Heat and Power Systems

By Sabina Dhungana, DNR Forest Products Specialist, Madison

Were you shocked by your mill or plant’s power bill recently? Then 2021 might be a good year to consider adding a wood-fired combined heat and power (CHP) system or upgrading your existing biomass-fueled boiler system to add power generation capability.

Operators and managers of mills or other forest industry plants looking to reduce energy costs may qualify for the 30% energy tax credit included in the 2021 Federal Omnibus spending bill. Organizations may also be eligible by upgrading an existing biomass-fueled boiler system to add power generation capability. Biomass energy systems with more than 150 kW of electricity generation capacity may be eligible for the tax credit. To qualify for the energy tax credit, construction must start before Jan. 1, 2022.

The 2021 Omnibus also established a 30% Waste Energy Recovery Property tax credit for power systems with less than 50 MW capacity. A “waste energy recovery property” is defined in the legislation as a property that generates electricity solely from the heat of buildings or equipment if the building or equipment’s primary purpose is not electricity generation.

Eligible systems could use any fuel source (e.g., natural gas), not just wood-fired systems. Property owners must decide whether to claim the energy tax credit as a CHP facility or elect to treat their facility as a waste energy recovery property – they can’t claim both. To qualify for the Waste Energy Recovery Property tax credit, construction on the project must start before Jan. 1, 2024. Note that this credit scales down annually from 30% to 22% by the year 2023.

Many sawmills with kilns and old boilers could take advantage of these tax credits by adding a backpressure steam turbine to their system. Other companies that currently don’t have a wood boiler could also qualify for the tax credits if converting to a biomass-fired heat and power system.

Whether a biomass CHP system makes sense financially depends on each company’s situation. Companies with ready access to mill or manufacturing residues such as bark, chips and sawdust, or cull logs or ends or pieces or companies paying high prices for purchased power may have a financial incentive to explore CHP systems. For other companies, a wood heat or CHP system may provide a more stable outlet for the disposal of mill or manufacturing residues.

Companies interested in evaluating whether wood-fired heat or heat and energy systems are a good fit can get free assistance through the U.S. Department of Agriculture Forest Service. The Wisconsin Department of Natural Resources (DNR) partners with the Forest Service’s Wood Energy Technical Assistance Team to provide free wood heat and power evaluations. Contact Sabina Dhungana, DNR Forest Products Specialist, at 608-220-4531 for further assistance.

For more information about the federal income tax energy credit, consult your tax professional and see 26 U.S. Code § 48 – Energy credit and 26 U.S. Code § 45 – Electricity produced from certain renewable resources, etc., (c) (3) Open-Loop Biomass. For more information about the Waste Energy Recovery Property tax credit, see Section 203, pages 2453-2455 in the Omnibus Budget Bill.

26% Tax Credit Passed For Residential Biomass Heat Systems
Homeowners are also beneficiaries of the 2021 Omnibus Spending Bill. Congress passed a 26% tax credit for residential biomass heat systems in December 2020. A tax credit was implemented for wood and pellet heaters with a thermal efficiency rating of 75% (higher heating value of the fuel). The tax credit, initially set at 26% for 2021 and 2022, drops to 22% in 2023. The credit expires at the end of 2023, unless extended. The IRS is expected to issue guidance on the tax credit this year. For more information, see the Alliance For Green Heat’s web page.

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