Tax Credits for Residential Fuel Cells

You won’t find residential fuel cells in too many homes. Because the price tag is steep and the technology unfamiliar, most home owners have stuck with traditional power systems — or turned to better known sources of alternative energy such as solar or wind.A federal energy tax credit on residential fuel cells that’s good through the end of 2016 could convince more home owners to give the green technology a try. And if promised savings on energy bills are realized, residential fuel cells could eventually become more common.

How residential fuel cells work

Fuel cells can operate in different ways, but in general, residential fuel cells combine oxygen with hydrogen extracted from natural gas or propane to produce electricity. The chemical process uses the fossil fuels cleaner and more efficiently than the combustion process that occurs in, say, a gas furnace. The primary byproducts of fuel cells are heat and water.

Residential fuel cells can be tied directly into a home’s electrical panel to supply electricity. Excess electricity can even be sold back to your local utility. More likely, fuel cells will meet a portion of a home’s power needs, with the rest drawn from the electric grid. As a bonus, fuel cells can continue to function during power outages.

The heat produced as a byproduct by fuel cells can be used to provide hot water and heat to your home. A fuel cell system, which has heat-exchanging technology built in, is tied to a boiler or water heater and works in tandem with those units. Access to a fossil-fuel source such as natural gas is required. A typical residential fuel cell system is about the size of a refrigerator.

Fuel cells come at a hefty cost

Residential fuel cells aren’t cheap. A system can cost $50,000, and that’s not counting installation. A federal tax credit can help defray some of the expense, as can energy savings once the system is up and running. Manufacturers estimate a system can lower utility bills by as much as 40% a year. That’s an annual savings of $890 for the average home owner, making fuel cells best suited for regions with well-above-average energy costs.

Residential fuel cells can be integrated into just about any type of heating system: radiant heat, hot water baseboard, or forced air. Most home owners will require a system with a capacity of 5 kilowatts or less. Fuel cells capable of generating 2 kW to 5 kW of electricity should work effectively in homes between 2,000 square feet and more than 4,000 square feet.

Natural gas is by far the most common fuel source for residential fuel cells. Budget for a hookup to your home, if you don’t already have one. The system can be sited inside with your other mechanicals, or in some cases outside.

Installation adds to the price

It’s cheaper to install residential fuel cells in new construction. Expect to pay more to retrofit an existing home. The federal tax credit applies to both new and existing homes, as long as it’s your primary residence.

Installation in a newly constructed home can run between $3,000 and $4,000, on top of the $50,000 for the system. In an existing home, installation can add $12,000 to $25,000 to the total bill. Costs escalate depending on how far the system is from your electrical panel and boiler, and how much wiring and plumbing is involved.

Some cities require permits to install residential fuel cells, so budget time for you or the installer to secure them. Most local governments won’t be accustomed to issuing them since so few systems are in use. According to Clear Edge Power, a maker of residential fuel cells, a system shouldn’t take more than three days to install once the paperwork is in order.

Tax credit has limits

The federal tax credit for residential fuel cells lets home owners write off 30% of the cost, up to $500 per 0.5 kW. The system has to have a minimum 0.5 kW capacity and efficiency of more than 30%. Take the credit in the year the system is placed into service. Use IRS Form 5695. Save your receipts and manufacturer’s certification statements.

There are other restrictions. Calculating your precise tax credit depends on the total installed cost of the system. To determine the credit, the cost is multiplied by 0.3 (30%) and the kW output is multiplied by $1,000. The taxpayer is entitled to the smaller dollar amount.

For example, if a 5 kW system costs $60,000, if you could take the full 30% of the cost, you’d have an $18,000 credit. But there’s that $1,000 per kW cap. So you’d only get $5,000 (5 kW x $1,000) of your potential $18,000 credit.

Convincing home owners to pay upward of $75,000 for residential fuel cells will be a tough sell until upfront costs decline. The federal tax credit helps, as do the energy savings, but payback periods remain lengthy unless your electricity rates are two, three, or more times the national average. State incentives can reduce system costs further, though the current number of incentives aimed at systems sized for home owners is limited. Check the Database of State Incentives for Renewables & Efficiency.

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These articles are not intended to give legal or tax advice, and you should consult your attorney or financial advisor for additional information.

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