Evaluating the IRA

Earlier this month, Congress passed - and President Biden signed into law - the Inflation Reduction Act (IRA), the largest climate bill ever. While slimmed down and altered from the original House bill, the IRA (and, to a lesser extent, the Bipartisan Infrastructure Law) will result in a huge influx of funding for clean energy, energy efficiency, and electrification.

My initial reactions to hearing of the bill’s passing were elation that the US is finally going to be putting in a serious effort into mitigating climate change at the federal level and shock that it actually passed, given all of the false starts and stops.

Then I thought, “Wow! Evaluating all of this could get complicated!”

What is in the IRA?

Other sources can provide comprehensive details on what is in the IRA and the modeled impacts, but at a high level, the IRA targets clean energy, health care, and taxes. Below are some of the things I am most excited about on the energy front, along with some initial evaluation questions we should start thinking about.[1]

Residential Tax Credits for Energy Efficiency and Electrification

The bill expands the Energy Efficiency Home Improvement Credit, which provides tax credits for up to 30% of the cost of energy efficiency upgrades, including heat pumps, weatherization, and upgrades to electric panels. One important change for this offering is that the credit will now be capped annually at $1,200[2] rather than the current lifetime cap of $500 ($200 for windows).[3] This means that in addition to people now being able to receive a larger total lifetime credit, they can also plan to phase projects over multiple years, helping overcome the upfront cost barrier.

The bill also expands the Residential Clean Energy credit, which targets renewable energy. This tax credit will now cover 30% of the cost of solar PV (up from 26%) and will now also cover battery storage, even if not connected to solar.

Crucial for both credits is the time period: both credits are funded for 10 years, compared to the past uncertainty of expiring laws that may or may not be renewed every few years. This hopefully will create some certainty in the market for contractors to hire and train up staff for a transformed market as opposed to potential boom and bust cycles.

Evaluation Questions

• Tracking impacts – How will the measures installed and their savings be tracked? This question applies to all of the items below as well. What savings are we tracking: kWh, kW, therms, CO2 equivalent? If we are tracking carbon, will it be based on time and location or a blended annual value?
• Deployment vs. Attribution – If the IRA’s ultimate goal is reducing carbon emissions as quickly as possible, then its focus should be on rapid deployment and gross savings rather than net savings. How will this impact utility programs and how they claim savings?
• Multiple-year projects – With annual caps on tax credits, some homes may spread out energy efficiency or electrification improvements over several years to maximize rebates and keep project costs manageable. Will contractors and homeowners be able to create this sort of long-term plan? In what order will projects occur (i.e., will weatherization happen before the heat pump before the solar)? Net-to-gross frameworks often break down dealing with multi-year projects. How will that be treated?
• Workforce education and training – Who is going to do all of this work, and will it be done well?

Whole House Retrofits

The IRA also provides about $9 billion in direct rebates for whole house electrification retrofits. The funding will go to the Department of Energy to distribute to states in the form of two programs of roughly equal size. The first comes from the High-Efficiency Electric Home Rebate Act (HEEHRA), which provides rebates to low and moderate-income households for installing electric appliances (heat pumps, heat pump water heaters, stoves[4], and clothes dryers) and weatherization measures (insulation, air sealing, and ventilation). Importantly, it also provides rebates to upgrade the home’s electric panel and wiring (an overlooked barrier).

A similar program, the HOMES rebate program, focuses on comprehensive home retrofits but is not limited to low or moderate-income households or electric measures.[5] The program also includes $250 million for workforce education, helping to mitigate another barrier.

Evaluation Questions

• Allocation to states – How will the DOE allocate this to states? And how will states implement the programs? Even with these large funds, it will only cover a small share of homes in the country.
• Equity – The programs focus funding on low and moderate-income households, but will the rebates be enough to meaningfully increase electrification among these households, or are there other barriers that need to be addressed?
• Savings calculations – Savings for the whole house projects will be performance-based. Will that be done correctly?

Energy Code Improvements

The IRA contains $1 billion related to energy codes. About one-third of this is allocated to assist state and local governments in adopting IECC 2021 and implementing plans for increased compliance (of IECC 2021). The remaining two-thirds will provide tax credits, increasing the efficiency of new construction. This will be in the form of a $2,500 credit for ENERGY STAR New Homes and $5,000 for zero net energy-ready homes. On the commercial side, builders can receive a $2.50 per square foot tax credit for being 25% above the ASHRAE 90.1 baseline and $5.00/SF for 50% above that baseline.[6]

Evaluation Questions

• Attribution – All builders can apply for these credits, meaning that builders in more progressive areas that are already building to these levels could ride the free ridership train to money town.
• What to target? – Should the funding focus more on helping lagging states adopt more recent codes or focus on improving compliance of states already adopting IECC 2021?
• Interaction with utility programs – How will these market transformation efforts interact with utility new construction programs? How do you measure savings? What will be industry-standard practice?

Financing

The IRA allows the Environmental Protection Agency to distribute $27 billion in funds to green banks and other nonprofits, with a focus on disadvantaged communities and low-income households. The bill also provides $40 billion for DOE’s Loan Programs Office for large energy projects that reduce GHG emissions. There are other financing-related items included, such as loans for rural electric co-ops for electrification.

Evaluation Questions

• Who receives the loans? – To whom will these funds be distributed?
• Data tracking – How will the information about projects receiving loans and their savings be tracked? Financing programs often have limited data to estimate or verify savings.

Tax Credits for Non-Profits

The IRA also makes many changes to the Investment Tax Credit and Production Tax Credit, which target large generation projects. The change that stood out to me is that credits can be received as direct payments rather than tax credits and also assigned to other parties. Previously, only tax-paying entities were eligible for these credits. This means that the ability of non-profits, such as electric co-ops, to develop large renewable generation projects increased dramatically.

And Lots More!

This just scratches the surface of what is included in the IRA and the related evaluation questions. There are many other cool things included, such as funding for industrial decarbonization, climate justice, tax credits for both new and used electric vehicles, funding for electric mail trucks, and on and on. It has the potential to transform the energy system and our industry. I’m optimistic that we can make it happen and excited to help. Hopefully, thinking through some of these potential issues early in the process will maximize the IRA’s impact and make the implementation and ultimate evaluation of these huge efforts as smooth as possible.

[1] Many of these questions apply to all of the items covered, but are only listed once.

[2] An exception to this is a $2,000 credit for heat pumps and heat pump water heaters.

[3] The current tax credit is also only for 10% of the cost.

[4] I’m not sure if they have to be induction or not.

[5] The incentive levels are doubled for low and moderate-income households, however.

[6] Two notes: 1) These credits are for buildings that meet certain labor criteria; otherwise, the credits are lower; and 2) the current baseline is ASHRAE 90.1-2007, but will be increased in the future.