By now you have probably heard that Congress recently passed the Inflation Reduction Act (IRA) which will invest $369 billion in Energy Security and combatting Climate Change. According to the Biden Administration, this law constitutes “the single most aggressive action the U.S. is taking to tackle the climate crisis and create clean energy solutions in American history.” A recent Princeton University Study calculated that the Inflation Reduction Act would cut annual U.S. greenhouse gas emissions by about 1 billion metric tons by 2030, reducing carbon emissions by about 42% from 2005 levels. The biggest contributors to this reduction are in the transportation and power sectors, but buildings also play a huge role. In Washington, building heating systems and electricity use make up about 40% of our green house gas emissions. While the Inflation Reduction Act contains numerous provisions to help big businesses adopt more eco-friendly measures and jump-start clean energy production, there are also a number of provisions to help ordinary Americans go green. The law’s main method of driving decarbonization in the residential sector is through incentives in the form of tax credits and rebates for energy efficiency, electrification, and renewable energy projects. While the full text of the bill can be found here, this article aims to summarize some of the key provisions that may impact the markets for efficiency, electrification, renewables and green building. These changes will start in 2023.
Section 25C – Energy Efficient Home Improvement Credit
Previously called the “Nonbusiness Energy Property Tax Credit”, section 25C tax credit were set to expire at the end of 2021. This credit was available for homeowners installing new insulation, windows & doors, or HVAC systems. With the IRA, for 2022, the 25C tax credit was reauthorized but will remain unchanged. However for 2023 to 2034 when the inflation reduction act starts to phase out, Congress expanded the potential tax credits available for home energy efficiency projects. Previously the credit maxed out at 10% of the project’s cost or a $500 lifetime credit for a given taxpayer for all years from 2006-2021 and only applied to the taxpayer’s principal residence. A mere $500 tax credit for a $10,000+ new HVAC system did little to offset the cost and the fact that is could only be claimed once, limited the amount of projects a homeowner could do. The IRA changed the credit limit to up to 30% of the project cost and removed the principal residence requirement, opening the credit to rentals and vacation homes. A homeowner can now generally claim a $1,200 per year credit but with high efficiency HVAC systems including heat pump heating systems and heat pump water heaters a $2,000 tax credit is available. To be eligible for the tax credit, the measures must be installed in the calendar year for which credits are claimed, and the serial number of the installed equipment must be provided. There are some performance standards that energy efficiency measures must meet, namely windows and doors must be Energy Star certified, insulation levels must meet the most recent IECC levels and HVAC systems must be in the highest CEE Tier. Some new measures were added to the list of eligible measures for the tax credit including energy audits, air sealing, and electric panel upgrades if in conjunction with a qualified energy efficiency improvement (see chart above). These changes to the 25C tax credit are likely to drive increased demand for home energy efficiency projects in 2023.
Section 25D – Residential Clean Energy Credit
The federal tax credit for residential solar installations has historically been more generous than those for efficiency measures but has been phasing out from 30% to 26% the past few years and was set to completely expire at the end of 2023. I’ve heard from local solar installers have been booked out for the next year, trying to fit customers in before the credit expired. The Inflation Reduction Act restores the 25D tax credit to 30% and extends it until 2033 before it starts to phase out. This long-term extension will lead to more certainty for homeowners considering solar and provide stability to local installers who were rushing to get systems installed before the credit expired. Some other changes to this tax credit include allowing standalone battery storage systems to also be eligible for the tax credit if they have 3kWh or more capacity. There are many other provisions of the bill which should help spur more utility scale solar projects and make manufacturing panels cheaper. See the Solar Energy Industries Association summary for more information on these provisions. Having the full 30% tax credit can reduce installed system cost by tens of thousands of dollars and will be key for spurring more future residential solar projects as the Washington incentive program for solar was oversubscribed in 2021 and is no longer taking new participants. However solar installations in Washington will still be eligible for net-metering (until 2029 or net-metering exceeds 4% of utility’s generation capacity) as well as a sales tax exemption.
Section 45L – New Energy Efficient Home Credit
The New Energy Efficient Home (45L) tax credit has been in existence since 2005 but most local builders are not aware of it. Previously 45L tax credits offered builders of new homes $2,000 per home if modeled energy usage was 50% below that of a similar home built to the 2006 Energy Code. The credits were set to expire, and Congress renewed them in their existing form for 2022. For homes completed in 2023 and beyond, the IRA made some major changes to the 45L tax credit including extending the credit to 2032, providing $2,500 per home for single family homes that are certified under the Energy Star Single Family New Homes program, and $5,000 per home for those that are certified under DOE’s Zero Energy Ready Home program. Manufactured homes meeting certifying as Energy Star also qualify for a $2500 credit. Multifamily homes that meet Energy Star Multifamily New Construction Program qualify for a $500/unit credit. This increases to $2500/unit if workers are paid prevailing wage. Both the Energy Star and Zero Energy Ready Home standards will require verification by a third party, such as a certified HERS Rater. Kudos to RESNET for all of the advocacy to help pass this section of the bill.
Two New Rebate Programs
In addition to the tax credits, the IRA establishes two new rebate programs that aim to further energy efficiency and electrification particularly in low-to-moderate income households. Congress will distribute this funding to state energy offices (housed within the Department of Commerce in Washington). States must apply for funding, which will be allocated based on population and energy use. The DOE has yet to issue guidance to states on how to apply for rebate funding; once they do, states will then need to apply. Once approved, state energy offices will need to set up programs and recruit contractors. While these programs offer higher dollar amounts than many of the tax credits, there are still many unknowns such as how the rebates will be administered and how income levels will be verified. I reached out to Dept. of Commerce, but have not yet received any information from them about these programs (I will update this post when we learn more).
HOMES Program: One of these new rebate programs is called the Home Owner Managing Energy Savings or “HOMES” program and it will receive an allocation of $4.3 billion. There are two tiers of rebates with homeowners at or below 80% of Area Median Income (AMI) receiving a greater rebate amount. This program bases rebate amounts on either measured or modeled energy savings. With the modeled energy savings approach, energy auditors conduct calculations using software that trues up energy models with records of historical energy use. A minimum 20% energy savings is required for rebates with greater savings providing a higher rebate amount. For measured energy savings, the home energy usage is tracked following energy retrofits using DOE-approved software that accounts for variations in weather. A minimum 15% energy savings is required under this approach. Homeowners earning over 80% AMI will be be able to qualify for a rebate of up to 50% of project cost or $4,000 total. For low to moderate income homeowners, the rebate is 80% of the project cost, up to a maximum of $8000.
High Efficiency Electric Homes Program: The other rebate program is called the High Efficiency Electric Homes Program and it was allocated $4.5 billion to provide point-of-sale rebates for electrification projects. Unlike tax credits, these rebates will come up font. The rebate will cover up to 100% of the cost (subject to caps for specific appliances and measures) for households below 80% of AMI. For households between 80% and 150% of AMI, the rebates will cover 50% of the cost. The maximum total rebate amount is capped at $14,000 per household and a separate $500 rebate is available for contractors. The caps for specific appliances and measures are as follows:
- Heat pump water heater – $1,750
- Heat pump for space heating and cooling -$8,000
- Electric or Induction stove – $840
- Heat pump clothes dryer – $840
- Electric panel upgrade – $4,000
- Insulation, air sealing, ventilation – $1,600
- Electric wiring upgrades – $2,500
Households are not allowed to receive both HOMES and High-Efficiency Electric Home rebates for the same measure. However, nothing in the act prevents households from combining rebates with 25C credits or utility rebates. While the rollout for these programs may be slow and complicated, once deployed they will be a major game changer for residential energy efficiency and electrification.