How the implementation of the $10 billion in tax incentives and cash rebates in the Inflation Reduction Act will make or break America’s home electrification goals
We are at an exciting stage of our nation’s climate journey. Today, President Biden signed the Inflation Reduction Act of 2022 (Inflation Reduction Act), a historic new climate bill that includes $369 billion in clean energy investments that will accelerate the holistic decarbonization of the American economy.
The Inflation Reduction Act is an unprecedented federal investment in clean energy, with big bucks set aside for residential energy efficiency and electrification.
More than $10 billion is allocated to consumer rebates, market incentives, and tax credits for heat pumps and other upgrades that stop energy waste. The law also provides $27 billion in funding for communities, states, and regions to finance and invest in zero-emission technologies.
See Sealed’s complete homeowner guide to Inflation Reduction Act Rebates if you’re looking to make energy-efficient improvements.
We are excited about these developments, and we commend Congress and President Biden on this large down payment on a healthy and sustainable planet.
But this down payment is no guarantee of success.
To truly stop home energy waste and electrify all homes, the Inflation Reduction Act needs to do more than just spend money.
According to Rewiring America, even this historic investment is projected to electrify only one million households, which is less than 1% of our existing housing stock. That leaves behind millions of other homes still running on fossil fuels, waiting to be electrified.
In other words, the Inflation Reduction Act will only realize its full potential of making all American homes efficient and electric if it can leverage more than $100 of private capital for every $1 of federal money.
The good news is that the Inflation Reduction Act—in concert with other federal, state, local policy tools—has the potential to catalyze this kind of private capital investment, but only if five key principles are integrated into the implementation process:
Speed: Avoid the Market Freeze
When the average person reads about Congress passing historic investments in clean energy through new climate legislation, they often believe that means the money is accessible immediately.
Although some of the Inflation Reduction Act’s (also referred to in the news as the 2022 inflation relief bill or new climate bill) provisions—such as the tax credits—will be accessible sooner than others, the reality is that it takes time for the government to bring incentives to consumers and the market.
This is especially true for the $9 billion in energy efficiency and electrification program funds associated with the High-Efficiency Electric Home Rebate (HEEHR) program and the HOMES Rebate program, which must be allocated from the federal government to the states.
This means there are two different levels of government that need to create new rules, guidelines, and systems to issue billions of dollars to the market. The last time the government did this, under 2009’s American Recovery and Reinvestment Act (ARRA), it took more than a year, and even two years in some cases, for the money to reach the market.
The problem with this is that it has the potential to cause a “market freeze,” as consumers elect to wait until incentives become available before moving forward with an electrification project. What might follow? A reduction in market demand at the very time that we need to be building installation capacity.
To address this looming market freeze, we call on the Biden Administration and Secretary of Energy Jennifer Granholm to commit to the two following actions.
- First, we ask that the Department of Energy (DOE) publicly commit to the goal of allocating the $9 billion associated with the High Efficiency Electric Home Rebate and HOMES Rebate program to states, territories, and tribes within 6 months. This commitment requires DOE to establish criteria for application funding quickly which will ultimately accelerate the process for states and help ensure incentives for energy efficiency and electrification are available as soon as possible.
- Second, we ask the administration and DOE to commit half of the Inflation Reduction Act’s $500 million Defense Production Action (DPA) budget for clean energy technologies to heat pumps. This $250 million budget allocation will empower DOE to use its newly granted DPA authority to make heat pumps more accessible to American households while the other rebate program funds are being allocated to the states.
Sustainability: Prevent a Sugar Crash
Once incentives reach the market, the challenge then becomes ensuring that the incentive budget is spent sustainably. The goal is to avoid what we at Sealed call a “sugar crash.”
A sugar crash is when a surge in demand, prompted by generous rebates, burns through all the available cash marked for home electrification much sooner than expected. This has been happening across the U.S. at both the state and local levels, as my colleague Nate Kinsey recently pointed out. A market dependent on large consumer-facing rebates is not a market that can scale private capital or retain workers.
To avoid the sugar crash, DOE should include program requirements that ensure:
- Overall program budgets (federal, state, and utility) are set to achieve long-term policy goals and market transformation.
- Program design balances consumer-facing rebates with more flexible market incentives that encourage innovation and can be more easily adjusted.
- Program rebate levels are generous, but do not substitute or crowd out private capital.
- Program tracking is set up in a timely, predictable, and transparent fashion.
It is always tempting to spend money in the bank as quickly as possible, but in this case the bigger market impact will happen by enabling private capital to expand the market. This requires patience, prudence, and predictability in program implementation.
Performance: Reward Measurable Impact
While cash rebates for specific technologies are great, the real value of energy efficiency and electrification is unlocked when consumers are guaranteed their energy efficient home upgrade investments have the positive impact they are promised. The $4.5 billion HOMES rebate program does just this.
The HOMES rebate program provides funding for states to create whole home performance-based incentive programs. These programs will reward businesses that maximize measurable energy reductions regardless of the technology deployed. The more energy reduction, the more financial benefit to the business—which means bigger energy savings and more comfortable homes for consumers. Paying for more measurable impact is a virtuous cycle.
Best of all, the HOMES rebate program encourages states to not only focus on measurable energy savings, but also measurable greenhouse gas (GHG) reductions, which will accelerate residential electrification.
Going forward, states and utilities should use their states’ HOMES rebate program as a template for turning energy efficiency and electrification into an investable clean energy resource, comparable to solar and wind energy.
Equity: Accessible and Affordable
One of the best parts of the Inflation Reduction Act is its focus on equity.
Under President Biden’s Justice40 Initiative, underserved communities should receive at least 40% of the benefits of the Inflation Reduction Act’s clean energy investments. The electrification incentives are higher, and with more than half of the direct investments in efficiency and electrification geared toward low- and moderate-income Americans.
But money alone does not lead to equity. Too often in the past, low-income efficiency and electrification programs have become inaccessible to the very people they aim to help. Complex paperwork, unreasonable qualification criteria, and no concierge support—these are all symptoms of a culture and system that treats low-income households differently (and worse) than wealthier households.
To avoid this often unseen form of discrimination, programs must approach low-income households with the same respect that any business treats its best customers.
The process to confirm income qualification must be simple, easy, and fast. The types of organizations and market actors eligible to provide the incentives must be broad. And paperwork should be short, available in multiple languages, largely digital, and easily accessible from a mobile browser.
And given the fact that most low- and moderate-income households rent rather than own their homes, LMI incentives should be available to renters regardless of who actually owns the home or building. Any landlord paperwork, therefore, also has to be very simple and straightforward.
Co-Investment: Everyone Does Their Part
Historically, states, cities, and utilities have led the way when it comes to energy efficiency and electrification investments.
According to the Consortium for Energy Efficiency, utilities and state energy administrators spent over $2.1 billion on residential efficiency programs in 2019. And while the federal government is poised to step up in a historic way, $9 billion in consumer efficiency and electrification rebate program incentives over 10 years represents 42% of existing investment levels.
An 42% increase in investment is nothing to sneeze at, but it also won’t move the market at the scale necessary to meet US climate goals if existing investment levels from utilities and others stay flat—or, even worse, decrease. It’s fun to spend someone else’s money, but ultimately our climate and clean energy challenges are too great to rely solely on the federal government at this point.
To encourage co-investment, state legislatures and Public Utility Commissions (PUCs) should raise the bar by passing even more aggressive energy efficiency goals and adopting rules that enable federal dollars to become additive or stackable with existing programs.
For example, utility-run consumer-facing rebate programs should shift funds for traditional consumer-facing rebates to more market-based incentives for the companies that make, sell, distribute, and install heat pumps.
Studies have found that these market-based midstream and upstream incentives have an outsize impact on heat pump adoption by making them the default choice for consumers. These incentive values can also be increased or decreased in response to market conditions without significantly impacting customer perceptions.
Ultimately, implementing ways to make government money available to existing programs will make it more likely that the federal money goes farther.
The Road Ahead
We need the Inflation Reduction Act to catalyze the other 99% of fossil fuel powered homes that may not be electrified with this money alone.
Everyone needs to do their part, including the federal executive agencies, states, PUCs, utilities, and all other market actors. And federal regulators will need to step up and propose appliance performance standards that will phase out fossil-fuel machines in our homes.
Sealed looks forward to working with policy makers and the broader community of energy efficiency and electrification stakeholders to achieve these goals.
In the coming days and weeks, we will publish a series of articles detailing how we believe these five key principles for success can be implemented to ensure the biggest and most long-lasting impact.
Today is a day for celebration, but it is also just the first step in ensuring the promise of the Inflation Reduction Act is kept.
What happens now is no longer up to Congress, but rather people and organizations on the ground that have been fighting for cleaner energy for years. Let’s get to work!