Climate law could spur ​‘market transformation’ in home electrification

Editor’s note, August 16: This story was originally published on August 4, 2022. It has been updated to note President Biden’s signing of the bill.

Donnel Baird, CEO of BlocPower, thinks the Inflation Reduction Act could transform the country’s home efficiency and electrification markets. It could certainly boost the bottom line for his company and help the primarily lower-income and disadvantaged communities it serves.

Baird estimated that the act’s tens of billions of dollars in federal rebates, tax incentives, grants and lending capacity for electric appliances, heat pumps, rooftop solar, home batteries, efficiency retrofits and other building improvements could cut 5 to 40 percent of the per-home cost of the efficiency and electrification projects that BlocPower is doing around the country.

That ​“means there are millions and millions of buildings where you couldn’t make the economic argument, where now you can,” he told Canary Media, ​“particularly low-income buildings where the financial payback did not pencil out before.”

The result will be many more homes and apartments with lower energy bills, reduced health risks from burning fossil fuels indoors, higher property values for owners, and appliances that can interact with a grid increasingly powered by renewable energy, he said.

And, of course, it will be a vital part of combating the climate crisis. The direct use of fossil fuels in buildings accounts for about 13 percent of total U.S. greenhouse gas emissions.

The U.S. can’t meet its decarbonization goals ​“unless we electrify the 1 billion machines across our 121 million households across the country,” Ari Matusiak, CEO of pro-electrification nonprofit group Rewiring America, said at a Wednesday press conference. His organization designed one of the key electrification-rebate provisions of the new law. ​“Transforming the market so that we rewire America’s households is a big task,” one that ​“needs to be catalyzed” by federal legislation.

But when it comes to turning the act’s efficiency funding into that market transformation, ​“the devil’s in the details,” Baird said. ​“Can we pull it off in the real world?” 

That challenge includes straightforward issues of timing and complexity. How long will it take federal and state agencies to devise the rules to give out rebates and grants? Will those rules allow households and contractors to get the money relatively quickly, or will they be complicated by red tape?

Then there are structural questions. Can heat-pump manufacturers and efficiency contractors meet the demand expected to arise in response to a big jolt of federal funding? How can programs avoid a boom-bust cycle of big spending that eventually ends and leaves businesses facing shortfalls and layoffs?

These are the questions that climate activists and efficiency and electrification professionals will be asking in the months to come, said Panama Bartholomy, executive director of the Building Decarbonization Coalition.

“They took like 10 years of climate-activist angst and put it all into one bill,” he said. ​“It’s a Christmas tree of stuff.” But ​“it’s another thing to get the money out the door.” 

Andy Frank, president and founder of New York–based home-efficiency and electrification provider Sealed, agreed that successful implementation of the bill’s provisions ​“could spark a lot of market dynamics” that will lower the cost and improve the quality of homeowners’ clean-energy investments. ​“That creates a positive feedback loop.” But the federal and state agencies involved will ​“need to design the program rules and programs in a way that’s healthy and sustainable for the market,” he said.

This admonition applies to the three main buckets of efficiency and electrification support in the Inflation Reduction Act: tax credits, rebate programs and new lending authority that could be used to transform the home energy market.

1. Tax credits to promote efficient electric homes 

The most immediate impact will come in the form of tax credits, Frank said. That’s because most of them will be available to homeowners next year, and some of them will apply to investments made in 2022.

For homeowners, the most important is an expansion of the Energy-Efficient Home Improvement credit, known as 25C after its section in the tax code. It will allow households a tax deduction of up to 30 percent of the cost of energy-saving home upgrades, ranging from insulation and new doors and windows, to heat pumps that use electricity to heat and cool homes far more efficiently than fossil-fueled furnaces and water heaters, to upgrades of electrical panels to serve those new electric loads.

Most of these credits will be capped at $1,200 per household per year, or $600 per measure such as insulation or more efficient windows. But heat pumps — devices that can both heat and cool homes by tapping temperature differentials between indoor and outdoor air or underground thermal sinks — will be eligible for the 30 percent credit for up to $2,000 of their value.

The Residential Clean Energy credit, or 25D, will allow homeowners to deduct up to 30 percent of the cost of fancier home-electrification projects. Those include rooftop solar, which is currently eligible for a 26 percent tax credit but under the new law will be eligible for 30 percent. And for the first time, residential battery systems will be eligible for a tax credit, whether or not they’re connected to rooftop solar.

These home-efficiency and clean-energy tax credits have a 10-year lifespan, Matusiak noted. So as heat pumps and other technologies get cheaper over time, the relative portion of their costs covered by the credits will increase, he said — you will still get up to $2,000 off a heat pump even as the cost of that heat pump declines.

A 10-year lifespan also provides more certainty for contractors and manufacturers that may want to bundle the value of these credits into how they price their products and services. Whether contractors do that could ​“make or break these programs,” Bartholemy said, since homeowners usually follow contractors’ advice on what equipment to install — particularly when replacing a broken-down furnace or water heater.

While rooftop solar installers have had decades to build business models around federal tax credits, ​“it is very new for the home-electrification community,” he said. ​“It’s going to be contractors going to customers and saying, ​‘Here’s how we’re going to bundle all these incentives and tax credits’ — and state ones as well,” such as the heat-pump incentives available in California, Maine, New York and Washington state.

2. Rebates for electrification and whole-home efficiency

Congress hasn’t yet released an analysis of how much money the tax credits could end up directing into U.S. efficiency and electrification investments. But the Inflation Reduction Act does include two other programs that call for spending nearly $9 billion in direct rebates and incentives for efficient and electric homes.

Both of these rebate programs will be operated by the U.S. Department of Energy in conjunction with state energy offices, which means it will take longer to set up the federal and state rules that will allow them to start spending money.

Nate Kinsey, senior policy manager at Sealed, estimated that it could take one to two years before money starts flowing through the two programs, depending on how quickly DOE crafts the rules for states to follow and how ready state agencies are to implement them.

But once they’re up and running, they could start to make a big difference very quickly, Matusiak said — in particular, the $4.5 billion in direct rebates from the High-Efficiency Electric Home Rebate Act (HEEHRA), which was incorporated into the Inflation Reduction Act. Based on a Rewiring America plan, it’s aimed at quickly helping low- and moderate-income households afford not just electric appliances but the broader home electrical upgrades needed to support them.

Low-income households, defined as those earning 80 percent or less of area median income, will be eligible for a rebate of up to $8,000 to cover the full cost of equipment and installation for a heat pump for space heating, up to $1,750 for a heat-pump water heater, up to $840 for an electric stove or electric clothes dryer, and up to $1,600 for insulation, ventilation and sealing. Those that need to upgrade their household electrical system could receive up to $4,000 for an upgraded electrical panel and up to $2,500 for upgraded electrical wiring.

Moderate-income households earning between 80 and 150 percent of area median income will receive the same rebates but capped at no more than half of their total costs.

Based on today’s average prices for heat pumps, these rebates could cover the full cost of installation for low-income households, according to Lowell Ungar, head of the federal policy program at the American Council for an Energy-Efficient Economy (ACEEE). Moderate-income households can add tax credits to rebates to cover about two-thirds of their total costs, he estimated in an email.

Utility-bill savings from such upgrades will vary depending on a number of factors. But electric appliances ​“have already leapfrogged their fossil-fuel competitors on efficiency and performance,” U.S. Senator Martin Heinrich, the New Mexico Democrat who sponsored the HEEHRA legislation in the Senate, noted during Wednesday’s Rewiring America press conference, which means they can be expected to use significantly less energy over the long run.

The big question is how many homes this rebate structure will serve. Rewiring America forecasts that the rebates could enable roughly 1 million households to switch to all-electric power. But that will leave about 128 million U.S. households to go. And while the program is authorized for 10 years, without renewal, it’s likely the rebates will be exhausted well before then.

The second major home efficiency program in the new law, known as the HOMES Rebate program, is designed to be a bit more flexible, Bartholemy said. It allocates $4.3 billion to states to provide rebates for comprehensive home energy retrofits, which include building improvements and both electric and gas-fueled efficient appliances for single-family and multifamily residences.

State energy agencies will have a number of choices about how to direct this funding, which amounts to $2,000 per household or half the total cost of a project. There’s no income limit for taxpayers to participate in the program, but the rebates are doubled for investments by low- and moderate-income households. The program also includes $250 million for contractor training and support and ​“promises to greatly ramp up the number of retrofits” from current levels of about 200,000 homes per year, ACEEE’s Ungar said. These whole-home retrofits can reduce annual utility bills by an average of $540 a year for single-family homes and $210 a year for units in multifamily buildings, he said.

The HOMES Rebate program is also designed to support ​“performance-based” efficiency investments that can more directly compensate households based on how much energy their upgrades save — a seemingly simple concept that’s actually very hard to implement, as evidenced by attempts in government and utility-funded efficiency programs across the country.

Some early examples of ​“pay-for-performance” efficiency programs being tested in California and New York state could offer models for states as they look to create programs to use the new federal funding, Bartholemy said.

Matt Golden, CEO of Recurve, a company working on a pay-for-performance efficiency pilot program in California, noted that such programs now include ​“EV charging and energy storage and all kinds of stuff” that can reduce demand on the state’s power grid when it’s under the most stress, usually during summer evenings when solar power is fading and air-conditioning energy use remains high. This kind of ​“predictable, long-term load shaping” is a new way to measure energy efficiency, he said — and its value for grids trying to achieve 100 percent clean energy must be measured differently. The new funding in the Inflation Reduction Act can help states figure out how to best do that measuring.

3. Using public funding to boost the private market for efficiency and electrification 

Turning public-sector funding into an expanding and increasingly attractive private-sector business opportunity has been a long-running goal for energy-efficiency providers. The amount of money government and utility sources are investing in energy efficiency is tiny compared to the potential for efficiency improvements to reduce demand for energy and thus cut greenhouse gas emissions.

The federal Low Income Home Energy Assistance Program spent about $3 billion in 2020 helping households pay for heating, cooling and weatherization, for example, while North American utility-funded efficiency investments added up to about $9 billion in 2019. That’s a fraction of what’s needed. Each year, an estimated $100 billion in wasted energy could be prevented through easily identifiable efficiency investments, Cullen Kasunic, BlocPower’s energy-efficiency and renewable-energy finance leader, told Canary Media last year.

Meanwhile, the rate of replacing fossil-fueled home heating systems with heat pumps isn’t growing quickly enough to hit the targets that many decarbonization models say are needed for buildings to reduce their emissions in line with climate mitigation goals. The International Energy Agency reports that heat-pump installations must triple by 2030 for the world to stay on the path toward net-zero carbon emissions by 2050, but last year in the U.S., heat-pump installations grew by only about 15 percent, most of that in new homes.

Home electrification today faces two problems, said Baird of BlocPower: ​“We don’t have enough demand” from customers and contractors, and ​“we don’t have a big enough workforce” to do the work. Federal tax credits and rebates can start to build that demand and encourage contractors to hire and train more workers, but on their own, they’re not enough to spur the level of electrification we need, he said.

Other parts of the new law, such as $3 billion for environmental and climate-justice block grants and $1 billion in grants and loans for affordable-housing efficiency projects, will help disadvantaged communities overcome cost barriers that prevent them from accessing efficiency and electrification upgrades, he noted. And low-income households and communities facing job losses or long-standing environmental harms from fossil-fuel industries are eligible for enhanced tax credits.

Federal programs that help lower the cost of debt financing for efficiency and electrification projects will also be critical, Baird said. The Inflation Reduction Act includes $27 billion for a Greenhouse Gas Reduction Fund — a new term for a federal green bank — that could capitalize state and local green banks that are making low-cost financing available to community-solar, energy-efficiency and electrification projects.

The act also authorizes an additional $40 billion in lending authority for DOE’s Loan Programs Office, he noted. The office has traditionally supported large-scale clean energy infrastructure and manufacturing projects, but it is also exploring ways to lower the cost of smart electric appliances and solar-battery systems for homes and businesses.

Rewiring America’s Matusiak highlighted the value of lending from green banks and the Loan Programs Office in ​“buying down the cost of financing” for heat pumps, induction stoves and other efficient electric appliances. Add an uptick in that lending to the other provisions in the Inflation Reduction Act, and together they can make a big difference. ​“Putting the full faith and credit of the United States behind the lending power that’s ultimately available to consumers — that’s what we think pushes this thing well north of the tens of billions of dollars” in potential investment over the next decade, he said.