Inside the IRA’s historic, high-stakes investment in energy efficiency

Canary Media thanks KORE Power for its support of our special coverage of the Inflation Reduction Act’s first year.

The Inflation Reduction Act has created the biggest federal investment in home energy efficiency in history, with $8.8 billion to weatherize homes, install efficient electric heating and appliances, and help households save billions of dollars in energy costs and cut their carbon emissions.

Now, nearly a year after the law’s passage, the rules for how U.S. states and territories can access these unprecedented federal incentives have been released — and the hard work of putting the money to use can begin.

Late last month, the U.S. Department of Energy issued its requirements and instructions for accessing $4.3 billion from the Home Efficiency Rebates Program, which offers whole-home efficiency grants, and $4.275 billion from the Home Electrification and Appliance Rebates Program, which offers rebates for electric-powered home systems.

Those two programs — along with $225 million in grants for tribal governments that haven’t yet been finalized — represent a ​“groundbreaking” effort to bring efficiency to millions of homes and apartments across the nation, DOE Deputy Secretary David Turk said during a July 27 press conference revealing the new rules.

“Just to underscore how big a deal this is, families will be able to save hundreds and thousands of dollars on insulating their homes, installing heat pumps, upgrading to electric energy appliances, and much, much more,” he said.

DOE forecasts that these incentives could drive up to $1 billion in annual energy cost savings across the country. They could also help create over 50,000 jobs, ​“from manufacturing all the way to installation,” Turk said.

If these programs can meet DOE’s goals, they could have remarkable implications for the energy transition. More efficient homes can reduce demand for the fossil-fueled heating and cooking that makes up roughly 13 percent of U.S. carbon emissions. They can also ease strained U.S. power grids at a much lower cost than building new power plants.

Energy efficiency remains an under-tapped resource, however. The Inflation Reduction Act’s newly finalized programs offer a chance to reverse that. But that will only happen if the programs, which will be administered through states rather than the federal government, are set up correctly, experts say. And now that the DOE has issued its guidance, it’s up to the states to figure out exactly what ​“correct” looks like.

This critical task is not going to be an easy one for states and territories — especially those that don’t already have a robust staff on hand to sort through the complexities of administering these programs.

“The goal is to set up a program that makes it easy for states to do outreach and collect inputs from the marketplace, and then quickly implement it themselves,” said Panama Bartholomy, executive director of the Building Decarbonization Coalition. ​“I think the jury’s still out on whether or not the DOE did that.”

Big money for efficiency, but still just a start

States and territories will receive their share of the money via formula grants, which range from as low as $30 million for smaller states and U.S. territories to hundreds of millions of dollars for the most populous states.

This funding comes with plenty of requirements for the state energy offices that will be in charge of most of the money.

These entities, set up by state governors’ offices or legislatures, must craft education and outreach strategies to reach households across demographic and income boundaries. They’ll need to create consumer protections to guard against fraud and abuse, as well as community benefits plans to boost economic and social impacts in underserved communities. State energy offices must also figure out how to get the all-important utility billing and energy metering data necessary to measure their impacts.

But most important to the long-term success of this effort is DOE’s requirement that every state and territory develop a ​“market transformation plan” that can ​“catalyze a sustained increase in supplier participation and consumer demand for energy-efficient electrification upgrades,” including for lower-income households and disadvantaged communities.

Making efficiency improvements across the country’s 121 million households will cost a lot more than $8.8 billion, energy efficiency experts say. In fact, they likely add up to hundreds of billions of dollars. These transformation plans are meant to make the impact of the climate law’s efficiency programs last well beyond the money allocated.

“IRA funding alone isn’t nearly enough to transform our nation’s housing stock,” said Greg Smithies, a partner and co-head of building-focused climatetech investment for venture capital firm Fifth Wall. ​“Impact beyond the home energy rebates is just as, if not more, important.”

There’s a tension between the fastidious work required to make these programs transformative and the need to disburse the money as quickly as possible, however. Turk highlighted the ​“thousands of conversations” that the DOE has had with states, territories, tribes and other stakeholders to help craft this balance, and he promised an ​“array of assistance to states and territories” from DOE to come.

Turk said some states may begin providing rebates as early as this year. But efficiency experts said that timeline is unlikely for all but the most sophisticated state energy offices. In fact, many states will face challenges in simply meeting the programs’ core requirements, Bartholomy said.

A handful of states such as California, New York and Massachusetts have energy offices with hundreds of employees, he said. But most have just a handful of full-time staffers, including many that have only two to four people. Those short-staffed agencies will need lots of support to comply with the programs’ requirements and make decisions on the parts of the programs left up to their discretion, he said — and do it in a way that doesn’t overly complicate how the money rolls out to contractors and households.

“You have to design these programs to work for the market,” Bartholomy said. ​“If the contractors say, ​‘It’s not worth it,’ then these programs are going to fail.” 

How billions of dollars in home electrification incentives will be rolled out

HEEHRA: The big home electrification rebate program

Of the two programs, the Home Electrification and Appliance Rebates program — often called HEEHRA after the High-Efficiency Electric Home Rebate Act, a bill that was folded into the Inflation Reduction Act — will likely be simpler to get rolling.

That’s because its $4.275 billion in funding is structured around a fairly straightforward set of incentives for specific electric appliances that can replace fossil-fueled equipment such as water heaters, furnaces, stoves and clothes dryers, as well as associated insulation and ventilation work and electrical panel and wiring upgrades.

HEEHRA is strictly for low- and moderate-income households earning less than 150 percent of their area median income as defined by the federal government. Those earning less than 80 percent can receive rebates equal to the full cost of a project, while those earning between 80 and 150 percent can receive up to half.

These rebates can be combined, or ​“stacked,” with many other efficiency incentives, said Kara Saul Rinaldi, CEO of policy strategy firm AnnDyl Policy Group. Those include long-standing federal programs such as the Weatherization Assistance Program and the Low Income Home Energy Assistance Program, as well as the tax credits for home efficiency investments created by the Inflation Reduction Act, she said. State agency and utility-funded efficiency programs can also be stacked with HEEHRA rebates, she said.

This can yield benefits beyond the $14,000 total per household from the full value of all HEEHRA rebates combined, Saul Rinaldi noted during an August webinar hosted by the Building Performance Association, where she serves as chief policy officer. Her firm has calculated that low-income households could potentially receive more than $22,000 in combined federal incentives, while moderate-income households could reach $19,000.

One of the biggest challenges for implementing HEEHRA — verifying the income of eligible households — is left up to the states, she noted. DOE will be working with states, territories and the Internal Revenue Service on methods to streamline that process, which can add complexity and administrative costs. The Biden administration has already started offering states access to federal databases of income-qualified customers to help them manage these complexities.

DOE is also working with states and territories to balance ease of access to funds with consumer protections, Michael Forrester, an official with the DOE Office of State and Community Energy Programs, said during last month’s press conference.

“We want to make sure that these rebates can be available at point of sale so that individuals aren’t required to provide upfront expenses,” he said, since low-income households ​“oftentimes can’t front that cash.” At the same time, DOE will be reviewing state consumer-protection plans to ensure ​“the contractors working on individual homes are trained and qualified to do the work.”

HOMES: Billions of dollars for broad-based home efficiency

Unlike HEEHRA, the Home Efficiency Rebates Program — also known as the HOMES program — isn’t limited to low- and moderate-income consumers. Nor is the $4.3 billion flowing through the HOMES program tied to straightforward incentives for equipment and projects.

Instead, the HOMES program’s incentives are based on the energy savings that result from efficiency investments. The Inflation Reduction Act allows states to implement this in two primary ways. One is using computer models to assess the impact of different efficiency upgrades on individual homes — what’s known as a ​“modeled” approach. The second is by using real-world measurements of the difference between energy consumption before and after those improvements are made — a ​“measured” approach.

The HOMES program’s modeled approach offers $2,000 per home that can establish a 20 percent energy savings against an individual state’s average home energy usage baseline and a $4,000 incentive for those that reach 35 percent energy savings. The measured approach pays incentives based on energy savings above a 15 percent reduction threshold, which could allow particularly deep efficiency retrofits to earn more than they would under the modeled approach.

The total amount of incentive is limited to no more than half a project’s cost for households above 80 percent area median income and no more than 80 percent of project cost for those below that income threshold.

As for ​“market-rate” households — those that aren’t low- or moderate-income — an analysis from AnnDyl Policy Group indicates that the average household could receive more than $7,200 for an efficiency project using HOMES incentives and the Inflation Reduction Act’s home efficiency tax credits. That’s likely ​“a fraction of the cost of the upgrade,” but still provides ​“a key incentive,” the firm notes in the analysis.

Just how states and territories may implement these HOMES incentives is an open question, however. DOE’s guidance allows states and territories to ​“choose to implement the modeled path, measured path, or both.” But it’s not clear that every state will be able to easily meet the requirements that DOE has set out for creating programs that meet its requirements.

These modeled and measured savings calculations are far more complicated tasks for state energy offices to take on than the simple rebates available under HEEHRA, said Erica Larson, senior manager of regulatory affairs and market development for energy consultancy ICF.

Right now, most of the country’s energy-efficiency programs follow the simpler tack of tying rebates and incentives to the cost of the appliances, equipment and retrofits being installed in homes and businesses.

Actually determining how much energy they save, by contrast, requires real-world energy data from utility bills, smart meters or sensors. ​“At a minimum, data from utilities is vital” to implement a modeled or measured program, Larson said.

Some utilities still collect customer billing data via monthly utility meter readings, which is the bare minimum of data to work with, she said. Advanced metering infrastructure (AMI) — the smart meters that can record energy usage in 15-minute or hourly increments and share that data in digital formats — is even more useful.

“Existing state infrastructure, particularly the availability of AMI, is really important to consider,” she said. About 80 percent of U.S. homes and businesses will have smart meters by the end of 2023, according to the research arm of utility trade group Edison Electric Institute.

But that still excludes many homes that state energy offices are obligated to serve. And even utilities that collect home-by-home energy data may not be willing or able to easily share it, Larson said. Some state regulators have ordered utilities to make smart-meter data available to customers and help them share it with chosen third parties like efficiency providers. But most of the country’s utilities have failed to adequately share data, according to companies and nonprofit groups tracking the sector.

This combination of data-availability challenges and complexity may make it hard for less-resourced state energy offices to implement the HOMES program. That challenge will be greater in states where utilities and regulators haven’t already started instituting modeled or measured efficiency methods, as has happened in only a handful of states such as California.

This complexity has led to some debates in the run-up to the release of DOE’s guidance, with some state energy offices and other parties asking DOE to allow simpler, ​“deemed-savings” structures that don’t use real-world energy data. Opponents warned that loosening the rules could weaken the impact of the federal funding and miss an opportunity to create more effective state efficiency programs once that money has run out.

DOE’s guidance retained the data requirements, although it offers some workarounds for collecting data on hard-to-measure settings, such as multifamily housing units that don’t have separate meters, or homes with furnaces and boilers that use ​“delivered fuels” like oil and propane.

“We realize that every state is different — every state has different housing stock, every state has different climate zones, every state has different fuel mixes,” DOE’s Forrester said during last month’s press conference. ​“We will be building a robust set of data tools in order to track what is installed and as rebates are claimed so that we can monitor and measure the impacts over time.”

AnnDyl’s Saul Rinaldi, who lobbied to have the HOMES program included in the Inflation Reduction Act, said that finding ways to unlock home energy data will be key to establishing programs that outlast this initial burst of funding.

“You can’t manage what you don’t measure,” she said. ​“This is a great opportunity for states to work with their public utility commissions and with their contractors to provide safe and secure data access.”

How can states pull this off? 

All in all, state energy offices have a complicated road ahead to meet the requirements in DOE’s guidance, Bartholomy said. 

“The guidance is very thorough and gives a lot of discretion to the states, but also enforces a lot of process on the states,” he said. ​“That’s a pretty rough combo for state energy offices, which by and large are poorly staffed.”

Many of DOE’s rules come straight from the Inflation Reduction Act, he noted. But others were added by DOE. One major addition is a requirement that every state must allocate at least half of its total funds to households at or below 80 percent of their area median income and at least 10 percent of their funds to multifamily housing.

“The heavy focus on low-income [households] is great to see,” Bartholomy said, because ​“that’s the hardest part of the sector to address — and quite often, the part of the sector that requires the greatest additional measures for remediation efforts in homes,” such as repairing roofs, replacing out-of-date windows and air ducts, and other structural work.

DOE will require states to hit these low-income minimums, as well as meet DOE’s multiple planning and measurement and verification requirements, to receive the full scope of funds allocated to them.

Keith Dennis, president of the nonprofit Beneficial Electrification League, agreed that the new focus on low-income households is important. Research from his group indicates that HEEHRA funds can help low-income rural households pay back the cost of home electrification and efficiency projects within two years, as compared to more than a decade without them.

“Most people don’t have money set aside for when their water heater goes out or their furnace goes out, let alone to plan ahead,” he said. But the families his organization has helped to weatherize their homes and replace aging electric resistance and propane heat with modern heat pumps ​“were huddling around their space heaters, feeling uncomfortable, spending too much on energy — and it’s completely turned things around for them.”

Lower-income and disadvantaged communities lack financing options for projects and cost more to serve than wealthier homeowners, he said. Adding too much complexity to programs that serve them could backfire by driving contractors away, he warned. ​“Do you need to model the whole house if you’re just switching out a water heater or a stove?” Well-designed programs will need to find a balance between these two competing imperatives, he said.

DOE does allow each state and territory to use up to 20 percent of their total funding for administrative costs, Saul Rinaldi noted. That could help them hire more staff, buy software or contract with third-party companies to manage the more complex aspects of the HEEHRA and HOMES programs.

It’s likely that the states that already have robust efficiency programs will be the first to meet DOE’s requirements and start rolling out programs late this year and early next, she said. But DOE’s ongoing efforts to create support structures could help less-prepared states move ahead.

At the same time, some states might pass up the DOE’s money entirely. Last month, the Florida Office of Energy informed the Biden administration that it would forgo $346 million in HOMES and HEEHRA funding. That decision was triggered after Florida’s Republican Governor Ron DeSantis used his line-item veto power over the state budget to reject a $5 million federal block grant to fund the planning and verification measures required to access the funds.

More Republican-controlled states may follow Florida’s lead, Dennis warned. ​“The biggest barrier to this is the resources,” but ​“the other is politics — and I think that’s the most unfortunate issue.”

DOE’s Turk addressed the risk of other states rejecting funding during last month’s press conference. ​“We very much hope all our partners across the country would also see it in their interest that their constituents could benefit from this,” he said.

States do have until mid-2024 to decide whether or not to file the plans and seek the funding. Once that deadline has passed, money for states and territories that don’t accept it will be reallocated to others.

But Ari Matusiak, CEO of Rewiring America, the pro-electrification nonprofit that helped craft the rebate plan that became the HEEHRA program, said that most of the states his group is contacting are ​“looking for resources and wondering about available tools to help them take advantage of the dollars.”

Rewiring America is working on a set of software tools to meet that demand, which it plans to roll out in the coming months, he said. One is a ​“personal electrification planning tool” to calculate the financial, health and climate benefits of household electrification choices and make plans accordingly. Another, dubbed the ​“incentive API” (application program interface), will build on the home efficiency and electrification rebate calculator his group released last year by including the federal, state and utility rebates and incentives that can be stacked up for households across the country.

“We’re very focused on taking the friction out of the process,” he said. ​“We’re building these tools, effectively, for everybody in the market — and state energy offices are great partners for that.” 

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