Energy in 30: Breaking down the Inflation Reduction Act

Tune in to Energy in 30 hosted by Joan Collins and David Meisegeier. On our sixth episode, "Breaking down the Inflation Reduction Act," hear from ICF thought leaders Justin Rogers, Maci McDaniel, Mark Pignatelli, and Erica Larson as they offer an initial breakdown of the recently passed Inflation Reduction Act of 2022 (IRA) as it relates to the energy, climate, and utility industries. While our experts comb through all of the details, the team is here to provide a high-level overview of some of the act’s most impactful facets to these industries.

Topics in today’s special flash episode include:

• High-level overview: Understanding the IRA
• Comparing the IRA to previous federal legislative efforts
• Leveraging tax credits that impact midstream programs and utilities
• The impact of the IRA on home construction and new homes
• Pushing efficiency into the electrification space: Understanding the role of gas utilities

Full transcript below:

Joan: Hello and welcome to “Energy in 30.” We are back with a special episode that breaks down the Inflation Reduction Act of 2022 that was signed on August 16th. This is Joan Collins, and we're airing a late-breaking flash round episode to get out in front of this, as it relates to energy efficiency, electrification, equity, and DERs—sharing early highlights for our audience.

David: And this is David Meisegeier. Joan and I will be taking a pause for this flash round and handing the microphone over to Justin Rodgers, Senior Director at ICF, who's going to lead a discussion with other ICF thought leaders. So, if you're a utility manager, consultant, technology provider, or just curious about energy, we think you'll really appreciate this episode.

Justin: Welcome. Welcome, everybody. We have officially broken into the podcast studios and are taking over this week. I'm Justin Rodgers, Senior Director at ICF, in our energy and utility practice. We're here to talk about what might be one of the most significant climate investments made by the U.S. ever—in my lifetime at least. It contains about $370 billion in funding for clean energy and electric vehicle tax breaks, domestic manufacturing of battery and solar panels, and pollution reduction. Very, very exciting times for anybody in the energy and climate industry, and for utilities across the United States.

Today, we're going to talk specifically about the specifics of the bill related to energy efficiency, electrification, and distributed energy resources, and really hone in on just some small components of the bill. We have some experts to talk about some specifics of the bill. It's very fresh, so there's going to be kind of new analysis coming out around this, and I'm sure others are doing analysis as well. On the podcast today, we have with us a few experts from our new homes, midstream and regulatory affairs, and I'll ask them to introduce themselves.

Maci: Hi, I'm Maci McDaniel. I'm a Senior Energy Technical Director with ICF, leading our midstream program offerings.

Mark: Hey everybody, thanks for joining. Mark Pignatelli. I'm a director here at ICF, leading our national programs for new homes.

Erica: And I'm Erica Larson, Manager of Regulatory Affairs and Market Development.

High-level overview: Understanding the IRA

Justin: Awesome. Welcome, everybody. Erica, let's start with you. I know you've spent some time reading through the actual text of the legislation and digging through that. Can you start us off by providing a summary of the bill and how it's structured?

Erica: Sure. So high level, there are really three things going on in the bill. The first is tax stuff that doesn't have anything to do with climate, and I didn't pay much attention to. The second is healthcare related—Medicare, Medicaid kind of things that I didn't pay any attention to. And then there's all of the climate stuff, which is the bulk of the 750-or-so-page bill. It’s dedicated to provisions, mostly dealing with climate. There's some energy resilience, some habitat kind of things woven in there as well. But largely it is a climate bill, and it has a lot of climate provisions in it.

When you take just the climate piece of the bill, I break it up into two sections. There is a lot of tax credits and deductions. So that's one part of the bill—a really hefty part of the bill—that's going to be administered by the Treasury. And then you have a bunch of grant and loan programs as well. A lot of those are administered by DOE, but there's also some going to agriculture, there's some going Bureau of Indian Affairs—there's a lot of different federal agencies that are going to be involved in those grants and loan programs for different kinds of climate efforts.

Comparing the IRA to previous federal legislative efforts

Justin: I think most people in our industry are going to make connections to this with other climate bills or legislation in the past. How does this compare to those other bills or acts in the last 10 or 20 years?

Erica: So, this is much larger. I knew that this question was coming, so I spent a little bit of time trying to ballpark how much money is in this one versus some of the others that have come before. You have ARRA [American Recovery and Reinvestment Act], around the time of the Obama administration, which had some climate funding in it, but wasn't really primarily a climate bill. That had about $90 billion in climate-related provisions in it. And then you have just recently IIJA [Infrastructure Investment and Jobs Act], the Biden administration's infrastructure bill. Again, not exclusively a climate bill—had a lot of things going on in it. That, if you want to be generous, you could say had a couple hundred billion dollars in it for climate. But a lot of that climate money was not for climate avoidance or emissions reductions. A lot of it was climate resilience investments to make our infrastructure more resilient to climate change, but not actually preventing climate change.

Another large portion of those investments were just investments in public transportation, which of course is very important for preventing climate change—investing in our public infrastructure in that way; but also, would probably be part of any large infrastructure package—very focused on roads, bridges, and transportation, like the Infrastructure Act was.

Now this one, even if you want to be generous, IIJA was a couple hundred billion. This one, the estimates are more around $360 billion focused on climate change. And I would say that it's really tough to pin down that number because people are having to make estimates about what those tax credits are going to do—how large they're going to be, how many people are going to take them up. So, this one could actually be, I think, much larger than $360 billion, depending what you expect the future to hold.

Leveraging tax credits that impact midstream programs and home builders

Justin: Yeah. I'm glad you brought up the tax credits. We heard and we have on here Maci McDaniel and Mark Pignatelli from ICF, and there's a couple areas specific to their focus on midstream and new construction. Specifically, we have an increase in the tax credit for new construction for single-family and multifamily homes, from $2,000 per home tax credit to builders to $5,000 per home to builders. And then there's a number of tax credits for whole home retrofits, as well as program funding that will be coming out in 2023 for residential whole home retrofits and residential electrification. I think there might be some implications for midstream programs there, for utility programs there. Just a broad question to everybody on the podcast today. What have we heard, if anything, from industry partners about the impacts of this bill?

Mark: Yeah, Justin. Great question. This is Mark. I can touch a little bit on the 45L tax credit specific to new construction, as you just mentioned. I've had a few conversations recently with a few of the top national builders and production builders, and can share a little bit of what we touched on. I would just say, keep in mind for folks that are listening in that, although the 45L tax credit expired at the end of 2021, this has been around for years—I think close to 15 years. But this IRA bill is getting a lot of press for good reason. And this tax credit is now richer. There's more money, which is always a good thing. So, I think in general conversations I've had, this is good news to builders. My understanding too is that this tax credit will be retroactive, not only for this year, but I believe for 2021 as well. So more good news for builders.

Keeping in mind this: there are requirements. They have to meet ENERGY STAR certification requirements to get the $2,500 for single-family. There's also a $5,000 tax credit if you're achieving the DOE Zero Energy Ready Home Certification. So again, overall, I think it's good news to builders. This is going to help them look at their design specs and increase efficiency. These tax credits are certainly going to help offset some of those incremental costs to achieve above-code, high performance construction, coupled with utility incentive programs that they can leverage.

One thing to note that I've heard is that this applying for a 45L tax credit, for example, it can be onerous. It can be somewhat burdensome from an administrative standpoint. So, it does take money to make money in some cases here. I think a lot of builders that are looking at this have to keep that in mind, and make sure they can do this efficiently. So that's just a few tidbits that I thought I would share, and I'll pass it off to Maci.

Maci: Thanks, Mark. Yeah, Justin, like Mark said, I think at least on my side of the fence with midstream and dealing with our manufacturing distributor partners—while I think all of them have taken notice of these generous offerings that this bill has brought to the table for them, they are far more focused right now on other things like supply chain constraints and the effects of baseline changes and federal standard changes for them. I think as time goes on, their attention will turn towards these tax credits and how they can leverage them in their business, but it certainly hasn't risen to the top of the pile just yet.

Justin: Yeah. And that makes sense, given the supply chain issues that I think most people in the industry are aware of. Maci, on that point, I guess, what impact do you see on these tax credits, if any at all, or even how midstream programs can best make use of this bill? I guess what impacts do you see on midstream programs that all the utilities might be running, or even the role of midstream for utilities moving forward?

Maci: Yeah, I think midstream certainly will have an opportunity to take advantage of these tax credit offers. It's going to be incumbent upon us to make sure that our trade allies are trained on the tax credits, and what the opportunity is for customers who want to take advantage of them. Contractors tend to not be as willing to get involved in things that don't directly impact them. So, it's going to be an education process across the trade ally network to get them to promote them to customers, and leverage that in the sale of high-efficiency equipment that meet the criteria for the tax credits. But as we all know, tax credits aren't new, and contractors aren't always willing to promote them. We're going to have a big task on our hands to make sure that they're trained, and that distributors and manufacturers are driving that through their business offerings.

Justin: Erica, I don't mean to put you on the spot with this question a little bit, but as Maci was talking, it made me think of it. For some of the electric vehicle tax credits, I feel like I saw that there's some indication that there's the potential that the tax credit can go to the dealership and that the discount is given right then to the buyer of the electric vehicle. Have you seen, or do you think that's a possibility with some of these kind of residential tax credits that are in the bill?

Erica: I don't think that it was set-up in the bill for the residential tax credits to be given straight to a trade ally. I think there's going to be quite a bit of work for the Treasury in figuring out how those point of sale tax credits, I guess, are going to work on the electric vehicle side. They're going to have to come out with regulations to define that, and those provisions go into effect a little bit later than the sort of general tax credit for EVs. I think that's not likely to happen on the residential side without some legislative language giving direction on how it would work.

The impact of the IRA on home construction

Justin: And then Mark, for new construction or new homes programs, what do you see as the potential impact, I guess, above and beyond anything you may have touched on previously?

Mark: I see some short-term and long-term impacts here. Just to give some quick context for listeners—so one thing to note: 24 of the largest 25 builders in the country are building ENERGY STAR certified homes in at least one of their divisions. So that's a good thing. They've been leveraging the 45L tax credit, so I think that's going to continue to take place. That obviously impacts utility programs. A lot of the new home programs that we implement align with ENERGY STAR and provide incentives for those projects that certify.

I think the exciting piece here is really around the DOE piece with the Zero Energy Ready home. That's a new $5,000 tax credit. Of those large builders, only six of the top 20 are DOE Zero Energy Ready builder partners. So, I think we could start to see perhaps more certifications at that Zero Energy Ready standard. Keep in mind that's 40% to 50% more efficient than a code-built home. So, it's not a trivial pursuit.

With that being said, I do expect from a short term that this is a good thing. We're going to start to see builders really evaluating their design specs, looking to leverage this tax credit, in addition to utility incentives like I mentioned earlier. It's going to be top of mind right now for builders, I think. Especially considering this is extended for 10 years, the 45L. So, I think for utility programs, it's an opportunity for them to really deepen their relationships with their builders and developers, and not only educate and help assist builders with how they leverage these tax credits and apply for them. Is there an opportunity to dovetail that with some of the utility programs already in place to make it easier for builder participants to leverage both tax credits and incentives?

So, the question that I have is, whether this is going to accelerate market transformation in the new home space. Are we going to see greater adoption of high-performance building codes like DOE or perhaps even passive house? And another thing to note, too, come January 2025, the tax credit will require ENERGY STAR version 3.2. Right now, it's requiring version 3.1. Typically, with these version changes at ENERGY STAR, it's another 10% increase in efficiency. So again, it's raising the bar. Will that impact things like codes and standards? And maybe looking at increasing market penetration in areas where there are weaker codes. So, I could see things like that start to perhaps have an uptick, and seeing builders maybe looking to exceed the codes that are perhaps weaker in certain states.

Justin: And Mark, do utilities incentivize right now Zero Energy Ready Homes? Are there programs out there for that?

Mark: There are, yeah. One example that comes to mind: we implement several programs for utility clients in Maryland. We do provide a $1,000 incentive for projects that hit that DOE Zero Energy Ready Home Certification. So, I could see that also becoming maybe more commonplace in some of the program designs and trying to incentivize that. So yeah, it is happening, but not across the board.

Pushing efficiency into the electrification space: Understanding the role of gas utilities

Justin: And Erica, I want to maybe come back to you. Your background is in natural gas and working for a natural gas utility. How should gas utilities, if you have an opinion, or if you've heard, how are they thinking about this bill and their role in it?

Erica: I think a little bit. Like we were talking before, about some other industry folks not quite having gotten up to speed yet on the bill. I think that's probably true of most gas utilities, and they're trying to figure out what this means for them. There are different things that they're going to be excited about, and other things that maybe present risks to them. So, a lot of the stuff we've talked about today is efficiency-focused, but also electrification-focused. And so, it's really pushing that efficiency space into electrification. I don't know if gas utilities are going to be excited about that across the board. Now some of them are looking into electrification and trying to find ways to work with that in their business. But this is going to complicate that for them, and some of them aren't going to like it.

On the other hand, this bill does also have different provisions that are going to support use of hydrogen and support use of renewable natural gas in buildings. Those are things that many gas utilities are going to be excited about because that's a really clear way for them to start decarbonizing their fuel supply. So, I think it’s going to be a mixed bag for them.

Justin: Thank you. As we end the podcast, I wanted to get a sense from each of you, if you had any parting thoughts. Anything that you may not have had a chance to cover around this legislation and its potential impact on utilities and on their customer programs, whether it's DSM, whether it's beneficial electrification, whether it's another kind of customer-facing programs they offer?