Inflation Reduction Act 101: What’s in it and how does it affect me?

This may not be making headlines right now, but the Inflation Reduction Act is going to change your future home-buying experience. It will also change what’s in your home, or at least some of your neighbors’ homes. It’s going to change how things are installed in your homes. And it’s going to have major supply chain implications — although hopefully not the agonizing experience we’ve lived through for the past two years.

The Inflation Reduction Act, signed into law by President Biden last week after two years of Congressional drama that could have provided plot lines for a Game of Thrones episode, allocates $369 billion to slow U.S. carbon emissions. Almost any strategy that could slow global warming, and a few that almost certainly won’t, are included in the law: support for renewables, controls over methane, carbon sequestration, electric vehicles, and much more.

In this cornucopia, residential energy efficiency retrofits get a lot of love. The IRA allocates $9 billion for programs that offer rebates that encourage homeowners to improve the efficiency of their homes through two big programs. The $4.5 billion High Efficiency Electric Homes program will fund rebates for home electrification measures — heat pumps, heat pump water heaters, induction stoves, smart electric panels, and weatherization measures. The $4.3 billion HOMES program will provide rebates that reward homeowners who reduce the energy consumption of their homes by a significant amount (15% or more).

And a pile-on efficiency benefit: the modest tax program that enabled homeowners to claim up to $500 in tax credits for efficiency upgrades has been expanded so that homeowners can now claim $1,200 per year.

Residential renewables aren’t neglected either. The rooftop solar tax credit, which was scheduled to end in 2024 has a new lease on life: the new rules allow homeowners to claim 30% of the cost of the installation as a tax credit. That’s 30% of the total installation cost, including batteries, with no cap. The full 30% credit will be available through 2032 and will taper off in the following two years.

A program of this size almost inevitably changes the way business is done. There are opportunities and some challenges for contractors, manufacturers, and real estate agents buried in these bills. Here are just a few of the big potential game changers:

• Contractor business models: The HOMES program will benefit contractors who take a whole-house approach and help homeowners develop comprehensive strategies to improve their homes. The electrification program encourages contractors to enhance their electric HVAC and water heating offerings. Contractors who don’t currently offer these services and products will have a new incentive to step into the waters and will have some assurance that the program will be around for a while.

• Demand for high-performing features: The electrification program, and to a lesser extent, the HOMES program, are going to accelerate an already rapidly growing demand for heat pumps and heat pump water heaters. With luck, the bill’s size and duration will give manufacturers the confidence to ramp up and get ahead of the supply chain issues.

• Home value: One of the provisions tucked into the HOMES program is that homeowners who receive a rebate through the program also receive a certification from a third party that documents the improvements in a way that will enable the homeowner to recapture some or all of their value at time of sale. The number of rebates, and thus certifications, that will be issued is going to dramatically increase the visibility of high-performing homes in the real estate market. Expect homeowners to be showcasing home performance and buyers to start asking questions about it.

Observers whose memories in this field stretch back to 2009 may retain jaded memories of the residential upgrade programs funded through the American Recovery Act. The Obama administration intended those programs to be transformational in a way that would stimulate a massive consumer demand for energy efficiency. When the dust settled, most observers agreed that the initiative had fallen short of expectations: the programs funded through the act mostly didn’t achieve the energy savings they had projected, and the thorough-going market transformation didn’t materialize.

Although we won’t know for a while whether the IRA programs will fall short in the same way, there are some big reasons to think that this time will be different — a lot different.

• Size: The new programs offer headline-worthy rebates and tax credits — up to $8,000 for the efficiency rebates and $1,200 per year for the efficiency credits. It matters: these are likely to seize consumers’ attention and generate FOMO in a way that more modest ARRA-era programs didn’t.

• Scale and Consistency: The programs are national in scope, which will generate more attention and more buzz. They will be run by the states, which will have some flexibility, but will be required to adhere to federal guidelines. The result will be much more standardization and consistency than was the case during the ARRA years, when a multitude of local programs were encouraged to experiment.

• Timespan: The programs last through 2032, which is crucial in giving all stakeholders the ability to plan. The contrast with the ARRA period, which featured a sugar high of rapidly deployed money followed by an abrupt crash, is important.

This is just a quick and dirty overview of what we can expect from the IRA. In future blogs Pearl will dig into the details of the legislation and what it means for our stakeholders so that we can be prepared for the future, since the future seems to be moving toward us at top speed.