A wide array of distributed energy resources (DERs) are eligible for new incentives—including renewables, energy efficiency, and other advanced energy systems installed in homes and businesses. Many of these programs specifically address lower income, disadvantaged and tribal households and aim to ease their upfront costs as they transition to clean energy.
New and expanded programs include:
- § 13301 extends and modifies the residential energy efficiency tax credit found in 26 U.S.C. § 25C. The maximum credit is increased from $500 to $1,200 for most energy efficiency measures and an additional $2,000 is available for homeowners who install efficient heat pumps, heat pump water heaters or biomass stoves, and boilers.
- § 13302 extends the residential distributed generation credit found in 26 U.S.C. § 25D and makes stand-alone battery storage eligible without solar panels or other generation.
- § 13303 revamps the commercial energy efficiency deduction found in 26 U.S.C. § 179D that was previously available only to new construction. The revised deduction will be available to retrofits as well and the maximum amount is increased from $1.80 per square foot to $5.00 per square foot, but to achieve the maximum deduction the project must achieve deep energy savings, pay prevailing wages, and satisfy certain apprenticeship requirements.
- § 13304 refreshes the tax credit for energy efficient home building found in 26 U.S.C. § 54L. Under the modified credit, the maximum credit is increased to $5,000 per home, but to achieve that level of credit the home must be built to a DOE Net Zero Energy Ready standard and the builder must pay prevailing wages and meet apprenticeship requirements.
- § 22002 provides an additional $2B in funding for the Rural Energy for America Program. This funding will be used to provide financial assistance to agricultural producers and rural small businesses that want to become more energy efficient or undertake a renewable energy project.
- § 30002 creates a $1B fund for the Department of Housing and Urban Development to distribute to affordable housing providers for energy efficiency projects, distributed generation, electrification, or other sustainability projects.
- § 50121 directs the DOE to distribute $4.3B to states for home energy retrofit rebates. Rebate amounts will be based on the percentage savings achieved and for projects that save more than 35% the rebate may be $4,000 or more. Bonus rebates will be available to households making less than 80% of area median income.
- § 50122 directs the DOE to distribute $4.3B to states and tribal governments for home electrification rebates. Rebate amounts vary by appliance/measure but may be as much as $8,000 for an air source heat pump. Rebates will only be available to households making less than 150% area median income and bonus rebates will be available to households making less than 80% area median income.
- § 50123 allocates $200M to the DOE to support states in developing and implementing programs to train and educate contractors on energy efficiency and electrification.
- § 50131 sets up at $1B grant program for states and local governments to adopt energy efficient building codes. Two-thirds of the available money will be used to establish codes that meet or exceed the zero energy provisions in the 2021 International Energy Conservation Code.
- § 50145 allocates $75M to DOE to redistribute to tribal governments to support energy efficiency and other energy projects on reservations.
- § 60103 launches a $27B grant program for states, local and tribal governments, and non-profits to enable GHG reduction projects including energy efficiency and distributed generation. The provision will support non-profits that provide clean energy financing to homeowners and commercial entities. A significant portion of the funding must be used to support projects in low-income and disadvantaged communities.
- § 80003 allocates $150M to the Bureau of Indian Affairs for tribal electrification and zero emissions programs.
Promoting adoption of electric vehicles
As the source of nearly 30% of greenhouse gas emissions in the U.S., the transportation sector receives particular focus in the IRA with new and expanded incentives for electric cars and commercial vehicles. These programs cover both new and used vehicles and expand tax credits for vehicle charging infrastructure.
Notable EV incentives include:
- § 13401 revamps the tax credit in 26 U.S.C. § 30D for individuals who buy new EVs. The Act eliminates the manufacturer phase out but imposes domestic manufacturing/sourcing requirements which may be difficult to meet, sets income limits on households who may claim the credit ($300K adjusted gross income for a joint return, $225 for head of household, and $150K for an individual taxpayer), and also limits how much the new car can cost (no more than $55K for a standard car or $80K for a truck, van, or SUV). Eligible taxpayers may receive up to $7,500.
- § 13402 creates a new tax credit for individuals who buy used EVs. The new credit is limited to households making less than $150K adjusted gross income on a joint return, $112,500 for head of household, or $75K for an individual. The purchase price for the EV also may not have been more than $25K. Eligible taxpayers may receive up to $4,000.
- § 13403 creates a new tax credit for commercial EVs. Qualifying small vehicles may be eligible for up to $7,500 and large vehicles may be eligible for up to $40K.
- § 13404 increases and restructures the credit for installation of EV charging infrastructure found at 26 U.S.C. 30C. The maximum credit amount is increased from $30K to $100K and eligibility is expanded to include bi-directional charging infrastructure, but the credit will now only be available for infrastructure installed in low-income and rural areas.
- § 60101 creates a new grant/rebate program to help states, local governments, tribal governments, and school transportation associations electrify their fleets.
Cleaning up the power sector
One of the biggest tranches of funding within the IRA focuses on accelerating deployment of carbon-free generators, with both DERs and utility-scale energy systems qualifying for new and expanded incentives. Notably, the IRA expands upon the investment and production tax credits and introduces new direct pay options—opening those incentives up to local governments, nonprofits, houses of worship, and other organizations without tax burdens to offset.
Highlighted clean generation provisions include:
- § 13101 extends and modifies the existing renewable production tax credit for the next couple of years. To be eligible for the same amount of funding as was previously available, projects will have to pay prevailing wages and satisfy apprenticeship requirements. Bonus money is available for projects that meet domestic manufacturing requirements and/or are located in communities particularly negatively affected by the energy transition (called “Energy Communities” in the Act). After two years, this credit is replaced by the clean energy production tax credit, described below.
- § 13102 extends and modifies the existing renewable investment tax credit for the next couple of years. As with the revised production tax credit, discussed above, going forward projects will need to satisfy labor requirements to receive the same level of credit and, also like the production tax credit, bonuses are available to projects meeting domestic manufacturing requirements and/or being built in Energy Communities. Several new technologies are made eligible for the credit including energy storage, biogas used directly as fuel in buildings and industry, and microgrid controllers. After two years, this credit is replaced by the clean energy investment tax credit, described below.
- § 13103 increases the renewable investment tax credit available to solar and wind projects built in low-income communities or on Indian land by 10%. A 20% bonus is available for projects that are building as part of a low-income residential building project or a qualified low-income economic benefit project. The amount of bonus credits is limited to 1.8GW of capacity in 2023 and 2024 but a similar program is available under the clean energy tax credit in 2025.
- § 13105 creates a new credit for existing nuclear facilities. The maximum credit is 1.5 cents per kwh, but achieving the maximum credit requires paying prevailing wages and satisfying apprenticeship requirements and the amount of the credit a facility is eligible for is inversely proportional to the facility’s gross receipts from the sales of electricity. The credit is only available to facilities constructed before the passage of the IRA.
- § 13701 creates a new clean energy production tax credit that will replace the renewable production tax credit in 2025. This new credit will be available to any clean electricity production, where the greenhouse gas emission rate is zero or less. The base credit amount is 0.3 cents per kwh but this is increased to 1.5 cents for small facilities or facilities that meet labor requirements. Bonus amounts are available for projects satisfying domestic manufacturing requirements or built in Energy Communities.
- § 13702 creates a new clean energy investment tax credit that will replace the renewable investment tax credit in 2025. Like the clean energy production tax credit, this new investment tax credit will be available to electrical generation facilities where the greenhouse gas emissions rate is zero or less. The credit will also extend to battery storage. The base credit is 6% of the investment but this increases to 30% for small facilities and facilities satisfying labor requirements. Bonus money is available for small facilities placed into service in connection with low-income communities, facilities located in low-income communities or on Indian land, and facilities that are part of a low-income residential building project or a qualified low-income economic benefit project.
- § 13703 defines all generation facilities with greenhouse gas emissions rates of zero or lower and storage facilities as eligible for accelerated five-year depreciation.
- § 22004 allocates $9.7B to USDA for financial assistance to rural electric cooperatives to purchase renewable energy and zero-emissions systems, carbon capture, and to make energy efficiency improvements to electric generation and transmission systems.
- § 50144 provides $5B to the DOE to make loan guarantees for projects that retool, repurpose, or replace energy infrastructure that has ceased operations or enable operating energy infrastructure to avoid, reduce, utilize, or sequester air pollutants or greenhouse gas emissions.
Making hydrogen mainstream
Clean, renewable hydrogen technologies are now eligible for very generous incentives to help kickstart the nascent industry. The IRA implements a production tax credit for the first 10 years of a facility’s operation, with multipliers for prevailing wage and apprenticeship standards.
Hydrogen incentives include:
- § 13204 creates a new production tax credit for low greenhouse gas hydrogen production. The amount of the credit is based on the lifecycle greenhouse gas emissions from production and whether the project pays prevailing wage and satisfies apprenticeship requirements. The maximum credit is $3/kg.
Beyond reducing carbon emissions, the IRA also modifies and expands incentives for verifiable carbon capture and sequestration programs.
- § 13104 extends and modifies the credit found in 26 U.S.C. § 45Q for carbon capture and sequestration. Going forward, the size requirement for direct air capture projects will be reduced from 100,000 metric tons to 1,000 and from 500,000 to 18,750 at electric generation facilities. The maximum credit is increased to $180 per metric ton, but the amount of the credit depends on whether the carbon is reused or geologically stored, whether it is a direct air capture project, and whether the project pays the prevailing wage and satisfies apprenticeship requirements.
With an influx of new renewable energy in the electric system, the country will need a reliable and expanded transmission system to move the energy from where it’s produced to where it’s used. The IRA includes funding for new transmission and invests to speed the siting of new infrastructure—which currently can take years to complete, particularly where wires cross multiple jurisdictions and properties.
The largest transmission incentives:
- § 50151 allocates $2B to DOE to provide loans for the construction or modification of transmission facilities.
- § 50152 provides $760 to DOE to provide grants to state public utilities commissions or other siting authorities to speed siting processes and to assist with economic development in communities that may be affected by transmission projects
Methane emissions reduction
The new law attempts to reduce methane emissions in the extraction, transportation, and combustion of natural gas—one of the few sticks in legislation loaded with climate carrots. In addition to creating new reporting requirements, the IRA imposes stiff penalties for methane leakage and offers financial assistance for reduction efforts.
- § 60113 imposes fines for methane leakage from petroleum and natural gas systems that exceed certain leak thresholds of up to $1500 per ton of CO2e. $850M is allocated to EPA for grants and other assistance with methane emissions reductions and improvements in reporting.
What lies ahead
The Inflation Reduction Act, and its many energy and tax provisions, marks the start of a new clean energy era for the U.S. economy that will transform utility grid management and future planning.
ICF has unmatched experience working with electric and gas utilities and cooperatives of all types to understand how government initiatives and funding opportunities will impact operations and business models. As the U.S. deploys the critical climate solutions necessary to decarbonize the energy sector, ICF will continue analyzing this once-in-a-generation climate law to help utilities and other stakeholders better understand the opportunities and changes it will present. Learn more about navigating the IRA in our paper, "5 actions for utilities to prepare for IRA impacts."