The Inflation Reduction Act, Distributed Energy Resources, & Energy Efficiency

Tax day may not be popular, but there’s a reason to celebrate new clean energy tax credits thanks to the passing of last year’s Inflation Reduction Act (IRA). The IRA represents the largest federal investment ($369 billion) in decarbonizing and modernizing the power sector in history. Many parts of the power system will be impacted, notably the electricity sector. Residential electricity customers stand to benefit thanks to expanded and new financial support to deploy energy efficiency and electrification measures and distributed energy resources (DERs). The widespread deployment of DERs in turn has significant implications for how utilities plan and operate their systems.

Big Picture–What Does the IRA Aim to Do?

Securing the United States’ place as a global leader in “clean energy technology, manufacturing, and innovation” is the goal of the IRA (2022). The IRA builds on the 2021 Infrastructure Investment and Jobs Act (IIJA). Together, these bills provide significant investment for transportation electrification, state and local climate projects, clean energy manufacturing and supply chains, carbon capture, grid modernization, and other clean energy projects. These initiatives will prioritize elements like the expanded EV charging necessary to meet the Biden Administration’s ambitious plan to enhance EV manufacturing to account for 50% of all vehicles by 2030.

Notably, this legislation underscores the Biden administration’s commitment to environmental justice, equity, and its Justice 40 Initiative by prioritizing investments in disadvantaged communities. Overall, the IRA and IIJA, when layered on top of existing policies and programs, are estimated to reduce economy-wide U.S. greenhouse gas emissions by 40% below 2005 levels by 2030.

What Does it Mean for Residential Electricity Customers?

The IRA targets multiple sectors, including buildings and transportation, with big implications for average people. Residential electricity customers will have more resources at their fingertips to decarbonize their homes and transportation through different approaches, including:

• Energy efficiency & electrification measures
  • Both tax credits and rebates are stipulated in the IRA. The 25C Energy Efficiency Tax Credit is a 30% tax credit available for weatherization upgrades (insulation, doors, windows, energy audits), heat pumps, heat pump hot water heaters, and electrical panel upgrades. Low and moderate-income households are also eligible for rebates on qualifying electrification measures that cover up to 100% of the cost, up to $14,000. Even contractors who install these projects can access a rebate of up to $500.
• Energy generation (i.e. solar, storage) (rebates and tax credits)
  • The 25D Residential Energy Tax Credit offers a 30% capped tax credit for distributed (i.e. rooftop) solar, battery storage, and geothermal heat projects.
• Transport electrification (i.e. EVs and chargers)
  • The IRA offers a tax credit of up to $7,500 on new electric vehicles and 30% of the sales price of up to $4,000 for used electric vehicles. It also maintains the $1,000 residential EV charger tax credit. Reading the fine print is important, as tax credit eligibility varies by household income and only vehicles that meet certain requirements qualify.

When layered on top of state incentives, the economics for these technologies becomes even more appealing.

Why Utilities Should Pay Attention

The IRA’s investments available to residential electricity customers have the potential to affect the amount of demand, opportunities for flexible demand, and new sources of power for utilities. While residential electricity use has essentially flatlined since 2010, wide-scale energy efficiency and rooftop solar adoption could take an additional dent out of electricity sales. At the same time, widespread electric vehicle adoption and household electrification will likely provide a counterbalance, increasing electricity demand from residential customers and shifting load shapes for utilities (e.g. shifting from summer peaking to winter peaking due to the adoption of heat pumps and electric hot water heaters).

The IRA, DERs, & Energy Efficiency Conclusion

The opportunity for flexible demand due to DER adoption is an increasingly important tool for utilities to manage peak loads. In the end, if the IRA’s investments are fully realized, residential energy efficiency and electrification measures, DERs, and demand response programs could easily go from niche to mainstream, truly transforming how utilities plan and operate their systems.