Home Energy Retrofit Programs in the IRA

The Whitehouse has recently released an overall guidebook for the Inflation Reduction Act which gives an overview of its sweeping scope. Additionally, the Biden administration has recently released allocations for the major home energy rebate programs under the IRA.

This post identifies the IRA measures supporting existing home retrofits for energy efficiency and heating electrification. It also summarizes the other home energy related measures.

Residential retrofit tax credits

The IRA significantly expands an existing tax credit for “energy-efficiency improvements of residential homes.” See Guidebook at page 106. It replaces a $500 life time credit with an annual credit for particular measures — 30% of cost, with limits for certain types of improvement and a total limit per year.

The total annual credit is capped at $1,200, with a separate annual $2,000 limit for heat pumps. These caps are additive — $1,200 plus $2,000 — for a potential total credit of $3,200. Examples of the many eligible items and applicable sublimits are listed in this IRA fact sheet.

This annual credit will support ongoing investments by homeowners in energy efficiency. Home energy efficiency is often a journey — it is not usually accomplished in one year — so the availability of an expanded annual credit is welcome.

For the single-year big investment in a whole home heat pump, which will often run over $20,000 for homeowners, the $2,000 credit, in combination with the $10,000 Mass Save incentive, will make a material difference and send a positive message. The $2,000 incentive will make an even larger difference in heat-pump installations that do not fully displace fossil heating systems. In these partial conversions, the costs are usually lower and the Mass Save incentives are also lower, so the credit will loom larger in the benefit-cost computation.

More details on these credits appear in this IRS request for comments.

Residential retrofit rebates

The IRA creates two new federal rebate programs for home energy efficiency and electrification. These programs will be administered by the states.

  • “rebates to homeowners and aggregators for whole house energy saving retrofits” ($73 million for MA; $4.3 billion nationally — page 109 in the Guidebook).
  • “rebates for the purchase of high-efficiency electric home appliances” ($73 million for MA; $4.5 billion nationally — page 110 in the Guidebook).

The funds will be available starting at some point in 2023 and must be spent by 2031. So, Massachusetts consumers will receive up to $9 million per year in additional rebates under each of the two programs (up to 20% of the funds may go to administration).

Massachusetts is already spending approximately $800 million per year annually for rebates for residential energy efficiency and electrification (see current Mass Save plan at page 52), including $87 million per year for residential whole home heat pump conversions alone. We will want to design carefully targeted programs to make best use of the added federal funds within the program parameters as they emerge — my hope would be that the funds could be targeted for low-income rental units.

Residential energy workforce development

The IRA includes $200 million nationwide in grants for training of contractors involved in involved in the” installation of home energy efficiency and electrification improvements.” See Guidebooks at page 111. These grants will be made over the next 9 years. The allocations of these grants to states will apparently depend on specific proposals, but if the allocation is roughly proportionate to population, Massachusetts can expect something under $500,000 per year.

Massachusetts is spending approximately $18 million per year on efficiency and electrification workforce development through Mass Save (see current Mass Save plan — program administrator budgets). The new federal program will create opportunities for carefully targeted new workforce development programming.

Additional building energy measures

The Inflation Reduction Act includes the following additional measures in the building energy space — see Guidebook at pages 107-108 and 112-118.

  • Uncapped 30% credit for residential clean energy equipment like solar panels. This existing credit is extended through 2034, and expanded to cover batteries.
  • Tax credits up to $5,000 for energy efficient new home construction — more details in this IRS request for comments. Note that this credit is to be available for “substantial reconstruction and rehabilitation,” so may help support some deep energy retrofit projects, depending on how the IRS defines the terms.
  • Tax deductions for energy efficiency investments in commercial buildings — more details in this IRS request for comments.
  • Funding to support energy improvements in HUD-assisted housing ( $1 billion nationwide.)
  • A grant program to support states and localities working on adoption of enhanced building energy codes ($1 billion nationwide).

Additional related measures

The IRA includes two additional measures which might support building energy efficiency and electrification although not so targeted:

  • A $27 billion EPA program for competitive grants to non-profits “to mobilize financing and leverage private capital for clean energy and climate projects that reduce greenhouse gas emissions, with an emphasis on projects that benefit low-income and disadvantaged communities.”  See Guidebook at page 21.
  • $8 billion in EPA grant programs to cut air pollution in disadvantaged communities. See Guidebook at pages 85-6.

    Return to heat pump outline

    Published by Will Brownsberger

    Will Brownsberger is State Senator from the Second Suffolk and Middlesex District.

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    10 Comments

        1. Good to know it. I have an extremely low federal tax liability so it would not be a factor in my decisions.

    1. Hello Senator Brownsberger:
      Many thanks, as always, for the good information. Again, however, you have forgotten that those of us in Belmont who do not use gas are not eligible for Mass Save incentives. From your piece:

      “For the single-year big investment in a whole home heat pump, which will often run over $20,000 for homeowners, the $2,000 credit, in combination with the $10,000 Mass Save incentive, will make a material difference and send a positive message.”

      I’m a big fan of Belmont Electric, but the insulation, heat pump, and related incentives/credits do not compare.

      1. I’ve not forgotten it, but I completely appreciate your re-emphasizing it: For municipal light customers, only those who heat with gas will be eligible for Mass Save.

        This is a public policy problem: We want oil customers to be eligible for the incentives, because their conversions are economically more desirable than gas conversions, but in muni power communities, they don’t get the iMass Save incentives.

        On the other hand, politically, muni communities may or may not really want this to change because it will likely mean an add-on to their electric rates. Statewide electric power companies charge customers about 2 cents per kwh hour extra to support Mass Save. Muni customers don’t pay that.

    2. I would like to see the rebates by untied from tax rebates. Have the incentive applied at the time of equipment purchase. Like what was done with light bulbs where they were so much cheaper to by which made switching over easy. Things shouldn’t have to be made more complicated.

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