Inflation Reduction Act: What It Means for Climate, Sustainable Energy

August 19th, 2022


In April of last year, Metrus CEO Bob Hinkle and the Alliance to Save Energy’s SVP of Policy and Research Vincent Barnes discussed what the passage of the Build Back Better bill would mean for the sustainable energy industry and U.S. climate change policy. As the dust from the passage of the Inflation Reduction Act (IRA) starts to settle, Vincent and Bob reconnected to talk about their key take-aways on what is (and isn’t) in this historic bill.

After some twists and turns, we have a bill that includes a record $374 billion in climate spending. Can you two put into perspective what this means?

Barnes: From the perspective of energy efficiency, we’re talking about historical and unprecedented investments. This includes expansion of energy efficiency tax incentives valued at nearly $15 billion over the next decade. There are over $9 billion in appropriations to support energy efficiency rebate programs for consumers making relevant retrofits and upgrades; $1 billion to support the adoption of the latest energy building codes, including stretch and zero energy codes; another $3 billion plus for federal building emission reductions and energy efficiency that will allow the federal government to lead by example; and nearly $27 billion to support clean energy and energy efficiency investments, including $15 billion in low-income and disadvantaged communities.

Hinkle: This bill is the largest climate-related spending package in U.S. history, and it sets the stage for a near-term shift to electrification on several different fronts. The IRA places a strong emphasis on the utility, residential and transportation sectors but also contains some significant incentives for electrification of the built environment – particularly for large campus facilities, including schools, hospitals, universities, and municipal buildings. We now have a credible path to reducing our GHG emissions in 2030 by roughly 40% of 2005 levels. It gets us closer, but still short of what the U.S. pledged under the Paris Agreement to keep global warming below 1.5 degree Celsius (i.e., a 50-52% reduction from 2005 emissions).

Vincent, what will change now for Alliance to Save Energy members as they go about their work? Do you see any new specific areas of focus or activity?

Barnes: Our members will be looking for the Alliance to focus on IRA implementation to ensure that every opportunity to target dollars toward energy efficiency is identified and secured. This will be key as we think beyond the tax incentives, rebates and other areas, and look to opportunities such as the $27 billion allocated to support clean energy and energy efficiency investments, including $15 billion targeted for low-income and disadvantaged communities. The same can be said for the $40 billion in commitment authority for the DOE Loan Program, Federal building efficiency investments, and other areas.

Bob, how about for Metrus and others in the Energy-as-a-Service (EaaS) industry?

Hinkle: We’re increasingly focused on ways to combine energy efficiency, which has the best economics, with other sustainable energy upgrades. In particular, I see IRA as a catalyst to speed up the replacement of fossil fuel-based central plants on large campuses and buildings with EaaS investments that integrate solar and energy storage alongside energy efficiency. For standalone energy efficiency investments for large C&I customers, however, there aren’t many new incentives. Allowing for the allocation of the increased 179d deduction for projects for non-profits (e.g., colleges, hospitals, etc.) is helpful but not a game changer. Two other areas we are following closely include: 1) the $500 million allocation to the Department of Energy (DOE) to provide funding to states for energy efficiency improvements, and 2) the $4.3 billion in grant funding allocated to DOE rebates for electrification projects.

How does this bill fit into the overall policy landscape and work in the U.S. on energy efficiency and climate-related action?

Barnes: We see passage of the IRA – in addition to last year’s passage of the Infrastructure Investments Jobs Act – as the beginning, not the end. According to the International Energy Agency, energy efficiency can achieve 40% of the carbon emission reductions required under the Paris Agreement and reaching “net zero by 2050 hinges on a global push to increase energy efficiency.” That said, the value of energy efficiency goes beyond solely reducing emissions, and includes adding greater reliability to the U.S. electric grid, which is an essential component of the energy transition as the nation works to address climate change and rely more heavily on variable renewable resources to power the grid. Investments coming out of the IRA and the Infrastructure Investment Jobs Act are a necessary down payment to help ensure we are prepared as a country going forward to meet growing electricity demand.

Hinkle: The IRA is a key piece to the policy puzzle that provides meaningful incentives (rebates and tax credits) for sustainable energy upgrades. This includes new tax incentives as well as an extended timeline for existing incentives which is an important signal to investors. The IRA’s new loan and grant programs might provide some much-needed capital for larger decarbonization projects. However, we still need added policy tools to find ways to remedy the 10+% shortfall to our 2030 GHG emission reduction targets. The pending SEC climate disclosure requirements are essential to mobilizing private sector investment. Under these requirements, companies would have to disclose their direct (Scope 1) and indirect (Scope 2) GHG emissions using the internationally recognized Greenhouse Gas Protocol metrics. In addition, companies with GHG reduction targets will be required to disclose their progress towards those goals each year in their Form 10k.

What’s missing from this bill?

Barnes: I cannot overstate the unprecedented investments in energy efficiency provided in the IRA, particularly when coupled with achievements from the Infrastructure Investment Jobs Act. So, I hesitate at this early stage to focus on what is missing or what was not accomplished. The bill represents a significant step in the right direction. With that in mind, the Alliance looks forward to bill implementation, and working with Congress and others to ensure that emission reductions, energy affordability, grid reliability, and energy savings are achieved as envisioned. That said, if there is an easily identifiable area for additional focus, I would point to increased investments in what the Alliance identifies as Active Efficiency, particularly as it relates to grid-interactive efficient buildings (GEBs).

Hinkle: Bipartisan support. As historic as this bill is, climate change is still not a bipartisan issue. No Republican voted for IRA and it was passed through budget reconciliation where only a simple majority is needed. In general, I’d like both parties to understand good jobs, greater security and economic efficiencies can be created by upgrading existing infrastructure. In terms of other areas, this bill relies heavily on tax credits and incentives, direct pay and transferability of tax credits, all of which is key but, on their own, won’t get us to where we need to be. Having more federal requirements mandating corporate disclosure and action on building efficiency requirements (like many emerging policies at the city or state level) are needed quickly to make progress before 2030. Nonetheless, I do see the federal legislation in the past year as significant moves in the right direction.