The IRA's Impact on Building Efficiency and Decarbonization Markets

On August 16, 2022, President Joe Biden signed into law the Inflation Reduction Act (IRA) of 2022, designed to help Americans that are struggling with rising costs. However, the law also includes nearly $370 billion in incentives for clean energy and climate-related programs and is considered one of the most significant spending packages in history for climate change mitigation and adaptation. This blog is part of a series whereby Guidehouse Insights’ subject matter experts cut through the 755 pages of legislation to identify the IRA’s most significant elements and synthesize what they really mean for the future of clean energy technologies.

The IRA provides unprecedented investment in energy efficiency in residential, public, and commercial buildings, with a focus on electrification and full building retrofits. Residential and public sectors are expected to benefit the most, creating significant opportunities for OEMs and energy service companies in these markets. However, decarbonization in commercial buildings is also expected to accelerate thanks to new and expanded incentives. 

Even though incentives for commercial buildings are more sparce than those for residential and public buildings, the IRA allocates $1 billion to support building code adoption focused on stretch and zero energy codes, which will have a significant impact across all building types. Additionally, expanded solar and new energy storage investment tax credits will significantly boost decarbonization project economics in commercial buildings, especially when bundled with energy efficiency investments.

Specific mechanisms through which the act supports retrofits in different vertical markets include:

Rebates and tax credits for electrification in residential buildings

• IRA’s $9 billion in funding will significantly offset the costs of residential electrification. Low- and moderate-income households will now receive direct rebates for the installation of electric efficient appliances, including heat pumps, electric stoves, heat pump water heaters, electric clothes dryers, electrical panels and wiring upgrades, and insulation. Many rebates range in the thousands of dollars (for example, up to $8,000 for a heat pump or $1,750 for a heat pump water heater), in many cases making these appliances more affordable than fossil fuel alternatives.
• In addition to direct rebates, new tax credits up to 30% will be available to a wider range of households (by income) for equipment and installation costs for the same categories of equipment. The credits will further drive down the costs for low-income households, while also incentivizing higher income households to electrify and improve efficiency.

Whole building retrofit incentives in government buildings 

• The IRA further bolstered support for federal building decarbonization, which was set in motion by President Biden’s 2021 executive order that targets a net-zero emissions federal building portfolio by 2045, including a 50% emissions reduction by 2032.
• The IRA provides over $3 billion in funding to the General Services Administration (GSA) for federal building emissions reduction. This includes $250 million in direct measures to retrofit federal buildings, as well as over $2 billion for low-carbon materials in construction and $1 billion to support emerging decarbonization technologies. This allows the GSA to lead by example in building decarbonization.
• The act also expands the 179D Energy Efficiency Deduction, increasing tax credits from $1.88 per sq ft to up to $5 per sq ft for buildings that achieve 25-50% energy use reductions. The deduction applies if the system or building is installed on federal, state, or local government property.

Tax credits for nonprofit commercial buildings

• The 179D deduction has also been expanded by the IRA to apply to non-profits as well as public buildings, therefore creating new incentives for qualifying education, hospital, and other nonprofit facilities to pursue retrofits. 

All in all, the IRA is expected to significantly improve project economics for deep energy efficiency, electrification, and onsite renewable generation projects, especially in residential buildings. By creating a federal framework of incentives, the IRA will further accelerate growth in regional markets that already have strong incentives (for example, CA, NY, and MA), while also supporting nascent growth in states that have historically lagged in building decarbonization. Market players across the value chain, including equipment OEMs, contractors, design-build firms, ESCOs, EaaS firms, and other energy services providers are expected to significantly benefit.

For more information on how Guidehouse Insights can help you navigate the impacts of the IRA, please reach out to richelle.elberg@guidehouse.com.