Then President Joe Biden signed the Inflation Reduction Act (IRA) into law on August 16, 2022, we have begun exploring its implications, particularly with respect to the impact on the future of climate and the innovations that could shape that future .
As the most important piece of climate legislation in United States history, the IRA represents a fundamental regulatory inflection that could help create a different future. The purpose of this post is to share our understanding of the regulatory ramifications of this monumental bill, especially as they relate to the issues some of the world’s most capable founders want to address.
The IRA includes several major programs aimed at accelerating the electrification of buildings – replacing fossil fuel-powered residential machinery with electric equivalents. This has the benefit of eliminating combustion emissions, improving comfort and improving indoor air quality, which can have dramatic positive health effects.
There are three major programs that promote the electrification of buildings. The first (Sec. 50122) provides a total of $4.5 billion in equipment replacement funding and is means-tested: it covers up to 100% of project costs for those earning less than 80% of the median income (AMI) and 50 % of their income. project costs for those earning less than 150% AMI, with annual limits. Eligible appliances include heat pumps, heat pump water heaters, electric or induction ranges, electric or heat pump clothes dryers, upgraded fuse boxes, electrical wiring upgrades, home energy audits, and insulation and sealing.
The second program (Sec. 50121) is a performance-based residential energy renovation program that provides up to $4,000 per home or $8,000 per home for low-to-middle-income households. Projects cannot claim both this program and Sec. 50122.
To gauge the long-term effects of regulation, it is worth looking at the EU, which continues to play a leading role in evolving global climate policy.
Both programs can be combined with the third program (Sec. 13302), which extends the investment tax credit (ITC) to a 30% tax credit for eligible projects, including residential solar, solar water heating, fuel cell, small wind, battery storage, and geothermal heat pumps.
The IRA also includes significant and open funding for projects that broadly reduce greenhouse gas emissions and accelerate renewable energy deployment, many of which are likely to apply to building electrification projects, such as the Greenhouse Gas Reduction Fund (Sec. 60103 ), and $40 billion in loan guarantee authority for the Department of Energy (Sec. 50141).
The funding in the Buildings IRA is likely to catalyze the replacement of fossil fuel machinery in buildings and accelerate the adoption of all-electric alternatives. Today, the market share of these alternatives is relatively low and lacks contractor acceptance and expertise. Early examples of an increase in consumer demand for these products are Maine and New York.
While we won’t see an overnight shift across the country, these incentives will create a burgeoning residential electrification market, similar to how previous laws created a residential solar market. Issues we identified include:
- Fragmented contractor market.
- There are not enough trained professionals (electricians, HVAC technicians, etc.).
- Projects are often highly customized and time consuming to design and quote.
- Difficult for businesses and consumers to navigate the changing funding/incentive landscape.
- The ROI of these projects will be highly variable and vary from house to house.
- Most home appliances are replaced in an emergency if they fail, and most homes are not connected to 220V, so there is a pre-wiring problem that needs to be solved.
- Navigating the retrofit process is time consuming and confusing for consumers, requiring work from multiple contractors who do not plan individually for holistic project needs (e.g. panel upgrade).
Carbon capture/methane reduction
The latest scientific evidence tells us that to keep warming to 1.5°C to 2°C, we need to reduce emissions to about 45% by 2030 from 2010 levels and reach net zero by 2050. It is unrealistic to expect that we can replace all of our fossil fuel machinery and processes in that time frame.