Four Ways the Inflation Reduction Act Speeds the Shift to a Cleaner, More Affordable Energy Future
The passage of the Inflation Reduction Act (IRA) is a once-in-a-career opportunity, permanently shifting the course of both the US economy and global climate to a better future. And it represents the culmination of decades of work by RMI — our experts and analysis played a direct role advancing key provisions — along with countless other NGOs, businesses, communities, scientists, and policymakers
The full implications of the nearly 800-page bill continue to be assessed. But early modeling suggests its incentives will drive dramatic emission reductions: at least 40 percent by 2030, just shy of US commitments to lower emissions by half in that time.
Beyond that headline number, what’s particularly promising is the inclusion of a variety of relatively small investment signals that may cascade into huge impacts across the economy for decades to come. Taken together, they could propel consumers, towns, states, industry, and finance to build a better, more resilient economy.
Here are four ways these signals, small and big alike, will transform the energy sector by making clean solutions cheaper than today’s fossil systems.
1. Clean electricity
Electricity tax credits and loans are designed to spur rapid, nationwide deployment of wind, solar, and related renewables technology, which already beat fossil fuels on costs. The major wins:
- $5 billion for energy infrastructure reinvestment financing (plus $250 billion in loan guarantee authority) to make clean energy infrastructure more accessible and prevalent for communities with a history of fossil fuel production. This will offer waves of new economic investment and lower costs in the long run.
- Direct pay for states, localities, tribes, rural cooperatives, and nonprofits for the renewable investment tax credit (ITC) and production tax credit (PTC). This lets these entities to directly access tax credits and pass on 100 percent of cost savings to customers. The ITC and PTC are also extended for 10 years, giving renewable developers assurance for long-term clean energy planning.
- Ability to use PTC for utility-scale solar, and the ITC for battery storage — resulting in a more robust credit than before. This will let investor-owned utilities, which serve nearly three-quarters of US electricity consumers, produce electricity via cleaner energy sources at a cheaper cost, while allowing abundant solar energy to be stored and used later in the day.
- $9.7 billion in USDA assistance for rural electric cooperatives. This ensures rural electricity providers can take part in the clean energy transition, which will yield economic development and pollution-reduction benefits for these communities nationwide.
- Up to 50 percent ITC for community solar low-income projects. This cuts up-front costs and makes cheap solar accessible for energy-burdened communities.
- Extension of the residential solar tax credit (30 percent through 2033) including battery storage. This will add resiliency to both individual households and the grid at large.
2. Heat pumps and electric appliances
Heat pumps (which both cool and warm our homes), electric induction stoves, and other electrified household appliances offer a fast track to cut monthly household energy costs. Some key ways the bill will help scale those solutions:
- A High Efficiency Electric Home Rebate Program, funded at $4.5 billion, with rebates for induction stoves, heat pumps, and updating electric panels. This program is only eligible for low- to medium-income (LMI) households, and by delivering rebates at point of sale, the program is easier for LMI households to take advantage of than past incentives. For low-income households, it offers 100% rebate on heat pump costs, up to $8,000. Importantly, it also offers up to $500 for contractors installing electrification upgrades, encouraging them to familiarize themselves with this newer technology.
- Heat pumps are eligible for $2,000 worth of tax credits, whereas gas appliances will only receive $600. Heat pumps are already lowering utility bills for US households since electricity prices have risen less than prices for fossil fuel commodities.
- Incentives for new homes that achieve ENERGY STAR or Zero Energy Ready Home certification up to $5,000 per unit. Importantly, this tax credit was updated so units that also receive the low-income housing tax credit can still take advantage.
3. Clean hydrogen
A variety of critical basic industries — from Shipping to fertilizer and steel — can’t decarbonize without an affordable clean alternative to today’s fossil fuels. The bill’s commitment to green hydrogen, generated from renewable energy, opens the door to such a transition. Key details:
- A $3 production tax credit for each kilogram of green hydrogen produced. This means the cost of US-made green hydrogen can be cut to $1 per kilogram or below, when other incentives and credits are used. At this rate, green hydrogen will be cost-competitive with today’s fuels and feedstocks: coal, natural gas, and oil.
- The bill will stimulate private investment. Most importantly — given that the bulk of US green hydrogen production will come online in two to five years — the cost competitiveness of green hydrogen is decisive for investors. With greater confidence in affordability of green hydrogen, private capital will invest more in projects and create a virtuous cycle of rising supplies and falling costs for this clean fuel.
4. Manufacturing incentives
From batteries to solar panels, much of today’s critical clean energy technology is made elsewhere, creating supply chain risks for US developers looking to accelerate deployment. The bill’s manufacturing incentives will stimulate the return of many of these industries to the United States. And by subsidizing this capacity growth, the bill promises to improve supplies and lower costs. Some big steps forward:
- Manufacturing production tax credit for wind, solar, and batteries will foster competition in the global market, and encourage innovation in new processes and technologies. In batteries, it should drive down the average cost of production to $100 per kilowatt hour, a key threshold that allows the production of electric vehicles to be equivalent to the cost of production of a gas vehicle.
- Tax credits for the smelting and refining of critical minerals required to create the building blocks of clean tech, including platinum group metals, battery materials, permanent magnets, and rare-earth elements. This should help overcome offshore supply chain bottlenecks and ramp up domestic production. Larger, more dependable supplies should drive down inflation.
- Advanced manufacturing grants to scale US production facilities to build clean technologies. This should drive down costs via learning-by-doing and reduce supply chain risks by reshoring domestic manufacturing capacity.
- For Advanced Technology Vehicle Manufacturing, $3 billion in loans, with no limit on total loan capacity. This means funds could be leverage 30 times over which will let the Loan Programs Office de-risk investments throughout the vehicle and battery supply chains, putting further downward pressure on the cost of these technologies.
Moving Past the Tipping Point
This bill pushes the US economy over a beneficial tipping point, propelling us from today’s slower-growth business-as-usual path, to a trajectory that promises both sustained expansion for clean energy and lower energy costs economywide.
To be sure, while the plan is clearer than ever, much work awaits to make it real. We must overcome bottlenecks in workforce, permitting for clean energy projects, program applications, public awareness, and shared infrastructure. These fronts represent a huge opportunity for:
- New city and state climate policy to build on these federal gains
- Transformational utility plans, to modernize, decarbonize, and secure the grid while also benefitting consumers.
- Small business development, by helping small institutions gain rapid access to these credits.
- Household awareness, by spreading the good news and detailing real examples of personal benefit.
The next choices are up to the American people. Strategic, local implementation of this historic climate investment could allow us to reach our emissions reductions goals, while reaping close-to-home economic, health, and equity benefits.