The Inflation Reduction Act: Financial Incentives for Residential Energy Efficiency and Electrification Projects

The Inflation Reduction Act: Financial Incentives for Residential Energy Efficiency and Electrification Projects

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Updated March 1, 2024
The Inflation Reduction Act: Financial Incentives for
Residential Energy Efficiency and Electrification Projects
Introduction
years, the materials and practices at the time of construction
P.L. 117-169, commonly known as the Inflation Reduction
may not perform as well as today’s materials and practices.
Act of 2022 (IRA), includes a number of provisions
While the IRA does not specify what retrofits would satisfy
affecting energy use in the buildings sector. The IRA
its requirements, these might include efficient windows,
appropriates $9 billion for residential energy efficiency and
doors, and insulation materials.
electrification financial assistance programs. These include
consumer rebates and funds for technical training.
Applicants can demonstrate savings by comparing energy
consumption before and after the retrofits, either through
The IRA includes $4.3 billion to award grants to state
use of building energy models that estimate the energy
energy offices (SEOs, defined in §124(a) of the Energy
performance of the whole house, or by measured
Policy Act of 2005 (P.L. 109-58)) to develop and
performance. The energy savings requirements and the
implement Home Energy Performance-Based, Whole-
rebate calculation differ for the two methods.
House Rebates, also known as a HOMES (Home Owner
Managing Energy Savings) rebate program. In addition, the
For modeled performance, the rebate is awarded at two
IRA provides $4.275 billion to SEOs and $225 million to
different levels depending on the how much energy savings
Indian tribes to implement High-Efficiency Electric Home
is achieved. As shown in Table 1, for retrofits of SFHs that
Rebate programs. A further $200 million is appropriated for
achieve a 20% energy savings, an owner or aggregator is
SEOs to provide training and education to contractors
eligible for rebates of 50% of project cost, with rebates
involved in these rebate programs.
capped at $2,000; for low- or moderate-income (LMI)
households, rebates increase to 80% of project cost, up to a
The energy efficiency rebates are determined by energy
cap of $4,000. For SFHs achieving at least a 35% reduction,
savings of the whole house. The electrification rebate
the caps are doubled. The IRA defines LMI households as
supports a menu of projects, including replacing appliances,
those with income below 80% of area median income
adding insulation, and upgrading the in-home electrical
(AMI); these income thresholds are estimated at
delivery system itself. The two rebate programs have
https://www.huduser.gov/portal/datasets/il.html, but there
unique means-testing provisions and cost recovery rates and
are a number of methods for determining income itself.
caps, as explained further below.
Table 1. HOMES Rebates Based on Modeled Energy
To receive the funds, the SEOs apply for grants from the
Savings for Single-Family Homes
U.S. Department of Energy (DOE). The statute specifies
that DOE determine the amount of funds for each state

Rebate
Rebate Cap
using DOE’s allocation formula in effect on January 1,
at least 20% energy savings,
2022. This In Focus provides highlights of the statutory
but less than 35%

programs but does not describe all the details, some of
which will be determined by the SEOs.
if LMI household 80% of cost
$4,000
all other households 50% of cost
$2,000
The programs exemplify two main trends in home energy
efficiency programs. In the first, during the 1980s and
at least 35% energy savings

1990s, energy efficiency programs focused on single
if LMI household 80% of cost
$8,000
appliances or systems (e.g., windows), complemented by
appliance efficiency standards, information campaigns, and
all other households 50% of cost
$4,000
other policies. The second trend, which evolved later,
Source: §50121(c) of Inflation Reduction Act of 2022 (P.L. 117-169).
includes initiatives aimed at whole-house energy
Notes: IRA defines LMI households to have income below 80% of
performance. The rebates based on whole-house
the area median income for purposes of HOMES rebates.
improvements necessitated the development of
measurement methods and computer modeling platforms
for simulation of energy consumption in the home.
For MFBs, the projects are eligible for a rebate of $2,000
per dwelling unit, provided they achieve a reduction of
Whole-House Rebates (HOMES)
20%-35%. The total of all rebates in one MFB cannot
exceed $200,000. For at least a 35% reduction, the rebate
Section 50121 of the IRA offers HOMES rebates for energy
per dwelling unit and the cap per building are doubled.
efficiency upgrades that improve the overall energy
performance of a single-family home (SFH) or multi-family
building (MFB). As building stock can be in place for many
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link to page 2 The Inflation Reduction Act: Financial Incentives for Residential Energy Efficiency and Electrification Projects
The rebate structure differs slightly for MFBs with 50% or
High-Efficiency Electric Home Rebates
more of dwelling units occupied by LMI households.
Section 50122 of the IRA, High-Efficiency Electric Home
Energy savings of 20%-35% qualify retrofits for rebates of
Rebate Program, authorizes SEOs to establish programs to
80%, up to a cap of $4,000 per dwelling unit. For energy
provide point-of-sale rebates to eligible entities for
savings of at least 35%, the cap is $8,000 per dwelling unit.
qualified electrification projects (QEPs), which may include
In either case, there is no per-building maximum.
heat pumps for water heating, up to $1,750; heat pumps for
space heating/cooling, up to $8,000; and electric stoves or
The second way to show eligibility for rebates is by
electric heat pump clothes dryers, up to $840.
measurement. Provided that retrofits achieve at least a 15%
energy savings, homeowners are eligible for a rebate of
The IRA also funds rebates for QEPs that enable
50% of the project cost, or, alternatively, a reimbursement
electrification. These include up to $4,000 for an electric
calculated per kilowatt-hour of energy saved. Consultants
load service center upgrade and up to $2,500 for electric
who assist homeowners with participating in the rebate
wiring upgrades. The IRA also includes rebates of up to
program (i.e., aggregators) are also eligible. For LMI
$1,600 for insulation, air sealing, and ventilation. The total
households or MFBs having at least 50% of dwelling units
of all rebates is generally limited to $14,000 per household,
that are LMI households, owners or aggregators are eligible
and new equipment generally must be Energy Star certified
for a higher rebate of 80% of project cost, or, alternatively,
(42 U.S.C. §6294a). Further, an entity that receives one of
a reimbursement per kilowatt-hour of energy saved, with no
the above rebates and performs the installation may receive
statutory cap. The rate is $100 per 1% reduction in energy
up to an additional $500, provided the amount is
consumption of the average SFH or MFB in the state;
commensurate with the scale of the installed upgrades.
multiplying this rate by the homeowner’s actual energy
savings gives the amount of the rebate. For LMI households
The means testing falls into three tiers. Households with
or MFBs having at least 50% of dwelling units that are LMI
income below 80% of the AMI may claim a rebate for the
households, the per-kilowatt-hour rate is twice as large, or
full expense of their upgrades, up to $14,000. Those whose
$200 per 1% reduction in the state average. These are
income is 80% or more but generally not greater than 150%
summarized in Table 2.
of the AMI are eligible for rebates of 50% of their costs, up
to $14,000. Households are generally not eligible for
Table 2. HOMES Rebates Based on Measured Energy
rebates if their income is greater than 150% of the AMI.
Savings
Certain entities determined by DOE who install upgrades in
such households are also eligible, according to the same
Means
Rebate
Rate (alternative
means-testing schedule.
Testing
Rebate
Cap
method)
if LMI
80% of
Owners of MFBs, or certain entities who install upgrades in
none
$200 per 1% of
households
cost
reduction from avg.
MFBs (as determined by DOE), are eligible for 50% of the
value of the above rebates if at least 50% of dwelling units
home energy use
are households with incomes generally not greater than
all other
50% of
none
$100 per 1% of
150% of AMI. If at least 50% of dwelling units are
households
cost
reduction from avg.
households with incomes below 80% of AMI, the rebate
home energy use
increases to 100%.
Source: §50121(c) of Inflation Reduction Act of 2022 (P.L. 117-169).
State-Based Home Energy Efficiency
Notes: IRA defines LMI (low- or moderate-income) as income below
Contractor Training Grants
80% of the area median income for purposes of HOMES rebates.
Measured energy savings must be at least 15% for the rebate option.
Section 50123 of the IRA also appropriates $200 million
for SEOs to provide training and education to contractors
and organizations involved in the rebate programs.
The IRA includes requirements on both methods—modeled
and measured energy savings. For modeled energy savings,
How Rebates Will Be Made Available
the IRA requires models to adopt a specific technique,
On November 2, 2022, DOE announced its allocations to
ANSI/BPI-2400, for calibrating the building energy models.
states according to a statutory allocation formula. The IRA
Analysis has shown that such calibration improves the
allocated $225 million to Indian tribes. DOE issued an
accuracy of the predicted energy improvements.
“Early Administrative Funds” Administrative and Legal
Requirements Document (ALRD) on March 23, 2023, to
The IRA requires measured performance evaluations to use
allow SEOs “to begin to hire and conduct a minimum set of
open-source advanced measurement and verification
planning and administration activities.” DOE has released
software. DOE maintains a list of such software (which
its ALRD for the program and application instructions for
includes its own self-developed software).
the states and updated it on October 13, 2023 and for Indian
tribes on November 17, 2023. DOE reports that several
There is an additional rebate of up to $200 to certain
states had applied for program funding as of March 1, 2024.
entities performing HOMES retrofits on behalf of eligible
entities in disadvantaged communities as determined by the
Secretary of Energy.
Martin C. Offutt, Analyst in Energy Policy
IF12258
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The Inflation Reduction Act: Financial Incentives for Residential Energy Efficiency and Electrification Projects

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