(Inter)Connecting the Dots: Recent Progress in Interconnection Reform

Interconnection is a hot topic in the electric power sector. Indeed, new generator connections to the grid, the duration of the process, and the costs are long-running concerns for several parties. Federal and state regulators, independent power producers (IPPs), state legislatures, and utilities consider what reforms might be needed and how to implement them. Each of these entities present different, sometimes conflicting, perspectives on the needed changes to the interconnection process and the overall goal of reforms. Over the last three years, the DSIRE Insight team has noted an uptick in interconnection-related actions.

Green Tariffs and Additionality: Do Voluntary Renewable Programs Accelerate the Energy Transition?

The concept of additionality is an important consideration for purchases of renewable energy certificates (RECs) by large corporate customers. Corporate purchases of unbundled RECs have been criticized for not actually increasing the amount of renewable energy available, particularly when the RECS are sourced from areas without renewable portfolio standards (RPS) and large surpluses of renewable energy. Many corporate purchasers have tightened their standards for renewable energy purchases, seeking contracts with specific renewable energy projects or seeking out utility programs that offer dedicated renewable energy capacity.

Top State Clean Energy Policy Trends of 2023

With the end of 2023 upon us, our team likes to take the opportunity to look back on all of the policy and regulatory activity we’ve tracked through the year and think about some of the overarching trends and themes that we’ve seen. Across the areas of distributed solar, grid modernization, transportation electrification, and power decarbonization, our team tracked more than 2,500 actions taken by states and utilities this year, including introduced legislation, active regulatory proceedings, executive orders, and utility initiatives. From enabling virtual power plants and expanding clean energy targets to supporting building electrification and studying market reform, states and utilities took significant steps to advance clean energy in 2023.

Workshop Review: Growing the On-Site Solar Generation Market in North Carolina

Earlier this month, the NC Sustainable Energy Association held its annual Making Energy Work conference. The DSIRE Team, as part of its work at the NC Clean Energy Technology Center (Center or NCCETC), hosted a pre-conference workshop on Growing the On-Site Solar Generation Market in North Carolina. The workshop covered the challenges and opportunities associated with the on-site solar market in the state. The workshop was organized and framed by the Center, with the Center also leading discussions to gather input from interested distributed solar stakeholders. Participants came from solar installers, state and local government, non-profit and advocacy groups, financing entities, and end-use customers.

The State of Solar Decommissioning Policy: Then and Now

Generally, decommissioning requires the removal of systems and the restoration of land or infrastructure to its original condition or for a new use. When referring to a photovoltaic system, decommissioning usually includes removing the PV array, removing the balance-of-system (other parts of the system, excluding modules, such as wiring, inverters, mounting system, etc.), and restoring the land. While it might not seem like the most exciting topic, legislative interest in solar decommissioning has experienced a major uptick in recent years, and for good reason. While solar panels have a lifespan of 25-30 years, it is estimated that by 2030, end-of-life modules in the United States could total 1 million metric tons (Mt), and 10 million Mt by 2050. As the solar market continues to grow, so does the significance of policies to ensure proper decommissioning of these sites.

Is Clean Heat the Future of Consumer Choice?

With fluctuating natural gas prices, improvements in clean heat technology, and a plethora of financial incentives for electrification, consumers have been given more reasons than ever to turn off their gas in favor of electrifying their heating. Though there are a number of state legislative bodies restricting local action against fossil fuel heating, an upward trend in heat pump adoption and even a gradual embrace of clean heat in cold climates like New England beg the question: is clean heat the future of consumer choice?

Do RPS Policies Still Matter?

Our Q2 2023 50 States of Power Decarbonization Report found that 31 states took action during the quarter related to Clean Energy Standards (CES) or Renewable Portfolio Standards (RPS), including the consideration of at least 50 bills. RPS policies require utilities in a given state to have a certain percentage of their electricity sales come specifically from renewable energy sources by a certain date, while CES policies often build upon and are inclusive of RPS policies. CES policies generally require utilities to transition to carbon-free resources, including nuclear larger hydro systems, and other carbon-neutral technologies. Long used as the centerpiece of many states’ renewable energy policy framework, recent years have seen a slightly diminished focus on pure RPS policies. States are increasingly considering further refinement of their electricity markets through a more holistic lens that includes CES and net-zero carbon policies. In other cases, renewable energy development has far outpaced the requirements established by a state’s RPS policy, leading some to wonder, do RPS policies still matter?

Decarbonization Pathways: Comparing Minnesota and North Carolina

This month, we look at two states with regulated electric utilities - Minnesota and North Carolina - and their decarbonization progress over the last decade and a half. Before the term "decarbonization" became commonplace in the electricity sector, many states created renewable energy and/or energy efficiency targets. Both of these states created renewable energy goals for their electricity sector in 2007, prompting utilities to alter their electricity generation and procurement strategies to meet statutory renewable energy goals. 

Permitting Reform in the 2023 Debt Ceiling Bill

On June 3rd, Congress enacted the Fiscal Responsibility Act of 2023 to raise the federal government’s debt ceiling. As part of a section focused on growing the economy, the bill included significant changes to the National Environmental Policy Act, or NEPA. NEPA was enacted in 1970, establishing the President’s Council on Environmental Quality and putting guidelines in place requiring federal agencies to review the environmental impact of their proposed actions. These environmental reviews only come into play when a project falls on federal land, or when a project could affect pollutants covered by the federal Clean Air Act.

Power Decarbonization Across the U.S.: Where We Are, Where We Want to Go, and Where We Are Heading

Earlier this month, our team released its very first 50 States of Power Decarbonization quarterly report, tracking state and utility actions related to clean energy and emission reduction targets, planning and procurement rules, utility integrated resource plans, and more during Q1 2023. This new publication is intended to help energy industry professionals keep up with the fast-paced activity happening in the electric power decarbonization space, while connecting the threads of state clean energy policies and utility resource planning and procurement.

The Grid's Crypto-nite?

What is the first thing you think of when you see the word cryptocurrency? For some, it's the economic opportunity, for others, it’s flat out confusion. Maybe, like me, your mind goes straight to Dogecoin, the crypto-meme that swept through social media a few years back. Regardless of what does come to mind, chances are it’s not energy usage, but maybe it should be.

To Burn or Not to Burn: States Consider Blocking Gas Bans

The legislative year is well underway, and many states are essentially looking at one of two very different pathways: 1) prohibiting bans on fossil fuel-building infrastructure, or 2) banning fossil fuel-building infrastructure. Though some still have bills in limbo, others have already enacted laws this session that are primarily in support of the former and not the latter.

Nuclear’s Next Life

In the United States, civilian nuclear power has been a part of the energy mix since 1957. Since then, nuclear energy has gone through peaks and valleys, from economic slowdowns to regulatory shifts; and recently new power plant additions have been scarce. Nevertheless, through the fresh wave of incentives, pursuits of advanced reactors, and other nuclear technologies, nuclear’s future is being given a signal of support.

LMI Roundup: A Selection of New LMI Energy Policies and Programs Adopted in 2022

With the start of the new year comes a review of the past year. No one missed the historic passing of the Inflation Reduction Act, which included almost $400 billion dedicated to energy and climate change action. The programs and incentives in the Act were varied and wide-reaching, but this wasn’t the only major policy development to come about last year. States took action on everything you could possibly think of, and probably a few things you can’t! As time goes on, more and more governments are trying to make their policies increasingly inclusive, particularly by implementing rules to benefit low-to-moderate income, or LMI, residents. We’ll be taking a look through state-level actions throughout 2022 – the big and the small – related to LMI rules across various categories.

NEVI NEVI Land

By: Brian Lips, Sr. Policy Project Manager

In September 2022, the Federal Highway Administration approved the National Electric Vehicle Infrastructure (NEVI) Program plans submitted by all 50 states plus DC and Puerto Rico. The plans detail how each jurisdiction will use their share of $5 billion in federal funding to deploy EV chargers along interstate highways over the next five years. Now that the plans are approved, states are moving forward with implementation.

State NEVI Program Funding (FY 2022 - 2026)

While the Infrastructure Investment and Jobs Act established many parameters for the resulting NEVI plans, it still left many decisions in the hands of the states. The state plans address these decision points, including the exact site locations, the prioritization for project sites, and the contractual mechanism the state will use to find a contractor. 

Nearly every state anticipates issuing one or more requests for proposals (RFPs) to find third parties to install, own, operate, and maintain the charging stations. While some NEVI plans have a detailed timeline for when the state anticipates releasing the RFPs and awarding contracts, 19 states do not provide a clear timeframe for when they will release an RFP. 

While the timelines provided by states in their NEVI plans are subject to change, many of them show a fairly aggressive schedule. Eight states (CO, KS, MI, OH, OR, VT, VA, and TX) plan to release an RFP by the end of 2022, though Ohio is the only one of these states to have done so as of mid-November. An additional eight states (CA, CT, LA, MT, NC, TN, WV, and WY) plus DC expect to release an RFP by the end of the Q1 2023. Hawaii and Nevada, meanwhile, already have contracts in place that pre-date their NEVI plans. These states plan to amend their existing contracts to incorporate the additional NEVI requirements, and may issue new RFPs in the future if needed.    

State

Timing for First NEVI RFP

Alabama

First half 2023

Alaska

TBD

Arizona

Upgrades: Spring 2023
New Stations: Fall 2023

Arkansas

Second Half 2023

California

Q1 2023

Colorado

November 2022

Connecticut

Q1 2023

Delaware

TBD

District of Columbia

Q1 2023

Florida

TBD

Georgia

TBD

Hawaii

Existing contracts will be amended to include NEVI work. Additional solicitations may be considered in the future

Idaho

Spring 2023

Illinois

TBD

Indiana

October 2023 - June 2024

Iowa

Late Winter 2023

Kansas

Dec-22

Kentucky

TBD

Louisiana

Q1 2023

Maine

TBD

Maryland

State Fiscal Year 2023

Massachusetts

TBD

Michigan

Q4 2022

Minnesota

Early 2023

Mississippi

Fiscal Year 2023

Missouri

2024

Montana

Fall / Winter 2022

Nebraska

TBD

Nevada

Existing contracts will be amended to include NEVI work. Additional solicitations may be considered in the future

New Hampshire

Fiscal Year 2023

New Jersey

TBD

New Mexico

TBD

New York

TBD

North Carolina

Winter 2022 / 2023

North Dakota

TBD

Ohio

October 2022, Proposals due 12/21/2022

Oklahoma

TBD

Oregon

November of December 2022, may be delayed to early 2023

Pennsylvania

Late 2022 / Early 2023

Puerto Rico

Fiscal Year 2023

Rhode Island

TBD

South Carolina

TBD

South Dakota

August 2023

Tennessee

March 2023

Texas

Fall 2022

Utah

TBD

Vermont

Fall 2022

Virginia

Q4 2022

Washington

TBD

West Virginia

Winter 2022 / 2023

Wisconsin

TBD

Wyoming

Fall / Winter 2022

While the build out of a fast charging network will form a vital backbone for transportation electrification across the United States, it is far from the only effort being undertaken by the states. States and utilities across the country continually roll out new approaches to further support the transition to electric vehicles. Check out DSIRE Insight’s 50 States of Electric Vehicles report series and Electric Vehicle Single-Tech Subscription offerings to stay on top of all of these developments.

Community Solar: Improving Economic Opportunities

By: Vincent Potter, Policy Analyst

What is Community Solar?

The U.S. Department of Energy (DOE) defines community solar as any solar project or purchasing program, within a geographic area, in which the benefits of a solar project flow to multiple customers, such as individuals, businesses, non-profits, and other groups.

Image: Co-op Power

Community solar programs can expand access to renewable energy for customers that cannot or choose not to install resources themselves. Participation in community solar programs does not require that customers own property, have ideal conditions on a site that they may own, or pay construction and siting costs for renewable generation installation. If offered in their area, customers may simply choose to subscribe to a desired amount of renewable electricity, pay a subscription fee, and receive bill credits from the energy generated from their portion of the community solar array. 

As of September 2022, 21 states have rules that require utilities or allow other entities to develop community solar programs.

Community solar programs can differ greatly from state to state, or utility to utility. Some programs are open to third-party development, others must be run by utilities. Subscription size limits, purchase options, and bill credit rates can all vary. Many programs have provisions for lower-income households. 

Rules around community solar can be related to net metering policies, virtual net metering policies, or as entirely separate entities. In states without formal community solar program structures, utilities may choose to offer these programs. As of September 2022, 22 states and the District of Columbia had pending actions relating to community solar in their legislatures or before their utility regulators. 

Benefits from Community Solar

Subscribers to community solar programs receive the renewable electricity that they desire. This can be a benefit in and of itself. In some locations, community solar is viewed as a "premium product" and therefore, subscribers are not expected to save money on their electric bills overall. 

Policymakers and utilities throughout the United States are wary of "cross-subsidization" and tend to design programs such that only the beneficiaries pay. In North Carolina, community solar programs must not be supported by ratepayers that do not receive the benefits of the solar electricity generated. Ideally, subscribers would receive more tangible benefits, such as annual bill savings like net metered customers do. Community solar programs can be designed with participation or savings targets for lower-income customers. Lower-income households tend to pay proportionally more of their income for energy than wealthier households and community solar, which provides a bill savings, can offer relief. 

In areas with regional transmission authorities, community solar operators can gain additional value from market participation. This participation in capacity markets or other ancillary services can reduce the subscription costs needed for projects to stay afloat, meaning that customers can potentially benefit as well. In regulated markets, ancillary services cannot be valued by open markets. If a community solar installation has a host that can benefit from demand reductions, those savings can be passed along to subscribers at the host's discretion. 

Program Designs

Community solar programs throughout the United States use a range of different designs. Some programs sell the output of a panel for the life of the facility with a high up-front cost, similar to buying a solar panel and having it installed on the customer's property. Monthly and annual subscriptions are common options, which allow a smaller commitment from the customer but provide some additional uncertainty for the host. An additional common fee is an origination charge that would be imposed for the creation of new subscriptions. 

Most community solar programs use an opt-in subscription design. This requires customers to choose to participate. The facility or subscription administrator would educate and/or advertise the services and benefits of community solar electricity under this program model. When community solar programs are "premium offerings" and provide subscribers with net costs, this program model ensures that participants make informed choices before getting a more expensive product. 

Opt-out program design enrolls participants automatically. This design requires the subscriber to see a net savings or it creates a potentially unwanted additional charge on their energy bills. In New York and a few other states, this program design is used to ensure that lower-income customers can receive benefits from participation in community solar and similar programs without the necessity for educational and advertising campaigns by subscription administrators. This can reduce barriers to renewable electricity access, especially for lower-income households.

Image: ISO/RTO Council

Improving Benefits in the Southeast

Most of the Southeastern United States does not have access to a regional transmission organization that would allow easy market participation for community solar installations. Community solar facilities can provide additional benefits based on its host's electric service rates, especially if paired with energy storage. Cooperative and municipal utilities can experience significant savings from the coincident peak fees on their wholesale contracts. If community solar and storage systems are located strategically, they can also defer distribution system upgrades needed to support load growth on highly utilized infrastructure.

Research in North Carolina

Research conducted for the American Rescue Plan Act in 2022 analyzed the rate structures and wholesale contracts of several cooperative and municipal utilities in North Carolina. The research compared solar scenarios, battery sizes, and storage durations to identify general sizing and deployment strategies. The largest benefit found was in coincident peak reductions from solar and storage. None of the utilities analyzed had distribution infrastructure with forecasted load limitations that would create benefits from distribution deferral. 

Municipal and cooperative electric utilities are non-profit entities owned by their customers. Benefits accrued through coincident peak or demand reductions can be shared between the utility and customers. Program design can set subscription fees and credit rates such that customers receive a net savings on an annual basis while allowing the utility to support program administration costs and operations & maintenance expenses. Net annual bill savings can make community solar more accessible and appealing to lower-income customers. However, additional barriers may hinder participation.

There are informational and administrative barriers for community solar facilities to make customers aware and acquire subscribers. Some amount of annual attrition should be expected as customers relocate or their preferences change. Opt-out program design, seen in New York and in a few other states, can significantly reduce these barriers. If the program's intent is to benefit lower-income households and community solar programs provide a net benefit for participation, then an opt-out program design, where lower-income subscribers are automatically enrolled as capacity becomes available, can fulfill that mission. 

Conclusion

Community solar programs can provide tangible benefits not only to subscribers, but also host facilities and host utilities through demand charge reductions. When paired with energy storage, or optimally located within utility distribution infrastructure, the facilities can provide additional savings for their hosts. Program design can incorporate these host benefits and distribute a portion of them to subscribers to increase community solar participation benefits. To make benefit distribution more streamlined, an opt-out program model can be used to automatically enroll participants, reducing the administrative burden of subscriber acquisition. Opt-out programs require community solar program participation to result in subscriber savings to ensure that customers are not being drawn into a program which actually increases their bills, a particularly difficult prospect for lower-income households. 

Keep up with legislative and regulatory changes related to data access with the 50 States of Solar report or DSIRE Insight’s Single-Tech Solar Subscription.

The Good Kind of Global Heating (and Cooling)

By: Justin Lindemann, Policy Analyst

Header image created by Justin Lindemann

Climate resiliency has been impaired due to frequent extreme temperature changes and storms, putting much of our infrastructure under pressure – heating and cooling especially. Cheaper and more efficient technologies are thus required to meet demand and keep communities safe. This is a dilemma that may be answered by a long-existing innovation, the heat pump.

An Introduction to Heat Pumps

While heat pumps have been around for decades, recent climate imbalances have made the technology an important alternative to more traditional fossil-fuel powered furnaces and heating/cooling systems. The idea for a heat pump can be traced back to the mid-18th century, with the first having been developed almost a century later.

There are a variety of heat pump types, each with the functionality to heat and – though the name might be a bit deceiving – cool communities and industries, reducing energy inefficiency while saving money. Water-, ground-, and air-source heat pumps are the three main types of systems. Water-source pumps extract and reject heat from water systems, with temperatures depending on the season. Ground-source pumps utilize earth’s constant temperature to heat and cool, extracting heat during the winter months and earth’s cooler temperatures during the summer, from several feet underground. 

Then there are air-source (or air-to-air) pumps, which are the most commonly employed heat pumps today. Air source pumps come in either ductless or ducted versions, depending on whether the space in question has access to an existing duct system. As its name suggests, this type extracts ambient air temperature to heat/cool buildings.

Air-source pumps consist of an indoor and outdoor coil to help transfer heat. When heating, a refrigerant absorbs the ambient heat and evaporates it into a gas utilizing a compressor, shifting the heat through an inside coil and releasing the air into the space. After that, the vaporized heat returns as a liquid, and goes through an expansion device and back out – becoming different in pressure and temperature. The system’s reversing valve is responsible for switching between heating and cooling modes. The diagram below visualizes the process, and has similarities to water- and ground-source types.

Compared to the many furnace systems in the U.S. that run on fossil fuels, heat pumps run on small amounts of electricity (with more used during the winter) and can easily utilize distributed energy sources – like rooftop solar. Over the course of 15 years, switching to a heat pump can potentially save the average U.S. homeowner around $10,000 in upfront costs and energy bills.

Moreover, the absence of burning fossil fuels reduces emissions, which can help mitigate climate change and bear community health benefits. Low-income and BIPOC (Black, Indigenous, People of color) communities that face higher bouts of climate injustice would be impacted less by fossil fuel infrastructure and the resulting atmospheric pollution, if this and other cleaner tech were to be adopted. The recently passed Inflation Reduction Act (IRA) provides multiple incentives to help achieve these benefits.

The IRA and a Burgeoning Industry

The heat pump incentives stipulated in the IRA are spread out into various programs. Firstly, the extended Energy Investment Tax Credit (ITC) credits 30% for geothermal heat pump projects built before January 1, 2033, with the credit decreasing to 26% and 22% in 2033 and 2034 respectively. There is a 10% bonus if the project is located in energy communities, otherwise defined as brownfield sites and fossil fuel communities, and another 10% if the project meets domestic manufacturing requirements. The Energy ITC will be replaced by the new Clean Electricity Investment Tax Credit beginning in 2025. The tax credit maintains the 30% geothermal heat pump incentive (and all other provisions stipulated under the Energy ITC). In addition to the aforementioned bonuses, the improved incentive provides an additional 10% for projects in low-income communities or on Tribal lands, and 20% for those located in low-income residencies or connected to low-income economic benefit projects.

The IRA also includes amendments to the Residential Energy Efficiency Tax Credit, increasing the credit limit for heat pumps to $2,000 (or 30% of the cost, if lower) and extends it to the end of 2032. Likewise, the High Efficiency Electric Home Rebate Program in the landmark legislation provides up to $8,000 and $1,750 for heat pumps and heat pump water heaters, respectively. The nation’s heat pump production will also be supported through $500 million in Defense Production Act spending, available until September 30, 2024.

Besides the influx of federal support from the IRA, state incentives have existed to support clean technologies like heat pumps. Warmer-climate states have historically had a higher percentage of housing with heat pumps, due to the South being mostly electric-reliant for heating and cooling. States like South Carolina, North Carolina, and Alabama have the highest percentage of heat pumps, while Texas and Florida have the highest number installed. Considering the South has the highest number of low-income communities, continual adoption of heat pump technology could be particularly beneficial.

In Texas, about 38 financial incentives are currently available for heat pumps, with most being offered by utilities. One of these incentives is Southwestern Electric Power Company’s (SWEPCO) Residential Energy Efficiency program, which reduces the upfront cost for residential consumers by providing a rebate for selected contractors.

As for Northern, colder-climate states, they haven’t adopted heat pumps at the rate of others, primarily due to older variations of the technology underperforming under freezing temperatures. However, with innovations raising the resiliency and efficiency factor of the technology's heating mode – in addition to incentives and federal funding –  more might be persuaded to invest. In fact, a study released this year by the American Council for an Energy-Efficient Economy (ACEEE) showed that heat pumps will be the cheapest clean option to heat most single-family homes in the U.S. Similarly, a Guidehouse Insights report details a projected heat pump market valuation of $3.31 billion in 2031 amongst North America’s colder regions.

In terms of colder-climate examples, Minnesota has the greatest number of incentives of any state. But, the North Star State’s percentage of households with heat pumps isn’t comparable to that of the South. Most of the state’s incentives are delivered through rebate programs from utilities (especially municipalities and cooperatives). The Minnesota Municipal Power Agency (MMPA), which covers a dozen member communities, offers a rebate through its Residential Energy Efficiency program. The program is for those looking to upgrade specific household equipment, and offers $200 off each Energy Star certified air-source unit.

Europe’s Energy Crisis and Global Developments

Across the Atlantic, the combination of the war in Ukraine and climate concerns has pressured Europe to act on multiple fronts. Before war broke out, Europe imported 45% of its gas from Russia for energy and heating purposes. Military operations between Ukraine and Russia have influenced Europeans to gradually wean off Russian fossil fuels, while putting the continent in a tough spot as winter temperatures approach. Fortunately, the International Energy Agency (IEA) has estimated that a European heat pump rollout could reduce Russian gas reliance by two billion cubic meters in one year. This is exactly what the continent is striving for as it is projected to install 45 million residential heat pumps by 2030, with multiple nations already on course.

In Poland – a nation that grew quite dependent on Russian gas, alongside its own domestic supply of coal – household fervor for home upgrades has increased amidst the energy crisis. With the nation suffering a coal shortage before the influx of winter, more and more have decided to pull the trigger and install a heat pump. In 2021, the Polish heat pump association reported a 60% increase, months before the war in Ukraine. The coal-reliant nation updated its incentives this year, offering up to €15,000 for households wanting to modernize their heating and insulation.

Italy, on the other hand, offers one of the biggest financial incentives in Europe. Their stimulant recovers 110% of building renovation costs for home energy efficiency projects, including heat pumps. The initiative was authorized in November 2020 to help with their pandemic recovery and to convert existing infrastructure into resilient and energy efficient spaces. This and other actions have helped the Mediterranean nation reduce Russian gas dependency from 40% to 25%.

Yet, it is the Scandinavian nations with the coldest climates that have a higher percentage of heat pumps. In Norway, Sweden, and Finland, the percentage of households with heat pumps is about 60%, 43%, and 41%, respectively. The fact that countries with average winter temperatures of negative degrees Celsius have had such success offers additional support for why colder regions in the U.S. may be able to take greater advantage of heat pump technology.

Image (above) of a ductless air-source heat pump (Source: U.S. Department of Energy)

Internationally, other nations have had a build-out years in the making. Japan, for example, has one of the highest energy efficiency rankings, thanks in part to the 90% of households that use heat pumps. As a result, the country’s electricity consumption has dropped 40% in the past decade. Meanwhile, in China, heat pumps for cooling are common in northern urban provinces. During the winter, large scale heat pump networks, otherwise known as district heating, cover 80% of the region’s population. The IEA estimates the current global number of installed heat pumps to be at about 1.5 million per month, and projects 5 million per month in 2030.

What does the future hold for heat pumps?

Heat pumps are a clean, affordable, and efficient substitute for traditional fossil fuel furnaces and other heating/cooling systems. The growing interest in the technology has influenced many nations to establish incentives and make it more affordable, as communities try to scale up their resilience. The clean technology has the mechanical quality of providing both heating and cooling, and has been successfully tested in numerous climates. The flexible application mixed with the different kinds of heat pumps available gives the technology an advantage over fossil fuel alternatives. All in all, heat pumps are gradually becoming a staple for heating and cooling.

* * *

For more information on heat pump policies and incentives, visit the Database of State Incentives for Renewables and Efficiency (DSIRE), or contact us to learn about custom research offerings.

The Many Incentives for Homeowners in the Inflation Reduction Act

By: Brian Lips, Sr. Policy Project Manager

The Inflation Reduction Act of 2022 (H.R. 5376) is a sweeping piece of legislation, representing the largest ever investment in renewable energy, energy efficiency, and electric vehicles by the federal government. The bill extended and modified a number of existing tax incentives with new requirements or bonuses to favor or require onshore manufacturing, development within disadvantaged communities, and the use of fair labor practices. Congress also addressed challenges historically faced by non-profits and other tax-exempt entities by making new mechanisms to monetize the tax credits through direct pay or a transfer to an unrelated taxpayer. The bill also established several new incentives and appropriated funding to various federal agencies and state governments to further incentivize renewable energy, energy efficiency, and electric vehicles. 

While there are many key provisions in this bill, and DSIRE is being updated to incorporate all those that fit within its scope, this article focuses on the provisions of the bill that target the residential sector. As a result of the Inflation Reduction Act, there are now five tax credits that can benefit a homeowner or a prospective car owner, as detailed below. Additional incentive programs will also be made available through state energy offices using targeted appropriations from the bill. 

Electric Vehicles 

In its current form, the Plug-In Electric Drive Vehicle Tax Credit awards a tax credit of up to $7,500 to taxpayers who purchase a new electric vehicle. The credit is designed to decrease over time for each manufacturer as they produce more electric vehicles. The Inflation Reduction Act extended the tax credit through December 31, 2032, but adopted new rules that fundamentally change the tax credit and the vehicles that will qualify for it. Beginning on January 1, 2023, electric vehicles will only qualify for a tax credit if the final assembly occurs in North America and certain components meet the sourcing requirements established by the bill. 

Vehicles purchased in 2023 will qualify for a tax credit of $3,750 if 40% of the critical minerals used in their batteries are extracted and processed in the U.S. or another nation with which the U.S. has a free trade agreement, or the batteries are recycled in North America. These percentages increase over time. Vehicles can qualify for an additional $3,750 tax credit if an increasing percentage of battery components are manufactured and assembled in North America. The bill also caps the purchase price of vehicles and adjusted gross income of taxpayers to be eligible for the credit, and establishes a mechanism for the credit to be transferred to the vehicle dealer in exchange for a point of sale discount to the buyer. 

The Previously-Owned Clean Vehicle Tax Credit is a new tax credit adopted by the Inflation Reduction Act for used electric vehicles purchased by a qualifying taxpayer after December 31, 2022. The credit is worth the lesser of $4,000 or 30% of the sale price. The model year of the vehicle must be at least two years earlier than the calendar year in which the taxpayer acquires it, and the vehicle must have a gross vehicle weight of less than 14,000 pounds. The transaction must take place through a dealer and carry a sale price of $25,000 or less, and be the first transfer since the establishment of this tax credit. The credit is not available for taxpayers with a modified adjusted gross income exceeding: $150,000 for a joint filing, $112,500 for a head of household, or $75,000 for a single filing. As with other tax incentives, the Inflation Reduction Act established a mechanism for a taxpayer to transfer this credit to the dealer in exchange for a point of sale discount.    

The Alternative Fuel Vehicle Refueling Property Tax Credit provides a tax credit for the purchase of residential and commercial electric vehicle chargers, but it expired at the end of 2021. The Inflation Reduction Act reinstated the credit for purchases made in 2022 and extended the expiration date to December 31, 2032. Residential chargers can qualify for a tax credit of 30% of the cost up to $1,000. Equipment purchased for a non-residential purpose must meet certain labor requirements to qualify for the full 30% tax credit, but residential chargers do not.  

Renewable Energy and Energy Efficiency

The Residential Energy Efficiency Tax Credit was created by the Energy Policy Act of 2005, and provides a tax credit for certain energy efficient purchases by homeowners. While the credit previously had a lifetime cap of $500 and periodically expired altogether, the Inflation Reduction Act extended it through December 31, 2032 and increased its value for purchases made after December 31, 2022. The lifetime cap for the credit was removed in favor of caps on the amount of tax credit for each individual purchase or improvement, and an annual cap of $1,200 with some exceptions. Natural gas or electric heat pumps and natural gas or electric heat pump water heaters can qualify for a 30% tax credit up to $2,000. Other qualifying water heaters and HVAC equipment can qualify for a tax credit of 30% up to $1,200. Building envelope improvements, including windows, skylights, doors, insulation, and air sealing can also qualify for tax credits. 

The Residential Renewable Energy Tax Credit was also created by the Energy Policy Act of 2005, and provides a tax credit for renewable energy equipment purchased by homeowners. Previous legislation had established a phaseout of the credit, decreasing to 22% in 2023 and expiring completely in 2024. The Inflation Reduction Act delayed the phaseout of the credit and extended the expiration date. Eligible equipment placed in service by December 31, 2032 can receive a tax credit of 30%. The tax credit is scheduled to decrease in 2033 and 2034, and then expire altogether in 2035. The Inflation Reduction Act also made standalone energy storage systems eligible for this tax credit for the first time. 

Residential Tax Credits Available in 2023

Equipment Type

Incentive 

Maximum Incentive

New Electric Vehicles

$7,500

$7,500

Used Electric Vehicles

30%

$4,000

EV Chargers

30%

$1,000

Windows and Skylights*

30%

$600 per year

Exterior Doors*

30%

$250 per door, 

$500 per year for all doors

Insulation*

30%

$600 per year

Air Sealing*

30%

$600 per year

Natural Gas or Electric Heat Pumps

30%

$2,000

Natural Gas or Electric Heat Pump Water Heaters

30%

$2,000

Central Air Conditioners*

30%

$1,200

Gas, Propane, or Oil Water Heaters*

30%

$1,200

Gas, Propane, or Oil Water Boilers*

30%

$1,200

Biomass Stoves

30%

$,2000

Panelboards, Sub-panels, Branch Circuits associated with an above efficiency improvement*

30%

$1,200

Solar PV Systems

30%

N/A

Solar Water Heaters

30%

N/A

Fuel Cells

30%

N/A

Small Wind Systems

30%

N/A

Geothermal Heat Pumps

30%

N/A

Stand-Alone Battery Storage Systems

30%

N/A

* Tax credits for these items are subject to a collective annual cap of $1,200 per taxpayer

Future Incentives    

The Inflation Reduction Act also appropriated money to establish rebate programs at the state-level for residential energy efficiency improvements. The bill distributes $4.3 billion to state energy offices through 2031 to implement Home Energy Performance-Based Whole-House Rebate (HOMES) programs. The state energy offices will determine the final design of these programs, but the Inflation Reduction Act provides the broad parameters and sets the maximum incentive levels. The programs will target individuals and aggregators carrying out energy efficiency upgrades of single-family or multi-family homes with incentives based on the modeled energy savings of the retrofits. Retrofits to single-family homes that achieve modeled energy savings of 35% or more can receive a maximum rebate of $4,000 or 50% of the project costs, whichever is less. Retrofits to multi-family homes that achieve modeled energy savings of 35% or more can receive a maximum rebate of $4,000 per dwelling unit, with a maximum of $400,000 per building. Larger incentives will be available for qualifying low- or moderate-income houses. 

The Inflation Reduction Act also appropriated $4.5 billion to state energy offices and tribal governments to implement prescriptive energy efficiency rebate programs through the  High-Efficiency Electric Home Rebate Program. As with the HOMES program, the Inflation Reduction Act establishes the general guidelines for the program and the maximum incentives that the resulting programs can provide. The bill also includes a list of the appliance types and non-appliance upgrades eligible for incentives through the program, including heat pumps, heat pump water heaters, electric stoves, cooktop ranges, electric heat pump clothes dryers, insulation, air sealing, ventilation, and electric wiring. The bill also requires state energy offices to make these incentives available as point-of-sale rebates.  

State energy offices will need to submit their plans for these rebate programs and have them approved by the Department of Energy before they can implement them. It is unclear how quickly these programs will be made available, but they will be separately listed by state in DSIRE as soon as they are approved.