The enactment of the Inflation Reduction Act (IRA) is a transformative victory for the climate and the United States’ clean energy economy broadly – and for the PACE industry specifically.
IRA provides the PACE industry a massive boost, thanks to an array of building decarbonization tax credits and rebates designed to incentivize electrification and energy efficiency in residential and commercial buildings. Property owners’ interest in reducing their buildings’ emissions will spike thanks to these incentives, and projects will be more likely to be justified by their savings to investment ratio because the law will make it less costly to use energy efficient materials and equipment. More PACE-eligible projects will mean more opportunities for PACE to deliver low-cost financing for property owners. Most exciting, the law’s most significant impacts for PACE may only become apparent as the substantial grant and loan programs and clean energy manufacturing policies are realized.
Commercial Building Incentives:
- The IRA increases the 179D deduction from $1.80 per square foot currently to $2.50-$5.00/square foot. The size of the increase depends on the project’s efficiency gains and if the construction meets “bonus rate” labor standard incentives (pay prevailing wage, apprenticeship requirements). The law also expands eligibility by lowering the previous 50% energy efficiency threshold to 25%. The IRA also creates a pathway for retrofits to buildings which are five years or older under 179D. The retrofit must be pursuant to a “qualified retrofit plan” and the building owner must show that the retrofit in fact reduced that building’s annual energy usage intensity by at least 25 percent. (Sec. 13303)
- The IRA expands the New Energy Efficient Home Credit to apply for all multifamily building construction, providing a $2,500-5,000 per unit credit. (Sec. 13304)
- The IRA provides over $837 million in grants and loans through HUD for sustainability improvements to affordable housing, which is authorized to seed up to $4B in loans. Eligible projects include energy efficiency, climate resilience, building electrification and more. (Sec. 30002)
Residential Building Incentives:
- The Energy Efficient Home Improvement credit allows households to deduct from their taxes up to $600 percent of the purchase and installation cost of insulation, windows and skylights or electric panel upgrades to their homes, and up to $1,200 for the installation of a heat pump or heat pump water heater. (Sec. 13301)
- Residential Clean Energy credit for up to 30 percent of the cost of on-site residential solar electric, battery or other renewable energy projects. (Sec. 13302)
- The IRA provides $8.5 billion to establish in partnership with states rebate programs for a variety of home energy upgrades under the Home Owner Managing Energy Savings (HOMES) rebate program including heat pumps, insulation, main panel upgrades and electric wiring, particularly for LMI households. (Sec. 50121 and Sec. 50122).
Grants and Loan Programs:
- $1 billion to states and local governments to upgrade building codes, which will create demand for PACE eligible upgrades in new construction. (Sec. 50131)
- $5 billion for states and local governments to establish and implement greenhouse gas reduction plans. (Sec. 60114)
- IRA establishes the “Greenhouse Gas Reduction Fund” which allocates $7 billion to EPA for states and local governments to provide grants, loans and technical assistance to help communities to deploy zero-emission technologies like residential rooftop solar, or otherwise take action to reduce emissions. In addition, $20 billion is provided to provide resources to green banks and CDFIs for clean energy projects. (Sec. 60103).
- The language in these grant and loan programs is expansive, and could easily be read to allow states or local governments to, for instance, fund credit enhancements or technical assistance grants which enable the expansion of PACE programs.
Clean Energy Manufacturing Policy:
- IRA expands and extends the Advanced Energy Project Credit (Sec. 13501) and Advanced Manufacturing Production Tax Credits (Sec. 13502) which are designed to bolster the domestic manufacture of solar panels, heat pumps, batteries and a number of other clean energy technologies. In addition the law provides $60 billion to onshore clean energy manufacturing across the supply chain of clean energy technologies. Taken together, these investments will strengthen the clean energy manufacturing sector and reduce costs to consumers for this equipment, which will have the downstream effect of significantly increasing the likelihood that more building projects will “pencil out.”
PACENation will continue to work with our members, the federal government, states, local governments, and other stakeholders to closely monitor the implementation of IRA to identify key opportunities for PN members to advance the use of PACE to create more energy-efficient, resilient buildings.