Inflation Reduction Act Paves the Way for Faster Transition to Clean Energy in the US

Biden signs the Act into law after the Senate and House of Representatives approved it


In a significant development, President Joe Biden signed the ‘Inflation Reduction Act of 2022,’ which the U.S. House of Representatives and the Senate had passed. The Act addresses issues of climate change, taxes, healthcare, and inflation.

The Act proposes $369.75 billion in energy security and climate change programs over the next ten years.

The Act would deliver billions of dollars in taxes and other incentives to U.S. solar manufacturers. It will equip them with government support to compete with Chinese and Canadian solar energy products.

Made in the USA

To boost domestic manufacturing (all steel, iron, and manufactured products must be made in the U.S. to be considered domestic content), the Act states that manufactured products will be considered U.S.-made if at least 40% of all the manufactured products used in the projects are made in the United States. The percentage would rise for projects that start construction after 2024 and eventually reach 55% for projects to be constructed after 2027.

Projects in energy communities could qualify for another 10% investment tax credit (ITC).

Incentives for consumers

The Act provides a range of incentives to consumers to decrease utility bills. This includes direct consumer incentives to buy energy-efficient and electric appliances, clean vehicles, and rooftop solar, and invest in home energy efficiency, with a significant portion of the funding going to lower-income households and disadvantaged communities.

The ITC for residential consumers has increased from 26% to 30% until 2033 when it will drop to 26% in 2033, 22% in 2024, and to zero in 2035. Standalone energy storage is eligible for ITC for installations of 3 kWh or more.

Families that take advantage of clean energy and electric vehicle (EV) tax will save more than $1,000 per year.

Also, there will be $14,000 in direct consumer rebates for families opting for heat pumps and other energy-efficient home appliances, helping families to save $350/year.

The Act provides $4.3 billion to state energy offices to establish rebates for various home energy upgrades under the Home Owner Managing Energy Savings (HOMES) rebate program. Rebates for home energy retrofits up to $8,000 per home or 80% of the project cost if the project saves at least 35% will be provided. Multi-family rebates are also supported with different rebate amounts.

Nearly 7.5 million more families will be able to install solar on their roofs with a 30% tax credit, helping families save nearly $9,000 over the life of the solar system or $300/year.

The legislation also has provisions for up to $7,500 in tax credits for new EVs and $4,000 for used EVs, helping families save $950/year.

The government aims to power homes and businesses with clean energy by 2030 by deploying 950 million solar panels, 120,000 wind turbines, and 2,300 grid-scale battery plants.

The Act has set aside $9.6 billion to develop advanced cost-saving clean energy projects at rural cooperatives serving 42 million people.

Greenhouse Gas Reduction

The Inflation Reduction Act would also help reduce greenhouse gas emissions by nearly one gigaton by 2030, or a billion metric tons, which is nearly ten times more than any other climate legislation ever enacted. The Environmental Protection Agency will oversee the ‘Greenhouse Gas Reduction Fund’ totaling $29 billion.

Investment and Production Tax Credit

The business ITC has been extended to 30% for projects that have started or will start construction before the end of 2024, and the credit will become available for standalone storage projects. Solar also becomes eligible for the production tax credit (PTC), which is currently at $0.026/kWh for 2022 and rises with inflation.

The ITC could increase to 50%, and in some cases, to 70% if domestic content requirements are met, and the project is located in certain areas.

It would provide a new 30% investment tax credit for standalone storage. Pumped-storage hydroelectric projects also qualify for this tax credit as standalone storage.

A total of $10 billion has been allocated for the Section 48C tax credits, and up to $6 billion will go to projects located outside of census tracts where a coal mine closed after 1999 or a coal-fired power plant was retired after 2009.

Under the new Act, projects can choose investment or production tax credits. Standalone storage is eligible only for the investment tax credit. The ITC becomes available for interconnection costs for projects with a net output of less than 5 MW.

Last year, the U.S. Congress passed the $1 trillion Bipartisan Infrastructure Law (Infrastructure Investment and Jobs Act), a once-in-a-generation investment in the nation’s history aimed at improving the country’s infrastructure.

Recently, the Biden administration announced $56 million in funding, alongside a new set of initiatives to augment the innovation in solar manufacturing and recycling to make energy more cost-effective and create more jobs.

Earlier, the U.S. Department of Energy (DOE) had announced $3.16 billion in funding from President Biden’s ‘Bipartisan Infrastructure Law’ to expand domestic battery manufacturing, bolster domestic supply chains, and spur job creation. DOE will also set aside $60 million in grants to support second-life applications for batteries once used to power EVs and new processes for recycling materials back into the battery supply chain.