The Inflation Reduction Act (IRA) became law one year ago, on August 16, 2022. Its billions in investment for the clean energy transition includes considerable resources to spur heat pump adoption across the country. But how much of an effect will it have? Will the IRA on its own accelerate heat pump adoption enough to help the United States meet its climate goals? And if not, what other policies and regulations might states consider to bridge the gap?
RAP and CLASP are seeking to answer these questions in a paper that will be released this fall. Our research models the IRA’s effect on the uptake of electric heat pumps and concludes that while the IRA is a major step forward, state policies will be needed to propel even greater heat pump adoption to fully bridge the gap. The paper will present several policies and regulatory recommendations to help states build on the IRA to further increase heat pump adoption.
The IRA and Heat Pumps
The IRA contains hundreds of billions of dollars in new spending and tax breaks intended to modernize the U.S. energy system, promote clean energy, reduce health impacts, and increase tax revenues. Most importantly, the IRA provides a framework for U.S. economy-wide GHG emission reduction.
One important aspect of the clean energy provisions within the IRA is heat pump adoption. Heat pumps are the key technology for decarbonizing buildings and will need to be deployed rapidly to realize emission reductions in the buildings sector commensurate with meeting emission reduction goals.
The IRA programs that support the deployment of clean and efficient heat pumps will be important drivers in scaling the adoption of these important technologies in American homes and businesses. Two of the more significant programs to heat pump adoption are the High-Efficiency Electric Home Rebate Act (HEEHRA) and the Energy Efficient Home Improvement Credit (Section 25C) tax credit. HEEHRA provides point-of-sale consumer rebates on appliances including heat pumps, in order to enable low- and moderate-income households across America to electrify their homes. The 25C tax credit provides up to $2,000 in tax credits to lower the cost of a heat pump installation, a savings of up to 30 percent.
The Impact of the IRA on Heat Pump Adoption
Our paper will present an analysis of the impact of the IRA on household adoption of heat pumps. The analysis compares a business-as-usual heat pump adoption scenario with a scenario reflecting incentives from the two key IRA programs, HEEHRA and 25C. It finds that the IRA will prompt more than 2 million households to switch from gas to electric heat pumps by 2032. Considering that 61% of U.S. households used natural gas for at least one energy end use in 2020, this leaves plenty of space for state policies to add to what the IRA is doing.
This modeling adds to the existing literature, which indicates that while the IRA is a major step forward, decarbonization of the building sector will require additional policy initiatives to get to a path toward full building electrification.
Policies for States Looking to Expand Heat Pump Adoption
State and local governments have a range of policies and program options that can help clear barriers to heat pump deployment. These options have been tried and tested and can be ramped up to create a supportive market environment, provide additional funding to support heat pumps, give consumers tools and information they need to make educated choices, and enable more equitable receipt of benefits for citizens. State-level options for promoting the uptake of heat pumps include:
- Improved public access and participation will ensure that the IRA delivers GHG savings in all communities, especially with communities of color, indigenous communities, low-and moderate-income communities, and other communities that may be underserved by agency programs.
- A clean heat standard can apply to wholesale fuel providers and promote the adoption of cleaner and more efficient alternatives to fossil heating fuels, for example, heat pumps.
- Hybrid heat policies can support the practice of adding a heat pump to supplement a building’s existing fossil heating system to both cool and heat a home more efficiently and at lower cost.
- Energy efficiency programs can be ramped up and focused on supporting heat pumps in buildings whenever existing systems are being replaced.
- Flexible rate designs with time-varying volumetric charges can promote flexible operation of heat pumps, while reducing costs for consumers and supporting integration of renewable energy.
- Workforce training and development is essential to upskill existing energy system workers and train new workers on heat pump technologies.
- Tariff on-bill financing can help manage up-front costs for customers who would otherwise not be able to afford efficient and clean appliances like a heat pump.
The IRA is a great leap toward electrification, decarbonization, and incentivizing the deployment of heat pumps. States and localities can build on the IRA and bridge the remaining decarbonization gap by adopting their own policies and programs that further heat pump adoption.