The Inflation Reduction Act of 2022 (IRA) is the largest climate-based investment ever made by the federal government. The legislation commits $369 billion on behalf of energy security and climate change mitigation over the next decade with an overreaching goal to reduce carbon emissions by 40% by 2030 compared to 2005 levels.
The bill, which was approved along partisan political party lines, has drawn enthusiastic reactions — both positive and negative in nature — from government officials, industry associations, efficiency aficionados, and more.
While the bill covers numerous industries, this article will showcase the provisions that matter most to the commercial comfort engineering sector, provide some insight into what to expect, and allow those working in the industry to share their opinions.
Per the bill’s authors, the IRA is designed to lower energy costs, increase energy security, and speed up the decarbonization of all aspects of the economy. These objectives will be achieved through various energy provisions targeted at the commercial sector, including Sections 45, 48, 179D, and more.
The IRA provides critical additions and updates to Section 45 to the U.S Internal Revenue Code of 1986. Section 45 credits, which account for electricity produced from certain renewable sources (including geothermal, solar, and wind facilities), have been extended through 2024.
Under new Sec. 6417, eligible taxpayers can elect to treat certain energy credits as tax payments. For facilities owned by S corporations or partnerships, the S corporation or partner will make the election.
Section 45Q — Carbon Oxide Sequestration Credit: This section was expanded and enhanced to provide a tax credit for the construction of carbon capture facilities. Applications utilizing carbon capture, direct air capture, or carbon utilization beginning prior to Jan. 1, 2033, will qualify for the Section 45Q tax credit. In addition to extending carbon capture credits through 2033, the IRA also decreases the requirements for additional carbon capture facilities to qualify.
The base tax credit has been expanded, allowing industrial facilities and power plants to gain $85 per metric ton for CO2 stored in geologic formations, $60 per ton for the beneficial utilization of captured carbon emissions, and $60 per ton for CO2 stored in oil and gas fields.
The IRA also supports a related technology called direct air capture (DAC), which removes carbon dioxide that has already been emitted from the atmosphere.
Section 45V — Clean Hydrogen Production Credit: The credit covers the production of qualified clean hydrogen produced at a qualified clean hydrogen production facility over a 10-year period, beginning on the date the facility was placed into service. A qualified clean hydrogen production facility must be owned by the taxpayer claiming the credit, produce clean hydrogen, and be under construction before Jan. 1, 2033.
The IRA creates two provisions for clean hydrogen — a production tax credit (PTC)and an investment tax credit (ITC) — granting owners of production facilities the option to elect either of the two.
On the PTC side, the base tax credit is set at 60 cents per kilogram of clean hydrogen but increases to $3 per kilogram when the hydrogen’s life-cycle carbon intensity measures between zero and 0.45 kilograms of CO2 equivalent (CO2e) per kilogram of hydrogen and the taxpayer complies with the prevailing wages and apprenticeship requirements.
The IRA also includes a direct pay option, providing the exact benefit instead of a tax credit, for the first five years of production. Nonprofit organizations and co-ops are eligible to receive direct pay for all 12 years of the credit. Alternatively, taxpayers may monetize the credits by transferring them to another taxpayer.
On the ITC side, a base credit of 6% is available multiplied by an applicable percentage, which is 100% if the life-cycle GHG emissions rate is less than 0.45 kilograms of CO2e (carbon dioxide equivalent) per kilogram of hydrogen (adjusted downward as shown below based on the life-cycle greenhouse gas emissions rate). The increased credit rate is five times the base rate (i.e., up to 30%) if prevailing wage and apprenticeship requirements are met.
The applicable percentage is 1.2% (6% if prevailing wage and apprenticeship requirements are met) if the life-cycle greenhouse gas emissions rate is not greater than 4 kilograms of CO2e and not less than 2.5 kilograms of CO2e; 1.5% (7.5%) if the life-cycle greenhouse gas emissions rate is less than 2.5 kilograms of CO2e and not less than 1.5 kilograms of CO2e; and 2% (10%) if the life-cycle greenhouse gas emissions rate is less than 1.5 kilograms of CO2e and not less than 0.45 kilograms of CO2e.
In addition to the PTCs for clean hydrogen, the IRA creates a 30% credit for energy storage technology constructed before Jan. 1, 2025, which includes hydrogen-related storage.
Retrofit facilities are allowed; however, the clean hydrogen credit cannot stack with the carbon capture and sequestration tax credit.
Section 45X — Advanced manufacturing credit: Section 45X provides a manufacturing production credit for U.S. production of various photovoltaic cells and other solar and wind energy property.
Section 45Y — The Clean Energy Production Tax Credit: To encourage the clean production of electricity, a new credit was created in Section 45Y supporting the production of electricity at qualified facilities. Qualified facilities (which includes certain expansions of existing facilities) must be placed in service after Dec. 31, 2024, and have a GHG emissions rate of zero.
Section 48(a) of the Internal Revenue Code (IRC) grants project owners eligibility for federal business energy investment tax credits for installing designated renewable energy generation equipment.
The amended Section 48(a)(3) will allocate $10 billion in tax credits to qualifying projects starting in 2023. Approximately $4 billion will be set aside for qualifying projects in census tracts in which a coal mine or coal power plant has closed and in which no project received a previous 48C credit allocation.
Projects will receive a base credit rate of 6%, applied to qualified investments utilized within advanced energy projects. To receive a bonus rate of 30%, taxpayers must satisfy prevailing wage and apprenticeship requirements.
Eligibility has been modified to include projects to establish, expand, or re-equip facilities for the production, manufacturing, or recycling of advanced grid, energy storage, and fuel cell equipment; equipment for the production of low-carbon fuels, chemicals, and related products; renewable energy and energy efficiency equipment; equipment for the capture, removal, use, or storage of carbon dioxide; and advanced light-, medium-, and heavy-duty vehicles and related components and infrastructure.
The credit is also allowed for projects that are designed to reduce carbon emissions at existing industrial facilities by at least 20%.
The Secretary of Energy will determine allocations to projects each year with a requirement that property is placed in service within four years of the allocation date.
The expanded provision allows taxpayers to claim a tax credit for the cost of energy property across numerous applications including:
- Thermal storage: For thermal energy storage property, the provision provides a base credit rate of 6% and a bonus credit rate of up to 30% for projects placed in service after Dec 31 and begin construction before Jan. 1, 2025.
- Geothermal heat pumps: The credit covers “equipment which uses the ground or ground water as a thermal energy source to heat a structure or as a thermal energy sink to cool a structure.” The credit, which phases out over time, starts with an initial base credit of 6% and a bonus credit rate of 30% of the basis of energy property. The base credit rate is 6% for property that begins construction before Jan. 1, 2033, and which is placed in service after Dec. 31, 2021. The base credit rate phases down to 5.2% for property that begins construction after Dec. 31, 2032, and before Jan. 1, 2034, and 4.4% for property that begins construction after Dec. 31, 2033, and before Jan. 1, 2035.
- Domestic content: Taxpayers may claim an increased credit with respect to energy property created in the U.S. that is placed into service after Dec. 31 if such property meets specific domestic content requirements. The increase is 2 percentage points (or 10 percentage points if the taxpayer meets the prevailing wage and apprenticeship requirements).
- Energy communities: For any energy property that is placed in service within an energy community, the credit percentage is increased by 2 percentage points (or 10 percentage points if the taxpayer meets the prevailing wage and apprenticeship requirements).
179D, the “Energy Efficient Commercial Buildings Deduction,” applies to property placed in service after Dec. 31. The provision updates and expands the energy-efficient commercial buildings deduction by increasing the maximum deduction, determined on a sliding scale.
The maximum value of the base deduction is $0.50 per square foot, increased by 2 cents per square foot for every percentage point by which the designed energy cost savings exceed 25% against the reference standard, not to exceed $1 per square foot.
The value of the bonus deduction is $2.50 per square foot, increased by 10 cents per square foot, for every percentage point by which designed energy cost savings exceed 25% against the reference standard, not to exceed $5 per square foot. To receive the bonus, projects must fulfill prevailing wage and apprenticeship requirements.
The provision only allows deductions for a building for three years. For property to qualify, it must meet one of the following requirements:
- Installation of such property begins prior to the date that is 60 days after the secretary publishes guidance relating to prevailing wage and apprenticeship requirements;
- Installation of such property satisfies prevailing wage and apprenticeship requirements. The provision updates the eligibility requirements for energy efficiency standards; and
- Property must reduce associated energy costs by 25% or more in comparison to a building that meets the more recent of either:
- ASHRAE Standard 90.1-2007 or a more recent standard published by ASHRAE, the Air Conditioning Engineers, and the Illuminating Engineering Society of North America; and
- The provision eliminates the availability of a partial allowance of credits and allows taxpayers to take an alternative, parallel deduction for energy-efficient lighting, HVAC, and building envelope costs placed into service in connection with a qualified retrofit plan.
The value of the base deduction is determined by the reduction in a building’s energy usage intensity (EUI) upon completion of the retrofit, equal to 50 cents per square foot, increased by 2 cents per square foot for every percentage point by which the reduction in EUI exceed 25%, not to exceed $1 per square foot.
The value of the bonus deduction is $2.50 per square foot, increased by 10 cents per square foot for every percentage point by the reduction in EUI exceeding 25% against the reference standard, not to exceed $5 per square foot. To qualify for the alternative deduction, a building retrofit project must reduce a building’s EUI by no less than 25%.
IRA’s Potential Impact
To help understand its net effect, Energy Innovation Policy and Technology LLC modeled the climate and energy provisions of the IRA using the U.S. EPS, an open-source and peer-reviewed climate policy model that estimates climate and energy policy impacts using publicly available data. Energy Innovations’ research confirms:
- Passing the IRA will reduce GHG emissions an estimated 820-1,200 MMTs of carbon dioxide equivalent (CO2e) in 2030, despite the oil and gas leasing requirements. Those reductions would reduce U.S. emissions 37%-43% below 2005 levels and make significant progress towards achieving the 2030 U.S. NDC of 50%-52% below 2005 GHG emissions;
- The IRA could create up to 1.3 million new jobs in 2030, concentrated in the manufacturing, construction, and service industries, and avoid nearly 4,500 premature deaths annually by reducing air pollution, both by 2030.
- Through greater clean energy deployment, the bill could avoid up to 4,500 premature deaths and up to 119,000 asthma attacks annually by 2030;
- Combined with state action and forthcoming federal regulations, the IRA puts the U.S. within reach of its Paris Agreement commitment to cut emissions 50%-52% by 2030; and
- The IRA will strengthen the U.S. economy by creating up to 1.3 million new jobs
What impact will the IRA have on the energy industry? Well, it depends on who you ask.
Paul Fakes, senior manager of government relations with the American Society of Mechanical Engineers (ASME), believes the bill provides important incentives for clean energy development and deployment priorities supported by the organization, many of which are complimentary to last year’s bipartisan infrastructure law.
“The new and expanded tax incentives will offer important assistance for homeowners to upgrade their appliances to more energy-efficient water heaters, heating and cooling systems, and other home efficiency upgrades, including weatherization and electrical renovation, to support rooftop solar and home electric vehicle charging.”
Congress provided long-term stability for homeowners and manufacturers by providing clear guidance on eligibility standards as well as a long-term authorization — through 2032 — for many of the key energy efficiency credits and incentives newly reworked by Congress to increase their impact on progress towards meeting U.S. emission reduction goals. They’ve also backed up a lot of these incentives with grant assistance for energy planning and conservation activities, said Fakes.
“For example, the bill provides over $670 million in grants for states and localities to assist in the adoption of the latest building codes, including those that meet or exceed the 2021 International Energy Conservation Code for residential buildings or the ANSI/ASHRAE/IES Standard 90.1-2019 for commercial buildings,” said Fakes.
Through it all, implementation will be key to ensuring success, both in consumer awareness and ease of access to eligibility information for homeowners and businesses.
“The bill places a great deal of responsibility on states to engage in energy and climate response efforts designed to meet the needs of that particular region,” concluded Fakes. “So, effective leadership at the state level to direct federal resources will be a key measure of success in the short term.”
Officials at RMI — a nonpartisan, nonprofit organization committed to transforming global energy systems across the real economy — believe approximately 115 million square feet of commercial space will likely be retrofitted by way of tax credits and rebates.
Because the building retrofit tax credits are uncapped and extend for a decade, the bill could potentially enable even more energy efficiency and electrification retrofits than currently envisioned, stated RMI reps. The law also includes more than $30 billion in flexible GHG reduction spending for states and cities. The federal government, the largest real estate holder in the nation, will have new resources and requirements to address the GHG footprint of its properties. And new funding for embodied carbon labeling and environmental product declaration systems for construction materials will help develop the market for lower embodied carbon in buildings nationwide.
Megan Owen, vice president of enterprise sales and marketing, McKinstry, said the IRA represents an unprecedented opportunity to innovate waste and climate harm out of the built environment.
“The IRA renews certainty for the market,” she said. “We see energy codes strengthening across the country and the regulatory market moving to drive cleaner sources of energy at the local and national levels [e.g., bans on natural gas in cities or 100% clean initiatives across utility territories]. The tax incentives, the ITC and PTC in particular, provide much needed financial support for building owners and occupants transitioning their carbon footprint over the next decade and beyond to comply with the changing landscape.”
In practical terms, Owen said distributed energy resources (DERs), like solar, storage, and heat pumps, will likely be more affordable for commercial building owners and/or residential consumers. And because the cost has often been a barrier to entry, engineers will likely see more design and system choices based on the outcomes clients want instead of solely focusing on first costs.
“On its face, this is a game changer for clients,” Owen said. “Because we are already designing projects that will go into service in 2025 or later, this has an immediate effect on clients' project financials.”
In the short term, she believes the legislation will allow the firm to ramp up its investments in staff and resources that focus on solar, battery storage, and distributed energy solutions.
“These additional hires will bolster our existing teams across the U.S. already working to support clients as they invest in their infrastructure, reduce operating expenses, and achieve ambitious decarbonization goals,” she said. “Regardless of where a client is on the spectrum of transformation, this bill enables their journey to develop a more efficient and resilient infrastructure.”
Vincent Sakraida, P.E., LEED AP, vice president and director of mechanical engineering, WSP, said the IRA is the culmination of the built environment's 20-plus years of momentum toward energy conservation and environmentalism, adding that WSP has actively implemented electrification and decarbonization for a number of clients the past several years.
“Realizing the momentum toward electrification and decarbonization, the firm has dedicated sustainability consultants to assist clients and in-house staff in selecting the best technologies for specific projects,” he said. “Long-term plans are to ensure all in-house staff are properly trained in the advantages and disadvantages of the different technologies and to actively assist our clients in developing technology implementation strategies to take advantage of tax credits and maximize energy savings.”
Martha Larson, director of sustainability, RMF Engineering, called the legislation "significant," stating it will serve as a catalyst to continued development.
“In just the past few years, RMF has seen exponential growth in requests for sustainable building design and energy decarbonization master plans, particularly for campus-scale district energy systems,” she said. “At this point, there are proven technologies and several completed projects that demonstrate how to achieve substantial emissions reductions within the built environment. With $369 billion focused on clean energy and carbon reduction, the IRA will have a catalyzing effect. Many plans will now move into implementation. We expect to see many more shovels in the ground.”
Larson is confident the IRA will help solve two of the firm’s decarbonization practice group’s biggest challenges: education and capital.
“The initiatives championed by the IRA are essential to increasing overall awareness and education on why electrification is a promising path toward reducing emissions,” she said. “More than raising awareness, the IRA outlines powerful financing measures that will be integral to turning ambitious emissions reduction goals into developed designs and implementation plans. Upfront capital funding is one of the biggest barriers to implementing a multiyear decarbonization plan. A life-cycle cost analysis may justify the long-term financial benefits of electrification, but managing the upfront capital costs is a challenge. The IRA promises tax credits and incentives for renewable energy and low-carbon heating and cooling equipment, which can make a low-carbon transition financially more favorable than maintaining and replacing traditional fossil fuel-based equipment. The IRA extends those credits to nonprofit entities, like colleges and universities, who can now get direct payments instead of setting up separate entities to take advantage of the incentives. As a result, we anticipate that RMF's decarbonization practice group will soon be busier than ever as our clients begin to tap into these benefits.”
A Missed Opportunity
While the bill brings a certain level of excitement to a portion of the industry, there is another segment that isn’t as enthusiastic.
“Democratic lawmakers now own the consequences of this radical bill, including the potential economic fallout, additional inflation, more workforce shortages, and high materials prices that we could see in the near future,” said Kristen Swearingen, vice president of legislative and political affairs, Associated Builders and Contractors. “It imposes anti-growth tax policies and injects hundreds of billions of federal dollars into the economy at a time when we are facing record-high inflation.
“Penalizing employers that pay wages based on experience, quality, and market rates and limiting opportunities for millions of construction workers who choose not to join a union is no way to legislate,” she continued. “The so-called Inflation Reduction Act will provide an increased tax credit for private employers that impose Davis-Bacon prevailing wage requirements and government-registered apprenticeship labor-hour quotas. This unprecedented expansion of prevailing wages not only puts contractors that use industry-recognized apprenticeships at a serious competitive disadvantage when it comes to winning contracts for these critical energy projects, but it also limits the ability of many otherwise-qualified small businesses and skilled construction professionals from participating in these projects.
“While the bill provides $250 billion in incentives for clean energy projects, 83% of the value of these credits lies in projects that nonunion workers will be largely prevented from participating in due to these labor restrictions,” concluded Swearingen. “For an industry facing a workforce shortage of 650,000 in 2022, this is no time to impose restrictive labor policies that would exclude nearly nine out of 10 U.S. construction workers from building America’s energy infrastructure.
From its name to its lack of a cost-analysis study, John Varley, P.E., FASHRAE, HBDP, LEED AP BD+C, mechanical engineering manager, AAA Engineering, has many concerns regarding the potential impact – or lack thereof – of the IRA.
“My first concern is what it will do to the economy,” he said. “Stimulating demand with the highest inflation in 40 years doesn’t reduce inflation. Further, the parts of it I have studied seem to be directed at invigorating demand for anti-carbon energy sources with no regard as to what this will do to the world.”
Assuming this legislation is successful at electrifying transportation and buildings, the resulting escalation in energy prices will devastate most of the population and exacerbate the inequity its authors seem so intent to use as the reason for its passage, he continued.
“With respect to the practice of consulting engineering, the push toward electrification of buildings will burden consulting engineers with unnecessary analysis required to justify inelegant solutions to the control of the indoor environment,” he said. “It will increase our efforts without a corresponding growth in fee and will not be good for us or our clients.
“Additionally, the regulations resulting from this legislation need to undergo scrupulous cost-benefit analysis before enacted,” Varley concluded. “If not, the results will likely damage the environment. Does anyone think solar or wind farms aren’t a blight on the environment? Making buildings more efficient is a good thing, but this legislation will have minimal impact on this and is unneeded. The building stock in the U.S. has seen increasing efficiency over the past two decades because it’s good for the bottom line of building owners.”
Kevin Dickens, senior project manager, Jacobs, believes incentives create an artificial sense of technology acceptance or readiness.
“Even with these incentives, most technologies will not provide any realistic payback,” he said. “The average consumer cannot afford solar panels or changing to geothermal, even with the cash back. As engineers, we will be tasked with studies that will not pan out and, essentially, contribute to design churn.”
While Dickens believes there are positive aspects to the bill, and it does move the industry ever so slightly in a new direction, the bill simply doesn’t live up to its hype.
“In spite of good intentions, the IRA does little to nothing when it comes to inflation, and it will have negligible impact on the environment,” he said.
The government infusing cash into the commercial construction market adds competition, higher prices, and lead time exacerbations to an already struggling industry, said Chuck Dale-Derks, principal, McClure Engineering.
"A number of incentives, grants, tax credits, etc., are minimal in actual size and will make little to no impact. [i.e. $150 for a home energy audit, $200 per home credit for energy upgrades in a disadvantaged community, and a whopping $286.41 per school to reduce air pollution at schools, if you do the math considering all schools in the U.S.]," he said. "
Dale-Derks also shared some concerns regarding the timeline of the credits and codes included in the IRA.
"Dates of applicability are almost random," he said. "Some start after February 2023 and remain active or in effect for various periods of time from less than two years to more than 10 years. Additionally, one part of the IRA references ASHRAE Standard 90.1-2007, while another part references the 2021 International Energy Conservation Code, and yet another points to the ANSI/ASHRAE/IES Standard 90.1-2019. Putting in writing a fixed reference for about 10 years that will conflict with state and municipality building codes and possibly fixes a standard reference for many more years is troubling."
Paul Ehrlich, founder and president, Building Intelligence Group, was surprised at the bill's magnified focus on electrification.
"This bill provides incentives for homeowners to make their homes ready for a lower carbon electric grid through the installation of upgraded electrical panels; heat pumps; heat pump water heaters; and efficient electric appliances, such as induction ranges and heat pump dryers," he said. "This is really going to accelerate the movement to efficient electrification. It makes senses to start doing these changes now, while the grid slowly transforms to being lower carbon. The same argument can be made for the transition to electric vehicles.”
While the legislation may spur a small level of innovation, it’s simply missing the mark, said Howard McKew, P.E., FASHRAE, president, BuildingSmartSoftware LLC.
“Ice is melting north of us, and water levels are rising to the south,” said McKew. “Our government needs to wake up and focus on climate change and the issues the coming generations will be left with. Leadership needs to come from the top. After 50-plus years of energy conservation and climate change impacting our world, something must be done.”