Leveraging Benefits for Equity: Understanding Utility Opportunities Within the IRA

The federal Inflation Reduction Act of 2022 (IRA) marked the single largest financial investment toward combating climate change in U.S. history. The sweeping law’s tax credits and grants will allow private and public utilities alike to pursue clean energy innovation and deployment and to leverage market momentum for direct-to-consumer incentives. SEPA’s 2023 Utility Transformation Profile highlights carbon reduction paths for utilities, as well as opportunities – including the IRA – for utilities to catalyze timely and equitable progress.

Notable Federal Investment Provisions for Equity

Before digging into the opportunities, we summarize several notable provisions that can help utilities ensure that the benefits of carbon reduction are distributed equitably. (For a broader look, there are many efforts to track federal policy provisions focused on justice and equity, including this 2022 summary of IRA provisions from the Harvard Environmental & Energy Law Program.)

The White House’s Justice40 Initiative, established by President Biden in Executive Order 14008 in January 2021, directs 40% of the benefits of many federal investments to flow to communities that are overburdened by pollution. It covers Federal investments in climate change, clean energy and energy efficiency, clean transit, affordable and sustainable housing, training and workforce development, remediation and reduction of legacy pollution, and the development of critical clean water and wastewater infrastructure. This applies to federal programs created under the IRA.

The IRA includes many provisions for ensuring the benefits of clean energy reach designated Energy Communities, designated Low-Income Communities, and individual low-income households.

For utilities, developers, and states engaged in clean energy project development and customer programs, three provisions and community definitions are of particular interest:

• To extend the benefits of solar and wind Investment Tax Credits (ITC) and Production Tax Credits (PTC) to certain disadvantaged communities, IRA includes several kinds of bonuses. These apply to §45 (PTC), §48 (ITC), and §48E (Clean Energy Tax Credits, a technology-neutral credit that replaces the ITC and PTC in 2025).
  • An Energy Communities bonus: for projects sited in one of three types of Energy Communities. The list of areas eligible for the Energy Community Tax Credit Bonus was finalized on June 15, 2023. Energy Communities generally include (a) areas reliant on fossil fuel industries for employment or local tax revenue and also experiencing high employment, (b) areas with closed coal mines or retired coal power plants, and (c) brownfields.
  • Low-Income Communities Bonus Credit Program §48(e): for facilities serving one of four types of designated Low-Income Communities. Qualifying facilities must be located in (a) low-income communities, (b) on tribal land, (c) as part of affordable housing, or (d) must deliver direct financial benefits to low-income households. Criteria for each community type are described in detail in the Department of Treasury’s May 2023 proposed rule-making on administering the § 48(e) bonus credits. The Department of Treasury anticipates releasing final rules later this year.
• To focus advanced energy development and redevelopment on revitalizing communities with closed coal mines and retired coal power plants, the IRA recently announced bonuses for the Qualifying Advanced Energy Project Credit program. This applies to § 48C.
  1. Advanced energy projects include clean energy manufacturing and recycling, critical materials refining, processing and recycling, and projects that reduce greenhouse gas emissions at industrial facilities.
  2. Bonuses are available for census tracts considered energy communities for the purposes of the Advanced Energy Project tax credit based on proximity to closed coal mines and retired power plants. (Note that these communities are different from the three types of “energy communities” designated for ITC and PTC purposes.)
• The IRA’s direct-to-consumer rebates include increased incentives to low- and moderate-income households, defined relative to area median income. The U.S. Department of Energy will distribute funds to states and Tribal governments who will, in turn, allocate to consumers.

Leveraging IRA’s Provisions for Equitable Carbon Reduction

Utilities can leverage the IRA’s provisions as well as guidance from the Justice40 initiative to amplify equitable carbon reduction benefits. Building off the 2023 Utility Transformation Profile, SEPA has suggestions for utilities looking to make the most of IRA provisions.

The first step in siting new clean energy developments in designated Energy Communities and designated Low-Income Communities is ensuring benefits for community members. Siting a new clean energy project in these areas unlocks a higher tax credit for the developer, but the policy goal is to make sure the community is “dealt in” to clean energy. To prioritize equity in these communities, utilities should:

• Recognize that economic, energy, and cultural needs and wants vary across Energy Communities and designated Low-Income Communities.
• Engage with community members to identify their priority benefits and make sure they receive them. This may include local ownership, local construction and operations, and maintenance jobs, support for career training, professional development, and apprenticeships, establishing agreements that direct clean energy cost savings to local customers, minimizing impacts on the environment and cultural sites, or co-developing a project with reliability benefits.
  • May’s proposed rule-making for solar and wind tax credits under § 48(e), for example, includes an optional method to prioritize applications from tribal Enterprises, Alaska Native Corporations, cooperatives, non-profit entities, and certain other project owners.
• Prioritize community value alongside project economic analysis and grid needs and interconnection considerations.
• Examine the amount and quality of benefits flowing to Energy Communities and designated Low-Income Communities. Utilities responding to SEPA’s 2022 Utility Transformation Challenge are in the nascent stages of measuring equity outcomes from their customer programs. One way to help align IRA implementation– and customer programs– with Justice40 is using routine program impact evaluations to examine and report the share of benefits going to disadvantaged and other priority communities.

Extract of top metrics used, as reported in SEPA’s Embedding Equity in Utility Transformation report.

The anticipated rush of consumer electrification and efficiency action gives utilities an opportunity to reduce inequities in carbon reduction benefits. Direct-to-consumer rebates and tax credits arising from the IRA improve the economics of electrification but may not simplify the process. To smooth the customer journey and promote equitable access, utilities can:

• Collaborate with state and tribal governments implementing IRA Home Energy Rebate Programs. While the IRA covers 100% of certain electrification costs for low-income households, moderate-income customers may need to stack IRA incentives with other incentives to make the finances work. The good news is many utilities already offer incentives for residential electrification technologies supported by the IRA, such as heat pumps and heat pump water heaters. Utilities with existing customer programs can lend their expertise to states to help develop effective programs to utilize IRA funds. They can also proactively provide customers with the information needed to stretch their dollars across multiple programs.
• Look for opportunities to channel customers who install IRA-supported electrification equipment into utility demand response and demand flexibility programs. According to our 2022 Utility Transformation Profile, less than half of those with residential demand response programs were taking extra steps to reach disadvantaged customers (44%), and most had yet to develop programs using technology with high potential for demand response (see figure below).
  • The IRA’s rollout is an opportunity to both expand demand response and flexibility and to quickly expand the benefits of these programs to disadvantaged customers. Opportunities stem from the improved economics of grid-connected electrified technologies (e.g., behind-the-meter battery storage and EVs), increasing consumer interest and acceptance, and increasing and diversifying the pool of customers who can bring their own devices to utility programs.
  • With states and tribes expected to focus on distributing a large share of the consumer incentives to income-qualified customers, utilities will have the opportunity to reach and engage an influx of new adopters. Effectively and equitably channeling IRA participants to utility demand response programs will require close collaboration with states– and a singular focus on crafting a simple, transparent, accessible customer journey.

Next Steps

The IRA rollout is progressing in stages. Check the IRS’s IRA website and the U.S. Department of the Treasury website for the latest information as you prepare to leverage this policy. By working together, utilities and partners can establish a shared vision for how regulation can maximize equitable benefits and the investments utilities have already made in a carbon-free future.