Michael Jung is executive director at the ICF Climate Center.
On August 16, 2022, President Biden signed into law the Inflation Reduction Act, or IRA, which allocates $369 billion in funds to address climate change through clean energy. It aims to reduce greenhouse gas emissions about 40% below 2005 levels by 2030 through tax incentives and grants for transportation electrification, building efficiency, home energy rebates, and renewable energy, along with several other related energy-oriented and climate-focused provisions. This legislation represents the largest single climate investment to date in this country and will bring about seismic changes in the energy landscape.
For electric utility leaders, planning for IRA impacts may seem less pressing than pursuing more immediate funding opportunities for grid infrastructure through the preceding bipartisan infrastructure law, or BIL. However, the IRA’s rebates and credits will accelerate the electrification of energy utilization in homes and businesses, as well as boost the adoption of personal and commercial electric vehicles. In turn, utilities will see a substantial increase in demand and change in utilization patterns. Electric power utilities will need to prepare their infrastructure and business processes to meet the expectations of customers who are transitioning to increasingly electrified technologies.
The IRA not only encourages increased electrification — it also drives down the cost of renewables to accelerate the clean energy transition. For example, ICF estimates that the revamped production tax credit, without accounting for bonuses introduced by the IRA, could reduce the levelized cost of energy of solar and wind in 2030 by as much as 35% and 49%, respectively. Bringing new renewable generation online at the scale and speed that the IRA incentives will bring about will tax aging grid infrastructure and impact reliability.
The IRA presents challenges but also creates opportunities. There is potential for utilities to substantially boost their clean energy efforts, upgrade infrastructure, and improve customer satisfaction, but they must start by developing an integrated plan of action. To prepare for potential challenges and make the most of IRA funds, now is the time for utilities to develop strategies to effectively respond.
Reevaluate your plans; Integrate your BIL and IRA strategies
The bipartisan infrastructure law puts forward $65 billion to directly upgrade the U.S. national power infrastructure, as well as billions more in funding that could further enhance our grid, such as for communications, hydrogen and cybersecurity. Utility planning for infrastructure investments funded by the BIL should be closely integrated with their preparations for the impacts arising from the IRA.
With lower clean energy costs, expanded electrification incentives, and accelerated EV adoption arriving quickly, utilities should first start preparations by reassessing current plans and revisiting business assumptions. For example, more DERs and increased electrification will shift 5- and 10-year load estimates, requiring utilities to revisit distribution system planning and revise demand-side management programs. It will become more important, perhaps even necessary, to upgrade systems and processes to enable distribution planning at an hourly resolution and to unlock grid edge visualization and optimization capabilities to prepare for changing peaks and multidirectional flows. Awareness of customer investments in, and resultant changes in consumption patterns from, IRA-incentivized assets must inform utility investments in BIL-funded infrastructure.
Climate risk and resilience modeling provide utilities with the necessary information to effectively plan for volatile future risks and identify where grid infrastructure may be most vulnerable. It’s critical that this type of modeling be revisited with the accelerated adoption of IRA-subsidized clean energy technologies from customers in mind.
The IRA creates an opportunity for utilities to become more flexible, responsive and resilient. Utilities of all sorts can use the IRA’s tax credits, direct payments, and reinvestment financing to meet clean power goals more quickly and affordably than previously imagined. This includes transitioning to renewables and energy storage, which can actually reduce consumer costs and accelerate greenhouse gas reductions.
The sizable grants offered by the BIL fund programs are intended to modernize and enhance resilient grid infrastructure. Funding is available for a wide variety of purposes and for many different types of grantees — including community based organizations, state and local governments, and private entities. Utilities can align new modeling and projections with efforts to secure BIL funding, focused on how these grid infrastructure projects will address expected impacts from the deployment of IRA-funded assets.
Broaden your strategies to inform and guide customers about energy opportunities
Once integrated modeling of both BIL and IRA impacts is complete, utilities must determine which initiatives to accelerate or expand based on findings. For instance, operators should focus on plans to react to and guide customer adoption of both DERs and increased electrification.
Utilities can prepare for this scenario by developing a distributed energy resource strategy to integrate DER assets— such as rooftop solar panels, EV chargers, heat pumps and water heaters. With the right software tools in place, such as DER Management Systems, Advanced Distribution Management Systems or other grid-edge optimization software, DERs can be aggregated and orchestrated to provide various grid services, from system-wide load reduction to localized voltage optimization. This leverages assets at the edge of the distribution system to contribute to the reliability of the overall grid, affording utilities new options to mitigate grid conditions such as peak load and voltage deviation.
A critical component in the deployment of any approach is proactive communication with customers and contractors. Many will be unaware of IRA incentives, like the availability of, and channels for access to, rebates on home energy audits or energy efficient appliances. The energy efficiency tax incentives in the IRA are primarily focused on low and medium-income customers, and include a wide range of options. With so many benefits for their consumers, utilities should regularly update customers or provide resources to capitalize and understand IRA programs. New opportunities are emerging to upgrade traditional energy efficiency programs to help inform, facilitate, and make more equitable customer decision-making to take full advantage of IRA-funded opportunities.
Proactively engage with stakeholders
The IRA can accelerate efforts to reach an electrified and equitable energy future. Many state regulators are currently studying how the IRA may impact both the grid and ratepayers, and state energy offices are currently thinking through their applications for IRA funds. It’s critical that utilities proactively engage their regulators and stakeholders before the effects are felt. Impact models should be shared with regulators as soon as possible, so that both entities can establish relationships with affected groups and develop a shared approach to maximize IRA benefits.
Utilities are entering a transformational decade fueled in part by the IRA. Utilities can prepare by modernizing current plans and traditional strategies to respond to increased electrification and more clean energy resources on the grid, communicate with customers and contractors, and proactively engage with regulators. In order to tangibly change our climate future, utilities can leverage this unprecedented moment to help meet clean energy goals.
