A new analysis from Ekotrope, the leading provider of home energy rating software, shows U.S. home builders might leave money on the table. Ekotrope software is used to generate energy efficiency insights for one in four U.S. homes. Its analysis concludes that if the homes built this year were slightly more energy efficient, builders could claim more than $160 million in projected tax credits under the Inflation Reduction Act’s (IRA) builder tax credit (45L).
Under the previous 45L tax credit, any home sold in 2022 is eligible for a builder credit of $2,000 for an energy-efficient home (defined as one at least 50 percent more efficient than a home built to the 2006 IECC, with 20 percent efficiency savings from the building envelope). Prior to passage of the IRA, the 45L tax credit was typically extended on a year-by-year basis and retroactive, leaving builders with a lot of uncertainty about its renewal and making it difficult for them to plan.
The IRA now provides home builders with a credit of $2,500 for single-family homes that meet ENERGY STAR Version 3.1 (until 1/1/25 and then Version 3.2) and meet 2021 IECC prescriptive envelope standards. That credit increases to $5,000 for homes that meet the DOE Zero Energy Ready standard and applies from January 1, 2023, through December 31, 2032. This gives builders the opportunity to develop a long-term plan to use the credit in the future.
Now that the requirements are based on ENERGY STAR and the 2021 IECC, every home must undergo the ENERGY STAR certification process, making the Home Energy Rating Score (HERS) critical.
Using data from its 2022 database of homes, Ekotrope found that 93,000 builds perform 10 percent above the compliance threshold for ENERGY STAR version 3.1, which could net more than $238 million in tax credits for home builders. An additional 64,000 homes were within 10 percent of the compliance threshold, meaning they almost passed the compliance requirement. This is more than $161 million in potential tax credits left on the table. Often, a modest increase in insulation levels will enable a builder to qualify for the credit.
While the incentive is significant, for some builders, increasing the prescriptive envelope requirements of a new home to the 2021 IECC is an above-code requirement for their jurisdiction. Yet, DOE analysis shows significant savings can be achieved relative to the 2018 IECC, ranging from a national average of 6.4 percent to 11.6 percent depending on which efficiency package option is assumed.
Data Analysis Leads to Insights
Ekotrope shared its analysis during the first webinar of a new series it launched to share insights on home-building data, focusing on specific industry changes and how they might impact the industry while providing recommendations on moving forward and planning ahead. Energy Raters and builders alike use Ekotrope’s software to make informed decisions about home construction. In addition, product manufacturers, utilities, and homeowners use Ekotrope products to get information on energy-related performance metrics of homes. Lenders also use their products to provide preferred lending to energy efficient homes.
Ekotrope’s data analysis shows that with just a few changes in some of the most common specifications for homes builders can leverage the significant credit provided by 45L. Tradeoffs will allow builders more than one way to comply with 45L. This kind of detailed data and analysis can be tremendously beneficial to HERS raters in educating builders about how to make the changes necessary in their construction practices to be able to leverage the tax credit.
To view the full Ekotrope webinar detailing the analysis and the tax credit provisions, click here.