What does the Inflation Reduction Act mean for air source heat pump adoption?
This blog was updated on December 20, 2024
Navigating Market Shifts and Strategies for Success: 2025 Outlook
The broader trends of decarbonization and electrification may face challenges, but demand for efficient, sustainable technologies like heat pumps remains strong.
Minnesota has a long history of pragmatism and bipartisan recognition of the benefits of energy efficiency. Policies like the Next Generation Energy Act of 2007 and the ECO Act of 2021 have demonstrated enduring support for energy-saving measures. Utility programs, which are well-established and stable, will continue to support heat pump adoption.
Heat pumps offer one of the most efficient ways to heat and cool a home, providing substantial energy savings during Minnesota’s long winters and warm summers. Regardless of political developments, the economic and environmental benefits of heat pumps remain clear. The MN ASHP Collaborative will continue to provide tools, resources, and updates to market partners to help us all navigate these shifts, achieve business goals, and promote energy efficiency statewide.
Breaking Down the "Value Stack" of Heat Pump Incentives
There are multiple sources of incentives that can be utilized by a homeowner at the same time, but not all are as likely to experience changes in the coming years. For example, utility incentives are certain to continue under their current energy saving programs, while federal incentives will be more vulnerable to change. For a comprehensive list of low-cost financing options and other incentives, please visit the Minnesota Air Source Heat Pump Collaborative website.
- Local Incentives: In many areas, municipalities or local programs provide additional incentives for heat pump installations. These local programs can be a valuable addition to the financial benefits available to homeowners and should be explored as part of any bid process.
- Utility Rebates: Minnesota’s utility-led energy efficiency programs remain strong and continue to offer substantial rebates for heat pump installations. These programs are well-established and provide a reliable avenue for reducing upfront costs for homeowners.
- Federal Tax Credits: Under the IRA, homeowners can claim up to 30% in tax credits for qualifying heat pump installations. If you purchase a system in 2024, it will be tax eligible. A system purchased in 2025 is less certain, but we will update our information as we learn more. Contractors should encourage homeowners to act quickly to capitalize on this opportunity while it is in place.
- State-Operated Rebate Programs: Minnesota is actively working to secure federal funding for state-operated rebate programs, which could provide rebates of up to $14,000 for qualifying low- and moderate-income homeowners. Although no specific information is currently available, these programs are expected to be significant, and contractors should stay informed as updates become available. For program updates, please visit the Department of Commerce website.
- Home Efficiency Rebate (HOMES): The Home Efficiency Rebates program will provide rebates for whole-home energy saving improvements. The rebate amount will vary based on the amount of energy savings achieved and a household’s income. The rebate amount can range from $2,000 to $8,000 or more per home.
- Home Electrification and Rebate (HEAR): The Home Electrification and Appliance Rebates program will provide rebates to replace non-electric appliances with more efficient electric appliances, and to upgrade a home’s electrical service to be ready for increased electric demand.
- Minnesota Legislature also approved state funding for related home energy rebate programs. To learn more about this available funding, please visit Heat Pump Rebates and the Electric Panel Upgrade Grants. These programs are designed to be "stacked” with the federal rebates to decrease overall project cost.
- Financing Options: Low-cost financing options are available both locally and statewide, making it easier for homeowners to manage the upfront costs of heat pump installations. By highlighting these options, contractors can help homeowners overcome financial barriers to adoption.
By staying informed and leveraging the array of incentives available—from local programs to federal tax credits—contractors and homeowners alike can maximize their opportunities in this dynamic landscape. The MN ASHP Collaborative is committed to being your partner in navigating these changes, providing the resources and updates you need to drive success and build a more energy efficient Minnesota.
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The recently passed Inflation Reduction Act (IRA) includes significant incentives aimed at improving energy efficiency in Minnesota homes and businesses through federal tax credits and rebates. These programs have the potential to accelerate heat pump adoption and change the HVAC industry for years to come. Read on to learn more about the current 25C deductions, changes coming in 2023, and future federal rebate programs.
What benefits are available now?
An extension of the earlier 25C Energy Efficient Home Improvement Credit is available through the end of 2022 with a $500 lifetime cap.
- Heat pumps qualify for a tax credit on 10% of the project cost, up to $300. The heat pump must be installed in an existing primary residence (the credit does not apply to new construction or multifamily).
- Heat pumps must be ENERGY STAR certified to qualify for this tax credit. More information about the tax credit and qualifying equipment can be found here.
What’s changing in 2023?
Starting January 1, 2023, the 25C tax credit will increase to 30% of the cost for all eligible home improvements made during the year by a taxpayer in a residential home.
- The credit has an annual cap of $1,200, except for heat pumps and heat pump water heaters, which qualify for a $2,000 credit.
- As the annual cap resets each year, a homeowner could perform work in stages to claim maximum tax credits (for instance, air sealing and insulation one year and a heat pump the next year).
- In 2023, qualifying heat pumps will need to meet the Consortium for Energy Efficiency’s highest efficiency tier specifications (not including any advanced tier). These criteria are listed in the table below.
What benefits will be available in the long run?
The U.S. Department of Energy will distribute funds to state energy offices across the country. These funds will provide rebates through two programs that can be used in conjunction with a tax credit to further incentivize heat pump equipment installations. Implementation of these programs will take more time, as state energy offices will need to submit plans to administer these rebates in accordance with DOE guidance.
The Home energy performance-based whole-house (HOMES) Rebate Program will provide rebates for whole-home retrofits based on modeled or measured energy savings.
- This rebate can be used for heat pump installations and HVAC upgrades.
- Homeowners can qualify for rebates on 50% of project costs, up to $2,000 for 20% energy savings or $4,000 for 35% energy savings.
- Households below 80% of Area Median Income qualify for rebates on 80% of project costs, up to $4,000 for 20% energy savings or $8,000 for 35% energy savings.
The High-Efficiency Electric Home (HEEH) Rebate Program will provide rebates to low- and moderate- income households (at or below 150% of the Area Median Income) for energy efficiency upgrades and electric equipment.
- Homeowners can qualify for rebates on 50% of project costs or 100% of project costs for households below 80% AMI.
- Heat pumps will qualify for up to $8,000.
- The program also includes rebates for upgrading electric panels and wiring.
The HOMES and HEEH rebates are not intended to be used on the same home.
Additional Resources
Clean Energy Resource Teams – A Minnesota-specific collection of homeowner-focused resources on IRA programs, including information on Area Median Income to help households estimate which rebates they qualify for. Make sure to check out the additional resources linked at the bottom, including an interactive savings calculator.
The Building Performance Association – A trade association and support organization for HVAC and Home Performance contractors.
ACEEE Policy Brief: Home Energy Upgrade Incentives – A more in-depth summary of energy efficiency programs in the IRA.
The information above is a high-level overview of the Inflation Reduction Act of 2022 and how it ties to Air Source Heat Pumps and weatherization/home performance. Please consult a tax professional to determine how tax credits apply to your organization or personal finances.
