Inflation Reduction Act Will Decrease and Stabilize Household Electricity Prices
In a comprehensive power sector analysis, RFF researchers find that the Inflation Reduction Act would save households approximately $170–$220 annually and reduce electricity price volatility.
In a comprehensive power sector analysis of the proposed Inflation Reduction Act (IRA), a team at Resources for the Future (RFF) has found that, if enacted, the legislation would save typical American households up to $220 per year over the next decade and substantially reduce electricity price volatility.
Legislative text for the IRA released by Senate Democrats on Wednesday, July 27, contains an extensive set of provisions to promote a variety of clean energy technologies, facilitate domestic energy production, and address climate change. The legislation includes provisions to extend and expand tax credits for renewable energy and storage, while providing “bonuses” in the form of bolstered tax credits for clean energy projects located in energy communities, using domestic content, and meeting certain labor standards.
Modeling by RFF finds that the IRA’s effect on the US power sector would have the following big-picture effects over a ten-year period between 2023 and 2032:
- Retail electricity costs are projected to decline 5–7 percent over the next decade, compared to a scenario without the IRA.
- The average household will experience approximately $170–$220 in savings, saving American electricity consumers $209–$278 billion over the next decade.
- 2030 electricity sector emissions are expected to be 69.8–74.9 percent below 2005 levels.
- Ratepayers are insulated from volatility in natural gas prices, with electricity rates projected to decrease even under a high natural gas price scenario.
The research comes amid volatile energy prices over the last two years—from astonishing lows in the early days of the pandemic to near-record highs in recent months. Among their findings, the authors note that the legislation’s ability to reduce price volatility is particularly significant.
“There’s been debate about whether a clean energy economy would help consumers by reducing price volatility, and this is a clear demonstration that it does,” coauthor and RFF Fellow Kevin Rennert said. “Our modeling shows that the greater amounts of clean electricity deployed on the grid in response to the proposed policy insulate ratepayers against shocks in fuel prices and mute the effects of such price swings. "
To assess the specific effects of the IRA on price volatility, the RFF team modeled the bill under differing natural gas price scenarios. They ran three policy scenarios: one without the IRA; one with the IRA, given its standard 30 percent investment tax credit and inflation-adjusted $25 per megawatt-hour (MWh) production tax credit; and one in which additional “bonus” provisions are realized and the IRA provides a 50 percent investment tax credit and $30 per MWh production tax credit.
The graph and related findings illustrate three main points:
- Under the IRA, ten-year average electricity prices are down under all natural gas scenarios.
- The IRA delivers its greatest consumer benefits in the case where consumers are vulnerable to high natural gas prices. Without the IRA, high natural gas price scenario could lead to an increase in retail electricity prices of 5.6 percent over the next decade; with the IRA, the modeling shows electricity prices would remain nearly unchanged or, in the modeling that included “bonus” provisions, prices would decline about 2.3 percent.
- The IRA reduces variability in electricity prices. Without the IRA, prices could fall by about 4.6 percent in a scenario of low natural gas prices or rise by as much as 5.6 percent in a high natural gas price scenario—a difference of 10.2 percentage points. With the IRA, prices could fall by 7.6 percent in the low natural gas price scenario or would be nearly unchanged in a high natural gas price scenario—a difference of just 7.6 percentage points. With the “bonus” provisions, the price variability falls further, to just 6.8 percentage points.
“All-in-all, our modeling suggests that the IRA will counter inflation and volatility in the power sector,” study coauthor and RFF Senior Fellow Dallas Burtraw said. “And we expect that these deflationary effects will kick in quickly—this means, practically, that people should expect to see electricity bills come down within the first year.”
For more information on the IRA and its impact on the power sector, as well as more information on the model methodology, read the issue brief, “Retail Electricity Rates under the Inflation Reduction Act of 2022,” by RFF Research Analyst Nicholas Roy, Senior Fellow Dallas Burtraw, and Fellow Kevin Rennert.
Resources for the Future (RFF) is an independent, nonprofit research institution in Washington, DC. Its mission is to improve environmental, energy, and natural resource decisions through impartial economic research and policy engagement. RFF is committed to being the most widely trusted source of research insights and policy solutions leading to a healthy environment and a thriving economy.
Unless otherwise stated, the views expressed here are those of the individual authors and may differ from those of other RFF experts, its officers, or its directors. RFF does not take positions on specific legislative proposals.
Kevin Rennert is a fellow at RFF. He also serves as director of the Comprehensive Climate Strategies Program and the Federal Climate Policy Initiative.
Darius Gaskins Senior Fellow
Dallas Burtraw is a Darius Gaskins senior fellow at RFF. Burtraw’s research includes analysis of the distributional and regional consequences of climate policy and the evolution of electricity markets including renewable integration.
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