That puts states at the center of what comes next. A new class of governors and state lawmakers — including six new Democratic trifectas — will take office in 2027 ready to act on energy affordability. Given the limited opportunities in Washington, federal lawmakers will need to rely on state governments to advance an effective national energy agenda, both now and under the next administration. The question before them is how to design policy with that in mind from the start.
The 2022 Inflation Reduction Act offers both a model and a warning. The IRA has been transformative, catalyzing hundreds of billions of dollars in clean energy investment, supporting good jobs and domestic manufacturing, and driving economic growth nationwide. But with hindsight, one clear shortcoming emerges: Federal decision-makers too often treated states as grant recipients rather than institutional partners capable of deploying capital and shaping energy markets. This attitude hampered the law’s speed, effectiveness, and durability.
For instance, to implement the law’s Home Energy Rebates — an $8.8 billion program designed to operate through state energy offices and deliver energy efficiency and cost savings for consumers — the Department of Energy required states to navigate an unusually complex approval process. Many states had to hire outside consultants just to apply. Nearly five years after the law’s passage, only a handful have gotten their projects off the ground. The ambitions were real; the architecture made them slow.
The Environmental Protection Agency’s $20 billion Greenhouse Gas Reduction Fund offers a similar lesson. The GGRF was inspired by the growth of state and local green banks, and like them was designed to provide low-cost financing to clean energy projects throughout the country. Those same state-level green banks with local market knowledge and lending experience were well-positioned to deploy capital into local projects, yet they did not receive program funding directly. In consequence, only a small number of existing green banks received a small amount of this funding — less than 10% of the total available — before the Trump administration froze the program in its entirety. DOE’s Loan Programs Office, meanwhile, had $40 billion in authority to loan to state energy financing institutions, but it executed zero such loans.
These aren’t isolated examples. They’re symptoms of a systematic failure by the federal government to treat states as partners in the process of designing and implementing policy. In recent years the federal government has generally engaged with governors and state policymakers through intergovernmental affairs offices staffed with political appointees that treat states more like stakeholders to be managed than governing partners.
State governments are the machinery through which energy policy becomes real. They regulate utilities. Their laws govern the siting and permitting of energy infrastructure, including the data centers now reshaping electricity demand. They oversee housing and land use. And they run the economic development and financing agencies that work to expand local economies. Policies built around these state institutions can move faster, deliver greater local benefits, and last longer — especially as federal policy careens in wildly different directions every few years. Had the federal-state partnership been stronger from the start, IRA funding might have been deployed more quickly and delivered impact sooner in both red and blue districts, making it much more difficult for the Trump administration to roll back these policies.
For Democrats looking to advance an agenda that can deliver more affordable, reliable and clean energy, there’s never been a better time for this partnership, given the 30 governorships their party will hold starting in 2027 — the most in over 30 years.
So, looking ahead, what should happen next time?
Invest in state capacity quickly. For all their powerful authorities, state agencies often lack budget and staff capacity. The IRA mostly routed its dollars around them through tax credits, federal loans, and competitive grants. The few programs it did run through states, such as the home energy rebates, came with detailed federal requirements. Those safeguards were well intentioned, meant to protect consumers and guarantee results. But they assumed a capacity states never had the funding to build.
Formula funding, by contrast, is a no-regrets strategy to build that capacity. These are funds designed by federal lawmakers to be dispersed to all states based on a numeric formula (e.g. population or other appropriate quantitative metric), and are generally made to be easy for states to access. For example, DOE’s State Energy Program has delivered formula grants to all state energy offices, helping to fund their operations for over 40 years. According to the National Association of State Energy Officials, each federal dollar distributed through the program has leveraged more than $10 in state and private investment. EPA’s Clean Air Act programs similarly provide flexible grants to state environmental agencies. Future legislation should multiply the amounts of formula funding available in the IRA and streamline access. It should also pair these efforts with competitive funding that rewards cutting-edge state policies and cross-state collaborations that move industries and markets toward cleaner technologies.
Capitalize state financing institutions directly. States have long managed infrastructure finance, from the 1960s birth of housing finance agencies, to clean water state revolving funds, to federal funding for surface transportation infrastructure — all of which is now intrinsic to how infrastructure is built in this country. That model should now also anchor the next generation of clean energy infrastructure finance — for states to drive locally-impactful projects and economic development. DOE’s authority to lend to state institutions also remains intact.
Leverage state authority where it’s strongest. State public utilities commissions have a longstanding role in regulating the nation’s electric utilities. Federal policymakers should use this to their advantage, providing federal grants to expand PUC staff and expert capacity to oversee utility planning and rate cases. The State Energy Oversight Act, for example, would provide formula funding to state public utility commissions for financial and technical assistance. In addition to supporting their day-to-day role in utility regulation, this could also empower commissions to ensure that new federal tax incentives and investments deliver effective ratepayer relief — a true federal-state partnership that delivers on energy affordability.
States are also closest to the siting, permitting, and interconnection barriers now constraining low-cost clean energy expansion. The next generation of federal energy legislation should build upon and help proliferate state policy innovations like Michigan’s Renewable Ready Communities program, which helps local governments buy into locating energy developments in their towns, and Texas’s connect-and-manage interconnection process, which adds new energy faster than any other U.S. grid.
At the same time, federal policymakers shouldn’t ask states to lead delivery of every program. Where incentives can clearly benefit individual consumers and companies and reorient markets toward more affordable clean technologies, direct federal incentives — especially the IRS’s existing tax filing infrastructure — can be more efficient than new state programs built from scratch. The federal government also has a critical role to play in supporting technology innovation and expediting permitting for projects that cross state lines.
Finally, future federal leaders must prioritize clarity, simplicity, and speed. The next energy legislation should streamline requirements and include real deadlines, backed by deep White House engagement with governors of both parties. That should include stronger regional federal staff support — for example the EPA maintains regional offices throughout the country, while DOE does not. This agenda must also be led by senior officials with genuine authority, not those buried in an intergovernmental affairs office.
States haven’t waited. Green banks now operate all across the country. Forty-five states have built climate plans that are ready to be acted upon. Twenty-four states are committed to achieving 100% clean energy. And this week’s elections have delivered new state leaders ready to build a more affordable energy economy. States are already building America’s energy future. Washington’s job, next time, is to trust them — and build alongside them.
