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A practical guide to using the climate law to get cheaper solar panels, heat pumps, and more.

Today marks the one year anniversary of the Inflation Reduction Act, the biggest investment in tackling climate change the United States has ever made. The law consists of dozens of subsidies to help individuals, households, and businesses adopt clean energy technologies. Many of these solutions will also help people save money on their energy bills, reduce pollution, and improve their resilience to disasters.
But understanding how much funding is available for what, and how to get it, can be pretty confusing. Many Americans are not even aware that these programs exist. A poll conducted by The Washington Post and the University of Maryland in late July found that about 66% of Americans say they have heard “little” or “nothing at all” about the law’s incentives for installing rooftop solar panels, and 77% have heard little or nothing about subsidies for heat pumps. This tracks similar polling that Heatmap conducted last winter, suggesting not much has changed since then.
Below is Heatmap’s guide to the IRA’s incentives for cutting your carbon footprint at home. If you haven’t heard much about how the IRA can help you decarbonize your life, this guide is for you. If you have heard about the available subsidies, but aren’t sure how much they are worth or where to begin, I’ll walk you through it. (And if you’re looking for information about the electric vehicle tax credit, my colleague at Heatmap Robinson Meyer has you covered with this buyer’s guide.)
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There’s funding for almost every solution you can think of to make your home more energy efficient and reduce your fossil fuel use, whether you want to install solar panels, insulate your attic, replace your windows, or buy electric appliances. If you need new wiring or an electrical panel upgrade before you can get heat pumps or solar panels, there’s some money available for that, too.
The IRA created two types of incentives for home energy efficiency improvements: Unlimited tax credits that will lower the amount you owe when you file your taxes, and $8.8 billion in rebates that function as up-front discounts or post-installation refunds on equipment and services.
The tax credits are available now, but the rebates are not. The latter will be administered by states, which must apply for funding and create programs before the money can go out. The Biden administration began accepting applications at the end of July and expects states to begin rolling out their programs later this year or early next.
The home tax credits are available to everyone that owes taxes. The rebates, however, will have income restrictions (more on this later).
“The Inflation Reduction Act is not a limited time offer,” according to Ari Matusiak, the CEO of the nonprofit advocacy group Rewiring America. The rebate programs will only be available until the money runs out, but, again, none of them have started yet. Meanwhile, there’s no limit on how many people can claim the tax credits, and they’ll be available for at least the next decade. That means you don’t need to rush and replace your hot water heater if you have one that works fine. But when it does break down, you’ll have help paying for a replacement.
You might want to hold off on buying new appliances or getting insulation — basically any improvements inside your house. There are tax credits available for a lot of this stuff right now, but you’ll likely be able to stack them with rebates in the future.
However, if you’re thinking of installing solar panels on your roof or getting a backup battery system, there’s no need to wait. The rebates will not cover those technologies.
A few other caveats: There’s a good chance your state, city, or utility already offers rebates or other incentives for many of these solutions. Check with your state’s energy office or your utility to find out what’s available. Also, it can take months to get quotes and line up contractors to get this kind of work done. If you want to be ready when the rebates hit, it’s probably a good idea to do some of the legwork now.
If you do nothing else this year, consider getting a professional home energy audit. This will cost several hundred dollars, depending on where you live, but you’ll be able to get 30% off or up to $150 back under the IRA’s home improvement tax credit. Doing an audit will help you figure out which solutions will give you the biggest bang for your buck, and how to prioritize them once more funding becomes available. The auditor might even be able to explain all of the existing local rebate programs you’re eligible for.
The Internal Revenue Service will allow you to work with any home energy auditor until the end of this year, but beginning in 2024, you must hire an auditor with specific qualifications in order to claim the credit.
Let’s start with what’s inside your home. In addition to an energy audit, the Energy Efficiency Home Improvement Credit offers consumers 30% off the cost (after any other subsidies, and excluding labor) of Energy Star-rated windows and doors, insulation, and air sealing.
There’s a maximum amount you can claim for each type of equipment each year:
$600 for windows
$500 for doors
$1,200 for air sealing and insulation
The Energy Efficiency Home Improvement Credit also covers heat pumps, heat pump water heaters, and electrical panel upgrades, including the cost of installation for those systems. You can get:
$2,000 for heat pumps
$600 for a new electrical panel
Yes, homeowners can only claim up to $3,200 per year under this program until 2032.
Also, one downside to the Energy Efficiency Home Improvement Credit is that it does not carry over. If you spend enough on efficiency to qualify for the full $3,200 in a given year, but you only owe the federal government $2,000 for the year, your bill will go to zero and you will miss out on the remaining $1,200 credit. So it could be worth your while to spread the work out.
The other big consumer-oriented tax credit, the Residential Clean Energy Credit, offers homeowners 30% off the cost of solar panels and solar water heaters. It also covers battery systems, which store energy from the grid or from your solar panels that you can use when there’s a blackout, or sell back to your utility when the grid needs more power.
The subsidy has no limits, so if you spend $35,000 on solar panels and battery storage, including labor, you’ll be eligible for the full 30% refund, or $10,500. The credit can also be rolled over, so if your tax liability that year is only $5,000, you’ll be able to claim more of it the following year, and continue doing so until you’ve received the full value.
Geothermal heating systems are also covered under this credit. (Geothermal heat pumps work similarly to regular heat pumps, but they use the ground as a source and sink for heat, rather than the ambient air.)
Here’s what we know right now. The IRA funded two rebate programs. One, known as the Home Energy Performance-Based Whole House Rebates, will provide discounts to homeowners and landlords based on the amount of energy a home upgrade is predicted to save.
Congress did not specify which energy-saving measures qualify — that’s something state energy offices will decide when they design their programs. But it did cap the total amount each household could receive, based on income. For example, if your household earns under 80% of the area median income, and you make improvements that cut your energy use by 35%, you’ll be eligible for up to $8,000. If your household earns more than that, you can get up to $4,000.
There’s also the High-Efficiency Electric Home Rebate Program, which will provide discounts on specific electric appliances like heat pumps, an induction stove, and an electric clothes dryer, as well as a new electrical panel and wiring. Individual households can get up to $14,000 in discounts under this program, although there are caps on how much is available for each piece of equipment. This money will only be available to low- and moderate-income households, or those earning under 150% of the area median income.
Renters with a household income below 150% of the area median income qualify for rebates on appliances that they should be able to install without permission from their landlords, and that they can take with them if they move. For example, portable appliances like tabletop induction burners, clothes dryers, and window-unit heat pumps are all eligible for rebates.
It’s also worth noting that there is a lot of funding available for multifamily building owners. If you have a good relationship with your landlord, you might want to talk to them about the opportunity to make lasting investments in their property. Under the performance-based rebates program, apartment building owners can get up to $400,000 for energy efficiency projects.
For the most part, yes. But the calculus gets tricky when it comes to heat pumps.
Experts generally agree that no matter where you live, switching from an oil or propane-burning heating system or electric resistance heaters to heat pumps will lower your energy bills. Not so if you’re switching over from natural gas.
Electric heat pumps are three to four times more efficient than natural gas heating systems, but electricity is so much more expensive than gas in some parts of the country that switching from gas to a heat pump can increase your overall bills a bit. Especially if you also electrify your water heater, stove, and clothes dryer.
That being said, Rewiring America estimates that switching from gas to a heat pump will lower bills for about 60% of households. Many utilities offer tools that will help you calculate your bills if you make the switch.
The good news is that all the measures I’ve discussed in this article are expected to cut carbon emissions and pollution, even if most of your region’s electricity still comes from fossil fuels. For some, that might be worth the monthly premium.
Tax Credit #1 offers 30% off the cost of energy audits, windows, doors, insulation, air sealing, heat pumps, electrical panels, with a $3200-per-year allowance and individual item limits.
Tax Credit #2 offers 30% off the cost of solar panels, solar water heaters, batteries, and geothermal heating systems.
Rebate Program #1 will offer discounts on whole-home efficiency upgrades depending on how much they reduce your energy use, with an $8,000 cap for lower-income families and a $4,000 cap for everyone else.
Rebate Program #2 is only for low- and moderate- income households, and will offer discounts on specific electric appliances, with a $14,000 cap.
Read more about the Inflation Reduction Act:
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Robinson Meyer:
Hello, it’s Friday, October 2, and this is a special New York Climate Week edition of Shift Key. Last week, Heatmap welcomed climate and energy leaders, experts, and influencers to Heatmap House, our all-day summit in New York City. Among those leaders was New Jersey Governor Mikie Sherrill. Governor Sherrill is a former Navy pilot, federal prosecutor, and member of the House of Representatives. She was elected New Jersey’s governor in November 2025. That campaign, and her election year last year, was dominated by the state’s surging electricity prices, and specifically by how the interaction between the AI data center boom and features of the local multi-state electricity market, PJM, had caused power bills to surge in the state by about $260 per household.
Robinson Meyer:
Governor Sherrill ran on and implemented a one-year rate freeze. She’s since passed other legislation meant to make it easier to build solar and batteries in the state. My colleague, Heatmap correspondent Matthew Zeitlin, has been covering those policies, and last week he sat down at Heatmap House to discuss them with Governor Sherrill, as well as to discuss the future of her climate and electricity agenda. Let’s go to that conversation now.
Robinson Meyer:
Matt and Governor Sherrill were recorded in front of a live audience at Heatmap House at 22 Vanderbilt in New York City on September 23rd. I’m Robinson Meyer, the founding executive editor of Heatmap News, and you are listening to Shift Key.
Matthew Zeitlin:
Mikie Sherrill, thanks. Thanks so much for coming across the Hudson this morning to join us. Let’s just start with, I think, the kind of electricity or energy policy issue most associated with you. Is there a rate freeze in New Jersey right now? And are your constituents, the rate payers, are they still angry about their electricity bills?
Mikie Sherrill:
That’s a great question. So, yes, there is a rate freeze. In fact, that was a commitment I made. And so I didn’t, I would say less than an hour into my administration, the middle of my inaugural address, I declared a state of emergency on utility costs, froze rates, and then at the same time signed executive orders to increase power generation across our state. We’ve been at it ever since. And the movements we’ve made will save New Jersey rate payers over a billion dollars a year as we are implementing all of these changes. And, but no, rate payers are not happy in New Jersey, nor should they be, because rates did go up double digits. So they saw a large increase. And, you know, in large part, there had been a lot of people asleep at the wheel on how we were going to move forward in advanced technologies and generate more power and drive down costs.
Matthew Zeitlin:
So as I understand it, a component of those executive orders was taking some of the funding that comes from the regional greenhouse gas market and putting that into rate relief. You know, there is stuff on any New Jersey ratepayers bill that funds things that are government programs, energy programs. Have you rethought kind of both the RGGI and the societal benefits charges to think about why are we adding stuff onto the bill instead of, you know, making it cheaper?
Mikie Sherrill:
So we actually have taken stuff off the bill. There was an incentive on our bill that had been in place for years to incentivize our utility companies to join PJM. Well, they joined PJM years ago and they weren’t going to leave. So we took that off the bill and we just did that to drive down costs. We did use a little bit of our Reggie friends because there had been some rate cases that had already been made in the previous administration that we had to address so that we could keep rates flat to meet our commitment. What we’ve really done, though, that I’m very excited about with some RGGI funds is to put $100 million incentives into solar and battery storage projects so that we can see more generation in these clean power technologies. And I think that’s something that we’re going to see. EDA has just been putting that at our economic development authorities. So we’re very excited about what’s coming.
Matthew Zeitlin:
Yeah. And then just kind of building off of that. Obviously, New Jersey has aggressive climate commitments. How do you talk to your how you’re going to meet those climate commitments when they’re, I think everyone would say they’re most concerned right now about kind of that number on the bottom of their bill.
Mikie Sherrill:
Certainly. Look, we have, you know, when I say we have an affordability crisis, it’s not just one thing. It’s a crisis because it’s everything. Housing prices are up in some cases by 60% in some towns in the last five years. We have utility costs up by double digits last year. They were set to go up double digits this year until I froze them. We have, you know, the federal government’s cutting health care. So we have 70,000 people that can’t afford to be in the affordable care market anymore. We have about 300,000 people who are being kicked off the Medicaid rolls that we have to deal with. So there is a crisis going on. So you cannot simply say to people, you know, sorry, your bills are just going to keep skyrocketing. That is not the answer, which is why we’ve acted so aggressively.
Mikie Sherrill:
I approved 18 solar and battery storage projects in the first six months because we knew the federal credits were going to run out if we did not get that done. So that’s why we had to take on permitting reform right away to make sure we were growing that. I lifted a 50-year nuclear moratorium.
Mikie Sherrill:
We have continued to look at new and innovative things. A lot of people are talking about virtual power plants to get more capacity and drive-down costs. We are implementing that. I would suggest, and we were talking a little bit about this before we went on, it was so interesting. I’m one of one of the very few people that actually ran in 2025. So we knew the landscape. We knew what Trump was ending. We knew what the future looked like. We knew what we could and couldn’t do and spaces that we’d have opportunity and where opportunity was shut off from us. So we we could hit the ground running. And we also took advantage of best in class people.
Mikie Sherrill:
We have, she’s sitting right there, Maddie, who’s worked in New Jersey Power and understands it very deeply. We have Elizabeth Knoll, who came out of the federal government, who worked for Granholm and now is working for New Jersey. We have amazing people who are developing these new and innovative things. And I think the reason that New Jersey has now become a market leader in how you advance clean energy in a really innovative way is because we’ve just set up this government. So everything’s starting from, okay, where are we and how do we get to a better place and taking on all those new innovations.
Matthew Zeitlin:
Yeah, I mean, we were talking backstage, you know, when I took this job three years ago, I had no idea I’d be writing so much about energy policy in the state of New Jersey, but from the campaign and then, you know, in your first year here, there’s been so much going on. Obviously, we need to talk about data centers, you know, not too long ago. New Jersey had a program, a tax, you know, abatement, a tax incentive to attract data centers to the state. Obviously, there’s been a lot of local backlash to them. There was an enforcement action, I think, this morning in Vineland, New Jersey. That tax incentive has, I believe, been reversed. From your perspective now, if a data center developer wants to set up in New Jersey, what do they need to do?
Mikie Sherrill:
Well, we’ve laid out exactly what they need to do. They need to bring their own energy. They need to invest in our grid. They need to report their water and power usage. They need to hire good talent so that they create jobs in the community. And they need to bring community benefits. We’ve also put them in their own rate class, so they are not harming other rate payers. And we mean business. And I think you can see that with the action we brought against the Vineland data center. So this is not a free ride for anyone. If they want to engage in building this out, it has to be a benefit to our communities in New Jersey.
Mikie Sherrill:
What was so interesting to me, I was telling you about different financing agencies and different power generators and what this was going to look like going forward. And it was so fascinating to me to see the difference between the old and new. Some people at the table are saying, oh, you know, people are saying don’t invest in New Jersey because labor cost of labor is high. And I said, that is so fascinating. You’re telling me that because I have heard from so many people about how they’re dying to invest in New Jersey and they want to know how. And I said, yeah, we’re a labor state. You’re going to have to pay for talent. But at the same time, we are laying out exactly how you invest in New Jersey to take a lot of the risk out of it. But you have to come to the table early. You can’t just come in and say, work out some deal in back rooms and come say, now I’m going to plop a data center here.
Mikie Sherrill:
I mean, there are places in New Jersey where you should not be building data centers. There are places in New Jersey where it might make sense, but the towns and communities are going to decide that. So you have to start engaging early with them to explain what you want to do and why you want to do it. And finally, I’ve said, and you’ve, I told a data center, I said, and you guys have been horrible at it. I’m just telling you, nobody knows what a data center is and you need to explain why it’s even important. Are you curing cancer? You know, what are you doing? Why is this a societal benefit. And then I’ll end by saying, look, it’s up to businesses. They make money, right? Scientists innovate. Government needs to protect people. And that’s where government has been asleep at the wheel. And that’s why I think you see so many people not trusting innovation right now or where it’s going, because government needs to protect people from these downside risks. And right now, I would say the federal government’s not going to do it, which is why as a state, we are engaging so aggressively.
Matthew Zeitlin:
So obviously we were talking about this backstage, New Jersey has this great history of innovation technological development, and right now you have a lot of advanced industries in New Jersey — a pharmaceutical industry, financial services you have a lot of research around the Princeton National Lab. When you’re trying to attract these kind of next generation industries how do you then kind of, on the other way, how do you kind of assure them that they can set up large energy consuming facilities that, you know, are that anchor those industries?
Mikie Sherrill:
It’s kind of interesting twofold. I would say to a large extent, we don’t need to attract some of these innovators. We need to keep them. Innovation starts in New Jersey. We have a million different spinoffs. We were talking about they’ll do fusion and they’ve already got the magnets that are found few places in the world. I mean, they come and spun off from the National Lab at Princeton. We have companies like that all over the state. And we have states like New Mexico that are constantly saying, you know, here, come here. And people in New Jersey, and if you’re not from New Jersey, this may surprise you, but people in New Jersey love New Jersey and we want to stay there. And we want our kids to go to the great schools there and we want to continue to grow businesses. So companies don’t want to leave New Jersey. We just have to make sure they have enough, you know, that there’s not some other incentive driving them away.
Mikie Sherrill:
At the same time, when you say, how can I assure that people are going to have all the power they want, we are creating a structure so that people can make sure that they have clean power generation. That’s why something like a virtual power plant is so interesting. But it is not on the state to kind of assure you can do whatever the heck you want in power generation. It is up to the companies to work with us to say, okay, I want to invest in this. This is going to be a net good for the people of New Jersey. So for example, I’m going to build a virtual power plant. I’m going to have battery packs in everyone’s basement. I’m going to pay them to do that. And we’re going to generate new clean power for this entity. That is how they need to come to work.
Mikie Sherrill:
And I would again say that that was what was so interesting at the table, because there are people who get that. In some of the most innovative power generating companies, in some of the most innovative technological companies, they get that. They know where this is all going. Some of the old school companies are still sort of coming to the table saying, what can you do for me? That’s not where we are right now. We need to understand what benefit can you bring to the people of New Jersey.
Matthew Zeitlin:
And you mentioned earlier that, you know, your gubernatorial race was in 2025. We obviously have the midterms coming up in November, and then we have, you know, another election in 2028. What, when Democratic candidates come to you and ask about how they should talk about energy and electricity policy, or if they’re not coming to you and you would like to say something to them, what are you telling them? How they, you know, obviously every state, every district’s different, but what are some … What are some things you learned in 2025 that could be applied elsewhere in the country?
Mikie Sherrill:
Sure. I just want to go back one second. I know we’re on such limited time. That’s why I’m speaking fast. I would say the reason I was saying what can you bring to New Jersey is because the business case has been made for innovation technologies, and they are raking in billions of dollars. And we just need to make sure that as we build out these systems, that it goes to a benefit to everyone, that we are not simply funneling billions, trillions of dollars into a few people in Silicon Valley. We want to make sure this is a net good. That’s what I said government does, is we protect communities from those downside risks and we invest and create opportunity there. That’s what we’re looking to do, is making sure everybody gains here.
Mikie Sherrill:
The thing I would tell people who are running is you have to be nimble, You have to be innovative and you have to be aggressive and you can’t, you have to take risks. The status quo is not working for anyone. The can has been kicked down the road on too many different issues. And if you were going to try to duck your head and say some mealy mouth thing like, you know, we’re going to do all of the above and, you know, and it’s, you know, everyone’s welcome and we like business. That’s not going to cut it. you have to be able, I mean, we charged through the campaign by understanding deeply what was going on in our state. And so we were joking. I would say, you know, a lot of people in the whole market couldn’t tell you what PJM is, right? Still, a lot of governors probably couldn’t really delineate it. We knew everything about everybody because when your utility bill goes up by double digits, the person you’re going to hire to be the no boss of your state better understand why. And exactly what they can do to fix that.
Mikie Sherrill:
And then I have to convince people, because the final thing I’d say is, I’d say since Reagan, this idea of like government’s always the problem, get them out of the way and everything goes well, has come to its logical conclusion, right? There are areas where we need government to function, and we need government to function well, not just to sort of regulate stuff to actually drive innovation, to drive success for people, to drive opportunity, and make sure the rising tide lifts all boats. That’s what has been missing in so many cases. And so I think if you want to run for us, if you want to hold the public trust, if you want to be a public servant, then you need to engage deeply and you need to be really good at your job. And that means telling people exactly what you can do to make their lives better.
Matthew Zeitlin:
I think that’s probably as good a note as any to end on. Mikie Sherrill, thank you so much.
Mikie Sherrill:
Well, thank you. I really appreciate it.
Matthew Zeitlin talks with the New Jersey leader at Heatmap House at New York Climate Week.
Governor Mikie Sherrill is a former Navy pilot, federal prosecutor, and a member of the U.S. House of Representatives. She was elected New Jersey's governor in November 2025 in a campaign dominated by the state’s surging electricity prices.
For this episode of Shift Key, Governor Sherrill joined Heatmap correspondent Matthew Zeitlin for a live conversation at our Heatmap House event, part of New York Climate Week. She reflected on electricity inflation, power markets, and what a data center developer would need to do to build in New Jersey.
Shift Key is hosted by Robinson Meyer, the founding executive editor of Heatmap News.
Subscribe to “Shift Key” and find this episode on Apple Podcasts, Spotify, Amazon, YouTube, or wherever you get your podcasts.
You can also add the show’s RSS feed to your podcast app to follow us directly.
Here is an excerpt from their conversation:
Matthew Zeitlin: So obviously — we were talking about this backstage — New Jersey has this great history of innovation technological development. And right now you have a lot of advanced industries in New Jersey — a pharmaceutical industry, financial services you have a lot of research around the Princeton National Lab. When you’re trying to attract these kind of next generation industries, how do you kind of assure them that they can set up large energy-consuming facilities that anchor those industries?
Mikie Sherrill: It’s kind of interesting, twofold. I would say to a large extent, we don’t need to attract some of these innovators, we need to keep them. Innovation starts in New Jersey. We have a million different spinoffs. We were talking about, they’ll do fusion, and they’ve already got the magnets that are found few places in the world. I mean, they come and spun off from the National Lab at Princeton. We have companies like that all over the state. And we have states like New Mexico that are constantly saying, you know, here, come here. And people in New Jersey — and if you’re not from New Jersey, this may surprise you — but people in New Jersey love New Jersey, and we want to stay there. And we want our kids to go to the great schools there and we want to continue to grow businesses. So companies don’t want to leave New Jersey. We just have to make sure they have enough, you know, that there’s not some other incentive driving them away.
At the same time, when you say, how can I assure that people are going to have all the power they want? We are creating a structure so that people can make sure that they have clean power generation. That’s why something like a virtual power plant is so interesting. But it is not on the state to kind of assure you can do whatever the heck you want in power generation. It is up to the companies to work with us to say, okay, I want to invest in this. This is going to be a net good for the people of New Jersey. So for example, I’m going to build a virtual power plant. I’m going to have battery packs in everyone’s basement. I’m going to pay them to do that. And we’re going to generate new clean power for this entity. That is how they need to come to work.
And I would again say that that was what was so interesting at the table, because there are people who get that. In some of the most innovative power generating companies, in some of the most innovative technological companies, they get that. They know where this is all going. Some of the old school companies are still sort of coming to the table saying, what can you do for me? That’s not where we are right now. We need to understand what benefit can you bring to the people of New Jersey.
You can find a full transcript of the episode here.
Mentioned:
Matthew on Governor Sherrill’s electricity rate freeze
Previously on Shift Key: Energy Secretary Chris Wright on Trump’s Pro-Nuclear, Pro-Fossil Fuel Agenda
Previously on Shift Key: Al Gore on AI, ‘An Inconvenient Truth,’ and the Biggest Surprises of the Past 20 Yearst 20 Years
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The bill would let states and utilities discriminate against data centers and crypto miners, requiring them to pay higher rates to cover the full cost of any system upgrades.
Call it the data center double tap.
A wonky set of provisions in the Senate’s bipartisan permitting deal would rewrite federal electricity law to allow states and utilities to discriminate against artificial intelligence data centers and crypto miners for the first time.
The proposal would force AI data centers to pay for any new transmission infrastructure required to serve them — while still paying full freight to use the rest of the power grid. It could even let states require the facilities to subsidize other customers’ power rates.
Senator Martin Heinrich, the ranking Democrat on the Senate energy committee, mentioned the provisions during a press event announcing the deal on Wednesday, but they have so far attracted less attention than the bill’s other measures.
If enacted, the bill will “mean that we actually require big load centers — whether that’s a factory or a data center — to not pass those costs on to the American consumer by statute, not suggestion,” he said.
The bill arguably goes further than that summary. It creates new carve-outs in federal law that disadvantage data centers and crypto miners specifically, allowing states to discriminate against them as compared to other large-scale customers. It also protects electricity customers from the future risk of data centers failing to pay their bills.
The proposal comes at an auspicious time. Utilities are already gearing up to spend tens of billions of dollars building new transmission lines and power infrastructure to meet energy demand from AI data centers. The law would seek to ensure that tech companies and data center developers bear the cost of those upgrades.
Since the data center boom got underway, just about everyone involved — tech companies, utilities, environmentalists, and even President Trump — has agreed on one thing: Normal Americans should not pay for data centers’ burden on the power system.
These expenses can be significant, especially for the transmission system. Because a single computing facility can guzzle gigawatts of energy at once, compressing a city’s worth of power demand into just a few acres, it often requires the construction of specialized new infrastructure, or it risks causing blackouts and brownouts for nearby customers.
In 2024, utility customers in the country’s largest power market paid $4.3 billion for transmission upgrades to supply data centers, according to a Union of Concerned Scientists report.
Trump enshrined guarantees against these payments in his Ratepayer Protection Pledge in March. That document vowed that data center companies must pay for all of the electricity used to run their facilities, any new power plants required to generate that electricity, and any “new power delivery infrastructure upgrades.”
There’s just one issue: Under federal law, the last part of that pledge is nearly impossible.
Since the early 1990s, federal law has prohibited utilities from charging customers for both the cost of using specific transmission infrastructure and the cost of using the rest of the power grid.
The origins of that ban go back to a 1992 case where a power plant in one utility’s service area wanted to sell electricity to a neighboring utility. The local utility wanted to charge it the “normal” cost of using its power grid, plus a special fee to cover the cost of crowding its own customers off the necessary transmission lines.
The Federal Energy Regulatory Commission ruled that was illegal. Instead, it said, utilities could make a customer pay for the “incremental” cost of using specific transmission lines, such as those built to service their facility. Or they could charge for the “embedded” costs of the existing power grid.
Utilities could not charge customers for both “incremental and embedded” costs, it said; instead, utilities had to choose the higher of the two. FERC formalized the policy in 1994.
Electricity law has changed significantly since then, and those FERC rules don’t apply to power plants, Ari Peskoe, the director of the Electricity Law Initiative at Harvard Law School, told me.
But the ban still applies to electricity customers — even very big ones, like data centers. Peskoe wrote a Utility Dive article in April credited with first identifying the clash between the FERC rules, the data center boom, and the White House’s pledge.
The rules have serious implications for energy affordability. In practice, virtually every utility today is charging data centers for the “embedded” cost of using the existing grid, Peskoe told me. That’s because utilities want to avoid fights with each data center about which transmission upgrade costs are “incremental” and which are “embedded.”
Instead, utilities are forcing all of their customers to pay for the cost of transmission upgrades to serve those data centers. That means data centers will likely drive up normal Americans’ electricity rates for the next decade or so, even if officials, lawmakers, and tech companies say they don’t want that to happen.
The Senate proposal would change this, instructing FERC to require utilities to charge data centers for the cost of any new grid upgrades required to serve them as well as the costs of the underlying grid. In other words, it would mandate data centers pay for embedded and incremental costs.
These types of customers “should incur the full cost of the transmission service they require,” the bill says. This change would apply narrowly to data centers, crypto mining operations, and any facilities doing AI training — essentially discriminating against data centers under federal law.
The bill would also write a new section into the Federal Power Act that would require data centers, crypto miners, and other computing facilities larger than 20 megawatts to cover the entire cost of their service. The bill says utilities can’t spread the cost of providing energy or building infrastructure for data centers to any other customer.
If data centers leave a contract early, they will still have to pay for the full cost of those grid upgrades. And before a utility can upgrade any of their infrastructure to serve a data center, it must get “financial assurances or contributions” from that facility to cover the costs of doing so.
The bill also allows states to go further than these provisions — they can discriminate against data centers, set special rates by which data centers subsidize other customers’ power rates, and auction off the right to connect to the power grid.
Since I’ve learned about these provisions, I’ve struggled with what to call them. They aren’t quite a new tax on data centers, because the government does not collect the revenue. But many of them have tax-like qualities: They impose significant new costs on future data centers that would then be used to pay for upgrades to the broader power grid, and they protect the power system from the downside risks of a data center bust. They also allow for cross-subsidy of the power system, where payments from data centers can reduce everyone else’s electricity rates.
The law would bring federal rules governing electricity somewhat closer to those that already exist for natural gas, though it goes much further than those rules, too. Since 1999, FERC has generally assumed new interstate natural gas pipelines should be entirely paid for in an “incremental” way, meaning that new shippers or customers are supposed to bear the costs of service expansion alone. Having customers pay for embedded and incremental pricing remains illegal under federal natural gas law.
When combined with other provisions in the bill — such as those that make building new interstate transmission lines much easier — the new policies could help spur a large-scale buildout of electricity infrastructure paid for by the data center boom.
But even setting that more ambitious potential aside, the law would cover existing holes in the laws protecting Americans from paying for the data center boom.“I think it’s an improvement on the status quo,” Peskoe told me. “I think it’s consistent with data centers paying their ‘fair share,’ and consistent with the text of the Ratepayer Protection Pledge.”
And it is also “consistent,” he added, “with how normal people might think about these issues.”