Stand Alone Storage Investment Tax Credit: Game Changing Provision in the Inflation Reduction Act of 2022
On July 27, U.S. Senate Democrats released the text of the Inflation Reduction Act of 2022 – a $370 billion investment to reduce greenhouse gas emissions 40 percent below 2005 levels by the end of the decade. The act includes several climate and energy-related provisions like those included in the Build Back Better Act, which stalled in the U.S. Congress earlier this year. This investment, signed into law by President Joe Biden on August 16, 2022, includes renewable energy tax credits, including a new stand-alone energy storage investment tax credit (ITC) that applies to any system placed in service after Dec. 31, 2022. This article highlights why the creation of a stand-alone energy storage ITC is such an industry game changer for renewable energy deployment and grid services.
Better Economics Mean Accelerated Energy Storage Deployment
The energy storage industry and clean energy advocates have pushed for an energy storage ITC for many years, because it would reduce the capital cost of energy storage projects by 30 percent. According to Wood Mackenzie Power & Renewables, the ITC could boost storage deployments by 25 percent immediately, which is sorely needed for the United States to meet its decarbonization goals. The American Clean Power Association notes that the country needs 100 gigawatts (GW) of new energy storage capacity by 2030 to meet the pace of clean energy deployment to decarbonize the power system by 2035. There is currently just over 7 GW of battery energy storage on the power system, which is equivalent to powering more than 4 million homes through the hours of peak demand on the electric system (either a hot summer day or a winter peaking morning).
Several U.S. states have policies that favor energy storage, either as a procurement target or a requirement to consider energy storage in utility integrated resource plans. An energy storage ITC will undoubtedly increase energy storage deployment in areas of the country that may not currently see projects, because there are no market signals (price and value of energy storage easily understood for investors and developers).
Optimized Siting Will Improve Value to the Grid
Currently, energy storage must receive greater than 75 percent of its stored energy from solar in order to be eligible for the existing solar federal ITC. By extending the ITC to stand-alone storage, it will allow utilities and developers to optimize energy storage facility locations, rather than requiring them to be connected to solar projects. This will help energy storage deliver greater value to the electric grid, providing services including frequency regulation, energy arbitrage, deferral of transmission and distribution projects, and addressing peak energy demand. Stand-alone energy storage also allows for optimal siting, where batteries offer the best value to the grid, rather than forcing colocation with solar projects. The stand-alone energy storage ITC also puts energy storage on a level playing field with other clean energy technologies, such as solar and wind, by accelerating its adoption with lower costs (and in this sense, providing uniform tax credits across all technologies).
Giving Emerging Technologies a Boost
More than 90 percent of the recent energy storage deployments are lithium-ion batteries, but a slate of new energy storage technologies are ready for deployment (e.g., sodium sulfate batteries, flow energy storage). Currently, lithium-ion batteries are the preponderance of energy storage projects (excluding hydropower), but other energy storage technologies will deploy more quickly as costs decline, due to the ITC and greater commercialization.
To qualify for the storage ITC, projects must meet labor standards for wages. A storage project will be able to claim another 10 percent credit if it meets a standard for materials produced domestically and a second 10 percent if it is in a community that faces closure of a coal-fired power plant or is in a low-income community project area.
Propelling Forward the U.S. Clean Energy Agenda
As President Joe Biden signed this bill into law on August 16, 2022, the United States signaled investment in clean energy on a scale it has never done previously. Other countries, such as China, have focused on a strong state investment in clean energy, and now the United States is following suit.