The U.S. needs a storage ITC to reach carbon-free electricity goals

Swinerton’s Mira Loma, California, energy storage project.

The United States needs energy storage to reach the carbon-free electricity goals necessary to curb the worst effects of climate change. Storage technologies make renewables dispatchable like fossil fuels, yet they’re still not in abundant use.

“We are seeing significant demand for solar paired with energy storage across the United States for use-cases such as firming, shaping, minimizing curtailment risk and enabling the solar to look more like baseload power,” said Josh Rogol, chief development officer at Strata Solar, in an email.

One reason adoption of storage hasn’t exploded yet is the lack of a federal tax credit to reduce the cost of deployment. Currently, storage must be paired with solar to receive an ITC. Further, a battery can only take advantage of the solar ITC if it is at least 75% charged directly from the PV asset it’s paired with for five years. That means the paired batteries cannot perform many of the additional demand arbitrage functions they’re capable of, lest they forfeit the ITC.

“The structure of the investment tax credit today drives technology and design decisions that often lead to suboptimal technical and financial structuring that could be ameliorated by broadening the ITC eligibility, specifically by eliminating the need for the [battery] to be charged by PV during the five-year ITC recapture period,” Rogol said.

Swinerton’s Mira Loma, California, energy storage project.

Morten Lund, partner at law firm Stoel Rives, said hybrid solar + storage facilities hamstring batteries.

“[Batteries] can do 100 different things, but if you can only charge from the solar system, you can only do really two or three or even just one. They basically become time-delay equipment and nothing else,” Lund said. “If you unbundle them, now you’re free to do full grid-support services from your battery, while also providing that time-shift service for the solar system.”

Those grid-support services include frequency regulation and voltage support, while many battery owners also want to take advantage of time-of-use rates and charging from the grid on poor solar harvest days.

Mark Frigo, VP of storage for Nexamp, said the many different functions of batteries make it difficult for them to be classified under the existing rules and regulations for energy assets, preventing them from taking advantage of credits that other assets can. At times, batteries can fall under all energy categories: generation, transmission and distribution and load.

“That’s been the biggest challenge. It doesn’t neatly fit into one of the categories as the rules have been outlined by both federal and state authorities,” Frigo said.

A more renewable power grid needs batteries

For the U.S. power grid to vastly increase clean energy on the grid, ample storage must be available to use clean power at all hours, not just when the sun is shining or wind is blowing.

A Strata Solar energy storage project in North Carolina.

“If we must transition to a world where we produce energy without carbon, the missing piece is batteries,” said Gregory Jenner, partner at Stoel Rives. “Although I think we’ll get there eventually, we’ll get there a lot faster with some sort of governmental incentive that juices the process, just like we did with solar.”

Bernadette Del Chiaro, CEO of the California Solar + Storage Association, compared the status of storage now to where solar was in 2007-08 — enjoying slow and steady upward growth, but in need of long-term government programs like the ITC to increase the pace and reach climate goals. And just as importantly, federal support for solar could be a signal to the states to do their part to implement storage-friendly policies.

“It would be really a clear indication that this is something that the United States wants to really make happen, bring to scale and deploy throughout the country to help stabilize the electric grid and transition to clean energy,” Del Chiaro said. “What we need in order to bring that technology to scale is these types of long-term initiatives and incentives, government programs to give the industry and give consumers that assurance that this is a technology we want to invest in.”

Del Chiaro appreciates that storage can qualify for the ITC in conjunction with solar, but said standalone storage projects have to be very unique to pencil out without a tax credit at this time. One example where it’s worked is a Tesla storage system installed at the Ventura River Water District plant in Ojai, California. The energy storage system is charged from the grid at night when electricity is cheaper, then the stored energy is used to pump water up the hill during the day at peak electricity hours.

“They’re able to do it because they’re in a really unique situation with really high demand charges, but there are many other customers that would want to add a battery to their facility but for whatever reason aren’t in a place to or can’t add solar,” Del Chiaro said.

Industry awaits new opportunities

Nexamp develops solar + storage projects and believes a storage ITC would open significant storage development opportunities, both with and without solar. The ITC cost savings for a company like Nexamp could be passed down to the end user, making for more affordable storage projects.

A solar + storage project by Nexamp.

Standalone storage legislation would also offer Nexamp more flexibility in system design and grid-support functions.

“We would still pair it with solar, but you would design the system, perhaps, instead of having a DC-coupled project, you would have an AC-coupled project, where you’d be able to charge more from the grid,” Frigo said. “As a result, you might be able to offer more ancillary services than you would have been able to otherwise.”

Swinerton works as an EPC on both solar + storage and standalone storage projects and is also supportive of an additional ITC, but  the company expects market growth to continue even without one.

“We are seeing a number of those projects moving forward and expect, with or without change to the ITC on storage, that those projects will continue to move forward because of the economics and the need for those type of hybrid projects,” said George Hershman, president of Swinerton. “Those types of enabling platforms, whether it be energy storage or clean hydrogen, are all good for the renewables industry.”

The status of standalone storage legislation

In March, bipartisan congressmembers introduced standalone energy storage tax credit legislation in both the House and Senate, and President Joe Biden released his infrastructure bill that also alludes to such a credit, but it’s still uncertain if these initiatives will pass. Until then, developers are left waiting.

“It will be great once they get it done. In the meantime, it’s making everybody’s life difficult because nobody can plan,” Stoel Rives’s Jenner said.

A solar + storage project by Nexamp.

While the standalone ITC is important to boost the nascent energy storage market, Del Chiaro said other policy initiatives are also key to growing storage in the country.

“You’re not going to be able to bring the economy of scale for storage on the back of an ITC alone. We need to have a suite of policies like what we had for solar to help bring this technology to market,” she said.

A standalone storage ITC would mostly assist developers of larger projects, according to Del Chiaro. Residential consumers will likely continue to want their storage paired with solar, so extending the solar ITC is crucial too.

Strata Solar’s Rogol said the most important policy change necessary to benefit storage is a universal tariff system that can compensate storage projects for all the benefits they provide to the grid.

“The storage market must be compensated for more than time-of-use arbitrage for all of its benefits to the grid to be unlocked,” he said. “So long as battery energy storage has a market signal that it can react to, it can provide a compelling economic case in many parts of the grid.”

Lowering soft costs by streamlining permitting and codes and standards is also important for storage growth.

“That type of thing seems so small and boring, but it can sort of make or break this industry,” Del Chiaro said. “A ton of work went into [codes and standards] on the solar side and it took us a while, so we can learn from that and get out ahead of it.”

By creating a standalone storage ITC, extending the solar ITC and streamlining storage permitting, the storage market could rapidly scale and allow for more intermittent renewable energy to come onto the grid.

“We need the full suite of policies to really make this technology pencil out for consumers, drive those prices down and create that mature market that we are starting to enjoy on the solar side,” Del Chiaro said.

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