What the Inflation Reduction Act Means for Energy Storage

The passage of the Inflation Reduction Act over a year ago represented the biggest climate legislation seen in the US so far. It provided investment tax credits (ITC) for standalone energy storage, meeting a major request from the industry.

Manghani, director of the strategy at LS Energy Solutions, discusses the impact of this policy change, and the open questions that remain.

What the Inflation Reduction Act Means for Energy Storage

It's been a year since the Inflation Reduction Act (IRA) was passed on August 16, 2022. Excitement is high in the renewable energy industry. The IRA's broader decarbonization impacts have been widely discussed.

The consensus is that the IRA will accelerate, but not fully achieve, the transition to net zero emissions. Analyses after its passage predicted a 20-30% increase in solar, wind, and storage installations over the next decade.

IRA benefits boosting storage growth include the energy community adder, 48C advanced energy project credits, direct pay and transferability of ITC, and extended tax credits for wind and solar. Notably, storage has specific incentives across the value chain.

Key IRA energy storage provisions include:

a) ITC for standalone storage: The industry previously claimed ITC for solar-paired projects, but this is the first eligibility for standalone storage. Most projects will qualify for at least a 30% credit by meeting wage and apprenticeship conditions.

Improved economics will drive more orders and deployments. Rapid acceleration highlights other obstacles like interconnection delays.

b) 45X manufacturing tax credit: The IRA introduced credits for manufacturing various clean technologies, including batteries and inverters. Inverters are narrowly defined, overlooking storage inverters.

The $45/kWh credit on US-made cells and modules will reduce the gap with Asian products. But it is uncertain whether domestic products can be cost-competitive.

For example, recent China LFP cell prices have been in the low $100s/kWh. After 301 tariffs and the 45X credit, US-made cells would need to price around $170/kWh to compete.

c) Domestic content adder: The ITC has a 10% bonus for 100% US steel/iron and 40% US-produced project content.

The May 2023 domestic content notice raised more questions. It disappointed the industry by rigidly linking bonus eligibility to battery cell origin.

Defining costs in terms of manufacturer direct costs seems to require integrators to disclose margins. This conflicts with the premise of "cost to the taxpayer."

The restrictive percentage calculations make the adder almost impossible without full US content across batteries, BMS, and components.

The unachievable requirements make the notice a non-starter. Few if any projects are moving ahead with the 10% bonus.

As the UK transitions to renewable energy sources, battery energy storage systems (BESS) play an integral role in securing energy supplies. BESS provides grid stability by optimizing inconsistent wind and solar generation. It also stores surplus energy when demand is low, so it can be used during peak times. With lithium prices dropping in recent years, BESS presents an attractive investment for utilities seeking profit from selling stored energy at higher prices during high demand.

However, BESS projects face risks from extreme seasonal weather that require planning.