The U.S. energy storage market is growing tremendously. Indeed, IHS Markit projects that over 40 GW of energy storage capacity will be installed by 2022, starting from a base of only 0.34 GW installed in 2012 and 2013. This growth of the U.S. energy storage market is driven by several commercial and regulatory factors, including an increase in recent utility-scale power purchase agreements, declining costs of lithium-ion batteries, the availability of state and, to a certain extent, federal incentives for solar + storage projects. Here are the five main factors guiding the market heading into 2020.
Utility interest
This has been the year of utilities embracing large-scale storage. In February, Arizona Public Service announced that it would add 850 MW of battery storage by 2025. In June, NV Energy announced procurement of 1,200 MW of solar paired with battery energy storage systems from three major solar projects. Following that, the Los Angeles Department of Water and Power announced plans to procure an approximately 300-MW battery energy storage system paired with up to 400 MW of solar electricity under a 25-year power purchase agreement. In late June, Pacific Gas and Electric (PG&E) announced plans to procure approximately 567 MW from three energy storage projects. Large-scale deployment of energy storage systems will only continue to grow as more and more electricity providers embrace the technology.
LCOE case
The declining cost of lithium-ion batteries has been the subject of much interest in the energy storage market. According to research conducted by Bloomberg New Energy Finance, the levelized cost of energy (LCOE) — the cost of a technology delivering energy over its lifespan — for lithium-ion batteries has fallen by 35 percent since the first half of 2018, which is an even steeper decline than the continuing decline in LCOE for solar and wind generation resources. This decline in the long-term cost of supplying electricity from lithium-ion batteries is making battery storage systems increasingly cost-competitive with natural gas-fired and coal-fired power plants.
The RPS piece
State-level programs have encouraged the expansion of the energy storage market. For instance, states like California, Massachusetts and New York have issued renewable portfolio standards (RPS) with strong mandates for utilities to comply with annual target thresholds for procurement from renewables and energy storage. According to the U.S. Energy Information Administration, at least 29 states currently have binding RPS policies. Additionally, some states have begun to offer tax breaks related to energy storage systems. For instance, in 2017, the Maryland Energy Administration announced new legislation establishing an income tax credit for energy storage systems, making Maryland the first state to do so. Furthermore, regulated utilities have been encouraged by their respective state public utilities commissions to include greater renewable and energy storage resources in their resource plans. Consistent with this, Georgia Power recently submitted a 2019 Integrated Resource Plan that proposes procurement of energy from an additional 1,000 MW of renewable resources and deployment of battery storage technologies.
ITC incentive (part 1)
Federal law currently provides for up to a 30 percent business Investment Tax Credit (ITC) under IRC Section 48 based on the qualified tax basis of a qualified energy storage system that is coupled with a renewable energy project. The ITC has played a significant role in boosting the growth of the renewables market and the growth of the energy storage market. In light of this, some in the solar industry have been advocating for a further extension of the ITC or at least a more gradual phaseout. [Editor’s note: A five-year extension of the ITC has in fact been proposed in both the House of Representatives and the Senate as of presstime.]
Although taxable entities generally are eligible to claim the ITC, tax-exempt entities, such as a federal agency or public school system, are not able to do so. In addition, the IRS currently takes the view that an energy storage system must be charged more than 75 percent by a paired solar energy generation resource to be eligible for the ITC. Under the IRS’ current view, if the solar energy storage system is charged between 75 and 99 percent by the paired solar energy generation resource, the amount of the ITC is proportionately reduced. There is also uncertainty regarding the qualification of energy storage systems retrofitted to existing solar projects.
The IRS has provided further clarity in the context of a residential rooftop installation for which a non-business residential ITC was claimed. In a 2018 IRS ruling, the IRS permitted the non-business residential ITC for a qualified energy storage system installed within one year after the completion of the original solar generation resource but required that the energy storage system must be charged 100 percent by the solar generation resource. The application of that ruling to a business installation is unclear.
ITC incentive (part 2)
Due to limitations and uncertainties with respect to application of the ITC, energy storage advocates have pushed for a federal tax credit specific to stand-alone energy storage systems to be passed. These efforts have thus far been unsuccessful but a current U.S. House of Representatives bill in support of this goal, the Energy Storage Tax Incentive and Deployment Act, has been reintroduced to Congress (a similar version of the bill was first introduced in 2016). This bill would grant full ITC eligibility to residential and commercial (including utility-scale) investments in energy storage with a capacity larger than 5 kWh (3 kWh for residential) subject to the same ITC step-down currently set for solar described earlier.
If attempts to extend the ITC or obtain a stand-alone energy storage system federal tax credit fail, it is anticipated that increased state-level incentives or further reductions in costs with respect to solar and energy storage technologies would be needed to compensate for the decline of the ITC.
Despite challenges, the pattern of declining costs, coupled with the availability of long-term offtake and capacity agreements and the availability of federal and state incentives, has made the revenue stream supporting the energy storage market more economically viable and attractive to potential financiers.
Amish Shah, Madeleine Tan, Alyssa Walker and Kyle Wamstad are with Eversheds Sutherland.
— Solar Builder magazine
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