Efforts to introduce investment tax credit (ITC) incentives to support and accelerate the deployment of energy storage in the United States are gaining traction in Congress and the Biden Administration.
Rising Demand for Energy Storage
As more and more of our country's electricity comes from intermittent renewable resources like solar and wind, energy storage is becoming increasingly crucial for maintaining reliability (keeping the lights on) and resilience (ensuring the grid can withstand emergencies such as wildfires and hurricanes), managing electricity costs during peak demand, as well as achieving state-level renewable portfolio standards and greenhouse gas emissions targets.
The Solar Energy Industries Association predicts that by 2025, nearly 25 percent of all behind-the-meter solar systems will be paired with storage, compared with less than 6 percent in 2020. Already, over one-quarter of all commissioned or announced utility-scale solar projects in the United States include storage.
Recent Extension of the Solar ITC
In late December 2020, Congress passed a $2.3 trillion omnibus spending bill. The bill contained an energy research and development investment plan—including $1.08 billion designated for energy storage over the next five years—and key renewable energy tax credit extensions that will provide a substantial boost for federal renewable energy development incentives.
For solar, the legislation provides a two-year extension of the ITC at its current 26 percent through 2022 and at 22 percent through 2023, as well as an extended January 1, 2026, deadline for completing projects that have claimed the credit based on when they started construction under "safe-harbor" provisions. The incentive sunset schedule is now as follows:
- 2021-2022: Residential and commercial solar energy system owners can deduct 26 percent of the cost of the system from their taxes.
- 2023: Residential and commercial solar energy system owners can deduct 22 percent of the cost of the system from their taxes.
- 2024: Owners of new commercial solar energy systems can deduct 10 percent of the cost of the system from their taxes. The ITC is no longer available for residential solar energy systems.
However, despite extensive lobbying efforts by renewable energy and storage industries, the legislation did not extend ITC eligibility to stand-alone energy storage. Likewise, renewable energy advocates were unable to secure a "direct-pay" provision which would allow tax credits to be converted into direct payments from the federal government, rather than as offsets to tax liability.
Existing ITC Eligibility for Solar+Storage
Storage devices paired with solar (and other renewables) are currently able to benefit from the federal ITC under certain circumstances. In past private letter rulings, the IRS has allowed storage costs to be counted as part of a solar installation's cost subject to the ITC, if the batteries are:
- (a) In close proximity;
- (b) Under common ownership (i.e., owned by the same taxpayer); and
- (c) Charged at least 75 percent of the time by the solar energy system, rather than from the grid, over the course of the year.
To claim the full value of the ITC, the battery must be charged by renewable energy 100 percent of the time, otherwise the ITC will be prorated according to the percentage of renewable energy (between 75 percent and 100 percent) that it receives.
Similarly, the IRS has determined that batteries that are retroactively added to an existing solar system can also qualify for ITC, but only if they are charged completely from solar. However, the IRS has not yet formalized guidance for how ITC eligibility applies to solar+storage, leaving developers and investors with some uncertainty.
On March 9, 2019, Representatives Mike Doyle, (D-PA-18), Vern Buchanan (R-FL-16), and Earl Blumenauer (D-OR-3) introduced the Energy Storage Tax Incentive and Deployment Act. This bipartisan legislation would create a standalone investment tax credit (ITC) for energy storage technologies for utilities, businesses, and homes.
The Senate companion legislation was also introduced on March 12, 2021, by Senators Martin Heinrich (D – NM) and Susan Collins (R – ME). The bill further enjoys support from the U.S. Energy Storage Association and Citizens for Responsible Energy Solutions.
On March 31, 2021, the Biden Administration unveiled the American Jobs Plan. Amongst its sweeping infrastructure and tax proposals, the plan would grant a 10-year extension to the ITC and Production Tax Credit (PTC). The plan would also extend the scope of the ITC to include energy storage systems and make the tax credits "direct pay," two changes that have been lobbied for by renewable energy and storage industry advocates for years.
These proposals are in line with the "9 Key Elements" of President Biden's plan for a "clean energy revolution," which include a commitment to invest $400 billion over 10 years in clean energy and innovation. Tax credits will likely be a crucial component of this effort.
Future of Energy Storage Under the Biden Administration
The outlook for energy storage under the Biden Administration is promising. In January 2020, Energy Storage Association (ESA) CEO Kelly Speakes-Backman was appointed to the senior leadership team at the Department of Energy Leadership.
In an interview last November, Speakes-Backman described ESA's top policy recommendations for the 117th Congress and Biden Administration, including the creation of a stand-alone energy storage ITC with a direct-pay option. The Solar Energy Industries Association's 100-Day Agenda for the Biden Administration similarly includes the creation of an ITC for energy storage amongst its top legislative goals.
Now, with the introduction of the American Jobs Plan bill, President Biden is proposing a 10-year extension and phase down of an expanded, direct-pay ITC and PTC for clean energy generation and storage. The introduction of bipartisan bills to extend ITC to stand-alone energy storage is an encouraging development.
Perhaps with the Biden Administration's support, the new Congress will finally extend ITC to energy storage sometime in 2021. Even if Congress does not act, the Biden Administration could provide the energy storage industry with more certainty by urging the IRS to clarify and formalize its guidance on solar+storage ITC eligibility.
The energy team at DWT actively tracks state and federal developments related to renewable energy development. Any questions can be directed to Patrick Ferguson, Anna Fero, or any other member of DWT's energy practice group.