In President Joe Biden’s first State of the Union address on March 1 he briefly discussed the need for clean energy tax credits to lower households’ energy costs while helping the Biden administration meet its clean energy goals.

Biden said, “Let’s provide investment tax credits to weatherize your home and your business to be energy efficient and get a tax credit for it; double America’s clean energy production in solar, wind, and so much more.”

While the Build Back Better Act (BBBA) containing Biden’s clean energy proposals is currently stalled due to concerns from Sen. Joe Manchin, D-West Virginia, about the scope of the $2.2 trillion iteration of BBBA, the $325 billion clean energy tax incentives the bill contains continue to have strong support from the administration and Congress, including Manchin.

Even though the clean energy generation priorities have gained the most attention, the need for clean energy storage is a growing priority. The Biden administration has set a goal of achieving 100% carbon pollution-free electricity in the United States by 2035, and expanding clean energy storage is needed to achieve this goal. The Biden administration has also set a goal of permitting 25 gigawatts of solar, geothermal and onshore wind energy capacity on public lands by 2025. Increasing the storage capacity of renewable energy will help attain this goal. The Unites States has made initial progress towards increasing its storage capacity, as $1.5 billion was invested into storage, thus installing 3.5 gigawatt hours of new storage capacity in the United States in 2020. More information about the Biden administration’s clean energy goals can be found in this previous Notes from Novogradac post.

Last year saw an increase in clean energy capacity and the total clean energy capacity in the United States has now surpassed 200 gigawatts. Though this is enough to power about 2 out of 5 households in the United States, overall clean energy capacity installation still needs to increase. Only 45% of the needed new clean energy capacity was installed in 2021 to meet the United States’ current emissions goals. While the pace of clean energy installation needs to increase, storage projects need to be constructed to compliment these projects in order to provide energy during peak demand, as the generation of wind and solar energy may not occur during peak demand. Only 10% of the clean energy projects in the pipeline are for battery storage. Expanding the renewable energy investment tax credit (ITC) will help to boost investments in clean energy capacity and storage.

Installation of Clean Energy in 2021

Texas saw the highest amount of clean energy installation in 2021 followed by California:

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In the fourth quarter of 2021, 1.173 gigawatts of battery storage were installed, which is the first quarter where more than 1 gigawatt was installed. In 2021, a total of 2.599 gigawatts of battery storage were installed, which outpaced 2020 by 1.7 gigawatts. The growth of both clean energy capacity and clean energy storage shows the need for these projects to be combined to meet the Biden administration’s clean energy goals.

Clean Energy Capacity by State in 2020

The chart below lists the percentage of wind and/or solar energy produced by each state in 2020, according to the United States Energy Information Administration:

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Clean energy only accounts for a small percentage of electricity generation in many of the states in the chart above. To help states increase their capacity for clean energy, investors need to expand storage projects to provide energy when clean energy projects cannot actively produce electricity. The solar energy sector has been expanding, but it is dependent on the growth of the solar energy storage capacity. Solar-plus storage projects have been increasing in recent years. As the use of solar energy increases, so will the need for solar energy storage. Thirty-four percent of solar energy projects in the pipeline are paired with battery storage projects, the highest of any clean energy projects to be paired with storage.

ITC Eligibility

The ITC as it stands can apply to energy storage if the battery uses renewable energy from a solar or wind project that is already claiming the ITC. Storage projects are only eligible for the ITC if it meets the dual use test. According to the dual use test, a storage project is only considered solar if no more than 25% of its energy inputs come from sources other than solar. This would be the same for wind energy. To the extent this threshold is surpassed, the storage project will not be eligible for any ITC, however, by staying below the threshold, the storage project will be eligible for the ITC. A taxpayer can only claim the ITC if the battery storage is part of the generator. The ITC cannot be claimed for stand-alone storage projects. If the ITC were expanded to cover stand-alone projects, claiming the ITC for storage projects would be easier. However, later improvements can qualify for the ITC.

To best ensure a storage project will qualify for the ITC as it stands, it should only use solar energy from a single solar project and both the battery and solar facility should be installed simultaneously. The battery also should be located on the low-voltage side of the main transformer and the whole project should be owned by the same taxpayer. These requirements limit the amount of storage projects eligible for the ITC, but creating an ITC for storage and/or expanding the ITC to fully cover storage would help to spur additional investment into storage.

Policy

As the regulations currently stand, there are limitations to what storage projects can claim the ITC. One cannot claim the ITC on part of a project and the renewable energy production tax credit (PTC) on another, so it is not recommended to combine a solar project that claims the ITC and a wind project that claims the PTC. At the moment, there isn’t incentive to currently combine wind PTC deals with storage. However, recently proposed legislation could expand the ITC to include more storage projects.

The Energy Storage Tax Incentive and Deployment Act of 2021 (H.R. 1684; S. 627) was introduced  and would expand tax credits for batteries that have at least 5 kilowatt hours of capacity and would expand the tax credits to include storage attached to residential properties and that have at least 3 kilowatt hours of capacity. This bill was also previously introduced in the 116th Congress (H.R. 2096; S. 1142).

The clean energy proposals in BBBA also include a proposal to allow the ITC to finance stand-alone energy storage, but as mentioned above, the BBBA is currently stalled in the Senate due to Manchin’s concerns. Whatever the fate of BBBA may be, there remains a decent possibility that ITC expansion, including the eligibility for stand-alone storage, will advance and be a key component of Biden’s clean energy priorities.

Stay tuned.