According to the American Clean Power Association, the United States needs to build 100 gigawatts (GW) of energy storage by 2030 to meet its climate goals, but only 3 GW have been built to date. The industry has long advocated for stronger policy support to make this goal a reality. Now it's finally here. The Inflation Reduction Act of 2022 will serve as a key driver for energy storage deployment in the U.S. and foster the nation’s transition to a clean energy economy.
The Inflation Reduction Act is the largest federal investment for climate in United States history, with a record of $369 billion set aside for energy and climate change out of the $430 billion package. The legislation will accelerate the deployment of low carbon technologies and spur domestic manufacturing while putting America on track to decrease greenhouse gas emissions by about 40% below 2005 levels in 2030.
The Inflation Reduction Act relies heavily on the tax code to advance the deployment of clean energy technologies and to combat climate change. The most important change for the energy storage industry is that standalone energy storage assets are now eligible for the investment tax credit (ITC). This is a measure that the industry has long advocated for.
Until now, energy storage was only eligible for the ITC if the batteries were connected to a solar energy project. Standalone storage provides numerous benefits beyond increasing the value and utilization of intermittent renewable power. It can provide backup power to critical load centers and enhance grid flexibility, reliability and resilience.
Under the Inflation Reduction Act, the ITC was increased to 30% under a ten-year fixed term for both standalone storage and solar-plus-storage facilities. In addition to the extension of the ITC, new bonus credits were created to multiply the benefits of clean energy deployments and achieve President Biden’s manufacturing and environmental justice goals. Developers can claim an additional ten percent bonus credit for using project equipment that is manufactured in the U.S., and another ten percent for assets that are located at decommissioned fossil fuel facilities in front-line communities.
Another impactful change that was made to the ITC is the ability for tax-exempt organizations to obtain a check from the Department of Treasury, which is referred to as a direct pay option. This means that entities like municipal utilities and electricity cooperatives that have historically been excluded from tax equity structures like the ITC can now participate – albeit at fifty percent of the value that tax-paying organizations can generate. These entities can now leverage their preferred bond rates for financing and own energy storage assets, which gives them greater flexibility in terms of operations and contracting and increases total potential financial benefit.
These credits will have monumental consequences for the energy storage industry – it will counteract the upward cost trajectory from 2021 and early 2022 supply chain bottlenecks and give investors much-needed certainty to re-ignite investments in the space. Although energy storage has enjoyed a decade-long cost decline, the industry experienced a global pricing reset that slowed deployment earlier this year.
The index for nearly every commodity that is required to manufacture lithium-ion batteries was up, which caused delays for many energy storage deployments in the U.S. Not only that, but because a vast majority of battery cells are manufactured in China, the global shipping crisis contributed to major project delays. Fortunately, the Inflation Reduction Act will also catalyze domestic manufacturing of battery technology in a way the U.S. economy has never seen.
The Inflation Reduction Act builds on President Joe Biden’s recent invocation of the Defense Production Act to accelerate domestic manufacturing of clean energy technologies, providing an infusion of over $60 billion in new funding. Since the bill became law, several major battery manufacturers like Panasonic and LG have already announced plans to set up shop in the U.S. According to Wood Mackenzie, system pricing will decline by 19% by 2031 as battery raw material and cell production capacity increase.
This is part of a very coordinated effort to incentivize domestic manufacturing in the U.S. While the Inflation Reduction Act is the carrot, the Section 301 tariffs on Chinese imports are the stick. It’s still yet to be determined whether the tariffs will be renewed after 2023. But since they enjoy broad bipartisan support, conventional wisdom leads us to believe that they will be and they are expected to step up from 7.5% closer and closer to the 25% maximum. If the new incentives aren’t enough to encourage manufacturers to onshore, the threat of higher tariffs may incentivize them to build factories, which can take two to three years, before they’re forced to increase prices.
Annual demand for lithium-ion batteries is set to surpass 2.7 terawatt-hours by 2030, according to BloombergNEF. The competition for batteries between integrators like Wärtsilä and electric vehicle automakers continues to heat up, with the automotive industry taking up most of the available supply. It’s extremely important that the energy storage industry pursue domestic supply opportunities to give energy producers and developers more security and pathways to meet the domestic content incentives outlined in the Inflation Reduction Act.
As a world leader in power system optimization and decarbonization, Wärtsilä is thrilled about the passage of the Inflation Reduction Act. It’s time to supercharge our energy transition, meet decarbonization goals, lower electricity bills for all Americans and step into our leadership as a clean energy leader.