The IRS has favored the coupling of batteries with local solar distributed generation (DG), thus far. It has tied the Investment Tax Credit (ITC) for batteries to the requirement that they be at least 75% supplied by a “qualifying energy source”, such as behind-the-meter solar. But, by reviewing and manifesting a larger interpretation of the guidelines for the ITC, as it may do before the end of this year, the IRS could dramatically boost the battery business while negatively impacting distributed solar in favor of utility scale clean energy, at least until 2021.
Tying batteries to net-metered DG doesn’t help storage economics
Currently, the vision of a scalable market for solar storage seems fleeting. Sexy gleaming packaged Lithium Ion battery solutions are ready and being deployed. But beyond a committed market segment, sales are not likely to soar under current tax policy, because the technology is expensive and the profitable applications are spotty. The developing PACE market is eager to offer straight financing. But our industry has trained energy consumers that “it’s about cash flow”. So when our sales forces propose the alluring idea of clean back-up power to customers, the battery “ROI” busts into the scene like Kramer into Seinfeld’s apartment – hairs stand on end and the air is sucked out of the room.
Batteries connected to a net-metered solar system are dedicated to stand-by power for the most part; net-metering offers better economics than using solar for daily cycling of the bank. Either way you get the ITC (assuming you are sourcing at least 75% of your battery power from your solar system). But you better like that beautiful battery cabinet, because if your emergency power use is 20-hours per year over 10 years, you are paying around 200x your normal power rates for the luxury…Gulp.
One way, currently, to make financial sense of battery storage in many markets (aside from large Demand management) is arbitrage, the leveraging of “Time-of-Use” tariffs to fill your bank with off-peak power for use during the utility’s premium cost hours. So, with no solar panels in the equation, you simply charge the cells with nighttime 8-cent energy and use that juice when the rates run 24 cents/kwh. Cool, but that scenario does not currently qualify for the ITC; and without the ITC, for most markets the cash flow on this method is generally, …meh. Solar beats it handily, generally.
Fixing it could have adverse impact on DG
Bright minds are working on getting more ITC respect for storage. At law firm Akin Gump Strauss Hauer & Feld, energy industry tax specialist John J. Marciano has a shoulder deep into it. “We’re trying to educate [the IRS] on behalf of several leading storage industry players, so that the agency’s interpretation of the ITC is in keeping with the environmental objectives of the US Congress.” says Marciano. ”What does it mean for a battery system to be used in connection with a solar project?”
As I see it, the outcome could include a scenario that, for the next few years, would unwittingly drive a dagger through the courting heart of distributed solar energy in net-metered markets, making batteries a solo act.
It would take two critical IRS updates.
- A statement that a utility’s “All renewable energy tariff” (such as SoCalEdison’s “green rate”) is a “qualified energy source” for battery buyers. This would imply an IRS determination that what matters in the outcome of current energy policy is the overall share of clean energy feeding the grid, rather than the juxtaposition of the “qualifying source” vis-à-vis the batteries being charged. So, solar power brought to you by your utility from a 100-miles away instead of your rooftop would be equally acceptable. This would essentially provide a battery system purchaser with a full 30% investment tax credit (plus depreciation for business applications) by simply committing to a utility’s 100% renewable energy tariff. It would catapult the sales of battery systems, perhaps at the cost of DG market share. Customers would sign-up for a utility’s Time-of-Use Green Rate, then get both arbitrage and stand-by power, along with the tax benefits. Utility scale solar projects would be the other winner.
- Removal of the 75% “cliff”, which currently only allows proportional allocation of the ITC to battery installations above the 75% clean energy sourcing ratio. Allowing a proportional allocation of the ITC to the potential charging percentage of a solar system could lower the average size of a solar system in favor of batteries. So if you are sourcing only 50% of your power from batteries, you’d get 50% of the ITC, and the rest of the bank could be used for power arbitrage. That would reduce the effective cost of the battery/solar combo, while still providing the stand-by feature so many people want. At least one major battery company out there has software nimble enough to allow for that, and others will follow quickly. In such scenarios, people with only a few solar panels could realize proportional tax credit on their battery investment, and that could tip the balance in multiple power markets.
The IRS can twist plots
Like many, I would love to see the storage business scale big; I would would favor anything that helped the economics while boosting DG, especially tax policy. That balance is what folks like John Marciano are busy attempting to cobble. But many years in this industry have taught me that the majority of customers don’t prioritize energy decisions based on independence or environmental objectives; they want reliable energy of equal or better quality at a cheaper price, for the least hassle possible. A simple IRS review that is not carefully thought out could unwittingly have negative impact on rooftop solar and put batteries in play as the property owner’s on-site energy product of choice. Economics aside, a packaged battery solution has none of the construction, costs and timeline issues integral to solar installation; also, you can take it with you when you move, and it works 24-hours a day, so long as it’s charged.
If you’re in the solar or battery business, stay tuned. Attorney Marciano tells me the Senate Finance Committee meets tomorrow Jun 9th on issues directly related to this topic. The ripples of expanded IRS opinions on the ITC might spin either industry in a direction we were not anticipating, for the next few years. In energy, as in many things involving choice, the market follows the money. ITC is our femme fatal.
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Other writings on this publication by Philippe Hartley: