Energy storage is an important part of a modernized energy grid. Energy storage has always been important, but as variable renewable resources become a larger part of the resource mix, energy storage becomes increasingly essential. While the energy industry broadly recognizes the importance of energy storage, there are significant obstacles to the development of energy storage facilities in the U.S., and as a result there are relatively few such facilities currently in operation.
Instead, in recent years, the U.S. has seen the rise of the hybrid power plant – energy storage coupled with generation. The most common combination is solar energy and lithium-ion batteries, but there are many variations. Hybrid power plants (typically) combine storage and generation behind a single interconnection and are contracted and financed as a single facility.
Standalone storage in the U.S. faces obstacles in two major categories – regulatory constraints and cost – and hybrid power plants cleverly mitigate both of those. A hybrid power plant is a power plant and is regulated as such. This avoids most of the regulatory obstacles imposed on standalone storage. Similarly, the storage component of a hybrid solar power plant can be considered part of the eligible basis for investment tax credit (ITC) purposes, thereby effectively applying the solar ITC to energy storage and reducing its cost.
Hybrid power plants also have some dispatchability. This can reduce the volatility normally associated with solar and wind energy. There are, however, significant drawbacks to hybrid power plants.
Modern battery technology is extraordinarily flexible. In addition to the familiar time-shifting function, batteries can also provide ancillary services including spinning reserve, frequency regulation, VAR support and more. These are all important services that provide value to the grid, and batteries can provide these services at only nominal marginal cost. In order to provide ancillary services to their fullest extent, however, the batteries must charge from the grid. Therein lies a fundamental limitation of hybrid power plants. Hybrid power plants in which the batteries are intended to qualify for the ITC historically have not charged from the grid in significant quantities, but instead charge their batteries primarily from the attached generating facility. If they charge from the grid in excess of applicable thresholds, it endangers ITC eligibility.
The Inflation Reduction Act of 2022 (IRA) became law on August 16th. After implementation of the IRA, standalone energy storage that is placed in service after 2022 is an eligible technology under both the current Section 48 investment tax credit (ITC) and its future replacement, the Clean Electricity Investment Credit. This means that energy storage can qualify for the ITC without being attached to a generating facility. The IRA helps mitigate the cost obstacle to standalone storage, and places standalone storage on the same cost level as the storage component of hybrid power plants. Does this mean that hybrid power plants are instantly obsolete? No.
The IRA removes a major obstacle to standalone energy storage, but does nothing to address the remaining obstacles. In particular, the IRA does not address the regulatory obstacles to energy storage.
The regulatory challenges of energy storage in the U.S. are complex. The overall energy regulatory regime was designed long before the advent of modern battery technology, and energy storage does not fit neatly into the old structures. Resulting challenges for energy storage include the inability to access energy and power markets, unclear or inapplicable interconnection rules, rate-base uncertainty and more. While the IRA does not address any of these issues, a host of changes at federal and state levels over the past several years have mitigated the regulatory challenges of energy storage – at least to some extent in some places.
Today, standalone energy storage has meaningful access to markets in several regions, including the California Independent System Operator (CAISO), the Electric Reliability Council of Texas and California (ERCOT), the New York Independent System Operator (NYISO) and the PJM Interconnection (PJM). Several states now also have energy storage mandates. In much of the country, however, standalone energy storage still only has limited access to revenue sources, if any.
This regulatory disparity is reflected in installations. A large majority of standalone storage projects currently operating in the U.S. are located in those few open markets. Hybrid power plants, on the other hand, have been adopted much more broadly across the country.
The IRA does nothing to change this dynamic. As a result, we should expect hybrid power plants to continue to be the design of choice in markets where there currently are few or no standalone energy storage facilities installed. This may change as local regulatory easing continues, but standalone energy storage in restrictive markets will, in the near term, be mostly unaffected by the IRA.
Nonetheless, the IRA is important also for these markets. Even though the IRA may not result in immediate change in more restrictive markets, an important obstacle has been removed when regulatory obstacles eventually fall. More interesting in the near term are the markets where standalone energy storage is currently possible under local regulatory regimes, which includes some of the country’s largest energy markets.
In these markets, including California and Texas, the IRA may have removed the last remaining significant obstacle to standalone energy storage. If so, there is likely to soon be an explosion of proposed storage projects, as well as a corresponding movement away from hybrid power plants, if only to move to a design that allows for more flexible battery operations.
It is also unlikely that hybrid power plants will vanish even in the more open markets. What the IRA does is make the hybrid design optional, not obsolete. Future hybrid power plants in these markets will be built because they are preferred, not because they are the only available path.
Even viewed with great caution and limited application, and even when considering the significant challenges that remain, the IRA is a significant achievement and a potential game-changer for standalone energy storage in the U.S.
Morten Lund is a partner in the San Diego office of Stoel Rives LLP. A member of the firm’s Energy Development group, he is the current chair of the Energy Storage Initiative and former chair of the Solar Energy Initiative. His experience includes development and financing of a broad variety of energy and infrastructure projects, covering the full lifecycle of infrastructure projects, from early-stage development through construction, financing and acquisition/divestiture. Lund has worked on wind and solar energy projects, energy storage projects, combustion generator projects, nuclear energy facilities, hydro-electric facilities, cogeneration facilities, chemical facilities, forestry/paper facilities, large aircraft and shipping fleets. He can be reached at morten.lund@stoel.com.
