This past month has been a critical one for energy storage in light of passing of the Inflation Reduction Act (IRA), which creates a standalone storage Investment Tax Credit (ITC) for the very first time. Until now, such an ITC was merely a storage developer’s dream. But now, the IRA has made that dream a potential reality, which would greatly level the playing field for standalone energy storage systems (ESS).
And yet, while this bill is a huge step in the right direction for ESS, these projects continue to experience roadblocks – from supply chain issues to tax abatements – both of which have been largely overcome by photovoltaic (PV) and wind projects. These roadblocks create real barriers to widespread adoption and implementation of ESS.
To decarbonize the grid, it is imperative that we focus on removing these barriers, particularly given that ESS offers operational flexibility and can be deployed at a moment’s notice – the type of capacity we need as intermittent baseload increases and traditional forms of longer duration resources come offline. Flexible ESS resources will also become increasingly required in a world experiencing climate change and extreme weather events.
As a member of the Spearmint Energy team, a newly-launched, next-generation renewable energy company enabling the clean energy revolution through battery energy storage, it is my hope that we can work together – policy makers, developers, investors and more – to pave the way for faster energy storage development. With that in mind, provided below are the most prominent barriers to entry for ESS, and potential solutions that can be adopted to remove them.
Financing
The problem: Anyone who has spent time modeling storage knows there are no simple answers as ESS have a multitude of variables compared to PV – augmentation, battery cycles, system life – just to name a few. Add merchant revenue to this and the returns can seem uncertain.
As more ESS come online, and there is operational data to support key assumptions, some of these issues will get fixed. Reframing how we think about the value of these assets is also key. They are not another PV or wind project and, therefore, merchant profiles and risks need to be viewed from a unique perspective.
A solution: With this in mind, one such solution from which ESS can benefit is implementation of tolling agreements during the initial stages of a project’s life to offset some of the risks and provide certainty of returns. Such tolling agreements are core to the strategy we’re putting into practice at Spearmint to help alleviate some of the financing risk. And, for those familiar with non-renewable generators, the operating profile of energy storage is similar. Unlike solar and wind projects, the assets are flexible and can be deployed when needed.
Long Duration and the Effective Load Carrying Capability (ELCC)
The problem: Long duration ESS is a key component of the energy transition and future of the grid. Not only do we need storage assets now, but we also need ESS that can reliably fill in the gaps as traditional resources retire.
In December 2020, CESA reported California will need ~55 MW of long duration assets by 2045. Notably, as we move toward a decarbonized future, this same significant scale of need, with varying levels, will exist across all geographies in the U.S. Despite the clear need in many markets, there aren’t incentives to support the development of longer duration solutions.
Take PJM as an example. The 2024/2025 BRA ELCC Class Ratings rates a six-hour solution at 97 percent and a four-hour solution at 82 percent. However, the capacity market isn’t strong enough to support the added cost of a four-hour solution, let alone a six-hour solution, and the cost of transferring from a four- to six-hour solution is approximately one-third more. Add that to the fact that the ELCC benefit is just 15 percent. As a result: 1) four-hour projects earn less, and 2) six-hour projects aren’t appropriately incentivized.
A solution: While I recognize that an ELCC methodology isn’t designed to incentivize one solution over another, but rather appropriately weigh the benefit of varying resources for capacity, it does indeed provide a market signal that policy makers should consider when attributing percentages to varying durations.
Further, policy makers can supplement the transition to longer duration by offering additional statewide incentives. Take Governor Newsom of California as an example. He took steps in that direction by including $350M in the budget to support long duration energy storage – a move that encourages development of longer duration assets and ensures those critical resources exist when we need them.
Permitting and Approvals
The problem: Permitting and zoning approval are additional hurdles facing energy storage projects. For most jurisdictions, energy storage projects are brand new technologies and, as such, do not have a place in the zoning matrix.
The solution: This can go one of two ways – either the projects are put in an existing bucket, like industrial, or the projects trigger a zoning amendment. The best solution to mitigate these issues is to implement statewide permitting standards and processes. The State of Virginia provides an example of a statewide permitting exemption for energy storage.
Standalone Energy Storage and Renewable Energy Certificates (REC)s
The problem: ESS don’t qualify for RECs or equivalent market incentives in most markets today because they don’t directly charge from renewable energy. As the grid becomes saturated with renewables, standalone projects are charging from renewable generation indirectly.
And yet, the ability for ESS to obtain RECs would open the market opportunities for these assets, including corporate procurement.
A solution: The MA Clean Peak Standard offers a great model for valuing the indirect renewable charging. Charging is linked to the shape of renewables on the grid and ESS can obtain CPECs if they charge during peak solar generation windows.
Supply Chain
The problem: It’s no secret that the energy storage industry is experiencing supply chain challenges. Even as the stars have aligned for the creation of a storage ITC, the cost of raw materials continues to climb, and supply constraints are tightening. The passing of the IRA is unlikely to improve that picture in the near term, as the increase in demand it will spur will merely exacerbate these trends.
A solution: Resolving this issue will take investment and patience, given the time and cost required for development of new supply avenues for lithium and the building of new energy storage manufacturing facilities to support increasing demand. The good news is that these efforts are already underway, and the IRA is likely to fuel further capital into energy efficient innovation, including in lithium-ion alternatives.
Tax Abatements
The problem: In most markets, there are no established abatements for standalone energy storage, which can have significant impacts on project economics due to the size of the capital expenditure.
For local jurisdictions evaluating the value of the project relative to other development, it is important to note that ESS comprise some of the most valuable/expensive uses of undesirable land, far eclipsing most alternative uses in the same, less than ideal, locations (substation frontage). Partial abatements can encourage development, while still generating significant tax income.
A solution: State and local governments have the power to facilitate projects by adopting favorable policies. The state of Arizona serves as a notable example, having amended its existing partial abatement for PV and PVS to include ESS as a standalone project.
The world is going to get warmer in the coming decades – the science is clear. As we work to decarbonize and stabilize the grid, we need supportive ESS policies and frameworks in every category. We need to pave the way for ESS to enable a 100 percent renewable future. Join us in being the solution. Join us in the clean energy revolution: visit www.SpearmintEnergy.com, email info@spearmintenergy.com or our LinkedIn page to learn more.
Headline photo courtesy of Spearmint Energy. Site for Project Revolution, Spearmint Energy’s recently acquired 150 MW battery energy storage project, in ERCOT Power Market.
Audrey Copeland is the senior vice president of Strategy and Origination at Spearmint Energy. She brings more than 15 years of diverse renewable energy and sustainability experience to her role, having previously worked across both utility-scale and distributed generation projects, and successfully leading the development of five GW-plus of projects. Before joining Spearmint, she managed the energy storage strategy and origination efforts for Q CELLS. Prior to that, she held roles at Vesper Energy, Ørsted, and Borrego Solar Systems. Copeland holds a BA in Environmental Studies and Anthropology from Eckerd College, as well as an MBA in Sustainable Management and certificate in Sustainable Energy Management from the Presidio Graduate School.
