Prevalence of Tax Credits Benefiting BESS in Our Modern Market
On August 16, 2022, President Joe Biden signed the Inflation Reduction Act (IRA) into law, marking one of the largest investments in America's economy, energy security, and climate commitment in congressional history. Although the importance of renewable energy is not new in modern America, the IRA has ushered in a greater incentive for renewable energy projects, both small and large. Complex in nature, tax incentives for clean energy represent one of the largest investments enacted through Biden’s climate bill. Initial estimates stated that the IRA would deliver at least $370 million in climate action, $257 billion of which comes from tax credits. This ballpark figure is thought to be eclipsed by three times the original projection since these tax credits are uncapped, with the only limit being market demand for energy projects. Some of these tax credits will go towards homeowners who make changes to their direct infrastructure or produce energy to the grid. However, most of the tax credit benefits will be seen by large corporations that can capitalize on either production tax credits (PTC) or investment tax credits (ITC).
As the names suggest, the clean energy production tax credit subsidizes the production of tangible energy assets. On the flip side of the coin, the investment tax credit supports the cash consideration when investing in renewable energy projects. With investment tax credits, large financial institutions and syndicators are compelled to invest in these projects to help aid the financial needs of these projects. In turn, these “sponsors” receive the tax credit write-off for the initial capital investment of the project. These exchanges between investors and developers are commonly referred to as tax equity transactions and can be simplified in a graph below. In addition to a capital investment from a third-party sponsor, project developers can receive a base credit worth 30 percent of the project’s value, provided they meet certain labor standards. Solar and wind assets are relatively cheaper energy sources in today’s market when compared to traditional energy assets such as crude oil and natural gas. Now, these very same renewable energy assets are becoming even cheaper with the incentive of the IRA, which makes developing these projects even more appealing for developers, manufacturers, and investors. In addition to solar and wind energy, battery energy storage systems (BESS) for the first time have become ITC eligible. Not only does this open a huge market segmentation for investors and developers, but more importantly, this opens the door for a scalable clean grid.
Battery energy storage is one of the fastest-growing assets in the energy sector because of this exact ITC eligibility, the relatively low cost of production, and the marginal land space required to operate these projects. With the swift rise of BESS projects, the Energy Information Administration (EIA) forecasts that the capacity of utility-scale energy storage will double in 2024 to 30 GW, from 15 GW at the end of 2023, and exceed 40 GW by the end of 2025. Several different types of BESS assets have emerged in recent years, such as lithium-ion batteries, thermal batteries, and fuel cells. Each of these BESS assets generates ITC credits but differs based on the way they generate tax credits due to their operational functionality.
How do battery storage projects differ from other renewable energy assets? They operate with different cash flow considerations and lower land use requirements. Since BESS is thought of as a reserve power source on the grid, traditional tax equity transfer deals are a less common consideration. This relationship leads BESS to be perceived as a well-insulated asset in the wholesale power market. Additionally, if you compare a wind, solar, and BESS project that all generate 50 MW of power, the wind energy asset will take up roughly 2,000 acres, the solar farm will take up roughly 400 acres, and the solar farm will only require a few acres. This relationship between BESS and other energy assets makes investors and corporate taxpayers increasingly more interested in buying into battery storage projects that can offer distinct benefits with relatively low risk and cost. With the increase in demand for development and investment infrastructure for BESS projects, the future is incredibly bright and has not shown signs of slowing down for years to come. These assets are a growing segment of the energy complex and make up critical investments in grid resiliency with much more room to grow.
Evergreen Action. “What Are Clean Energy Tax Credits and How Do They Work?,” May 17, 2023. https://www.evergreenaction.com/blog/what-are-clean-energy-tax-credits.
Evergreen Action. “What Are Clean Energy Tax Credits and How Do They Work?,” May 17, 2023. https://www.evergreenaction.com/blog/what-are-clean-energy-tax-credits.
Evergreen Action. “What Are Clean Energy Tax Credits and How Do They Work?,” May 17, 2023. https://www.evergreenaction.com/blog/what-are-clean-energy-tax-credits.
“Clean Energy Tax Credits From Energy Storage Projects Have Unique Benefits,” n.d. https://www.cruxclimate.com/insights/introduction-to-energy-storage
“Clean Energy Tax Credits From Energy Storage Projects Have Unique Benefits,” n.d. https://www.cruxclimate.com/insights/introduction-to-energy-storage
