Energy storage tax credits and climate goals: Latest developments in Washington

Commercial interest in energy storage is growing rapidly, driven by such factors as the rapid expansion of energy demand and the continuing emphasis placed by policy makers on achieving climate goals. In 2020, the US saw approximately 3.5 gigawatt hours (GWh) of energy storage installed, which is more than the aggregate 3.1 GWh of energy storage installed from 2013 to 2019.[1] Recent legislative and FERC actions (and coverage of these developments) further exemplifies the increasing interest in the energy storage market.

Despite the recent growth, energy storage capacity may not be expanding fast enough. To meet President Joe Biden’s goal of achieving 100-percent carbon-pollution-free electricity by 2035,[2] the US is anticipated to need 100 GW of storage by 2030.[3]

Recent legislative and agency actions suggest that one particular combination of federal responses could enable the US to achieve an energy storage capacity capable of supporting carbon-pollution-free electricity by 2035: energy storage tax credits plus greater access to markets for energy storage devices.

In this alert, we examine the Senate’s recently passed $1 trillion infrastructure bill; the $3.5 trillion budget resolution that the Senate recently passed; and the recent order from the Federal Electricity Regulatory Commission (FERC) on electric load carrying capacity (ELCC) in the PJM interconnection’s region, which affects pricing for energy storage. This article examines surveys how these three actions broadly affect energy storage in the near future.

Legislative activity

The Senate passed a $1 trillion infrastructure bill on August 10, 2021 that promoted clean energy growth.  The measure, however, no longer included some energy tax credits that the Administration had originally proposed, such as a production tax credit for energy storage.[4]

The bill, called the INVEST in America Act, was applauded by Energy Storage Association interim CEO Jason Burwen, who said, “A number of provisions included in the bill passed today…will boost U.S. storage technology manufacturing, increase investments in energy storage and other resilience solutions, and accelerate next-generation storage technologies.”[5] However, the bill fell short of the climate mitigation goals envisioned by President Biden’s American Jobs Plan because it failed to include a “demand-driven approach to energy storage.”[6] House Republicans, supported by more than 180 Democrats in a letter sent to House Speaker Nancy Pelosi and Majority Leader Steny Hoyer, had cited the need for “including critical clean energy, energy efficiency, and clean transportation tax incentives in the upcoming infrastructure package.”[7] This approach omitted energy storage. Support also for the recently passed $3.5 trillion budget resolution might also be expected to follow a similar trail of promoting tax credits aimed at generation and transmission rather than at storage.

The $3.5 trillion budget resolution passed by the Senate on August 10, 2021, and which may come before the House during the week of August 23^rd, is a blueprint for President Biden’s Build Back Better agenda. The resolution is a broad document that instructs committees of jurisdiction to write legislation in their areas of jurisdiction, and it is expected that green energy provisions will be included in such legislation.

It is possible that the legislation resulting from this process of creating a budget reconciliation bill that will contain the actual, substantive provisions could include more ambitious climate and clean energy provisions. One of these possible provisions is the Clean Energy for America Act,[8] which the Chairman of the Senate Finance Committee, Ron Wyden (D-OR), described as the “linchpin” of climate change efforts – perhaps because it could replace 40 individual tax incentives.[9] Given this possibility, those interested in energy storage tax credits are encouraged to become familiar with the bill.

The Clean Energy for America Act is described in a Senate Finance Committee summary as a proposal to “dramatically” simply tax incentives in order to provide a “simpler set of long-term, performance-based tax incentives that are technology-neutral and promote clean energy in the United States.”[10] While this description does not refer to energy storage on its face, promoting clean energy production may likely promote the research and development of energy storage technologies – as tax incentives create interest in clean energy production, these generators may also require more efficient and effective energy storage assets. Still, Senator Wyden views the Clean Energy for America Act as tying “tax incentives to emissions reductions and climate outcomes.”[11]

The focus on emissions reductions, rather than on developing technologies, could mean that the specific energy storage tax credits proposed in the Energy Storage Tax Incentive and Deployment Act of 2021 may not ultimately be enacted; the Energy Storage Tax Incentive and Deployment Act of 2021 is a bipartisan bill introduced in the House and Senate earlier this year but without further development in the committees to which the bills were referred. By comparison, the Clean Energy for America Act has been approved by the Senate Finance Committee.[12] In sum, despite the benefits that energy storage may bring, such as “accelerat[ing] decarbonization and enhanc[ing] electric system resilience while creating more jobs and capital formation in the energy storage industry,” it appears more immediate action is expected on tax incentives for clean energy production rather than for energy storage.[13] Still, a federal tax credit for stand-alone storage (versus qualifying storage as part of a solar facility) has been included in proposed legislation every year since 2015; it is probable that this credit will be enacted.

Nevertheless, even if, as a general trend, Congressional action is more immediately expected on tax incentives for clean energy production rather than for energy storage, it is also possible for agencies, such as FERC, to affect energy storage markets as well. 

FERC

FERC’s July 30, 2021 order affirmed and allowed the PJM Interconnection to alter its market design in a way that addressed criticism that the region failed to adequately recognize and value the role energy storage capacity plays in the region’s wholesale electricity market.[14]

PJM is a regional transmission organization (RTO) that coordinates the movement of wholesale electricity in all or parts of 13 states, including states on the Atlantic coast and the upper Midwest, as well as the District of Columbia.[15] In effect, PJM, as a neutral, independent party, manages the electricity grid for more than 65 million people.[16] Energy storage is one aspect of its long-term regional planning process to provide a board, interstate perspective that identifies the most effective and cost-efficient improvements to the grid. Energy storage is part of this picture. PJM has suggested that its current market design cannot adequately capture the value that energy storage provides.

FERC’s Order 841, issued in early 2018, aimed to allow energy storage resources to more openly participate in the capacity, energy and ancillary service markets under FERC’s jurisdiction.[17] To more closely align itself with Order 841, PJM proposed an ELCC to alter its “10-hour rule” market design for energy storage resources. Under the “10-hour rule” the capability of a resource is calculated by considering the amount of power the resource could provide continuously for 10 hours. This market design reflects how original market rules in the PJM tended to focus on a generators’ ability to serve peak demand with conventional dispatch generation – generation that is not subject to interruption.

Instead, pursuant to the ELCC model, load and generation is simulated for a hypothetical year. The goal of the ELCC mechanism is to enable a comparison of the reliability value of a limited-duration resource against a similarly sized unlimited duration resource. To reach this comparison (ie, in order to more accurately value the capability of the energy storage resource in a capacity market that includes both duration-limited and unlimited duration generation), the ELCC runs a simulation whose focus is to determine whether generation or storage resources can meet the needs of consumers in a particular hour of a hypothetical year. This result is then compared with a scenario involving duration-limited resources with a scenario involving unlimited resources. In this way, the ELCC produces a result that reflects the reliability value of a limited-duration resource in a capacity market that includes limited-duration and unlimited duration resources. In other words, proposed prices for stored energy under an ELCC model could better reflect the reliability risk of a limited-duration resource, and this reliability risk is what may ultimately allow the resource to be priced.

Pursuant to the PJM’s initially proposed ELCC, FERC commented that it would “discount newer unfloored ELCC Resources below their actual capacity value.” Accordingly, FERC rejected the initially proposed ELCC. FERC accepted, however, the revised ELCC which removed the pricing mechanism enabling this result.[18]

FERC did not agree unanimously with the ELCC market design. Commissioner James Danly concurred and Commissioner Mark Christie dissented from the order.[19] Commissioner Christie explained that he found PJM’s proposal unable to “meet the standard required for a finding that it is just and reasonable.”[20] He explains that the proposal, by pricing storage using an average ELCC value instead of a marginal value, could force consumers “to pay for capacity that does not deliver or to overpay for the amount of capacity the resources does deliver,” which is a “cost problem and reliability problem.”

Still, FERC’s approval of PJM’s ELCC for energy storage resources indicates that the agency is willing to approve methods that, while they may not be the most just and most reasonable way to price energy storage resources, certain market designs for these resources can still satisfy the “just and reasonable” threshold of Section 205 of the Federal Power Act.[21]

Conclusion

As Senator Wyden said, “energy policy is tax policy.” While a change for energy storage tax credits might not be imminent, it is not out of the question. Furthermore, the enthusiastic support for clean-energy initiatives, which also involves removing tax credits for certain fossil fuel activities, suggests that energy companies, as well as those interested in trading energy related commodities, may see regulations governing their markets being updated or replaced in the future. Expectations that such support could dwindle might not be realistic; the United Nations’ Intergovernmental Panel on Climate Change Sixth Assessment Report on climate change, published on August 9, 2021, found “it is unequivocal that human influence has warmed the atmosphere, ocean and land.”[22] Indeed, while the legislative response in 2021 has seemed to be generation and transmission focused, agencies such as FERC are still able to advance interest in energy storage capacity by approving market designs that may allow the capability of such resources to be more accurately valued. Still too, even though legislation is generation and transmission focused, once the desired infrastructure is established, changes in energy storage tax policies could be next.

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