The IRA Supercharges Energy Storage Investment and Deployment

On August 16, 2022, President Joe Biden signed into law the Inflation Reduction Act (IRA) of 2022, designed to help Americans that are struggling with rising costs. However, the law also includes nearly $370 billion in incentives for clean energy and climate-related programs and is considered one of the most significant spending packages in history for climate change mitigation and adaptation. This blog is part of a series whereby Guidehouse Insights’ subject matter experts cut through the 755 pages of legislation to identify the IRA’s most significant elements and synthesize what they really mean for the future of clean energy technologies.

The IRA invests roughly $1,100 per US citizen in tax incentives, loan guarantees, and direct grants for clean energy technologies to support the transition away from fossil fuels. The IRA includes billions of dollars to deploy both customer-sited and utility-scale energy storage technologies. The act also amends the definition of energy storage technology to include thermal energy storage technologies such as the sand battery, which was recently deployed on a commercial level in Finland. 

Standalone Energy Storage Investment Tax Credit

Although battery energy storage was previously eligible for the clean energy investment tax credit (ITC), prior to the IRA, batteries were required to be directly connected to renewable generators (e.g., solar PV arrays) for at least 70% of every year they are in operation. This requirement led to a disproportionate investment in solar-plus-storage hybrid projects but provided little support for flexible storage projects or for developing batteries to store renewable generation independent of the generators.

Under the IRA, standalone energy storage systems with battery capacities of at least 3 kWh are now eligible for the ITC. These energy storage systems are no longer required to be directly connected to renewable generation sources. As a result, these credits may lower the capital costs of standalone energy storage projects by roughly 30% or more, depending on whether equipment is sourced from US manufacturers. The IRA provides tax credits until 2034 to cover up to 30% of the cost of battery storage systems for homeowners looking to capture the energy they produce from residential PV units. 

Supply of Critical Minerals 

Tesla-founder Elon Musk recently opined that there is insufficient lithium on the planet to manufacture batteries both for EVs and for energy storage. Anticipating a potential demand crunch, the IRA establishes a new Advanced Manufacturing Production Tax Credit that directs nearly $30 billion to the domestic production of critical components—including rare earth minerals and their substitutes—used in the production and storage of clean energy.

A portion of the $500 million the IRA reserves for the Department of Defense is also intended to support domestic mining of critical minerals, such as lithium, and to explore potential alternative minerals that would reduce demand on the few existing sources of rare earth minerals. These efforts should indirectly benefit energy storage manufacturers by both reducing supply costs and supporting new storage technologies.

Even before the IRA, according to the Guidehouse Insights' Energy Storage Tracker 2Q22, the US was leading the world in deployed energy storage systems, with more than double the installed capacity of its closest competition, China. However, Guidehouse Insights’ Energy Storage Forecast Database 2Q22 indicated that rapid deployment over the next 10 years could see installed storage capacity in China surpass the US by 2031. It is safe to say that the IRA’s new incentives change the outlook entirely by supercharging technology development, fast-tracking deployments, and ensuring that the US remains the global leader in installed energy storage systems.

To learn more about how the IRA applies to large energy providers, reference the Guidehouse Guide to the Inflation Reduction Act for Energy Providers. For more information on how Guidehouse Insights can help you navigate the impacts of the IRA, please reach out to richelle.elberg@guidehouse.com.