How Inflation Reduction Act reforms U.S. energy storage market?

IRA subsidy for energy storage

U.S. President Joe Biden signed into law the Inflation Reduction Act of 2022 (IRA) on August 16, 2022. The IRA shells out $369 billion to tackle climate change and invest in the renewable energy sector, aiming to reduce carbon emission by 40% by 2030 compared with 2005 levels. The act substantially boosts solar, wind, and battery industries, as well as the energy storage market. It is the first to provide Investment Tax Credit (ITC) for standalone energy storage facilities in the U.S.

Before the IRA became law, residential ESS was only eligible for an ITC if the batteries are charged 100% by the solar facility, whilst FTM and C&I ESS were only eligible if charged 75% from solar energy. If pared 100% with solar, an ESS can avail 26% of ITC, and 19.5% if 75% pared with solar energy. The IRA not only extends the ITC through 2032 but also lifts these restrictions to include standalone energy storage assets.

Table 1. ITC rate before the IRA

 

The IRA provides two kinds of subsidy, one for FTM and C&I ESS, and the other for residential ESS. FTM and C&I ESS have a minimum nameplate capacity of 5 kWh, and residential ESS 3 kWh. Before the IRA, the subsidy will end in 2035 for FTM and C&I ESS, and in 2022 for residential ESS. Under the IRA, the 30% ITC remains effective for the coming ten years and does not step down until after 2033.

Table 2. ITC before and after the IRA

 

Requirements for additional bonus credit

In addition to the base credit, the act provides up to 10% of additional bonus credit for FTM or C&I facilities that satisfy certain domestic content requirements or are located in an “energy community.” Namely, an FTM or C&I facility can manage to attain an ITC of as much as 50%. 

The act categorizes FTM and C&I facilities by their net output. As shown in Table 3, facilities with net output larger than 1 MW must satisfy all labor and wage requirements to be eligible for the full bonus rate, otherwise, it only gets a maximum of 6% base credit and 2% extra credit. The total credit amount can vary from 6% to 70%, depending on the requirements satisfied. Given such a huge disparity, ESS developers would try to meet all labor requirements. Facilities with net output smaller than 1 MW are eligible for the full 30% base credit, regardless of labor and wage requirements.

Table 3. ITC requirements under the IRA

 

Impacts on U.S. energy storage market

The U.S. added more than 10.5 GWh and cumulated over 17 GWh of installed energy storage capacity in 2021. In 2022, there is optimistically projected 20 GWh of energy storage capacity, among which 85% come from the FTM market. 

The biggest impact of the IRA is that it includes standalone energy storage technology. In the past, C&I ESS must be paired with solar. Therefore, the time of charging and discharging is limited, and energy arbitrage is less feasible. The IRA allows C&I ESS to participate in more auxiliary services and energy-sharing projects on the grid side, thus having more flexible business models. 

Additionally, the IRA provides production tax credits (PTC) for local manufacturers and restrict the battery supply chain by allocating subsidy for the U.S.-made EVs. The localization of supply chains is underway. Localization will push up production costs in the short term, for cell production capacity is currently concentrated in China. Once the local supply chain is fully established, cost reduction will accelerate, boosting the long-term development of energy storage market in the U.S.

On the BTM-residential market, ESS are mostly installed to be integrated with solar energy. However, since the initial cost of constructing a solar-plus-storage system is far higher than installing a solar system, there is less than 20% of ESS penetration rate in solar capacity added every year. According to data from the Lawrence Berkeley National Laboratory (LBNL), in California, the median income of those installed solar-plus-storage systems is 41% higher than that of standalone ESS installers. Now that the IRA shortens the payback period, doubled with inferior grid stability of the U.S., installed capacity of standalone ESS on the BTM market may increase. 

Before the IRA, solar projects in energy communities are not eligible for energy storage ITC. With the IRA, participants of these projects may integrate standalone ESS and receive the subsidy. The IRA boosts installed energy storage capacity on both FTM and BTM markets, adding flexibility to different application scenarios.
 

Figure 1. U.S. installed energy storage capacity forecast
 

U.S. market after the IRA: Where are the chances for Chinese manufacturers?

The IRA supports not only local supply chain of the energy storage industry but also local battery cell supply chain. On the FTM market, in response to the White House’s strong attitude towards localizing supply chains, downstream sectors request cell manufacturers for products assembled in the U.S. Cell manufacturers have no choice but to make corresponding arrangements. 

Presently, cell manufacturers, such as Eve Energy and Hithium Energy, are actively planning production expansions in North America, Mexico, and neighboring countries. Since the construction period of upstream sectors of the cell supply chain is longer, manufacturers will focus on cell-to-pack and vertical integration first, and then consider cell production. Some of them may hedge risks through cooperation with South Korean manufacturers.

The IRA does not include any place of origin requirement for the residential energy storage supply chain, which is an easier playing field for new players. Therefore, many companies have been actively attempting to tap into the market. Many new entrants were seen at expos in the U.S. last year. In 2021, Tesla, BYD, and Enphase secured the largest market share, accounting for around 80% of sales volume in the U.S. residential energy storage market, suggesting huge potential for Chinese manufacturers. For new players, reducing production costs through production expansions and collaborating with distributors to widen market scope and sales channels are keys to consolidate their stance in the U.S. residential energy storage market.