It cannot be understated how transformative an energy storage ITC would be for the industry. At IronOak Energy, we have written previously on the impact of such an ITC, and even presented a positive take on its potential rollout.
Here, I want to pose the question of whether the industry is really ready for such a game-changing policy.
The graph above shows projections for the growth of energy storage development under the current policy regime. Not too shabby.
But is the energy storage industry prepared to put that delicious tax equity to good use on stand-alone energy storage projects (in practice, solar + storage applications currently qualify for the solar ITC)? Of course, the answer is always: it depends.
Depends on what? Some would argue that the critical issue holding back a tidal wave of energy storage projects is the technology.
One could easily view the vast array of energy storage technologies vying for prominence with some trepidation. Some are commercially viable, while many are not.
It takes some brainpower to suss out the contenders from the pretenders. Even the smarties at MIT have a tough time doing it.
Do we want the government to incentivize the deployment of technologies that may not be ready to contend for the main stage? Conversely, is that precisely the role we want the government to take?
The double-edged sword of government subsidy
This is a classic double-edged sword phenomenon. On one edge, there are green grassy fields of opportunity in rolling out new storage technologies in commercial applications. Accelerating storage deployment will drive down costs and help evolve viable business models. Beautiful.
Lurking on that other edge is the distinct possibility that many storage technologies in earlier stages of development will simply fail.
And failure is bad press, even if it is the Darwinian process of technological progress.
It puts the government in the untenable position of having subsidized a “reckless” experiment with taxpayer dollars.
“Picking winners and losers” they will say, even though an ITC is designed to avoid precisely this potential conflict.
And, let’s just say that there is a history of nasty repercussions for such interference with the so-called free market for energy (ahem - myth).
Solyndra - need I say more.
Some will say that Solyndra was blown out of proportion (it was) AND it was 5 years ago (a lifetime ago in the clean energy industry).
To top it off, Solyndra was backed with loan guarantees, not really what the ITC is about. Details, details...
But now, the vengeful energy gods have gifted us SunEdison. It was an altogether explicable collapse, but one that, nonetheless, provides ammunition against government support for the clean energy industry.
Who knows what would have happened with the extension of the solar ITC if SunEdison has filed for bankruptcy in 2015 rather than 2016.
So, be careful for when you wish upon your industry the scrutiny of being a target of government support.
Technological risk is a red herring -- it is really all about how to finance storage
Sure, risk exists with many energy storage technologies.
Even the most established battery technologies lack the operational history to assuage the concerns of investors looking at decadal time horizons. If you are absolutely intolerant of risk, go invest in government treasuries (just kidding - terrible idea).
Just running down the ladder to the cheapest storage technology fails to capture the complexity of the underlying value proposition. Cost is king, but there are many other factors competing for a role on the king’s court.
Energy storage technologies cannot be reduced to a simple efficiency or production metric, as with solar or wind (even that is an oversimplification, but at least a reasonable one).
There are more than a dozen potential services that could be generated by a given storage technology, many of which have few established market mechanisms to generate reliable revenue.
So, here’s the central takeaway.
The biggest challenge in the energy storage market is not how to choose the right technology. It is how to design the right market structures to support financial innovation.
Making energy storage bankable is close to being a precondition for the successful utilization of an ITC.
Recall that the success of the solar PPA model hinged on stable, contracted cash flows. Making solar bankable unlocked a vast market potential that we are still in the early stages of witnessing.
There is no equivalent financial structure with energy storage, yet there remains a distinct need to create consistently financeable project cash flows.
But wait, SolarCity and Tesla (perhaps soon to be joined in holy matrimony) pioneered a solar + storage PPA earlier this year.
The energy storage industry needs a financial product the equivalent of a PPA, and perhaps we are not too far off.
Thus far, it has taken a savvy, not mention risk tolerant, investor to back energy storage projects. There is only so much runway with this sort of approach.
Easing the path for new investment in storage will hinge on making this inherently complex technology and market application simpler.
There are already frontrunning markets generating experiences that will guide future market design and development - thanks, California.
In tandem with this type of market development, energy storage needs a greater degree of standardization of financial strategies and structures to help make projects pencil.
And not just for the smartest guys in the room, but for a broad swath of interested investors.
The question remains as to whether an energy storage ITC will aid or inhibit such progress.
- 5 Surprising States Where Commercial Energy Storage Works Today GreenTech Media, 7/20/16
- Making Energy Storage ‘Bankable’ Renewable Energy World 12/7/15
- Energy storage for renewables can be a good investment today, study finds MIT 6/13/16
- Energy Storage Would Get US Tax Credits in Bipartisan Bill Renewable Energy World 7/19/16
- Smart Grid, Battery/Storage, & Energy Efficiency Companies Raise $433 Million In Q2’16 CleanTechnica7/21/16
- “As per the terms of a 20-year power purchase agreement (PPA), Kaua’i Island Utility Cooperative (KIUC) is to pay $0.14/kWh for the emissions-free renewable power SolarCity’s solar-energy storage system dispatches to the grid.” MicroGrid Media 2/16
- “Venture capital funding for the battery and storage market also doubled in the second quarter, reaching $125 million across 10 deals, compared to only $54 million across 10 deals in Q1…” CleanTechnica 7/21/16
- “The newly agreed upon rules [in California] highlight energy storage systems (ESSs) as a key priority for the program moving forward. Most notably, 75% of the program’s $77 million annual budget will be allocated specifically for ESSs, with priority given to systems tied directly to renewable generation.” Navigant Research 6/29/16
- “...as the cost of wind and solar power systems comes down, the cost of storage systems will need to come down as well or they will no longer be profitable. That’s because at some point it would be more profitable to simply add more generating capacity rather than more storage capacity.” MIT 6/13/16