Why solar + storage is much more about grid integration than grid defection

Energy storage offers too many behind-the-meter benefits to consumers and grid operators to not become a common, if not essential, part of commercial PV projects. The myriad benefits of energy storage validate the basis of a beloved food analogy: “Energy storage is the new bacon—it makes everything better.”

The consumer-centric benefits are the most widely discussed, and they usually focus on shaving peak demand by reducing costly demand charges for commercial customers. In addition to mitigating demand charges, solar plus storage allows end users to benefit from time-of-use bill management, backup power availability, and increased PV self-consumption.

Moving up the food chain, utilities can use energy storage to achieve resource adequacy, transmission congestion relief, and transmission deferral. Finally, Independent System Operators, or ISOs, benefit greatly from energy storage predominantly by increasing frequency regulation, but also via voltage support and energy arbitrage. PJM’s Atlantic-coast-to-Illinois territory became the first ISO to provide monetary incentives ($40-$50 per MWh) for grid-scale storage that directly addresses frequency regulation.

On a related note, let’s talk about those scary “death spirals.” The U.S. energy storage market will be 8 times bigger in 2020 than it was in 2015, reaching 1.6GW of installed storage capacity. By 2020, the utility death spiral will have fully taken hold and grid defection will be occurring all over the country, right? I think not.

In 2014, I contributed to a Rocky Mountain Institute paper called The Economics of Grid Defection, which seemed to briefly serve as a crystal ball for the nascent energy storage industry. But no more than two years after the report was released, even a modest amount of grid defection seems highly unlikely given the proactive efforts by utilities nationwide to design pilot projects and sustainable policies that integrate solar plus storage with existing grid infrastructure.

The energy storage market will begin to resemble more of a shared economy rather than an increasing number of grid-defected silos. The availability of storage devices, both directly from the ramped up manufacturing as well as second-hand batteries from electric vehicles, will provide a sustained supply of storage assets to expand grid storage capacity. These are both compelling sources of affordable storage assets, and certainly a reason to believe the repeated headlines regarding anticipated drops in energy storage costs. The solar plus storage revolution is being driven by cost effectiveness and scalability, two key drivers that provide a strong signal for future growth.

Navigating murky waters: Accessing the ITC for solar + storage projects

It’s inevitable that developers compare the benefits of energy storage to the well understood benefits of solar PV systems. The reality is that the technology for deploying and optimizing energy storage is much more complicated than solar, which impacts the bankability and clear financing strategies needed for exponential capacity growth.

​Prioritized revenue streams from solar plus storage projects include basic kWh production from PV, in addition to the benefits derived from stored, dispatchable electricity when rates are peaking to shave off much more demand charges than solar could have ever done on its own.

Aside from contracted revenue from the end user, determining the ability for solar plus storage projects to qualify for the 30% ITC (Investment Tax Credit) is a critical factor for getting projects to hit desired investment return thresholds. Solar plus storage installations qualify for the 30% ITC, but developers need to pay close attention to system design to ensure that the intended cost basis appropriately applies to the ITC’s rules and regulations. A few key insights include:
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• The energy storage property must be integral to the operation of the renewable energy asset
  • Be aware that different storage technologies provide varied storage services, and not all of them are applicable to the ITC

• Solar must be providing at least 75% of the storage device’s capacity (a.k.a. “the 75% cliff”)
  • If another renewable energy source is charging the storage device as well, your project becomes threatened by “dual-use methodology” and may be subject to an ITC haircut

• There have been three notable U.S. IRS private letter rulings (PLRs) related to solar plus storage and the ITC
  • These letters only apply to the taxpayer that requested the PLR

• The standard MACRS accelerated depreciation schedule and the five-year ITC recapture period apply to energy storage property just as they do to RE property