On January 1, 2023, newly constructed standalone energy storage facilities became eligible for an investment tax credit (ITC) under Section 48 of the Internal Code of 1986, as amended (Code), pursuant to provisions of the recently enacted Inflation Reduction Act (IRA). Storage facilities placed in service before 2023 generally were only eligible for an ITC when constructed as part of a combined renewable generation (typically solar) plus storage facility and the storage system was charged by the paired renewable generation system at least for the 5-year initial operating period. Storage developers and owners will now be able to take advantage of new and significant tax credit opportunities, whether or not the storage system is paired with a renewable generation energy facility.
Renewable energy projects and storage projects eligible for the ITC—which will be available to projects that begin construction through the end of 2024, and for a new technology-neutral investment tax credit lasting well into the 2030s—are generally eligible for a base ITC of 6%, which will be increased to 30% if certain wage and apprenticeship standards are met. These standards consist of Department of Labor–published prevailing wage and apprenticeship standards with respect to laborers conducting the construction of a project and any alteration and repair of the project during its first five years of operations.
Additional and stackable credit “adders” (each, 2% base and 10% for projects that also satisfy the wage and apprenticeship standards) are available for projects that satisfy a domestic content standard (based on satisfaction of potentially stringent “Buy America” Department of Transportation procurement rules) or are located in an “energy community” (i.e., a brownfield site; an area which has or had certain amounts of direct employment or local tax revenue related to oil, gas, or coal activities and has an unemployment rate at or above the national average; or a census tract or adjoining tract in which a coal mine closed after December 31, 1999, or a coal-fired power plant was retired after December 31, 2009). Additional IRS and Treasury guidance is needed for how these adders are to be determined and documented.
Beyond extending the ITC to standalone energy storage, the IRA critically expanded the tax credit monetization opportunities for green technology tax credits, including the ITC, through the novel ability to claim refundable tax credits (a “direct payment” of the tax credits) or to sell tax credits to an unrelated buyer for cash. However, a refundable credit for ITC may only be claimed by tax-exempt and US federal, state, local, or tribal governmental entities (including Alaska Native Corporations), the Tennessee Valley Authority, and corporations operating on a cooperative basis engaged in furnishing electricity to persons in rural areas.
Prior to the IRA, the value of tax credits to regulated utilities was limited by Code Section 50(d)(2) “public utility property,” which created a normalization limitation for larger energy storage facilities (i.e., capacity in excess of 500 kilowatt hours) that generally required regulated utilities to spread the benefit of the ITC over the ratemaking period. The IRA permits an election out of this Code Section 50(d)(2) public utility status requirement, which should make energy storage projects even more appealing to regulated utilities, as they will be able to take advantage of tax credits on a level playing field with nonregulated entities as they undertake infrastructure projects.
This change may help utilities demonstrate to their regulators that utility-owned (and rate-based) energy storage projects may provide greater long-term value for rate payers than energy storage projects procured through energy storage tolling agreements (or other similar agreements).