With the Inflation Reduction Act (IRA) now law in the United States, American energy storage projects have their own federal investment tax credit for the first time ever. Over 7 gigawatts (GW) of battery storage has been deployed in the U.S. prior to this moment, with more than half of that capacity installed in just the past two years. ACP’s newly released Clean Power Quarterly Market Report shows that storage had its second-best quarter of installations yet, installing 1.2 GW of energy storage projects in Q3 of 2022. Now that the storage industry will have access to tax credits, battery storage installations are projected to exceed 10 GW per year for the foreseeable future.
The IRA solved the question of “Should we build energy storage?” by substantially advantaging the project economics of storage versus its competitors—primarily gas-fired generation. But the answers to “How much?” and “How fast?” for energy storage deployment will depend on resolving three core challenges: supply chains, interconnection and permitting, and modeling.
1. Many battery storage companies today tell us their top three concerns are supply chain, supply chain, and supply chain
To some extent, these concerns are a typical business cycle storyline, where demand increases and outstrips supply. Not only long-anticipated tax credits for energy storage, but also supportive state policies and continually declining costs have led to much higher expectations of storage deployments. This is occurring at the same time as private investors are highly capitalized and need places to park capital, particularly to meet new Environmental, Social, and Governance (ESG) investment goals.
But there’s an atypical aspect to this demand surge—because in lithium-ion batteries, the electric vehicle sector is already purchasing well over 10x the volume as the stationary energy storage sector, and growing. That cross-sectoral competition means that even if a storage developer can afford the price of batteries, automotive original equipment manufacturers (OEMs) can sign contracts for much higher volumes and crowd them out. The result is that nearly all of the grid battery supply for perhaps the next 24 months should be expected to already be under contract—and the many new entrants into this space may extend that contracting farther into the future.
And observers anticipate stiffening tariffs on Chinese goods, which potentially could include batteries, may be forthcoming from the Biden Administration. On top of commodity price increases and elevated demand, stronger tariffs could overwhelm the value of these crucial federal incentives that are intended to make America a leader in energy storage deployments.
2. The pace of storage deployment depends on the speed of interconnection and permitting processes – which are likely to slow down before they speed up
Prior to the IRA, developers were already lining up to connect projects to the American transmission system—and with that, more companies will line up behind them. Much has been written about why it’s so hard to build transmission infrastructure in the U.S., but the way energy storage developers will see it is through the lens of interconnection.
The timeline for processing transmission interconnection requests has lengthened significantly; developers entering a queue now must wait 4 years on average, often more, before they will have any chance of connecting their clean energy projects to the bulk electric system. And that’s not counting delays as regional electricity market operators reform their interconnection rules and processes—well-intentioned efforts that will likely mean slowing down through the middle of the decade before speeding up again.
Separately from interconnection, the geographic siting of energy storage is subject to permitting processes of a totally different flavor. Typically, local authorities have jurisdiction, and across the country they are being asked to issue permits for energy storage facilities for the first time. Lack of familiarity and training could create a parallel dynamic of local permitting slowing down before speeding up later this decade.
3. Power system models will decide if energy storage or other resources win the race to back up massive amounts of variable wind and solar power generation
Models are not reality, but power system models strongly influence what electric supply resources get realized. The unprecedented levels of new wind and solar power projects that will come online are driving debates over what is needed to keep the electric system reliable and affordable. Whether in organized electricity markets or regulated utility territories, grid operators and state regulators will turn to modelers to answer the question “What can we rely on and how quickly can we reduce reliance on fossil fuels hydrocarbons?”
In 36 states, utilities are responsible for developing an integrated resource plan (IRP) that identifies long-term system needs and what resources it will build or buy service from to meet those needs. While in many cases these IRPs are something of a box-checking exercise, increasingly state regulators and stakeholders see them as in fact the most central place where decisions about clean energy transition are made. But IRPs, unfortunately, do not account for changing dynamics in the energy storage sector. If these 10-20 year views into the future indicate only modest needs for energy storage, sales pitches to utilities about the attractive price tag of storage with IRA incentives may fail to get traction.
Meanwhile, every regional transmission organization (RTO) and independent system operator (ISO) regulated by the Federal Energy Regulatory Commission (FERC) is responsible for accounting for the system reliability of their entire territories, ranging in size from the single-state system of California ISO to the Midcontinent ISO’s territory over some or all of 15 states. The modeling choices of RTOs/ISOs will effectively determine what amount of storage gets procured—even in states that have 100% clean energy goals and might otherwise want storage as a source of reliability to also lower greenhouse gas emissions.
Any way you cut it, the U.S. energy storage industry is in an incredible moment. Decarbonizing the U.S. power system will require 150-350 GW of energy storage by 2035. ACP is proud to work on behalf of the U.S. energy storage industry to tackle these challenges and clear the path ahead for energy storage project development on a scale we have only imagined.