On April 4, 2019, Congressman Mike Doyle (D-PA) filed legislation to modify the federal tax code to include energy storage as an eligible technology for the investment tax credit (ITC). Currently, the ITC under Section 48 and 25D of the Internal Revenue Code allows project owners to receive federal tax credits for installing designated renewable energy generation equipment (see our extended story on the history of the ITC here). The code has mostly covered solar PV projects since it was first enacted in 2006. In March 2018, the IRS clarified that batteries also meet the qualifications to receive credits as long as the storage system receives the majority of its energy from the sun and solar panels. Stand-alone storage is not eligible for the ITC, thus the decision by Rep. Doyle and co-sponsors Rep. Linda Sanchez (D-CA) and Rep. Earl Blumenauer (D-OR) to request an update to the tax code.
“A storage ITC benefits not only solar, but also energy from a wide range of sources, helping to meet the nation’s current and new electricity demands,” said SEIA president and CEO Abigail Ross Hopper in a press statement. “As we work with Congress on a range of tax policies to meet Americans’ growing demand for development and deployment of clean energy resources like solar, making energy storage ITC-eligible is an important component of those solutions.”
One week after the House bill was filed, Senators Dianne Feinstein (D-CA), Martin Heinrich (D-NM) and Cory Gardner (R-CO) introduced the bipartisan Energy Storage Tax Incentive and Deployment Act of 2019 to the Senate. Both chambers of Congress are showing support for a universal ITC, but whether it will quickly pass is another story. Sen. Henrich also introduced a solo storage ITC bill in the Senate in 2016, but it never made it out of committee. Much has changed with battery technology since 2016 though.
“I continue to be incredibly excited by the potential for innovative energy storage technologies to improve the efficiency, reliability and resilience of our electric delivery systems that power homes and businesses. Over the last few years, storage technology has dramatically reduced costs while increasing our ability to manage grid supply and demand,” Sen. Heinrich said recently. “The deployment of energy storage needs to be at the center of our ongoing effort to move toward a cleaner and more reliable electrical grid.”
The likelihood of this new legislation passing in 2019 is slim but still possible, according to Gregory Jenner, partner at law firm Stoel Rives and former deputy assistant secretary of the U.S. Treasury for tax policy.
“The 2020 presidential election casts a shadow over everything Congress does, and any tax legislation considered will be taken up with the election in mind,” Jenner said. “This could result in only expiring provisions being considered, because they tend to have bipartisan support and are relatively non-controversial. In contrast, including new starters (such as the storage bill) means a much more difficult process, one that both sides might seek to avoid. Thus, the energy storage bill may be serving as a placeholder until the 2020 election is past.”
If/when the new legislation goes through, any battery or storage system with a capacity larger than 5 kWh (3 kWh in the residential market) installed after Dec. 31, 2018, will be eligible for the ITC on its current stepdown schedule — regardless of whether the storage system was installed with a solar array.
But until new legislation is passed, here is how a battery can likely take advantage of the ITC today. Solar Power World is not an expert in tax legislation, so the following information is just guidance based on previous rulings and should not be considered the absolute rule.
- The battery must be charged by a solar array.
The IRS clarified in 2018 that batteries installed with a residential solar array can receive the ITC if they are charged 100% by on-site solar. If the residential battery is only partially charged by solar panels, it cannot receive the ITC, as then it doesn’t meet the definition of “qualified solar electric property” in the tax code. Privately owned commercial or utility-scale solar-plus-storage installations can take advantage of the ITC as long as the energy storage system is at least 75% charged by the on-site solar. How much the large-scale battery is charged by solar also determines its credit size. NREL provided an example: A large-scale battery system charged by solar 80% of the time is eligible for 80% of the 30% tax credit, which equals a 24% ITC.
Things get sketchy when working in arbitrage and charging from the grid. Solar owners occasionally charging their batteries with grid electricity would not qualify to receive the ITC, as then their systems are not 100% charged by solar panels. Once the ITC is claimed though, battery owners can charge the system however they like.
- The battery must be installed within at least one year of the solar array’s completion.
A 2013 IRS ruling stated that an energy storage device could receive the ITC if it was installed as part of the original solar system. The 2018 clarification allowed the tax credit to still be applied on a storage device installed one year after the original solar system. It hasn’t been confirmed by the IRS if storage can be added to even older solar arrays and still receive the ITC. As Stoel Rives’ Jenner points out, without an official ruling, we don’t know for certain how retrofit solar-plus-storage systems would qualify for the ITC.
“In a world where investors want absolute certainty and clarity, we think this works, but the IRS never said that,” he said. “Treasury/IRS policy is that they don’t issue rulings on issues where they’re writing the regulations. So, we can’t figure out the answers; we don’t know for absolute certain. Lawyers think there isn’t a difference [in retrofit timelines], but they can’t say for certain. Does it apply? Probably. Should it apply? Probably.”
What to look for with the new legislation
While there is bipartisan support of renewables and energy storage, tax legislation is still difficult to pass. The upcoming 2020 presidential election may also shuffle Congress’s priorities. Jenner wanted to reiterate that the rollercoaster ride of getting tax legislation approved that includes an energy storage ITC clause has nothing to do with the national support of renewable energy.
“Not to say that some tax bills don’t get incorporated, but any tax legislation that is going to move is going to move because the committee chairs want it to move,” he said. “The House will do a bill and the Senate will do an entirely different bill. Unless there’s some consensus, nothing’s going anywhere. It’s a far broader question than energy storage. This has nothing to do with the merits of the issue.”
So, stay tuned. Politics run a slow, complicated race, but hopefully an energy storage ITC update is at the finish line.