How should Stem customers and partners expect the Inflation Reduction Act to impact their projects?
The Inflation Reduction Act (IRA) will have an immediate impact on clean energy projects as many of the tax credit revisions went into effect as soon as the bill was signed. Solar or standalone storage projects that are currently under construction will now automatically qualify for a 30% investment tax credit (ITC). This means that these projects will immediately see returns because their tax credit has been increased to 30% instead of the 26% ITC that they may have otherwise seen prior to the IRA.
The 30% tax credits can also be applied retroactively for any solar plus storage projects that were placed in service on or after January 1, 2022. Projects that meet that timeline criteria will see improved returns without having to meet any additional requirements or change operations.
Another way the IRA will impact projects is by breaking the dependency of storage on solar, and that’s due to the introduction of the standalone storage ITC.
Although we expect continued development of co-located solar and storage projects, we think there is now going to be faster growth with standalone storage. There’s several reasons why we are bullish on the growth of the standalone storage market.
The first is that storage can now be sited in many more locations than solar. Storage has a smaller physical footprint, and performance is less dependent on weather variables. That lends it to being sited in the most valuable locations such as dense load pockets and constrained grid areas where it’s often very difficult to deploy solar.
The second reason is that a storage ITC removes the requirement for storage to charge from solar, and this gives the storage system the flexibility to charge and discharge at the most valuable times. That’s going to open up more use cases and increase the overall revenue opportunity for storage. To cite one example, the storage system that is unconstrained from solar charging requirements will be able to provide much more value in the frequency regulation markets.
Finally, we think the storage ITC is going to generate demand for adding storage to existing solar plants. This is what we term a “storage retrofit.” Storage can now be retrofitted to existing solar under an independent off-taker agreement and still qualify for the ITC. This offers a really exciting opportunity for project developers and asset owners to add solar to existing storage projects in places where they may already have site control, already have interconnection infrastructure, and already have a customer or off-taker relationship.
For retrofits specifically, what are the types of qualifiers that would make a solar project a good candidate for adding storage?
In many ways, a good candidate for a storage retrofit will look similar to the types of projects that you would target for a greenfield solar plus storage installation. For behind-the-meter projects, we recommend targeting sites with large loads – typically at least 400kW of peak demand – and a favorable tariff for storage that has high demand charges, high coincident peak charges, or high energy rates with a large time-of-use differential. For front-of-the-meter projects, look for sites that have favorable wholesale revenue opportunities. This would include sites in ERCOT, CAISO, or ISO-NE. Also look for sites that have access to incentive programs or feed-in tariffs such as VDER in New York.
There are a few other things that you want to consider for a storage retrofit. Check to see if there are any interconnection limitations that may limit how much storage you can add to an existing solar site without incurring large upgrade costs. You’ll also want to make sure that the site has available physical space for a storage system. Finally, we recommend that you target sites where the customer or the off-taker is happy with their solar project, and they are enthusiastic for more clean energy development on site.
Those are just a few of the ways that the IRA is going to impact your clean energy projects. We’ll continue to provide more information. As always, don’t hesitate to contact Stem if you have specific projects or opportunities that you’d like to discuss.
Disclaimer: This content is preliminary and is provided for informational and planning purposes only regarding the Inflation Reduction Act. This does not constitute legal, tax, regulatory, policy, or other advice or guidance. The provisions in legislative bill text require further clarification and guidance by executive branch, regulatory, and other agencies.
