Energy storage use is on the rise in renewable energy, and for good reason. The renewable energy industry has waited many years for energy storage projects to be financially viable, and finally with the passing of the Inflation Reduction Act in 2022, there is an investment tax credit available for standalone energy storage. Utilizing energy storage has always been critical to enable mass deployment of renewable energy, but now there are significant financial opportunities when deploying energy storage as well.
The first step to determining if energy storage is right for your business is to learn how it works, why it is a crucial component of a renewable energy system, and what choices must be made to determine the right battery energy storage system to meet your company’s emissions or savings goals.
What is energy storage?
“Energy storage” refers to the process of converting electrical energy into a stored form that can be transformed back into electricity when needed. In renewable energy, we refer to energy storage as a means of storing energy generated via a renewable energy system such as solar panels or wind turbines.
Before examining why energy storage is necessary for renewable energy, it is important to understand how the electrical grid system currently functions. The grid was built with the assumption that it would be powered primarily by fossil fuels, which produce energy at a consistent, predictable rate, firm power. While other sources have also been used, such as large hydro power and nuclear power, these alternate sources of energy are more consistent forms of energy that can power the grid at all hours of the day.
As the US electricity grid takes on more energy from renewable sources, we need to consider how the grid was designed to operate and make the necessary adjustments to maintain firm power. Unlike power generated by fossil fuels, renewable energy produced by wind turbines or solar panels is intermittent, it ebbs and flows based on environmental conditions and is only available to use at the rate it is generated. For example, a solar PV system at night would not produce any energy. This poses a problem for an electrical grid reliant on consistent power, and forces utilities to seek energy elsewhere, such as fossil fuels. Energy storage is a solution that enables the use of renewable energy regardless of the time of day, weather, or seasonal conditions.
Energy storage and the Investment Tax Credit (ITC)
US energy requirements are currently at about 4.1 Billion Kwh according to USEIA. About 20% of this energy comes from renewable sources. In order to accommodate growing demand on the grid, we need to create new infrastructure to support it as well as new laws to create and improve upon incentives for renewable energy, and that includes energy storage.
In the past, eligibility for the Investment Tax Credit (ITC) for renewable energy required that batteries had to be charged by a connected wind or solar project at least 75% of the time. When renewable recharging fell between 75% and 100%, the value of the investment tax credit was discounted in proportion to any shortfall, driving up the cost of the system. For projects that fell below 75%, the battery energy storage systems (BESS) was ineligible and often made the project unviable. This version of the Investment Tax Credit did not recognize the value of energy storage, leading to the Solar Energy Industry Association (SEIA) for example to lobby for changes to the investment tax credit to support energy storage.
The Inflation Reduction Act (IRA) passed in 2022 provides a huge boon to the renewable energy industry and the Investment Tax Credit. Prior limitations on the credit have been removed, and now standalone battery installations are eligible for the same 30% investment tax credit as solar projects. With the price of energy storage declining as well, there has never been a better time to incorporate energy storage into renewable energy projects.
What types of energy storage are there?
Energy storage comes in many forms, from pumped hydro to mechanical systems and iron oxide. The focus of this article will be on two BESS technologies, Lithium-ion and flow batteries. These technologies pair well with software that controls the charge and discharge of energy.
Lithium-ion batteries currently dominate the market for battery energy storage solutions. They can be found in electric vehicles, cellphones, power tools and many renewable energy systems that are tied with storage.
Flow batteries are a newer technology that use liquid chemistries, including zinc bromine, to store energy for larger-scale applications. Although the market is predominantly Lithium-ion, there is a sharply growing interest in Flow batteries and this technology expected to represent a larger share of the market in short order.
What challenges does energy storage face?
Meeting today’s rapidly increasing demand for energy storage is posing significant challenges for manufacturers and their suppliers. Currently, efforts are underway to address a number of these issues:
Energy storage supply chain issues
There are supply chain constraints on virtually every element of renewable projects currently and this has been growing for several years. Slowdowns have plagued battery makers and industry overall. China now manufactures more than 70% of all lithium-ion batteries, and repeated COVID-related factory shutdowns have limited that country’s ability to meet international demand. Irrespective of any country’s dominance, the global supply of raw materials is not sufficient to meet projected demand for a clean energy future. Hundreds more mines could be required to ramp up production using current technology.
Investment Tax Credit (ITC) requirements for energy storage
The Inflation Reduction Act brings notable gains for the renewable energy industry. However, there are additional requirements paired with this bill that need to be factored in when pricing BESS projects. For example, in order to be eligible for certain elements of the ITC, a minimum percentage of the components of a given project need to be sourced in the US. Guidance on meeting this requirement given the limited number of U.S. suppliers is still forthcoming, but this rule could have a substantial impact on the ROI of renewable energy projects.
What is energy storage’s projected growth?
Despite challenges, the market for energy storage – particularly lithium-ion batteries – is expected to grow exponentially over the next decade. In October 2022, BloombergNEF projected global energy storage capacity to jump to 411 gigawatts (GW) – or 1,194 gigawatt-hours (GWh) – by the end of 2030, up from just 27GW/56GWh at the end of 2021. This forecast is up 13% from their 2021 outlook. Multiple factors are driving this uptake:
- In the United States, the Inflation Reduction Act’s standalone energy storage tax credits are expected to drive 30GW/111GWh of new capacity between 2022 and 2030.
- In Europe, a new policy called REPowerEU is expected to accelerate both renewable energy and related energy storage in response to the energy shortages related to Russia’s Ukraine invasion.
- Regulatory shifts in China and India are also expected to drive up demand in Asia.
How is energy storage being used?
As storage costs are falling – and incentives increasing – the number of use cases for battery energy storage systems (BESS) is growing. The critical piece is to understand HOW a BESS is intended to be used.
How businesses use energy storage
Businesses may choose to install a standalone BESS or pair one with an onsite renewable energy project for resiliency (backup power when the utility goes down), to increase their ability to decarbonize their operations, to earn revenue, or any combination of these goals. Determining priorities is critical when deciding how both to size the battery and how to dispatch (or not dispatch) the power it holds in reserve.
In general terms, there are two mutually exclusive benefits businesses need to consider before adding a battery energy storage system to their facility: do they care more about reserving the power for resiliency, or dispatching that power to reach decarbonization and/or revenue goals? If they care about both, the BESS needs to be large enough to accomplish both goals.
- For resiliency, the choice is relatively simple. What load needs to be supported and for how long? The battery size is a calculation based on this need and the software is programmed to ensure maximal backup power.
- For companies looking to go “net-zero” there will be a need to incorporate energy storage to utilize renewable energy 100% of the time. The economics of this can be daunting and often there is a staggered, long-term approach utilizing other means to offset what is not immediately economically feasible.
- For revenue generation, there are more considerations. Companies can offset their utility bill utilizing a number of strategies such as Energy Arbitrage, Demand Charge Management or Peak Shaving. Alternatively, they directly earn revenue if they participate in their utility’s Demand Response Program or even directly participate in wholesale markets. There are also potential aggregation strategies with FERC 222.
Each of these strategies come with unique requirements. For example, utilities require that facilities owners reserve their battery capacity specifically for utility-use during high-demand periods. Whether a company is prioritizing their own energy storage use versus financial rewards for participating in these programs will determine their willingness to committing to dispatch their power to the grid when it is needed.
A data center, for example, may care more about resiliency to keep their servers running 24/7 than they would about earning money back on their renewable energy production. On the other hand, a corporate office building may decide that since their employees will not be using any energy onsite after 6 p.m., they can afford to “sell” some of the electricity they have stored back to the grid and increase the return on investment of the system.
Businesses need to examine their priorities internally and determine which is more important to them: keeping the energy stored for themselves or selling it back to the grid.
Residential uses for energy storage
In residential settings, batteries are starting to take on natural gas generators as a backup power option, typically focused on supporting critical loads. However, they face many of the same choices for how they use this stored energy.
Energy storage manufacturers looking to target the residential market have created partnerships with solar manufacturers and installers to offer rooftop panels combined with battery storage systems that could help homeowners and businesses become energy self-sufficient. Even electric vehicle makers are developing a strategy for showcasing the multi-purpose use of EV batteries and chargers for supporting power in your home.
Some states, including California and Massachusetts, have begun offering incentives to residents who add storage to their homes to reduce local utility demand peaks.
How utilities use energy storage
As costs for battery energy storage systems (BESS) decrease, energy storage is playing an increasing role for utilities looking for increased system flexibility and renewable energy integration.
The primary question for utilities is determining how much energy storage to use, especially when considering interconnection between neighboring power systems and the variability of renewable energy depending on the time of day or season. Ultimately, they must have enough capacity to meet demand during the highest demand periods of the year. Determining an energy storage strategy is necessary as dirtier fossil fuel generation goes offline and renewable portfolio standards (RPS) goals need to be met.
Getting help with energy storage options
Calling on expert help when investigating battery options can be a great investment to help boost your organization’s resilience and decarbonization efforts. Without this assistance, you could be leaving valuable tax and utility incentive dollars on the table – and with it, you can maximize both operational efficiency and security. For more on how the Inflation Reduction Act’s changes to the Investment Tax Credit could open energy storage opportunities for your company, visit Empower Energies.