Solar Energy

Charged Up! the Inflation Reduction Act of 2022 and Its Impacts on Energy Storage Capacity in the U.S.

December 5, 2022
Climate Change, Energy Law, Environment, Solar Energy

Quinn Milligan, MJLST Staffer

The Inflation Reduction Act of 2022 (the IRA) is one of the most significant steps the U.S. government has ever taken towards fighting climate change. Over a decade, the IRA dedicates nearly $400 billion to clean energy tax incentives with the aim of reducing carbon emissions and aiding the U.S. energy economy in speeding up its transition away from fossil fuel based energy generation.[1] One of the most interesting features of the IRA’s emphasis on clean energy is the energy storage industry. The IRA extends the coverage of the 30% Investment Tax Credit (ITC) to standalone energy storage projects, and creates a system by which standalone battery projects can earn up to 70% in tax credits, with additional incentives linked to involvement in low-income housing and other projects.[2]

Why is that such a big deal? At a high level, one of the main obstacles to reliance on renewable energy sources, other than nuclear power, is the variability of their supply generation. Variability is easy to understand at a cursory level: You can’t rely on solar power when it’s not sunny out or wind energy when there’s no wind. So, variability of energy production from renewable sources has long been an obstacle to the increased dispatch of renewable sources.[3] Increased transmission capacity and energy storage capacity provide a solution to the variability in generation of renewable energy sources.[4]

The manner in which the Federal Energy Regulatory Committee (FERC) regulates the Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs) accentuates the impact of generation variability on the ability of renewable resources to be widely utilized. These ISOs and RTOs operate independently of the federal government to ensure that U.S. citizens have reliable access to affordable energy.[5] In essence, for huge swaths of the country, ISOs and RTOs oversee the markets wherein energy is purchased from generators and resold to retail suppliers, which provide energy to end consumers.[6] The ISOs and RTOs both forecast and plan for the energy needs of their areas of oversight, and then coordinate the purchase and sale of those contracts to fulfill the energy needs. These purchases happen at multiple different time scales, ranging from forward contracts, to day-ahead markets, and even minutes before requirement.[7] Because planning and forecasting make up such an important part of how energy is purchased, the variability of generation from renewables has historically made it very hard for ISOs and RTOs to rely on renewably sourced energy to fulfill any sort of energy need other than minutes-ahead contracts. However, that is the very problem many of the incentives in the IRA may help to solve.

The huge tax incentives given out to standalone energy storage projects are critical policy achievements that will go very far in aiding the U.S. to accomplish its lofty goal of reducing carbon emissions up to 40% below 2005 levels by 2035, as the Biden Administration claims will be accomplished with help of the IRA.[8] One huge change the IRA made to climate policies enacted under the Obama Administration was to remove the solar charging of battery storage in order to receive tax credits. Under the IRA, as opposed to prior legislation, investment in projects to create better storage will receive the IRA’s ITC regardless of what source of energy is used to fill that battery capacity.[9] This ITC for energy storage capacity pairs hand-in-hand with the tax credits extended under the IRA to renewables; for example, the IRA extends the current tax breaks for solar and wind generation for another 10 years.

The emphasis on energy storage capacity increases means ISOs, RTOs and other energy utilities will have less need to rely on fossil fuel energy sources to power their grids, as cleanly produced energy can be stored and dispatched on a longer-term basis to store power and make up for variability in generation. The other important aspect of increases in electricity storage capacity is that ISOs and RTOs can more comfortably rely on renewable energy sources to respond to fluctuations in peak demand periods than ever before.[10] Responding to changes in demand during peak demand hours has long been one of the main challenges for utilities, and one of the reasons our grid has continued to rely on fossil-fuel-based energy for so long. Its generation is reliable, cheap, established and abundant.[11] The increase in energy storage capacity resulting from the IRA’s incentive structure will help ISOs and RTOs transition more fully toward reliance on renewable energy in short-term markets, as well as the long-term capacity markets, by minimizing reliability concerns previously raised by generation variability.

The real genius of the IRA’s focus on the energy storage capacity from a policy standpoint is that all battery projects put into service after December 31, 2022, receive the ITC, even if they are powered by fossil fuels.[12] Unlike many climate change policies before it, this approach means the entire U.S. energy grid, and not just the renewables sector, will be incentivized to address a critical constraint on the deployment of renewably generated electricity and subsequently ease the transition of the grid away from fossil-fuel-generated electricity.

As time goes forward, the price of renewable energy continues to go down as compared to fossil-fuel-generated energy; in fact, renewable energy today is generally cheaper than fossil fuel energy.[13] That begs the question of why most of our electricity is sourced from fossil fuels when FERC directs the ISOs and RTOs to power the grid affordably. The reliability of renewable energy generation has long been one of the obstacles standing in the way of a transition to renewable energy generation, and the IRA’s electricity storage incentives go far in setting up the U.S. to successfully build the storage capacity needed to finally make a transition away from carbon reliance.

Notes

[1] https://www.mossadams.com/articles/2022/08/inflation-reduction-act-clean-energy-credits

[2] https://www.utilitydive.com/spons/ira-sets-the-stage-for-us-energy-storage-to-thrive/635665/#:~:text=The%20Inflation%20Reduction%20Act%20(IRA,70%20percent%20with%20additional%20incentives.

[3] https://www.rff.org/publications/explainers/renewables-101-integrating-renewables/

[4] https://climatechangeresources.org/storage/

[5] https://www.ferc.gov/power-sales-and-markets/rtos-and-isos

[6] https://bestpracticeenergy.com/2020/05/21/energy101-electricity-iso/#:~:text=What%20exactly%20do%20ISOs%20and,actions%20are%20unbiased%20and%20neutral.

[7] https://www.iso-ne.com/markets-operations/markets/da-rt-energy-markets/

[8]https://crsreports.congress.gov/product/pdf/R/R47262#:~:text=The%20same%20analyses%20estimated%20that,prices%2C%20among%20other%20uncertain%20factors

[9] https://www.ny-engineers.com/blog/energy-storage-tax-credit-before-and-after-the-inflation-reduction-act

[10] https://www.ncsl.org/research/energy/energy-storage-for-a-modern-electric-grid-technology-trends-and-state-policy-options.aspx

[11] https://www.solarreviews.com/blog/fossil-fuels-pros-and-cons#fossil-fuel-pros-and-cons

[12]https://www.mossadams.com/articles/2022/08/inflation-reduction-act-clean-energy-credits “Standalone battery storage. “If placed in service after December 31, 2022, standalone battery storage qualifies for the ITC, regardless of whether it’s charged by a renewable source.”

[13] https://www.weforum.org/agenda/2021/07/renewables-cheapest-energy-source/

Controversial Community Solar Garden Program Is a Target of Minnesota’s 2019 Legislative Session

March 8, 2019
Energy Law, Environmental Law, Solar Energy

Hannah Payne, MJLST Staffer 

In 2013, Minnesota’s legislature opened the way for certain solar projects with the passage of the Community Solar Garden Program. The program requires Xcel Energy to purchase the energy created by Community Solar Gardens (“CSGs”) that are under a certain generation capacity. CSGs represent a middle ground between residential rooftop solar and large-scale, utility-owned solar. The idea is that medium-sized solar arrays are built in or near communities by developers, local residents buy subscriptions, and then the utility buys the energy from the array and credits the resident subscribers’ accounts. Solar developers sell subscriptions by highlighting the chance to save money and help the environment.

CSGs have been controversial since the inception of the program. Along with the significant growth of CSGs in Minnesota have come concerns about the sales practices of developers, who have been accused of misrepresenting the certainty of profit or stage of project development. The Attorney General warns consumers to “make sure they fully understand a subscription agreement and carefully consider whether they are willing to commit to its terms.” Opponents also decry that the majority of the capacity – 90% – of CSGs is purchased by commercial and other non-residential customers, undercutting the idealistic image of CSGs bringing renewable energy tangibly closer to communities. However, CSG advocates point out that the vast number of subscribers – 92% – are actually residential; they just use less energy than commercial customers.

At the heart of the controversy is the price issue. Opponents of the CSG program, including Xcel, say that it is far cheaper to produce solar energy in a large-scale setting. Xcel recently committed to going 100% carbon-free by 2050, and is likely focused on building renewable capacity efficiently. On the other side, proponents claim that Xcel’s lack of tolerance for competition has resulted in the undervaluation of CSGs because the social benefits and avoided costs have been ignored.

In any case, the CSG program looks poised to undergo change this year; several CSG bills have been introduced in the legislature. Senator Mike Goggin, a nuclear plant manager at Xcel, has proposed total repeal of the CSG program. Another bill would require Public Utilities Commission approval of CSG projects and cap the amount of capacity that may be built within the program annually at 25 Megawatts (there is currently no limit). Other proposals aim to improve developer sales practices, one listing detailed disclosures to be required in promotional materials, another calling for the state’s Clean Energy Resource Team partnership to develop a “disclosure checklist” for developers. Yet another bill would fund a study of “economic benefits to farmers” to investigate if the CSG program may be tweaked to be more farmer-friendly.

Minnesota is a national leader when it comes to CSGs; many will be watching to see how the legislation develops. As Xcel and others get more serious about renewable energy, conversations and controversies around renewables can only be expected to increase. Watching a debate like this unfold is a great way to keep a finger on the pulse of the energy world in this exciting time.

Renewable Energy vs. National Parks

February 6, 2019
Energy Law, Environment, Environmental Law, Property Law, Solar Energy

By: Bethany Anderson

That’s what happened in Animal Welfare Institute v. Beech Ridge Energy LLC, where a wind energy facility was curtailed because it stood in the migration pathway of an endangered species—Indiana bats. The court allowed the facility to operate, but with significant constraints. For instance, though construction on those turbines already under construction could continue, Beech Ridge could operate only after it applied for and obtained an Incidental Take Permit (“ITP”), which would immunize Beech Ridge from certain ESA penalties for killing and injuring bats. Moreover, construction of additional turbines was conditioned on obtaining an ITP. Additionally, the Court ordered the Fish and Wildlife Service (“FWS”) to determine when Beech Ridge could actually operate after Beech Ridge obtained an ITP, taking into account the migration and hibernation patterns of the bats (see this report for a brief discussion on the aftermath of the Beech Ridge case).

In a similar energy against nature context, significant outcry (see this article) over oil and gas drilling in and around national parks arose in the last year. The Trump Administration opened up more public lands for mineral leasing, and directed agencies to revise or rescind rules that burden domestic energy development. Environmental groups lamented the endangerment of pristine public lands, darkness of wilderness night skies, quiet of natural soundscapes, and tech- and industry-free experiences many visitors crave. These are all legitimate concerns because the experiences, sounds, and sights preserved in our national parklands are preserved relatively unspoiled only in these limited corners of the country. The groups’ sentiment seems to be “let’s just drill somewhere else, okay? It’s a big country. Preservation uses claim few acres in the scheme of things.”

The recent outcry misses, however, concern over greener energy projects that also threaten wilderness and nature values. Like in Beech Ridge, there are two sometimes competing goals here. Renewables serve climate change goals, displacing carbon-emitting energy sources like coal, natural gas, and oil. National parklands preserve land and culture in their natural and historical state. What happens when green energy development requires a huge expanse of flat land exposed to sun year round? A solar facility one mile from Mojave National Preserve presents an example. Is such a land use plan any less invasive than drilling? Maybe it’s quieter and lower to the ground, and maybe it serves a goal that those in the nature fight can get behind better than oil and gas drilling. In this instance, the solar facility still a mile away and does not in any way reach into the park through something comparable to directional drilling. But the facility uses land that was previously untouched and is still potentially visible from parks. As another example, what happens when the only way to get offshore wind online is to construct a high-voltage transmission line across a historic park? Developers say alternative energy sources that replace closing coal plants require a transmission line crossing a historic trail. Opponents say the line undermines the historic atmosphere of the trail and surrounding park area, and may open the floodgates to more industrialization in historic and pristine areas. In the same way as oil and gas drilling, these developments undermine some of the wilderness and historic values park advocates fight for.

So how do we balance these seemingly competing values? National parks are to be preserved unimpaired for the enjoyment of present and future generations. That mandate may conflict with climate change-combatting green energy tech seeking the most effective locations for new facilities.

The 9B regulations (“regulations”) that govern nonfederal oil and gas rights in and around national parks are a framework from which to balance renewables with the preservation mandate. The regulations require a plan of operations, plans in case of spills or other emergencies, a security bond in case of harm to park resources, and eventual restoration of the land, returning it as close to its original status as possible after operations conclude. Renewables are likely more permanent than an oil or gas well, so space and distance restrictions will need to be stricter. But a similar plan of operations, with mitigation strategies and emergency contingencies, is a good start, especially since the regulations are already in place in one piece of the energy sector. As energy technology develops, it constantly brings novel challenges into the existing legal context. The 9B regulations provide a starting point for the ever-growing green energy versus preservation debate.

The Future Is Solar: Investing in Solar Energy Using Sale Leasebacks

November 13, 2016
Solar Energy, Tax Law

Alan Morales, MJLST Staffer

Solar energy has come a long way in the last few decades as the cost of producing photovoltaic (PV) cells, the main technology used in converting sunlight into electricity, has significantly decreased. Furthermore, there is a federal tax credit program available, which allows investors in solar energy to claim 30 percent of their solar energy installation cost as a credit on their taxes. This has led residential, commercial and industrial property owners to slowly increase their solar usage.

However solar developers, in many cases, will not have enough tax liability to make immediate use of the tax benefits. An essential financing mechanism for solar developers is a “tax equity” transaction, where tax benefits are sold to raise capital to build the solar project. This demand for cash, has caught the attention of private equity firms, pension funds and foreign investors.

To start, these cash investors must invest through a “blocker” corporation – a US entity treated as a corporation for tax purpose. Cash investors should understand how the tax equity works since they will be investing alongside it. It will also affect what the cash investor can get out of the deal. Then a cash investor might use a sale- leaseback to finance the project. Sale-leasebacks are common in the commercial and industrial rooftop and utility-scale solar markets. In a sale-leaseback, the developer sells a project to a tax equity investor for its fair market value and then the investor leases it back to the developer. In this case, the investor keeps all of the tax benefits, and receives cash in the form of rent from the developer. The developer has taxable gain on the sale to the extent the value of the property exceeds what it cost to build. Although a lessor position is not ideal for some cash investors, it can prove beneficial if they can purchase the project, lease it back to the developer, and sell a portion of the lease to a tax equity investor.

The main benefit to a cash equity investor is the flexibility. Cash investors are in a position to sell as much of its lease position as it wants, and retain as much cash flow as it wants. Sale-leasebacks are enticing for developers because it offers financing for the project while freeing up cash for their other business needs. The tax equity investor is least benefited and would have to become a member of the lessor before the asset is placed in service, which means having to take on some degree of construction risk.

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