The Inflation Reduction Act (IRA) significantly impacts the cost of commercial energy storage systems by introducing several key incentives and reforms that reduce upfront costs and enhance project economics. Here are the ways the IRA influences these costs:
Impact on Costs
- Investment Tax Credit (ITC):
- Eligibility for Standalone Storage: For the first time, standalone energy storage assets are eligible for an ITC, previously only available if connected to solar projects. This means that businesses can claim a 30% tax credit on the total cost of energy storage systems.
- Bonus Credits: Developers can receive additional credits if they use domestically manufactured equipment or locate projects in environmental justice communities, potentially increasing the ITC to 70% with adders.
- Domestic Manufacturing Incentives:
- Advanced Manufacturing Credits: The IRA includes tax credits for manufacturing battery cells and modules, encouraging domestic production. This can reduce reliance on imports and potentially lower costs by mitigating supply chain disruptions.
- Increased Domestic Capacity: Since the IRA’s passage, numerous battery manufacturing facilities have been announced, aiming to boost domestic capacity and reduce trade risks.
- Cost Reduction Over Time:
- System Pricing Decline: As domestic manufacturing increases, the costs of battery raw materials and cell production are expected to decrease, leading to a forecasted 19% reduction in system pricing by 2031.
Additional Benefits
- Direct Pay Option: Tax-exempt entities, like municipal utilities, can now benefit from the ITC via a direct pay option, although at half the value of tax-paying organizations. This increases their ability to invest in energy storage.
- Energy Storage Growth: The IRA has quadrupled the U.S. energy storage pipeline, indicating a significant increase in planned projects, which will drive further cost reductions due to economies of scale.
Overall, the IRA’s provisions help reduce the upfront cost of energy storage systems, making them more financially viable for commercial applications and driving growth in the sector.
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