Financial incentives that could encourage investment in pumped hydro energy storage include the following:
1. Government Grants and Funding Programs
- The U.S. Infrastructure Investment and Jobs Act (IIJA) has allocated $355 million from 2022 to 2025 specifically to support energy storage demonstration projects, including pumped storage hydropower (PSH), with an additional $150 million for long-duration energy storage projects. These funds reduce upfront risks and encourage project development.
- The Department of Energy also provides hydropower production incentives, with $125 million available to qualified hydroelectric facilities, which may include PSH projects.
2. Tax Credits and Investment Incentives
- The Inflation Reduction Act (IRA) offers a 10-year, technology-neutral energy storage investment tax credit (ITC) for new pumped storage hydropower facilities. This provides a direct financial benefit by reducing tax liability on investment, making projects more financially viable.
- The IRA also enables “direct pay” options for entities like cooperatives and public power organizations, and transferability of tax credits to parties that can better utilize them, maximizing the financial return for various types of owners and developers.
- Production tax credits (PTCs) are also available to hydropower projects that meet specific criteria, offering ongoing financial returns based on electricity generation.
3. Market Design and Regulatory Support
- Modifying energy market rules to value pumped storage’s ancillary services (like spinning reserve, black start capability, voltage regulation, and grid stability) can create new revenue streams and improve project economics. For example, assigning capacity tariffs for these services would allow pumped storage to monetize its reliability and flexibility benefits, attracting more investment.
4. Public-Private Partnerships and Mandates
- Countries that have government mandates or targets for energy storage capacity, including pumped storage, often see faster project development because such mandates create reliable market demand. Public-private partnerships and government-backed low-interest loans also lower financing costs and risks for investors.
Summary:
Financial incentives that encourage investment in pumped hydro energy storage revolve around government funding programs, tax credits (especially those introduced by the Inflation Reduction Act), improved market structures to recognize the value of pumped storage services, and mandated targets or regulations promoting energy storage capacity. These incentives help lower initial capital risk, increase revenue certainty, and improve returns on investment, thereby making pumped storage projects more attractive to developers and investors.
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