Tax credits boost US solar-plus-storage build

Regulation designed to remove barriers to the use of storage in US electricity markets, combined with a tax credit for solar farms plus storage, is providing competitive market returns for US developers. The scale-up in activity is generating cost reductions as solar and lithium-ion (Li-ion) batteries become more efficient and cheaper to produce, suggesting solar-plus-storage is on the way to becoming cost competitive with fossil fuels on an unsubsidised basis.

While not yet competitive on an unsubsidised basis with other energy sources, solar-plus-storage is proving viable in the US, where it is supported by a federal Investment Tax Credit (ITC) and state-level initiatives to integrate storage into the country’s electricity networks.

Tax and regulatory incentives

Many of these initiatives stem from a regulation passed in February last year by the Federal Energy Regulatory Commission – Order 841. This rule directed regional grid operators across the US to remove barriers to the use of storage in electricity wholesale markets. Grid operators subsequently filed compliance plans in December 2018.

The ITC, meanwhile, is set at 30% this year, falling in annual steps to 10% in 2022 for commercial and utility-scale solar-plus-storage, while for residential systems it drops to zero in 2022. The ITC does not apply to stand-alone storage projects, although bills have been introduced in the current Congressional session to extend the tax credit’s application.

Storage is expected to play a key role in facilitating the expansion of renewable energy, but it is solar-plus-storage in particular which is forging ahead in the US to take advantage of the time-limited ITC, demonstrating the boost that supportive regulation can give to renewable technology deployment. According to a study by consultancy IHS Markit, over 2 GW and 6.7 GWh of storage is likely to be paired with utility-scale solar PV systems in the US between 2019 and 2023, serving 10 GW of solar PV capacity, 16% of expected utility-scale solar PV installations in this period.

Electricity storage allows variable renewable generation to be used at any time. Solar generation rises and falls with the sun, reaching a peak at midday, but this is not necessarily when the electricity is required. Too much solar can lead to excess generation and grid congestion, problems which then limit the addition of further capacity. Storage can shift that excess generation to periods of higher demand, allowing more solar capacity to be installed.

Cost reduction path

Scaling up is important in reducing costs, which in turn will allow the solar-plus-storage technology combination to compete in the market on an unsubsidised basis in the future. There are good reasons to believe that costs will fall.

In its most recent study on the Levelized Cost of Electricity (LCOE) for different generation technologies, investment bank Lazard put the LCOE for a utility-scale solar farm without subsidies in a range of $36-$46 per megawatt hour (MWh). Go back to 2009 and the LCOE was a huge $323-$394/MWh. Solar PV costs have fallen by a factor of almost 10 in a decade.

The reasons behind this dramatic drop are twofold: the increasing efficiency of solar PV cells and lower manufacturing costs as production capacity has expanded globally. These principal factors led to a critical turning point in 2015, when solar PV costs equalled and then fell below those of electricity generated from a combined cycle natural gas plant.

LCOE studies provide a good comparison of costs, but they are not perfect. Costs for a coal or gas-fired power plant depend heavily on the price of fuel, while for solar the costs are largely the capital needed to buy and install the equipment. LCOE studies with different fuel and capital cost assumptions will produce different results, but the Lazard study shows that even if capital costs are relatively high, solar PV is still cheaper than fossil fuels.

Solar PV is also, naturally enough, sensitive to the level of irradiation and will perform much better in the sunnier states of the US, such as Hawaii, Arizona or California, and it is in these states where solar plus storage is really taking off.

Rapid cost reduction also expected for storage facilities

On the storage side, Li-ion batteries have also seen rapid reductions in cost. According to the report, Li-ion batteries for mobility and stationary storage applications, published in November last year by the European Commission, Li-ion battery costs have fallen from about 870 €/kWh ($981/kWh) in 2010 to around 170-215 €/kWh in 2017.

Similar to the upscaling of mass manufacturing for solar PV, sales of electric vehicles (EVs) grew by 64% last year and producers are building ‘mega-factories’ for Li-ion batteries to keep up with demand. This increase in scale can be expected to reduce battery costs further.

The report says that based on company announcements, global Li-ion battery production could grow by a multiple of four to six by 2021-2022, an extraordinary rate of expansion. Solar-plus-storage will reap the technology gains made by the producers of batteries for EVs. The study forecasts that the cost of Li-ion batteries will fall to at least half the cost of today’s production by 2030, and drop another 50% by 2040 to reach 50 €/kWh.

There is also confidence that solar PV costs will continue to drop as solar cells and manufacturing processes become increasingly efficient, as outlined in the report, International Technology Roadmap for Photovoltaics, published in 2017. Even without new innovation, the efficiency of commonly-used multi-crystalline silicon panels is likely to edge up from an average of around 17% to the current best-in-class level of 21%.

But for the moment in the US, it is the ITC which tips the scale when it come to the economics of solar-plus-storage. IHS Markit estimates that adding 25 MW of storage to a 100 MW solar farm would increase costs by 35-40%, based on 30 years of operation, with the battery system replaced after 15 years. However, assuming a high-efficiency system and applying the ITC, an LCOE of $40/MWh can be achieved, the consultancy says, providing clean renewable energy — when it is needed — at a cost competitive with fossil fuels.