As the U.S. Congress mulls a proposal to expand a federal investment tax credit for energy storage projects, several regulated utilities and power companies with regulated divisions want lawmakers to let them recover those incentives more quickly.
Doing so would enable greater deployment of energy storage at a lower cost to consumers and create a more level playing field between regulated utilities and independent project developers, the companies argue.
On Nov. 19, Democrats in the U.S. House of Representatives released a draft clean energy tax credits bill . Among other things, the draft bill would expand an existing 30% investment tax credit, or ITC, for storage projects so that the credit applies to stand-alone storage projects and those paired with a wide range of other energy resources. Currently, the ITC only applies to storage facilities paired with solar energy projects. Separate legislation to expand the storage ITC was released earlier in 2019 in both the House and U.S. Senate.
Enabling stand-alone energy storage projects to qualify for the ITC, supporters say, could improve the technology's economics and smooth the integration of renewable energy as U.S. generators and policymakers work to cut utility sector carbon dioxide emissions. Between 2019 and 2023, nearly 2,200 MW of stand-alone energy storage projects are set to start operations within the U.S., according to date compiled by S&P Global Market Intelligence as of May 15. Another 4,000 MW of storage projects co-located at U.S. power plants is slated to come online in that time frame.
Although many utilities would like an expanded storage ITC, regulated entities want to recoup that tax benefit more immediately, something nonregulated energy developers are already allowed to do under the U.S. tax code.
A group of utilities consisting of Duke Energy Corp., Xcel Energy Inc., Berkshire Hathaway Energy and Portland General Electric Co. is advocating for regulated utilities to be able to opt-out of the tax "normalization" requirements of the proposed storage ITC. Under current U.S. Treasury Department regulations that apply to regulated utilities, normalization spreads out the tax benefit from a particular investment over the life of a project.
Nonregulated entities are exempt from the normalization requirements, allowing them to claim the full value of the ITC upfront. But regulated utilities must spread the credit out across the life of the project, creating an "unlevel playing field" for those companies, Portland General Electric's, or PGE's, vice president for public policy, Dave Robertson, said.
As an example, PGE said approximate costs to build a 50-MW, four-hour storage battery without the normalization requirement would be $11/kW-month compared with $14/kW-month under existing requirements and $15/kW-month without the benefit of a storage ITC. That $3/kW-month difference would amount in a $36 million increase in costs to consumers across a 20-year battery life compared with redeeming the ITC without normalization, the company said.
Those added costs put regulated utilities at a disadvantage to other project developers when bidding on energy storage requests for proposals, said Pat Reiten, senior vice president of government relations for Berkshire Hathaway Energy.
To illustrate the downside of normalization, Reiten described the impact of those requirements on Berkshire's renewable energy portfolio. Berkshire subsidiary NV Energy Inc. has about 1,900 MW of contracted renewable energy capacity, all but 15 MW of which is from third-party power purchase agreements. He attributed the small amount of NV Energy's owned renewable capacity to the need to normalize a federal investment tax credit for new solar energy projects.
Normalization requirements "have resulted in utilities not being able to front-load the benefit [of investment tax credits], buy down the cost for customers and, therefore, the utilities have not been competitive in those RFPs," Reiten said.
A more competitive bidding process and owning more generation directly would benefit consumers, the regulated utilities assert. The opt-out proposal "is in the best interest of customers, ensuring that new technology is developed at the lowest possible cost," Xcel spokesperson Julie Borgen said.
Without such opt-out language, Duke spokesman Phil Sgro said the company will not back the proposed storage ITC before Congress.
But some industry experts are skeptical of the need for such tax policy reforms. Karl Rabago, principal of power consulting firm Rabago Energy and past executive director of the Pace Energy and Climate Center, said regulated power companies already have monopoly buying power, attractive debt-to-equity ratios, high rates of return and low risk, meaning the absence of normalization "is not necessary, and therefore not worth the price."
Regulated utilities "can always opt out by surrendering their monopoly status, but they want their monopoly cake and to eat the competition too," Rabago said.
Where things go from here
The challenge for regulated utilities will be getting lawmakers on board, potentially in a short timeframe.
Robertson said House lawmakers excluded the normalization opt-out provision from their green energy tax extenders package released Nov. 19 in part over tensions between regulated utilities and independent project developers, including the nonregulated arms of some large power generators. Those tensions coincide with a proposal from the Federal Energy Regulatory Commission that would further limit requirements for large electric utilities to buy power from small independent renewable energy facilities under the Public Utility Regulatory Policies Act, known as PURPA.
PGE and other regulated utilities, however, have been working with lawmakers, including Senate Finance Committee Ranking Member Ron Wyden, D-Ore., on a potential compromise storage ITC language, Robertson said. The push comes as tax-writing members of Congress are working to craft a new broad tax extenders package before the end of 2019 that could contain energy-related measures such as the expanded storage ITC. But if time runs out this year, regulated utilities are ready to take their fight into 2020.
If Congress acts in December on tax extenders legislation, "we're kind of lobbying to sort of hook our car on this train if we can right now," Robertson said. "But we've got a little time on the bigger [clean energy tax] package if it doesn't."