Tax Incentives for Energy Storage Systems
Solar + energy storage systems offer a myriad of local and grid-wide services. This article helps you with maximizing your incentives.
CivicSolar does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
Solar + energy storage systems offer a myriad of local and grid-wide services (for a primer see The Many Roles of Energy Storage, Introduction to Demand Charge Management, and The SolarEdge Energy Storage Solution). Although increasing lithium manufacturing scale will continue to be the primary driver of decreased system costs, a critical component of the current business case for a solar + stage system is the effective capture of federal tax incentives. Please note only privately owned solar + storage systems qualify for the incentives discussed below.
This article will cover the two major federal tax incentives available for energy storage systems (ESS); Modified Accelerated Cost Recovery System (MACRS) and the Investment Tax Credit (ITC). The federal solar investment tax credit is a deduction representing 30% of the cost of installing a solar electric system. This incentive is available to both residential and commercial system owners and the full 30% credit is slated to run through 2019, at which point it will begin to step down to 26% in 2020, 22% in 2021, and finally 10% in 2022 and beyond. Although the ITC is well-known and a commonly employed incentive in the realm of solar PV systems, under certain conditions its value can also be captured with an energy storage system.
The degree to which an energy storage system can capture the ITC is determined by the source of energy used to charge the batteries. Starting with the best-case scenario, batteries charged only by collocated solar PV is eligible for the full 30% deduction towards the installed system cost. For batteries charged primarily by collocated solar PV (defined as 75%-99.9% of the charging needs), the proportion of the ITC that can be applied to the energy storage system (ESS) is calculated by the proportion of charge from PV multiplied by the 30% ITC. For example, an ESS charged 77% of the time by solar PV would qualify for roughly 23% of the ITC (77% x 30%). It's worth noting that the PV system itself is still entitled to the full 30% deduction. ESSs charged less than 75% of the time by their affiliated PV system do not qualify for the ITC.
The other major federal tax incentive for ESSs is the Modified Accelerated Cost Recovery System (MACRS) paired with bonus depreciation. As long as there has been an income tax, deductions for asset depreciation have been recorded in the US. Solar and ESSs are no exceptions. Residential solar + storage systems do not qualify for MACRS and bonus depreciation. Born out of the Economic Stimulus Act of 2008, renewable energy systems can depreciate 50% of the value of the asset in the first year of operation. Projects claiming the ITC limit MACRS and bonus depreciation to 85% of the system value to be depreciated. Systems commissioned prior to January 1, 2018 qualify for 50% bonus depreciation. Systems commissioned after 1/1/2018 qualify for 40% bonus depreciation while systems commissioned in 2019 qualify for 30% bonus depreciation. Using MACRS businesses can deduct the depreciation expense of their ESS dependent upon the proportion of charge from PV. As you can see in the graphic above MACRS ranges from a 7 year period for ESSs not charged by PV to a 5-year depreciation schedule for systems charged by PV more than 50% of the time. A shorter depreciation schedule allows for increased cost recovery from the ESS and reduces the business's tax liability.
Understanding your qualifying incentives is crucial to providing an accurate and compelling solar + storage proposal. Energy Toolbase provides a comprehensive web-based platform to model residential and C&I solar + storage systems. In addition to modeling load profiles, solar + storage production, and purchase transactions, Energy Toolbase puts all available incentives at your fingertips to deliver an accurate financial proposal to your client.
If you have further questions, don't hesitate to reach out to Conor directly.
NREL: Federal Tax Incentives for Battery Storage Systems. January 2017