The 2022 Inflation Reduction Act (IRA) is a major shot in the arm for US alternative energy generation. The legislation contains US$369 billion in subsidies for alternative energy, potentially enough to cut America’s 2030 greenhouse gas emissions by 40%. Some of the subsidies simply restore tax credits that were set to expire. Another tax credit, however, specifically encourages the construction of standalone BESS projects that operate independently of a wind or solar farm.
Previously, BESS installations could only qualify for tax credits if they were part of a wind or solar farm. Not only did the storage have to be built concurrently with and located at the same site as the energy generation facility, it had to receive all its energy from that solar or wind source.
To understand the unintended consequences of this policy, we need to refer back to the duck curve. Incorporating a BESS facility into a solar farm should in theory help relieve the pressures on the grid by holding back some power to extend the delivery period further into the duck’s neck. But because of the way the old tax laws were written, any new BESS facility also came with new solar capacity, so the net effect was often to just fatten the duck’s belly and “make the mismatches even worse,” says Gao.
With the new standalone tax credit, a developer could build a BESS facility on the outskirts of Los Angeles that charges its batteries from solar farms in the Mojave during the day and discharges that power to homes and businesses in the evening. Then overnight, when electricity rates drop, the facility can recharge with power from the grid so that the batteries are ready to start discharging again as demand increases before sunrise.
Harding Loevner Analyst Lee Gao says that, according to his industry sources, the new BESS provision in the 2022 US climate change legislation “could be a game-changer.”
“Our industry sources think this standalone provision could be a game-changer in terms of adding to grid stability,” says Gao. There will need to be other solutions to plug the weather-related gaps that periodically bedevil any alternatives-heavy electrical grid. For instance, many utilities plan to replace their aging continuous-firing gas plants with solar and wind systems with BESS storage. What will still be needed, however, are more, smaller “black start” gas plants that can be quickly fired up to provide backup for the green energy sources. “That’s going to take time and money, too,” says Gao. “But at least now we’re starting to see more of a path forward.”
The architects of US trade policy with China seem to recognize the critical role of BESS—and CATL—in the energy transition. EV batteries produced in China aren’t eligible for subsidies under the new law, but there’s no such prohibition on BESS, perhaps a tacit acknowledgment that CATL has become too integral to BESS production for US climate objectives to be met without it. CATL is exploring new facilities in Mexico or the US to produce EV batteries to overcome the hurdles in the new law, but until then, it’s continuing to grow its BESS business in the US.
The company is also on the forefront of developing the next next generation of battery chemistry based on sodium-ion technology (that’s right, essentially making batteries from salt), which is easier on the environment and even less costly to produce than LFP and involves even lower (i.e., next to zero) fire risk. Though CATL does not expect to reach full commercial scale for several years, it plans to start shipping sodium-ion batteries in 2023. Because the cells are still slightly less energy dense than LFP ones, some of their first high-volume uses could be for BESS projects, where, unlike in an EV, size and weight are less of a priority.
“BESS has emerged as this nice supplement and stabilizer to the company’s earnings,” says Gao. “If US industrial policy temporarily causes the company to lose EV-related market share in the US, BESS should help smooth out the lumps until the North American plants are up and running. Or if, as I think is more likely, everyone realizes that without CATL there is no way the US can meet its EV targets either, then the BESS opportunity is all additive.”
Analyst Lee Gao contributed research and viewpoints to this piece. ESG Associate Maryna Arabei, CESGA also contributed research.
Featured Image: BESS in China’s Qinghai Province. Each shipping container-sized battery pack contains thousands of CATL cells.
¹ The Gemini Solar Project site also sits in the migration path of the desert tortoise, a charismatic creature that can live to 80 years old and whose environmental defenders tried to get the project moved. Quinbrook offered to move the tortoises instead, rounding up as many as it could find with the intent of returning them to the property after the work is finished. How the reptiles react to 1.8 million solar panels angled overhead remains to be seen.
² More recently, tightening global lithium supplies and supply chain shortages have caused the decline in LFP prices to slow and even back up a bit. However, as this occurred at the same time oil and gas prices were also rising, the net effect on LFP demand has largely been a wash. CATL is also relatively insulated from some of these forces because it secured its own dedicated lithium supply in western China and its investments in other reserves around the world.