Active engagement with the Judiciary is critical
Working closely with the Judiciary (AHJ) is critical to the success of the U.S. battery storage industry, but the following points need to be kept in mind at all times.
That’s the conclusion of multiple sources interviewed by TGPRO News at the RE+ Solar and Storage trade event in Las Vegas. Jurisdictions enforce building codes, fire codes, zoning and other important regulations in their particular area, and thus are effectively the gatekeepers of buildings in their towns, cities, counties and so on.
Obviously, this includes battery energy storage system (BESS) projects as well, and local fire departments and other similar agencies need to ensure that the developer’s plans include the use of certified safety equipment.
Seungse Chang, head and senior vice president of LG Energy Solutions’ Energy Storage Battery Business Unit, provided technology provider insights, while Burns McDonnell’s Ben Echeverria, energy storage regulations and compliance specialist, and Julian Hoover, project manager, offered perspectives from the EPC.
When asked what has changed in the U.S. energy storage landscape in the last five years or so since megawatt-scale BESS development became more commonplace, Hoover said jurisdictions and their communities tend to be much more educated about the technology than they used to be.
“You think of the challenges that the judiciary faced when [BESS] was first introduced, not even knowing what a battery storage program was. The big difference today is that there’s a lot more education being provided to the community, to the judiciary, to the EPCs, to the project owners, and I think we’re all starting to have a better understanding of what it is,” Hoover said.
Last year, in an interview for our quarterly newsletter PV Tech Power, Paul Rogers, a fire safety and battery storage subject matter expert with the Energy Safety Response Group (ESRG), said stakeholder engagement with the judiciary early in the development process is absolutely critical, but many in the BESS industry don’t realize or ignore it.
This is echoed in the site’s recent visitor blog, co-authored by one of his colleagues, ESRG head Nick Warner. Both are former firefighters with an intimate knowledge of the judiciary and its thinking.Burns McDonnell’s Ben Echeverria and Julian Hoover agreed with the ESRG experts on RE+ this week.
Echeverria said the early involvement of local authorities in applying for conditional use permits for project land can help jurisdictions familiarize themselves with the technology being used.
Education, education, education
“One of the most important things I’ve seen in dealing directly with jurisdictions is that they have two extremes,” Echeverria added.
“[Some of the judiciary] are uneducated, but somewhat worried because of their local atmosphere, if you will, toward the opposition. And then you see the other side of the extreme, the well-educated jurisdictions, because they’re hiring subject matter expert consultants to bridge that gap, to act as gatekeepers to make sure that they’re not going to go out and put something in their jurisdiction that they know nothing about and may or may not pose a danger.”
In other words, Echeverria said, it’s about “education, education, education,” noting that the industry’s reluctance to talk about fire safety only “exacerbates the problem,” and that many recent BESS programs have failed in their application because of local community-raised concerns.
At the same time, Hoover said that where there has been early engagement and success, education has helped guide industry best practices and led to active participation by jurisdictions, which is a step in the right direction.
Customizing to meet the requirements of specific jurisdictions
LG Energy Solution’s Seungse Chang told TGPRO NEWS that fundamentally, no large BESS project can pass the AHJ’s requirements without meeting the critical UL9540 certification or passing the UL9540A fire test. In most cases, the National Fire Protection Association code NFPA855, which contains these elements, is required.
LG Energy Solution has launched a systems integrator division, LG Energy Solution Vertech, which was largely formed through the acquisition of NEC Energy Solutions and therefore has a further stake in the sector and sells its BESS battery products and solutions.
From residential scale to large meter front-ends, without UL certificates and reports, LG ES or any other company would not be able to sell its products in the US.
However, Chang says that while in most cases this is sufficient to meet the requirements of the judiciary, there are times when it is necessary to go beyond the requirements of these standards and benchmarks in order for the judiciary to accept the use of BESS equipment in certain projects.
“Even though we are fully certified to UL regulations, different jurisdictions and counties have made some very customized and specific requirements,” Chang said, adding that the LG ES will meet those requirements, with the head of the battery storage division noting that no two requirement types are the same.
As Paul Rogers pointed out in his 2022 interview, fire departments believe that the worst-case scenario is possible with any equipment installed in their jurisdiction. Of course, it is their job to do just that and put the safety of the community first.
Chang agrees that mitigating the worst-case scenario is usually what these authorities are asking for. It can also work both ways, some jurisdictions may be less stringent, but the bottom line is that what the jurisdiction says works, and the industry can and should work with them.
“UL has specific recommendations, such as how far apart each container needs to be, but in some cases some jurisdictions require longer distances,” and in either case, a customized BESS is required What you need to know about IRAs and tax fairness
The Inflation Reduction Act has brought confidence and certainty to the clean energy industry, and Foley Lardner attorneys Adam Schurle and Morten Lund take a closer look at what this means for tax equity financing of energy storage, as well as exploring some of the questions that remain to be answered.
This is an excerpt from a feature article originally published in Volume 36 of Solar Media’s quarterly magazine, PV Tech Power, covering the solar and storage industries (premium access).
The Inflation Reduction Act of 2022 (IRA), enacted in August 2022, has the potential to revolutionize how solar and battery energy storage system (BESS) projects are developed and financed, particularly how tax equity financing is utilized in the industry.
Now that we are a year away from the passage of the IRA, it’s a good time to revisit whether some of the predictions, hopes and concerns associated with tax equity financing and the IRA have been realized.
A Double-Edged Sword
The ITC (Investment Tax Credit) has always been a double-edged sword. On the one hand, the ITC is undoubtedly the most important financial incentive for solar in the U.S. and has attracted significant capital investment to the solar industry. On the other hand, the nature of the ITC as a tax credit precludes many sources of funding and creates potentially harmful artificial incentives for the industry.
Nothing is certain but the tax
To utilize the ITC, a significant amount of income is subject to U.S. federal income tax and the claimant must generally be a U.S. taxpayer.
Prior to an IRA, ITCs were not transferable. Depreciation was not transferable. As a result, external financing is often required to realize the value of ITCs and depreciation, as project developers are often unable to absorb all of the tax benefits on their own.
The structures used to monetize ITCs are complex. The most common are partnership flip and sale-leaseback structures; some tax equity participants use reverse lease structures, but these are less common. These complex structures come with high transaction costs.
Solar and Storage Markets Shaped by Tax Credits
These requirements combine to create a set of circumstances in which the number of possible ITC investors is quite small. In practice, most tax equity investors are banks and insurance companies.
Prior to the IRA, BESS was not eligible to file for ITC on its own. Instead, a BESS was only eligible for ITC if it was paired with other ITC-eligible generation assets, such as solar systems.
There are also significant limitations on how a BESS can be used. In order to qualify for full ITC eligibility, under the so-called dual-use equipment rule, the BESS must be charged only by the associated solar system or other ITC-eligible property for at least the first five years after the BESS is placed in service. Service.
ITC is subject to a deduction for any charges from the grid or other non-eligible property, and ITC is not permitted to utilize the BESS if the total energy input to the BESS from non-ITC-eligible property is greater than 25%.
These restrictions make stand-alone BESS much less attractive, and most storage systems installed prior to the IRA were part of hybrid systems.
The IRA changed the solar and storage landscape dramatically. The full ITC rate was restored to 30%, and stand-alone BESSs have been added to the list of ITC-eligible facilities, meaning that BESSs now no longer need to be paired with other ITC-eligible generating facilities.The IRA extends the ITC-eligibility window for projects that begin construction no later than 2033, and possibly even longer.
In addition to the extension, the IRA added new eligibility requirements. Going forward, any facility that exceeds 1MWac must meet certain prevailing wage and apprenticeship requirements (although projects that begin construction before January 29, 2023 will not be subject to these requirements).
These prevailing wage and apprenticeship requirements generally require that wages paid by taxpayers, contractors, and subcontractors in connection with the construction, repair, or modification of a facility at local prevailing wage rates published by the U.S. Department of Labor and certain percentage thresholds for such work must be performed by qualified apprentices.
If an otherwise eligible agency is subject to, but does not meet, these prevailing wage and apprenticeship requirements, the agency’s credit will be reduced to 6 percent instead of 30 percent. In addition, for projects that begin operation in 2025 but do not begin construction before then, the new rule will require that the expected GHG emission rate for these projects be no greater than zero.
Transferability, Direct Payment Options
For the first time, ITCs, PTCs, and other renewable energy credits can now be sold to ratepayers on the open market.
Second, tax-exempt entities, including many universities and hospitals, state and local governments, and tax-exempt organizations, now have the right to claim direct cash payments from the U.S. government for tax credits they would otherwise be eligible to claim (but could not use due to their tax-exempt status).
These changes – transferability and direct cash payments, respectively – led some in the renewable energy industry (and others involved) to hope that we would soon see the day when tax equity financing would be less complicated. A year on, it’s clear that none of those hopes (or fears) have been fully realized.
Some changes have occurred. We’ve seen interest in tax credit transfers and a number of deals have been signed. Many direct payment deals involving tax-exempt entities building solar and BESS projects are in the works, and more are expected as more such entities get involved in renewable energy investments.
Third-party tax equity financing is here to stay
We have not seen any movement away from third-party tax equity financing. There are two main reasons for this. First, tax credit transfers are themselves a form of tax equity financing. While these transactions may be less complex and costly than other tax equity financing, they still add significantly to the complexity and cost of the program.
In addition, tax credit purchasers are subject to the same eligibility requirements and general restrictions as any tax equity investor, so the number of qualified investors has not increased, although there will certainly be some tax credit purchasers who are reluctant to participate in traditional tax equity.
Taxpayers without traditional tax equity experience may be hesitant to purchase credits. This reluctance can be mitigated by third-party brokers of tax credit purchases, which is expressly permitted by the transferability guidance, but which is currently an emerging market.
Second, and more importantly, only the tax credits themselves (ITC and PTC) are transferable. Depreciation gains cannot be sold. With a potential value of approximately 20% of the project cost, this in itself is usually enough to justify full tax equity financing.
While smaller projects may choose to forego the depreciation benefit (because the owner has no taxable income to utilize the depreciation), this is not a realistic option for larger projects. Tax-exempt entities have a similar effect: the direct payment option is only available for ITCs. if the tax-exempt entity is the taxpayer on the project, the depreciation benefit is gone forever. Assets are designed to meet these needs.”
