Energy Storage Tax Credit: Before and After the Inflation Reduction Law

The Inflation Reduction Act (IRA) didn't just extend the 30% federal tax credit for solar panels . Energy storage systems now qualify more easily than before, and this means that a much larger number of battery installations will receive the 30% tax credit.

Before the IRA, only batteries charged by solar panels were eligible for the Investment Tax Credit (ITC), which greatly limited their usefulness. Solar generation is not always available to charge batteries, and autonomous energy storage has promising applications. Having a dedicated tax credit for energy storage is also helpful for electricity consumers who cannot install solar panels for whatever reason.

Get a solar PV + energy storage project for your next construction project.

For example, if you own an apartment with shared roof areas, installing solar panels is typically not an option. However, a battery can be useful as a backup power source, and you can also use it to avoid peak kWh prices (if time-of-use rates are charged).

Here we will discuss how the federal tax credit for energy storage changed with the Inflation Reduction Act, comparing the requirements for residential and commercial installations. Keep in mind that the tax credit for standalone batteries will be available until 2023, and the solar charging requirement still applies as of 2022 for both residential and business systems.

Federal Tax Credit for Residential Energy Storage

Getting a federal tax credit for a home battery was already possible before the IRA, but there was one big restriction: Only batteries fully charged by on-site solar panels were eligible. This means that your battery had to be designed to never consume a single kilowatt-hour from the grid, and this brings several problems:

• You cannot charge the battery at night and charging is also limited during cloudy days.
• You cannot take advantage of a time-of-use tariff – charging the battery with cheap electricity during off-peak hours and reducing electricity consumption during peak hours.

The previous tax credit was also not available to homeowners who wanted to install just a battery system , as the electricity comes from the grid. Even if you selected an electricity plan with 100% renewable energy content or joined a local community solar project, the battery still wouldn't qualify for the tax credit. In other words, you couldn't make a battery eligible for the old tax credit using outdoor solar.

Thanks to the IRA, the 30% federal tax credit is available for all home energy storage systems with a capacity of at least 3 kWh. The source of electricity used for charging is no longer a limitation. The following table compares the tax credit conditions before and after the Law:

Federal Tax Credit for Commercial Energy Storage

Commercial battery systems were in a similar situation before the IRA, but their requirements were slightly less demanding. Residential battery systems were subject to a 100% solar charging requirement, but commercial battery systems only had a 75% requirement. This means that up to 25% of your load can come from other sources.

However, a business-owned battery system would only qualify for the full tax credit if 100% of the charge came from solar panels . Otherwise, the tax credit would be adjusted according to the percentage of solar charges. For example, a battery system that meets the 75% minimum charge requirement would not receive the 26% tax credit. This energy storage system would only be eligible for a 19.5% tax credit (75% of the maximum value).

The IRA also eliminates the solar charging requirement for business-owned battery systems, setting only a minimum system capacity of 5 kWh. This is slightly above the 3 kWh requirement for residential batteries.

Business owners should be aware of an additional requirement, which applies to installations with a power rating of one megawatt or greater. The base tax credit is just 6% in this case, and owners must meet certain work requirements related to prevailing wages and apprenticeships to get the full 30% tax credit.