Energy storage systems received a big boost in the Reducing Inflation Act: a dedicated 30% federal tax credit that remains available through 2034. Previously, energy storage could qualify for the solar tax credit, but there were restrictions which limited eligible applications:
- Only energy storage systems coupled with on-site solar power systems would qualify.
- Commercial energy storage systems had to receive at least 75% of their load from solar panels to qualify.
- Residential power systems were required to use exclusively solar charging (no grid charging).
The new requirements are much less demanding. The federal tax credit is now available for residential energy storage with at least 3 kWh of capacity and commercial energy storage with at least 5 kWh of capacity.
Make your building less dependent on the grid with an energy storage system.
Now that the solar charging requirement has been eliminated for the energy storage tax credit, the number of eligible projects increases dramatically. This includes battery systems used for power arbitrage and peak shaving – two promising applications.
Energy Arbitrage: Store Cheap Electricity to Avoid Expensive Electricity
Solar panels and wind turbines are now among the cheapest sources of electricity, but they have a common weakness. Both devices are unable to store energy on their own and you must use their electricity output when available. Unfortunately, solar panels and wind turbines cannot provide energy “on demand” when the grid is dealing with high consumption – and this is precisely when kilowatt-hour prices tend to rise.
Many electricity providers apply time-of-use (TOU) tariffs to transfer variable energy costs to their customers. Lower kWh prices are charged during off-peak hours, while higher kWh prices are charged when the network is under peak demand. A battery system can take advantage of this price difference, storing energy when prices are low and delivering energy when prices are high. This concept is called energy arbitrage.
Suppose your electricity supplier charges 15 cents/kWh during off-peak hours and 35 cents/kWh during peak hours. In this case, there is a difference of 20 cents between electricity prices at both times. The battery system can take advantage of this price difference with the following sequence of operation:
- Consider a storage capacity of 100 kWh and a round-trip efficiency of 95%
- The battery stores 100 kWh at 15 cents/kWh during off-peak hours, for a total cost of $15
- During peak demand times, the battery provides 95 kWh and the building avoids $33.25 in peak charges.
In this simplified example, the 100 kWh battery can save $18.25 per day with energy arbitrage. By repeating this procedure for an entire year, the battery could save $6,661.25. Even greater savings are possible if you combine the battery with an on-site solar power system, as you recharge without relying on the electricity grid. In this case, you can save a total of 95 kWh during peak hours ($33.25/day).
Peak Shaving: Reduce peak kilowatt demand measured by your power company
The concept of peak shaving is similar to power arbitrage, but there is an important difference:
- Energy arbitration aims to avoid the higher kWh prices charged by your electricity supplier.
- Peak shaving aims to reduce your building's individual peak consumption, which will not necessarily match network demand peaks.
Peak reduction makes economic sense when you have an electricity tariff with demand charges . In this type of tariff, you pay not only for the total energy consumption in kWh, but also for the highest kilowatt demand measured in the billing period. Demand tariffs are typically used for industrial consumers and large commercial consumers, and are less common for small commercial and residential tariffs.
A battery system can be set up to supply electricity when your building's demand is increasing, reducing the total amount metered by your electricity supplier. For example, if your tariff charges $10 per kilowatt of peak demand and you can reduce the metered value from 300 kW to 200 kW, you will save $1,000/month in demand charges ($12,000 per year).
Depending on how your electricity tariff is structured, it may be possible to use both energy arbitrage and peak shaving. In general, energy arbitrage is possible when your electricity supplier applies TOU rates, and peak shaving is possible when your bill has demand charges.
