US energy storage to ‘retain momentum’ post-reconciliation bill, near-term rush to complete projects

As reported by our colleagues at PV Tech last week, solar and wind projects need to begin construction within 12 months of the law’s enactment to retain their start of construction dates as safe harbour under the ITC and PTC rules or be in commercial operation by the end of 2027.

Residential clean energy and energy efficiency incentives will expire at the end of this year, and climate and environmental science funding will also be cut.

However, certain other clean energy technologies, including energy storage, geothermal, biomass and hydroelectricity, can qualify for technology-neutral tax credits at the full rate, which is 30% of Capex cost, plus domestic content bonuses to a value of about 45% in total.

As the bill passed through the House before going to the Senate, energy storage had been given similar treatment to solar PV and wind, with the ITC cut short. The storage ITC was subsequently restored as it passed through the Senate Finance Committee and retained through the final ‘vote-a-rama’ between Senators, which ultimately took it to the president’s desk to be signed.

“Energy storage is one of the technologies that was able to keep the momentum, and that’s because one: the tax credit phase timeline is longer compared to solar and wind,” Isshu Kikuma, energy storage analyst at BloombergNEF (BNEF), told Energy-Storage.news.

With BNEF having previously forecasted that removing the ITC could result in the growth rate of installations “plummeting,” that threat appears to have been abated, although challenges remain, Kikuma said.

The energy storage ITC remains along the original timeline set by the Inflation Reduction Act (IRA) in 2021, with projects eligible for the full rate until 2033, then phasing down to 75% in 2034 and 50% in 2035.

Secondly, the bill as it passed through the House and then Senate had required that projects needed to be placed in service by given deadlines, but the final version instead changed the language to “under construction.”

“That gives some room for the projects to get used to some of the new environments,” Kikuma said in an interview.

“Those are the two major reasons why energy storage can keep the momentum, but there are still some new caveats here.”

“One of the new additions in the ‘One, Big, Beautiful Bill Act’ is that the projects now need to meet certain thresholds for material assistance from prohibited foreign entities. This is something new,” Kikuma said.

Again, previous iterations of the legislation had worded it as a direct, blanket ban on ITC eligibility for projects that received ‘material assistance,’ whether equipment or investment, from Foreign Entities of Concern (FEOCs).

As it now stands, from 2026, 55% of a project’s costs need to come from non-prohibited foreign entities, with the rate increasing to 75% in and after 2030. Kikuma said BNEF expects the IRS to publish the new cost table by the end of 2027, but in the meantime, market players can use the safe harbour cost table presently used to determine the ITC’s domestic content bonus.

In that sense, the clarity now provided is a “good sign,” according to the analyst, but nonetheless presents a potential challenge, given the current low availability and relatively high cost of non-Chinese battery cells.

“If you look at the safe harbour cost table for domestic content, battery cells account for around 52%, so because the threshold for the non-prohibited foreign entities starting from 2026 is 55%, it will be very crucial for all projects in the US that want to get their tax credits to use non-prohibited foreign entity-related cells.”

In the short term, if projects source their cells from South Korea, for example, or another foreign source that is not designated FEOC, the developer will not be eligible for the domestic content bonus but will still get the ITC.

Kikuma said it is likely that many developers will rush to start construction of their projects before the end of 2025 to avoid the restrictions.

Anyone tied to a schedule of starting construction from next year onward might therefore need to explore alternative ways to source batteries or related components and manage their supply chains.

At present, however, as has been widely reported, pure US sources of battery cells are scarce. Fluence has begun using cells made in Tennessee by supplier AESC on about half of its US projects already, and a couple of weeks ago LG Energy Solution held an official opening for its mass production of lithium iron phosphate (LFP) cells in Michigan.

Besides those two bigger players, there is the startup Our Next Energy (ONE), which is producing LFP cells in the US and can avail of the 10% domestic content bonus, but other choices are few and far between.

The 45X Advanced Manufacturing Production Tax Credit also remains in place, which will continue to incentivise US domestic production.

However, FEOC restrictions will again apply. A further complication arises in that, whereas downstream projects can use the IRS domestic content bonus cost table for guidance, Kikuma believes there is not yet any similar or equivalent guidance for 45X.

“It might take some time for the IRS to come up with the safe harbour cost table for 45X. I think that can be a challenge for any equipment suppliers in the US trying to get the tax incentives,” he said.

Kikuma also cites the examples of Canadian Solar’s E-Storage subsidiary and Tesla as others that have publicly announced plans to produce in the US. Meanwhile, Kikuma said it is unclear whether Chinese battery makers, such as Gotion, which plans to manufacture in Illinois, will be affected by the new restriction, depending on what sort of company and ownership structures are in place.

That said, with the cost of Chinese products already low and falling, it is also possible that buying cells from China could still mean projects pencil out in the future without ITC incentives.

Kikuma said that may be the case, but noted that even before this year, some companies were already considering shifting away from Chinese supply chains to mitigate existing supply chain and policy uncertainties.

One of those policy uncertainties that has not gone away is the looming spectre of trade tariffs. US-China tariffs are currently ‘on pause’ until 12 August at a rate applicable to batteries and storage of about 54%, which is high, but lower than the rates in excess of 120% that had been thrown across the negotiating table earlier this year.

“That’s still the challenge that a lot of market players are facing right now,” Isshu Kikuma said, adding that there may be a lot of procurement activity for projects that want to begin construction during 2025 within this temporary pause.

Another potential supply alternative could be certain non-lithium electrochemical storage technologies, such as vanadium redox or other electrolyte-based flow batteries, zinc or other chemistries, for which supply chains could be fully US-based, or at least rely on non-Chinese exporters.

Citing the example of zinc hybrid cathode battery startup Eos Energy Enterprises, which claims to have a majority US supply chain, Kikuma said such alternatives could play a big role. Many of those alternative technologies, from Eos’ zinc battery to ESS Inc’s iron flow battery or Form Energy’s iron-air ‘multi-day’ battery, are being positioned as suitable for long-duration energy storage (LDES) applications.

The BNEF analyst notes that states like California, Massachusetts and New York are explicitly exploring LDES requirements in their energy mix, which could provide further market impetus for novel non-lithium tech.

The challenge for those players remains in reducing costs to be competitive with the incumbent technology, with lithium-ion’s sheer scale and market traction across electric vehicle (EV), BESS and other sectors providing economies of scale that alternatives are as yet nowhere near close to matching.

Asked why he thought energy storage retained the ITC where solar and wind did not, Kikuma said it was likely because, although the present administration does not consider an energy transition away from fossil fuels to renewables as a policy goal worth pursuing, it does value electric system reliability.

“I think that’s because the current administration focuses on reliability quite a lot. Right now, they don’t talk much about decarbonisation or the energy transition, but I think they do care about reliability. To maintain reliability, dispatchable power sources, or power sources with flexibility, are definitely key for the power grid. I think that’s why they’re keeping the support for energy storage, as well as other technologies like geothermal and nuclear.”