Energy storage firms face up to growing pains in booming US battery market

battery

Global energy storage firms pivoting towards the US battery market on the back of the transformational Inflation Reduction Act (IRA) are facing up to scaling constraints on battery supply and access to skills, while hopeful that external intervention will ease interconnection queues and policy uncertainty. 

In its industry insight report, ‘Taking Charge: Inside the US Battery Boom‘, US law firm Troutman Pepper finds that while firms are accelerating their US battery storage plans in the wake of the IRA, they are nonetheless alive to the market ‘growing pains’ that lie ahead. 

The report reflects upon the views of a range of market actors involved in funding, developing, advising, and operating US battery storage assets. With current constraints on battery supply and workforce set to compound further amid a rapidly scaling sector, these commentators have identified short-term fixes while the longer-term solutions set out in the IRA take hold. They include competing for battery supply from Asian manufacturers while US battery gigafactories are developed, and making greater use of external consultants to ease capacity bottlenecks on early-phase project development. 

The market is also optimistic that intervention from the Federal Energy Regulatory Commission and the Department of Treasury will address respectively the growing challenge of interconnection lines and questions over how certain key elements of the IRA, such as tax credit transferability, will work in practice. 

The fact these market growing pains are compounding tells its own story regarding the positive global industry reaction to the IRA. Less than six months after it became law, the US Energy Information Administration reported a steep increase in battery storage projects under development, with the 26.5 gigawatts (GW) of pipeline capacity it recorded in February, up 58 per cent on the pre-IRA figure, expected to expand further throughout 2023. 

Troutman Pepper’s report argues that the introduction of an investment tax credit (ITC) for standalone battery storage projects is the single biggest catalyst behind this growth. As well as triggering an influx of newly viable storage projects to the market, this move has brought developers greater flexibility across their entire portfolios, encouraged higher installed capacities, and started to create a ‘buyer’s market’ for investors. 

“We have been active in the US energy storage sector for over a decade, so are well aware of the industry’s current buoyancy. But we have also seen how rapid growth in the development pipeline post-IRA has placed even more stress on the supply chain,” says John Leonti, partner and co-leader of the Energy Industry Group at Troutman Pepper.

“Collaboration is a well-worn industry motto, but it really does sit at the heart of battery storage’s path to success in the US. The market needs fine-tuned specialist expertise to demonstrate that it’s possible to act smartly and quickly, without acting in haste. It’s heartening to find, through this report, that optimism in the market remains high, and we look forward to the challenges that will accompany the sector’s success.” 

The report concludes with Troutman Pepper’s forecast of post-IRA investment trends expected to shape the sector in the years ahead. Firstly, significant inward investment into the US battery sector from established renewables markets in Europe, Asia, and South America is expected to bring expertise to build the integrated battery supply chain in North America. But this could also mean exposing US developers and investors to trade disputes between the US and China. It is therefore expected that investors will turn to the solar sector for lessons in handling such short-term volatility.

Additionally, with supply chains for raw materials already becoming constrained, new domestic projects will need to be realised.

“Short duration battery storage is the main driver of battery projects. While emerging technologies such as flow, sodium-ion and other cutting-edge batteries are being rolled out, lithium-ion batteries remain the dominant commercial technology – over 90 per cent – for short-term energy storage, and expect to remain the dominant battery for the next several years,” comments Daniel N. Anziska, partner at Troutman Pepper.

“Raw materials for lithium-ion batteries include cobalt, nickel, lithium, manganese, iron, and graphite. Cathode, anode, separator, and electrolyte are the core components of batteries. With the passage of the Bipartisan Infrastructure Law and Inflation Reduction Act, which includes significant government funding, loan programs, and tax incentives, there has been a significant increase in domestic projects surrounding supply chain. In other words, the processing of lithium and other raw minerals, as well as significant anode, cathode, and separator projects. 

“However, China still produces – or processes – the majority of core raw materials and sub-components for batteries and there will need to be increased domestication of supply chain over the next three to five years to meet U.S. needs, both to take advantage of IRA incentives as well as to simply have available battery capacity to meet anticipated demand.”

Standalone storage may be grabbing the headlines but there will also be plenty of activity in the co-location space, especially with the addition of battery storage to operational wind and solar projects. Large institutional investors are expected to enter the tax credit market on the back of tax credit transferability measures, changing the due diligence dynamic for projects. And, finally, although utility-scale battery storage projects are booming under the IRA, in time, investors will begin to look at how they can apply the IRA rules to projects with emerging long-duration storage technologies.

“Generally speaking, technology continues to evolve at a rapid pace. Currently, short duration, and, in particular, lithium-ion short duration, dominates the market. But several competing battery chemistries using other materials continue to gain presence in the market,” says William R. Derasmo, partner at Troutman Pepper.

“Additionally, more recent solicitations, such as in California, are now actively seeking out long duration resources rather than just short duration. Thus, we can expect that over the next three years that long duration will become more prominent and begin to offer significant competition to short duration lithium-ion batteries.”

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