May 12, 2021
Helping Energy Storage Deliver Benefits to Local Communities through Tax Reform
The U.S. is on track for $7 billion in annualinvestment in energy storage by mid-decade, according to our recent U.S. Energy Storage Monitor report with Wood Mackenzie. Tax revenue generated from grid storage projects could provide a much-needed boost to local budgets, particularly in rural and small-town areas that have seen economic decline over the last several decades.
As energy storage deployments ramp up across the country, developers need clear visibility into the tax liability of planned storage projects as they make siting decisions and work out agreements with local governments for project approval. When it comes to local approvals, complex systems of taxation and assessment structures can make the economics of a potential energy storage project opaque at best and prohibitive at worst. Local governments have often adjusted their tax regimes to attract manufacturing or other clean energy industries to their jurisdictions and create investments that provide local benefits. “Front-of-the-meter” energy storage projects connected to local electric grids and transmission represent a new opportunity that deserves similar consideration.
Fortunately, states across the country are taking action to reform tax treatment of grid energy storage projects. The following states are leading the way in advancing or enacting energy storage tax reform measures in 2021:
- Virginia: HB 2006 / SB 1201 provides storage owners the option for a reduction in local property tax or to replace the tax with a fixed revenue share; and HB 2201 /SB 1207 authorizes local governments and energy storage developers to enter into siting agreements that may provide non-tax incentives to encourage energy storage development. ESA led the effort to pass these bills, which was signed into law in March. A full policy summary is available here.
- Colorado: S 20 will calculate the assessed tax value of energy storage systems in the same manner as renewable energy systems (like wind or solar) and was signed into law in late April.
- Arizona: HB 2153 exempts energy storage from state and municipal taxes and extends “renewable energy development zones” to include energy storage projects. The bill passed the House in February and is waiting a vote on the floor of the Senate.
- Vermont: S 128 provides a tax exemption and assesses a payment in lieu of taxes of $0.50/kWh for front-of-the-meter energy storage systems 600 kWh and greater. The bill is awaiting action on the Senate Committee on Finance.
Each state’s approach is unique, dependent on existing local law, state tax structure, and state priorities. The following three principles may be useful for states considering these types of reforms to ensure clarity for industry while promoting benefits in the communities where projects are sited:
- Standardization. A transparent, statewide floor or benchmark for tax rates or payment-in-lieu-of-taxes (PILOT) provides developers confidence of equitable tax treatment across the state.
- Balance. Tax exemptions and reductions can be essential components of storage project economics to ensure financing, but benefits must also flow to local governments. PILOTs or revenue shares are common mechanisms to help achieve this balance, which often require negotiation with local government associations to achieve the optimal result.
- Alignment. Many states have already created a property tax regime for renewable energy development, such as wind or solar. Particularly because energy storage systems are often co-located with renewables in hybrid configurations, it makes sense to extend the tax regime for renewable energy to storage.
Local tax reform is often a first step that states must take when developing their energy storage market and establishing decarbonization goals. As energy storage grows up and we enter the “Charging 20s,” it also becomes a critical piece of the policy framework necessary to drive job creation and clean energy investment while realizing the full potential of energy storage.
The U.S. Energy Storage Association will continue to monitor and support efforts for energy storage state and local tax reforms. Please reach out to ESA’s State Policy Director Julian Boggs at email@example.com for more information.