Clean energy factories, thermal storage get boost from new tax credits

The U.S. clean energy manufacturing sector got a major boost Thursday when the Internal Revenue Service released long-awaited tax credit rules.

The 2022 Inflation Reduction Act created unprecedented manufacturing incentives for wind, solar, batteries and critical materials produced in the U.S., but companies needed to see finalized rules before they could properly claim the credits. Now guidance is out — the IRS published the text in the Federal Register on Friday, kicking off a final 60-day comment period to fine-tune it.

“This is the form factor it’s going to be in — there might be some tweaks around the edges,” said Nathan Iyer, senior associate in the U.S. program at climate think tank RMI. (Canary Media is an independent affiliate of RMI.)

The new tax rules tell the clean energy industry exactly how it will benefit from manufacturing essential products in the United States and what rules it must abide by to secure the incentives. For instance, the credits require that the maker actually sells the item in question; factories can’t make things just for the purpose of claiming a tax credit. And the credits run through 2030, before tapering off to nothing by 2033.

That specificity is welcome news for producers of solar panels, batteries and wind turbines, which are hoping to build up domestic U.S. supply chains capable of rivaling much bigger operations in Asia. But the tax credits also proffer potentially transformative assistance to the up-and-coming long-duration energy storage and thermal storage sectors. The tax credits for thermal storage, in particular, could help jump-start efforts to decarbonize heavy industry if they enable that technology to replace the burning of fossil fuels as a means of generating intense heat.

Each step of solar power manufacturing receives its own tax credit, from polysilicon production through wafer slicing, cell fabrication and module assembly. Related components like backsheets, trackers and inverters earn manufacturing credits too. Domestic solar cells will earn 4 cents per watt (measured in direct current), and modules generate 7 cents per watt.

Wind power equipment gets a similar treatment, even extending to vessels built or retrofitted to perform offshore wind installations, which now earn a credit worth 10% of the sale price.

Domestic battery cells earn $35 per kilowatt-hour, and battery modules get another $10 per kilowatt-hour. China dominates most lithium-ion battery production in the world today, but a U.S. battery manufacturing belt has emerged since the passage of the Inflation Reduction Act. Those new factories need to prove they can compete on cost and quality with the incumbent producers in China.

The latest analysis from BloombergNEF found that electric-vehicle battery packs from the U.S. this year cost 11% more than those made in China, where they average $126 per kilowatt-hour. The new $45 per kilowatt-hour credit more than covers that cost premium for U.S. production (as recently as 2021, U.S. packs cost 40% more than China’s, per BNEF).

Thermal batteries leap toward affordability

But one of the most potentially transformational parts of the new rules extends a credit to ​“modules with no battery cells.” This definition was explicitly crafted to include flow batteries and thermal batteries, two climate solutions that have yet to break out of early commercialization — but which could ramp up quickly with a boost from the feds.

Flow batteries are one contender in the category of ​“long-duration energy storage,” the motley array of technologies capable of storing clean energy for many hours or many days. These technologies must push through early years of bespoke and then limited production to get to the point where quantity and experience bring their costs down. The 45X credit scales by kilowatt-hour, so technologies that store far more kilowatt-hours than typical lithium-ion batteries stand to draw in far more money through this credit.

The second category that could be completely transformed by the tax credits is thermal storage, which holds energy in the form of heat or cold instead of electricity. Some forms of thermal storage have been around for decades, like the ice batteries that help lower the cost of air-conditioning buildings at peak hours. But a newer crop of hot thermal storage technologies proposes a different vision: convert clean electricity into extreme heat at temperatures useful for industrial operations. Recently launched startups pursuing this include Rondo Energy, which uses refractory bricks, and Antora Energy, which uses graphite blocks. But these innovators basically need to invent a market for a whole new class of project, not to mention build out real-world installations and factory capacity.

Like conventional batteries, thermal storage can absorb cheap surplus wind and solar, helping the grid soak up ever-greater amounts of clean energy. Unlike lithium-ion, which doesn’t play well with high temperatures, thermal storage devices can transfer electricity into high-grade heat that becomes useful for energy-intensive industrial processes that would be hard to decarbonize otherwise.

The IRA created tax incentives for several tools that could also help decarbonize industry, including clean hydrogen and carbon capture and sequestration. But thermal storage has some fundamental advantages compared to those alternatives for high-heat delivery. The thermal storage materials require an upfront cost but can get reused with minimal degradation, Iyer pointed out, whereas burning hydrogen or operating carbon-capture equipment locks facilities into long-term operational expenses.

“With thermal batteries, once you put it into place, it can last for a very long time,” he said. ​“It can really have a competitive niche for this particular industrial-heat question.”

Modeling from groups like Energy Innovation shows that, over the long run, thermal storage has the potential to displace ​“an extremely large share of fossil fuels” used for industrial energy.

But getting to that point of cost-competitiveness is challenging because thermal storage is basically competing with the cost of fuel, which is far lower than the cost of grid electricity, said John O’Donnell, CEO of Rondo Power. The manufacturing tax credits push thermal storage costs closer to the tipping point where they can rapidly decarbonize U.S. industry, he added.

The credit will also encourage Rondo to expand its U.S. operations.

“We just discussed our first European large-scale projects last week at COP,” O’Donnell said. ​“We’re hugely excited about this 45X because we know it will make our thermal batteries, and others’ thermal batteries, more competitive in the much more challenging U.S. market,” which is characterized by low gas prices and an absence of carbon pricing in most places.

Antora Energy opened its first large-scale U.S. factory in October 2023. ​“Thermal batteries will roll off the production line this coming year,” CEO Andrew Ponec noted on LinkedIn recently; those products should now qualify for the 45X manufacturing credit.

Normally, climate hardware startups have to slog through years of selling expensive, first-of-a-kind projects until they build up enough demand to justify large-scale production, which brings down costs. The $45 per kilowatt-hour tax credit offers an express lane to zoom ahead to more compelling price points. Or maybe it’s more like a surfing instructor pushing a student’s board forward so they catch a wave sooner.

Based on the numbers he’s seen, Iyer said it will be as if thermal battery companies have jumped past four years of cost declines as soon as the credit goes into effect.

Companies still need to prove their technologies in the field and build out commercial-scale factories. But that gets much easier to do when the initial price point is significantly lower than it was before the credits appeared.