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Landmark legislation highlights the need for grid expansion

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Kent Knutson's picture
Energy Market Specialist Hitachi Energy USA Inc.

Kent Knutson is a market specialist focusing on energy industry intelligence for Hitachi Energy.  He has more than 30 years of experience designing and developing intelligence products for some...

  • Member since 2018
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  • Sep 22, 2022

On August 16, 2022, President Joe Biden signed into law the largest investment legislation supporting renewable energy in United States history. The Inflation Reduction Act (IRA) bill has roughly $370 billion of support for the energy transition. This big investment in carbon-free energy raises the most perplexing dilemma facing grid planners – how to solve intermittency while continuing to grow wind and solar capacity? The answer is wrapped up in the buildout of new transmission infrastructure, energy storage, and the expansion of grid-enhancing technologies such as advanced power flow controls, sensors, analytical tools, and innovative new engineering designs to expand existing grid capabilities like dynamic line rating.

Despite the huge investment in renewable energy over the past several years, the big winner in the nation’s fuel mix continues to be natural gas, even with natural gas prices hovering around $8/mmBtu – up nearly 4X from averages that fluctuated near $2/mmBtu just two years ago. Wind and solar are bigger contributors to electricity production today. Still, they have a long way to go to displace natural gas and coal, which serve as cycling and peaking fuels today for all practical purposes.

60:40 and holding

Despite the tremendous build-out of wind and solar capacity in recent years, the ratio of fossil fuel to zero-carbon electricity production has maintained at about a 60:40 split. During the 12 months ending in June 2022, natural gas (38.5%), coal (20.8%), and other fossil fuels (0.7%) accounted for about 60% of the country’s total power production. On the other hand, wind (10.2 %), hydro (6.5%), solar (3.2%), nuclear (18.4%), and other renewable energy (1.7%) have accounted for roughly 40% of total production. This ratio has been holding for some time, driven mostly by the continued need for dispatchable resources, especially during extreme weather events and peak demand times of the day.

U.S. electricity production by fuel, TWh

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During the 12 months ending in June, wind and solar accounted for 13.3% of total U.S. power production, up from about 12% in 2021. Driven most by the 10-year extension of key tax incentives, the new legislation will spur wind and solar capacity development. But to make that capacity produce energy around the clock, there needs to be a tremendous investment in the power grid, including transmission, energy storage, and other grid-enhancing technologies. The good news is that the bill has plenty of incentives to support these efforts, as well as offshore wind, electric vehicle charging, and other grid energy transition needs.

U.S. wind and solar electricity production (MWh) and % of total country output

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Key elements supporting renewables from the new legislation

Of the $369 billion earmarked for energy and climate, federal clean electricity tax credits account for more than 40% of the budget. Other major funding areas include investment in transportation infrastructure, individual clean energy incentives, clean manufacturing tax credits, clean fuel and vehicle tax credits, conservation, rural development, forestry, building efficiency, electrification, transmission, and additional Department of Energy (DOE) loans.  

Investment Tax Credit (ITC)

The Investment Tax Credit (ITC) has been increased from 26% to 30% and can now be transferable or sold to other taxpayers for either business or residential projects, including projects installed in 2022. After September 30, 2032, the credit will begin to decrease. Starting in 2025, the current ITC, which primarily supports solar projects, will become a technology-agnostic credit that applies to many emission-reducing technologies beyond solar.

Energy Storage Projects

The new legislation removes the requirement that only energy storage projects directly connected to solar farms can receive the 30% tax credit and now allows stand-alone storage projects access to the credit. So, for example, projects currently connected to a solar power project will continue to qualify for the credit, even if they are no longer charged by solar power.

Project siting – 10% tax credit adder

Projects in former brownfield energy sites can earn an additional 10% tax credit.

Use of domestic resources – 10% tax credit adder

Power projects eligible for the full 30% tax credit can increase their overall tax credit by an additional 10% – to 40% in total – by purchasing domestically produced hardware – albeit 100% of steel and iron must be manufactured in the United States. For manufactured goods – like solar panels, inverters, and electrical gear – the hardware must initially be 40% US manufactured.

Opportunity to pancake tax credits

The ITC 30% tax credit can be augmented in several ways with additional tax credits, including a 10% adder for selling electricity via community solar projects to low-income individuals, a 10% adder for using domestically produced hardware, and a 10% adder for being in a former fossil fuel energy community.

Production Tax Credit will become the Clean Electricity Production Credit

The Production Tax Credit (PTC) now fully applies to solar power and other carbon-free power production participants. Additionally, if a project meets the prevailing wage requirements, it will receive a tax credit of 2.5 cents/kWh (100%) for the first ten years of a project’s life. If a project does not meet prevailing wage standards, it will earn only 0.3 cents/kWh (20%) before adjustment for inflation. Going forward, the production tax credit increases as it is adjusted for inflation.

There are additional tax credits for EVs, electrical panels, heat pumps, and many other items directly related to the power industry. Another meaningful aspect of the legislation is that it will continue many tax credits into the 2030s, providing developers with more certainty and a more straightforward line of sight.

The great opportunity

The great opportunity of our time is solving renewable energy’s problem of intermittency at scale. However, until that is conquered, natural gas and coal will continue to play a critical role in maintaining grid reliability and resilience. Solving intermittency involves the construction of new and upgraded transmission lines, building both long- and short-term energy storage, and implementing modern grid automation technologies – all are paramount to supporting further expansion of renewable generation. 

The movement of electricity through a power grid that combines power generated at all voltage levels presents a massive engineering challenge. While generating power from traditional fuel sources can be scheduled, renewable power generation is less predictable. In addition, the high penetration of renewables requires a focus on frequency stabilization and voltage control. Grid-enhancing technologies (GETs), such as dynamic line ratings, advanced power flow control, and topology optimization, can move power more intelligently on the grid and improve the accuracy of available capacity on transmission lines. Without solving for intermittency, the energy transition will be stymied. The solution depends on the rapid and smart deployment of new and existing grid technologies. Providing customers with affordable, reliable energy keeps the economy humming and should be the underlying goal of all engineers and planners.

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Michael Keller's picture
Michael Keller on Sep 26, 2022

The motto of renewable energy: it’s only money and it’s not even ours!

I suspect only the investment class and some companies will be winners in Biden’s and the democrats raid on the taxpayers. As Europe and California amply demonstrate, excessive reliance on green energy leads to massive increases in consumer energy bills and energy shortages, with virtually no impact on the planet’s climate (the dogma behind the dumb policies).

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