Storage

Good, better, BESS: How to build your battery energy storage system

Good, better, BESS: How to build your battery energy storage system

Siting, Permitting, and Constructing Grid-Scale Battery Energy Storage System Projects

Contributed by Brooke Miller, Special Counsel, and Megan LaTronica, Special Counsel, Sheppard Mullin Richter & Hampton LLP

In the leadup to the COP28 summit and its resulting historic “Global Stocktake” agreement calling on countries to contribute to global efforts to reduce carbon pollution, a growing number of states have adopted ambitious climate and clean energy mandates. But making these goals a reality also requires a commitment to implementing the necessary infrastructure to shift energy supply to clean renewable sources.

In states with high “variable” (such as wind and solar) energy source penetration, utility-scale storage supports this shift by mitigating the intermittency of renewable generation and moving peaking capacity to renewable energy sources instead of gas plants, which may become even more critical with projected increases in climate-related peak load and heat wave events.

The scale of necessary infrastructure and the short timeline adopted for implementation call for swift and extensive enactment. For example, California alone needs around 50 GW of battery energy storage to meet its 2045 GHG reduction goals. Combined with rapid decreases in the costs of battery technology and improving incentives for storage projects (notably the IRA), increasing needs for system flexibility highlight the increasing role of battery energy storage systems, or “BESS” projects, in accomplishing global, national and local clean energy and climate goals.

As a preliminary matter, BESS projects need to be allowed to connect to the grid. From a regulatory standpoint, updating interconnection regulations is critical for scaling storage deployment to meet climate goals. Adopted in February 2018, Federal Energy Regulatory Commission (FERC) Order 841 directed market operators to develop rules governing storage’s participation in energy, capacity, and ancillary service markets.

Among other requirements, the rules must ensure open and equal access to the market for storage systems, taking into consideration their unique operating and technical characteristics. Although several states have updated, or are currently in the process of updating, their interconnection rules to include storage and to enable its more time- and cost-efficient integration onto the grid, the majority of state public utility commissions and utilities have yet to reform their interconnection rules to be inclusive of storage. New federal policies are also likely to incentivize the increased adoption of storage, particularly through the FERC Order 2222, adopted in 2020 and updated in 2021, intended to pave the way for aggregated DERs including storage on the distribution system to compete in wholesale markets.

Identifying the right location for a BESS project is also crucial for success. According to the National Renewable Energy Laboratory (NREL), siting has important implications for the services a BESS can provide, with locations in the distribution network near load centers providing the most benefits. Compared to traditional generation facilities, BESS systems have significantly reduced impacts, with flexible modular designs that can be accommodated more easily in infill locations plus minimal infrastructure needs.

Placing storage near load centers also has benefits where load centers (especially in urbanized areas) are located far from renewable sources (like utility-scale wind and solar generation facilities), resulting in energy losses relating to the generation tie line (or “gen-tie”) from the BESS to the load. The inclusion of energy storage technology in the definition of energy property eligible for the federal investment tax credit under Section 48 of the Code (ITC) for energy storage facilities in the broadly expanded siting potential for BESS projects, setting the stage for more siting on the distribution network near load centers.

Previously, the ITC was available only for storage co-located with generation facilities and reduced the ITC if the BESS was charged from an alternative source, with full disallowance of the ITC if such charging exceeds 25% in a calendar year. Under the IRA, projects can also qualify for a bonus credit, up to an additional 10%, if located in an “energy community”, which includes certain brownfields sites, census tracts with closed coal mines (after 12/31/1999), or retired coal fire generating units (after 12/31/2009) and those census tracts directly adjoining the same, among others. This incentive also plays into optimizing project siting.

Obtaining local permits presents yet another hurdle. While the expansion of siting potential for BESS projects is welcome news for accomplishing ambitious clean energy goals, BESS projects may nevertheless not always be welcome in local communities. Many jurisdictions do not specifically provide for energy storage uses in their zoning codes or acknowledge distinctions between generation and storage uses, although their impacts can be significantly different. Disputes relating to use classification are common, as is misinformation about impacts and risks.

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The Department of Energy recently obtained a report prepared by the Pacific Northwest National Laboratory (PNLL) to help clarify and explain the impacts of BESS projects for local planners and provide examples of how these impacts have been addressed in other communities. Chief among these are safety (especially fire safety) and local first responder coordination. Other impacts such as aesthetics and emissions may raise concerns as well.

Depending on the particular community and location of load centers, other land use issues may include impacts on agricultural, biological, or cultural resources that may require analysis and mitigation. Finally, some projects may have components in multiple jurisdictions, such as the primary BESS and the gen-tie; it is important to understand and coordinate roles between agencies and the applicant to ensure project approval.

Besides land use planning and resource impacts, some jurisdictions may require certain projects to provide community benefits. Public outreach, coordination with fire and emergency response officials, and communication with community groups regarding the benefits of the proposed BESS including local power quality and improved resilience during extreme weather events may also help address community concerns. In some cases, a formal community benefits agreement may be advisable or even required.

Finally, it is important to consider construction and operation concerns in advance to ensure these issues do not hinder the implementation of the BESS project. Labor concerns should be addressed early when necessary to obtain local support. Depending on federal tax credit eligibility requirements, the project may already be subject to prevailing wage standards. Following the passage of IRA, if a BESS project has not begun construction before January 29, 2023, the project will be subject to prevailing wage and apprenticeship requirements to increase the available ITC from six percent (6%) of eligible costs to thirty percent (30%).

Given the ambitious climate goals being adopted on the international, national, and local scale, combined with new federal regulations and incentives designed to further stimulate standalone storage, BESS projects offer significant opportunities for market participants and communities seeking to shift towards clean renewable energy. Though regulatory obstacles persist at multiple levels, meeting these climate goals depends on overcoming these hurdles by improving communication, sharing information, and cooperation at all levels. Via these efforts, safe and reliable renewable energy can be available to fuel our communities’ future.

About the authors

Brooke Miller is special counsel in Sheppard Mullin’s Real Estate, Energy, Land Use & Environmental Practice Group and is based in the San Diego office. Her practice focuses in the areas of land use planning, zoning, entitlements, environmental, local government and special districts law. She facilitates strategic approaches to land use entitlements, using her expertise in State and local laws to help clients statewide secure development permits for housing, mixed-use, commercial and energy storage. She has years of experience both advising and presenting before local government officials at the county, city and special district levels and defending entitlements in court. Ms. Miller received her J.D. from Notre Dame Law School. She can be reached at BMiller@sheppardmullin.com.

Megan La Tronica is special counsel in Sheppard Mullin’s Tax Practice Group and is based in the Chicago office. Ms. La Tronica’s practice covers federal income taxation with an emphasis on renewable energy, project finance and partnership taxation. She has significant experience representing clients on matters related to section 45 production tax credits, section 48 investment tax credits and other tax credit incentives, including on transactions involving tax-equity partnerships and lease financings, M&A transactions and back-leverage financing. Ms. La Tronica received her J.D. from the Catholic University of America, cum laude. She can be reached at MLatronica@sheppardmullin.com.