Ideas for the industry November 29, 2023
Active Thermal Energy Storage (ATES): Transitioning to Electrification Using Innovative Engineering and Tax Credit Strategies
Why is ATES Needed?
The transition from fossil fuels to electrification represents a massive undertaking for infrastructure at all scales – buildings, campuses, cities, and utilities.
To expedite the transition, the United States expanded the Section 48 Energy Credit through a provision in the Inflation Reduction Act of 2022 (commonly known as the IRA).
One potential use case for the energy investment tax credit is what Ecosystem calls “Active Thermal Energy Storage,” or ATES. Working with our network of professional advisors, Ecosystem has already identified client ATES projects that will benefit from the tax credit and successfully secured millions of dollars for our clients.
What exactly is ATES?
ATES is a series of mechanical and thermal components that are designed to heat and cool as a single functioning unit. By maximizing heat recovery and thermal energy storage in every aspect of engineering design and construction, we can realize additional energy efficiencies and also secure a significant financial incentive to help fund projects that achieve the goals of clean, decarbonized energy as expressed through the IRA.
For the IRA, a Thermal Energy Storage Property, is defined as a system that:
- is directly connected to a heating, ventilation, or air conditioning system,
- removes heat from, or adds heat to, a storage medium for subsequent use, and
- provides energy for the heating or cooling of the interior of a residential or commercial building.
ATES stores thermal energy for use at a later time in a closed-loop system, providing energy when it is needed to heat or cool the interior of a residential or commercial building.
What is the IRA?
The IRA was passed by the Biden administration to reduce inflation and promote clean energy; it is wide-ranging, spanning prescription drug price reform, enhancements to IRS operations, and changes to the tax code, some of which are related to energy projects.
The tax credit gained through the IRA can be used by the client directly or monetized using transfer provisions.
How does the IRA focus on ATES?
For us the most relevant and interesting parts of the bill are Section 48 and Section 48E. These sections address the tax credits available for owners and investors that implement specific projects under prescribed conditions and within a defined timeline. Both the Section 48 and 48E Energy Credits can be applied to energy storage projects, both traditional and ATES. The difference between Sections 48 and 48E relates to project timeline. Section 48 applies to projects that begin construction by December 31, 2024; projects that begin after that date and are placed in service after January 1, 2025, fall under Section 48E.
The Tax Credit program will remain in effect until 2032 (or a later date, when the Secretary of the Treasury determines that the annual US GHG emissions from electricity generation are 75 percent lower than 2022).
There are multiple tax credit rates depending on various criteria of how the project is implemented. The base credit is 6 percent. A significant increase to a 30 percent tax credit can be realized by achieving one of the following:
- have capacity of less than one megawatt,
- begin construction before January 29, 2023, or
- satisfy both the prevailing wage requirements [Section 48(a)(10)] and the apprenticeship requirements [Sections 48(a)(11)]
There are also 10% bonus credits, including the domestic content bonus credit and a rate increase for energy communities.
What does this tax credit mean for our clients?
With the Section 48 and 48E tax credits, electrification and decarbonization energy projects are within technical and financial reach for buildings, campuses, and communities! Designs and strategies to maximize its benefits can be implemented with a multitude of technologies and systems, including:
- tempered water distribution
- thermal energy generation
- air-source heat pumps
- geothermal and
- many other traditional technologies
The value of the credit can be used directly by some entities or monetized through a transfer of the credit to another buyer. Ecosystem has experience in developing and executing this mechanism.
What kinds of projects will benefit from the tax credit?
- A multifamily building in NYC implements an ATES project to renew aging and inefficient infrastructure while also complying with Local Law 97, a city law that mandates a series of escalating fines on carbon emissions.
- A large college campus builds an ATES to exchange and to store energy between their facilities using electrified (and non-electrified) sources of energy
- A commercial office building uses heat pumps to heat and cool simultaneously, while storing and exchanging energy between floors
Interested in learning more?
At Ecosystem, we are actively exploring ways our clients can take advantage of these tax credits, and we’re happy to discuss what we’ve learned. Stay tuned for more information, or reach out if you want to chat –
Adam Shelly
Project Development Director
646.596.6828
