In June 2023, China achieved a significant milestone in its transition to clean energy. For the first time, its total installed non-fossil fuel energy power generation capacity surpassed that of fossil fuel energy, reaching 50.9%. Contact online >>
In June 2023, China achieved a significant milestone in its transition to clean energy. For the first time, its total installed non-fossil fuel energy power generation capacity surpassed that of fossil fuel energy, reaching 50.9%.
China''s renewable energy push has ignited its domestic energy storage market, driven by an imperative to address the intermittency and variability of renewable energy sources such as wind and solar. The Chinese energy storage industry experienced rapid growth in recent years, with accumulated installed capacity soaring from 32.3 GW in 2019 to 59.4 GW in 2022. China''s energy storage market size surpassed USD 93.9 billion last year and is anticipated to grow at a compound annual growth rate (CAGR) of 18.9% from 2023 to 2032.
The Chinese government is increasingly focused on what it calls "new-type energy storage systems" (NTESS). This category encompasses a range of electricity storage methods, such as electrochemical systems (e.g., batteries), compressed air energy storage, flywheel systems and supercapacitors. However, pumped hydro energy storage—which relies on storing water behind dams to generate electricity when needed—is not included. In 2022, China’s cumulative installed NTESS capacity exceeded 13.1 GW, with lithium-ion batteries accounting for 94% (equivalent to 28.7% of total global capacity).
China is positioning energy storage as a core technology for achieving peak CO2 emissions by 2030 and carbon neutrality by 2060. In July 2021, the National Development and Reform Commission (NDRC) and the National Energy Administration (NEA) jointly published the "Guidance on Accelerating the Development of New-Type Energy Storage," which aims for the installation of 30 GW of new-type energy storage capacity and the transition from early commercialization to large-scale development by 2025. The "New Energy Storage Development Implementation Plan (2021-2025)," issued in March 2022 by the NDRC and NEA, aims to reduce the cost of NTESS by over 30% by 2025 and develop independent and controllable core technology and equipment for NTESS by 2030.
Following central government directives, approximately 30 provinces have unveiled individual plans for deploying NTESS since 2019. These plans collectively aim for a combined capacity of 60 GW, surpassing the NEA''s original 2025 target of 30GW. Localities have reiterated the central government''s goal of developing an integrated format of "new energy + storage" (such as "solar + storage"), with a required energy storage allocation rate of between 10% and 20%.
China has created an energy storage ecosystem with players throughout the supply chain. The upstream players are mainly battery and raw materials manufacturers, with many benefitting from first-mover advantage. Chinese manufacturers have gained a substantial market in this domain. According to SNE Research, CATL had achieved a 43% global market share by 2022. BYD and Eve Energy secured the second and third positions, with market shares of 12% and 7%, respectively.
The midstream players focused on integrated NTESS are more diversified. They include major battery manufacturers CATL and BYD, photovoltaic companies Trina Solar and Sungrow, and companies with a grid background such as XJ Electric.
The downstream segment is dominated by mainly state-owned enterprises (SOEs) that provide energy storage applications on the power generation, grid, and user sides, such as State Grid, Energy China and CHN Energy. In October 2021, Huawei and SEPCOIII, a subsidiary of PowerChina, were awarded the Saudi Red Sea New City Energy Storage project, the world''s largest energy storage project signed in 2022.
Despite massive investments, the utilization rate for NTESS remains low. The average rate is 6.1%, compared to 15.3% for thermal power plants. The main reasons for the low utilization of the “new energy + storage” application model lie in the overreach of local planning for energy storage construction, cost pressure resulting in more unqualified energy storage projects and the current grid scheduling mechanism, which means high expenses running energy storage facilities. In response to concerns over underutilization of storage, government regulators have reportedly begun exploring the removal of the mandatory integration policy and the optimization of the NTESS operation mechanism.
New energy storage also faces high electricity costs, making these storage systems commercially unviable without subsidies. China’s winning bid price for lithium iron phosphate energy storage in 2022 was largely in the range of USD 0.17-0.24 per watt-hour (Wh). However, the cost of electricity from pumped hydro storage has fallen to USD 0.07 per Wh. On top of electricity prices, safety and security are also key concerns, with energy storage facilities requiring system integration maintenance, error analysis, incident warnings and other emergency-related measures.
On 15 July, national plans for energy storage were set out by the Chinese National Development and Reform Commission and National Energy Administration. The main goals of new energy storage development include:
The guidance covers four aspects:
1) Strengthening planning guidance to encourage the diversification of energy storage;
2) Promoting technological progress to expand the energy storage industry system;
3) Improving the policy mechanism to create a healthy market environment;
4) Standardisation of industry management to improve the construction and operation.
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China’s proposed policy to accelerate energy storage deployments – with a target to take its energy storage capacity to 30 gigawatts (GW) by 2025 – could triple our current capacity forecast. The five-year timeframe could prove challenging from an economic standpoint, but China has good reason to push ahead.
Government support for the strategic battery market is strengthening against the backdrop of heightened US-China tensions and China’s pledge to peak emissions by 2030. The acceleration of its energy storage deployments is another example of China’s ambition to scale domestic strategic technology markets instead of diverting to exports, and to promote low-carbon technology and manufacturing.
A key point of the proposed energy storage policy is the pairing of renewables – wind and solar – investments with storage systems equivalent to 5-20% of renewable capacity in China’s still highly regulated power market. The pairing policy is causing a major shift in storage investment, moving from grid companies to state-owned renewables developers. China’s large state-owned power generation utilities, such as China Energy, Huaneng, Huadian and SPIC, will play a much more significant role and take on more financial risk moving forward.
These companies can access low interest rates for project financing, and take the risks and uncertainties of project development and grid connection with less concern for profit margins. Although there is no expectation for storage to be economically viable in the early development stage, the current business model will not be sustainable in the long term.
The lack of wholesale markets and difficulty in stacking revenue streams remain critical for the energy storage industry. China’s front-of-the-meter (FTM) projects barely make money as revenues rely on a fixed on-grid tariff. In 2020, China’s on-grid tariff for solar and wind hit a new low, staying in the range of RMB0.35-0.49/kWh (equivalent to US$54-76/MWh). Under such low tariffs, adding storage assets to renewables could double the project capex while creating zero economic gains for developers as time-of-usage power tariffs are not available for the FTM market.
Currently, the incentive of adding storage is prioritised grid connection for solar and wind plants under local grid regulations. In 2020, this grid interconnection requirement contributed 468 MW/812 MWh of the renewables-plus-storage project pipeline. Commercial and industrial solar-plus-storage provide better economic returns than FTM projects due to higher power prices on China’s east coast. But storage projects still face revenue uncertainties as power prices in China rely on policy and regulations instead of market fundamentals. Since the US-China trade war and Covid-19 crisis, industrial power prices have been pushed down three times, reducing by 30% in total. Storage developers could lose money under such market conditions.
However, there is light at the end of the tunnel as the proposed policy discusses reforms to improve storage project revenue channels. As China’s wholesale market reform gradually looks to move beyond regional pilots, the potential exists for energy storage to enter the trading market. The overall goal is to ramp up the total capacity of new grid-connected renewables and storage, including lithium-ion batteries, compressed air, flow batteries, flywheels, sodium-sulphur batteries and hydrogen.
We expect China to add 430 GW of new solar and wind capacity in the next five years, which could eventually boost 74 GW of new storage capacity by 2025 if up to 20% of the renewables-storage pairing ratio is applied. Under this grid regulation policy, China’s storage market demand could rise to 6 GW a year in the next five years, seven times higher than our H1 2021 forecast.
The new policy could mean that China overtakes the US as the energy storage leader in gigawatt terms by 2030, while requiring US$18 billion investment to meet its 2025 target. Some uncertainties remain, including project economics, detailed policies and supply chain constraints, but we expect to see more policies backed with strong action to meet the goal.
In summary, energy storage is positioned as a strategic technology that will help China achieve its carbon neutrality target by 2060. We believe the new policy is a clear signal of political resolve, and the 30-GW target could be reached by 2025. Under political pressure, state-owned enterprises will drive storage demand by building renewables-plus-storage projects in China.
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