Establishing electricity spot markets will necessitate large-scale energy storage applications, ensuring the value of energy storage and guaranteeing profit. Spot markets open up a wealth of opportunities for consumer-side electricity retailers, who, through integrating many different types of users and user loads, can participate in demand-side management, demand response, and peak load shifting. The value of energy storage isn’t just limited to its use in helping curb the differences in peak and off-peak electricity prices. Rather, we can conceive of energy storage as “one system, many uses.” Energy storage systems are a complete system able to realize a multitude of benefits.
The first half of 2016 signaled a high point for the Chinese energy storage industry. According to CNESA data, by the end of 2015, China had 118 energy storage projects in operation (excluding pumped hydro, compressed air, and thermal storage) with an accumulated 105.5 MW in capacity, representing 11% of installed projects worldwide. The compound annual growth rate from 2010-2015 was 110%, six times that of the global growth rate. After entering 2016, energy storage manufacturers released project plan after plan, which we estimate to reach up to hundreds of MW in scale. Nearly all recently announced projects are planned to be fully implemented within two to three years, with a wide variety of applications covering large scale renewables grids, ancillary services, distributed generation, as well as microgrids. Our preliminary estimates expect the installed capacity to approach 1GW (excluding pumped hydro).
The Value of Energy Storage Has Yet to be Fully Realized
Although the industry’s development trends are satisfying, when discussing the nitty-gritty of profits, investment returns, and financial capital in the industry, industry insiders universally acknowledge that if the industry wants to truly realize sustainable commercialization, there remain some prerequisites. At present, increasing product lifetime and safety are the fundamental issues in energy storage application, while policy support, financial subsidies, and lowering costs are the key factors to realizing profits. However, it is not until we have a robust electricity market mechanism that we can realize the true cost benefit of energy storage and unearth energy storage’s true application value.
Looking at technology developments in the past two years, we can clearly see substantial drops in costs in each category of mainstream energy storage technology. Take the previously installed lithium iron phosphate batteries in China as an example. In 2013, the cost was CNY 4500-6000/kWh, but after 2015 the cost was only CNY 2000-3000/kWh. By 2020, it is forecasted costs will even decrease to as low as CNY 1000/kWh. (Calculations based on expected life cycle, cost per kWh at CNY 0.26/kWh, excluding charging costs.) At standard 25°C, 0.5°C, and 95% depth of discharge (DOD), the cycle life of these batteries can exceed 5500 times. Energy storage technology has been progressively advancing, laying the groundwork for future commercialized use.
There are constant advancements in energy storage technology as well as economic feasibility, but when considering current mainstream applications of energy storage, the technology appears to be only useful for limited set of uses. This, however, is due to current economic constraints, and inaccurately reflects the potential of the technology. For example, user-sited installed energy storage systems’ only current benefit is optimizing peak and off-peak price differences. Energy storage systems installed in large wind farms, likewise, can only realize their value through storing small amounts of unused energy (usually 10% of generated wind capacity). To expand from these narrow examples, we thus need a comprehensive way of evaluating and optimizing all potential energy storage applications. China’s current electricity system, in turn, must provide energy storage systems with a reasonable marketization mechanism as well as encourage flexible deployment and fast response capabilities. The structure of the electric power service and supply-side needs to adjust and user-side energy efficiency must increase. Energy storage is already an indispensible part of future energy systems, realizing a larger array of energy storage technology applications and wide-spread marketization is imminent.
Realizing Energy Storage Marketization
Sustainable development of the energy storage industry and commercializing energy storage technology requires a compatible electricity system. With the first round of electricity system reforms in November of 2015, the China National Development and Reform Commission (NDRC) and National Energy Administration (NEA) published six sets of reforms, among them “Opinions on Advancing the Construction of the Electricity Market” and “Opinions on Establishing Electricity Transaction Institutions and Governing Regulations.” These reforms detailed the government’s plans for electricity markets, indicating their directions and goals. Qing Xia, Professor of Electrical Engineering at Tsinghua University, expressed, “The next step in electric marketization reforms is to establish an electricity commodities exchange market. As the saying goes, ‘Without commodities there is no market.’ After a commodities market is established, energy storage will have value.”
Compared with similar market reforms in 2002, the latest round of reforms is different in that it simultaneously calls for long-term commodities exchange and electric power and capacity balancing mechanism resembling constructing electricity capacity, ancillary services and multifaceted electric market systems. Frequency modulation, peak load shifting, and operating reserves all ensure capacity and can undergo reasonable market mechanisms to obtain economic gains. Under the new marketization scheme, different services can gradually enter the market, in a flexible, reasonable deployment. As one leader in the NEA expressed, “From the perspective of progress in developing the modern electricity market, the commodities market is a necessary part. It is the precise way to realize the actual price of electricity—all achieving optimal grid balancing, the sign of a mature and highly developed electricity market.”
A robust spot market represents a potential large-scale application of energy storage technology. Tsinghua University Professor Chen Qixin points out, “Through flexible deployment of energy storage systems, including power and energy models, energy storage can realize its worth in a spot market with its fast response time. At the same time, energy storage systems can provide the real time balancing and support services a spot market scheme would require.”
In the traditional market, electricity generating companies are the main providers of power and ancillary services. In the proposed spot market, however, providing ancillary services can be open up for bidding by other companies; this includes frequency modulation, pressure regulation, operating reserves, as well as black start services. Of these, it’s important to note that frequency modulation and spinning reserves have a strong coupling effect. High power energy storage systems with fast response speeds thus would be ideal to combine frequency modulation and spinning reserves ancillary services. In this sense, spot markets don’t require specific energy storage related subsidies in order to realize a profit; rather, energy storage systems could realize profits themselves. Professor Chen of Tsinghua University agrees, “In America, this scheme is already being used in electricity markets managed by companies like PJM (Eastern US) and ERCOT (Texas). Energy storage can provide quality ancillary services to gain profits. Its unit capacity profit from frequency modulation alone can even reach up to 3-5 times that of thermal power generators. This enormously increases the economic viability of energy storage systems.”
After establishing spot markets, user-side electricity retails can begin business, integrating many types and scales of user loads, participating in demand-side management, demand response, as well as peak load shifting work. Energy storage, we can see, is not only a useful way to bridge the gap between peak and off-peak electricity prices. Rather, the value of energy storage as “one system, many uses” can be realized.
Director of the energy storage projects at Beijing Ray Power believes that in a wholesale energy spot market, energy storage is an excellent resource as an “activator” of peak load shifting. One important use of spot markets is to sell electricity at its true price as it changes with time. Energy storage then allows you during peak price times to sell out stored electricity, using the price differences to acquire economic gains. When stored energy capacity relative to the system scale reaches a set degree, using energy storage to sell electricity during peak load times will increase competition on the generation-side. Compared to a scenario with no energy storage, this would bring prices down. On the other hand, during off-peak times, low prices will drive an increase in demand by those looking to buy energy to store, thus energy storage is the technical means to facilitate the economics behind peak load shifting.
In this way, energy storage helps reduce fluctuations in prices, enabling the electric load to avoid the risk of sharp peaks in prices. Likewise, from the perspective of physical operations, energy storage “cuts” from the peaks, to “fill in” the valleys to even out the electric load. Lowering the price differences between peak and off-peak hours reduces the need for large-scale unit load shifting as well as unit starting frequency, lowering both the unit and system’s composite generation costs. Energy storage participating in spot markets will allow for maximum benefits for power suppliers and consumers alike.
Recently, a series of national policies have come out including “Outline of the Thirteenth Five Year Plan,” “Action Plan and Strategy for Energy Development (2014-2020),” “Made in China 2025 – Plan for Implementing Energy Equipment,” “Guiding Opinions on Advancing the ‘Internet+’ Smart Energy Development,” “Action Plan for Energy Technology Reforms and Innovation (2016-2030)” and the “Pilot Program Notification for the National Energy Administration Promoting Energy Storage in China’sNorthern Regions Ancillary Services Subsidy (Market) System.” All of these policies give energy storage an important place in China’s development goals. Following the implementation of electricity system reforms and the establishment and improvement of spot markets, energy storage will make leaps, being a crucial element in supporting China’s energy transition.