China's Energy Innovation Action Plan

On April 18th, the NDRC and NEA released an “Energy Innovation Action Plan (2016-2030)", which aims to sharpen the country’s focus on energy technology innovation out to 2030.

China’s energy systems currently face a number of serious challenges due to resource insecurity, energy restructuring, pollution, energy inefficiency, and grid inflexibility. The Action Plan seeks to address these issues by highlighting fifteen areas for technological innovation:

1. Coal mining risk reduction
2. Unconventional, deep, and deep-sea oil and gas extraction
3. Clean and efficient coal technologies
4. Carbon capture and storage
5. Advanced nuclear power
6. Spent fuel reprocessing and radioactive waste disposal
7. High-efficiency solar power technologies
8. Large-scale wind power
9. Hydrogen and fuel cell technologies
10. Biomass, ocean and geothermal power
11. High efficiency gas turbine technology
12. Advanced energy storage
13. Key grid modernization technologies
14. “Energy Internet” technologies
15. Energy saving and energy efficiency technologies

Here’s a closer look at what the documents say about energy storage, particularly in hydrogen and fuel cell technologies, and advanced energy storage.

Hydrogen and Fuel Cell Technologies

• Research focusing on renewable energy and nuclear power-to-gas technologies, hydrogen production from next-generation coal gasification and methane reformation/partial oxidation, distributed hydrogen production, hydrogen purification, and development of key materials and technologies in hydrogen transport and storage. Research on methods to achieve low-cost and large-scale integrated hydrogen production, storage, transport and utilization. Research on hydrogen fueling stations, hydrogen production standards and business models.
• ŸResearch on PEMFC technologies, methanol/air hybrid polymer electrolyte membrane fuel cells (MFC), new energy mobility power sources, and research on extended life PEMFC and MFC electric vehicle pilots and program expansion.
• ŸResearch on distributed fuel cell battery technologies, in context of demonstration projects and scalable deployment.

Advanced Energy Storage Technology Innovations

• Research on high-efficiency concentrated solar power (CSP) technologies and high-capacity distributed thermal storage systems. Research on methods to increase grid peaking capabilities and the use of physical energy storage to address local supply issues. Research into renewable energy grid integration, distributed microgrids, the use of electric vehicles as grid storage, mastery of core technologies in each stage of energy storage development. Verification of completed pilot programs, ensuring that all technologies meet international standards and that Chinese energy storage technologies and industry development are internationally competitive.
• ŸActively research high energy density and low cost thermal energy storage technologies, new concept energy storage technologies (including liquid batteries, magnesium-based batteries, etc.), superconductor and electrochemical multifunctional hybrid energy storage technologies, and strive for key breakthroughs.

China’s North Now Open to Energy Storage

This month, Chinese policymakers passed the most substantial energy storage policy since power sector reforms began last year. The policy, “Announcement on Promoting Electrical Storage Participation in Ancillary Service in the ‘Three Norths’ Region” (the Announcement) opens up tangible regulatory pathways for energy storage deployments in China’s northeastern, north-central, and northwestern provinces, where high penetrations of wind power and must-run coal-fired power plants have created a need for better grid balancing.

During periods of grid oversupply, generators in China’s northern grids earn money when grid operators call on them to steeply reduce output or shut down, an ancillary service called “peak regulation (调峰)”. The Announcement now allows energy storage to earn money by absorbing this oversupply – allowing coal-fired generators to improve efficiency and reducing curtailment for wind and solar.

This is particularly valuable in China’s north because of the large deployments of combined heat-and-power coal-fired plants that provide district heating during the frigid winter months. Because these power plants must operate regardless of demand – homes have to stay heated – renewables end up getting curtailed during periods of low demand. The Announcement opens a new value stream for energy storage to address oversupply conditions and store the wind and solar energy that would otherwise be curtailed.

Interestingly, the policy allows both in-front and behind-the-meter energy storage to participate. Generator-side energy storage is required to be able to deliver 10 MW for four hours at a time. These installations will be compensated using existing payment schemes for coal-fired generators. The size requirements and compensation mechanisms for aggregated behind-the-meter installations have not yet been announced.

A little back-of-a-napkin number crunching suggests that this policy will significantly reduce the payback period for energy storage projects co-located with wind farms – to as little as five years under certain circumstances.

The (Rough) Math

Suppose that a 10 MW, four-hour energy storage system located at a wind farm fully charges twice during off-peak hours each day, and fully discharges twice each day during peak hours in the morning and evening.

This system can earn two value streams simultaneously: 1) “peak regulation” during charging, compensated at 300 CNY per MWh, and 2) electricity retail during discharge.

1. Charging: Although the compensation for downward regulation varies by region, we’re looking at the northeast grid, where compensation is highest at 300 CNY per MWh of downward regulation. The energy storage system can absorb 40 MWh, twice per day, so:

Daily regulation payment = 40 MWh x 300 CNY/MWh x 2 = 24,000 CNY

2. Discharge: Because the energy storage unit is co-located with a wind farm, it sells electricity at the on-shore wind feed-in tariff of 0.5 CNY/kWh. For simplicity’s sake, let’s assume 100% round-trip efficiency and full discharge:

Daily retail payment = 40 MWh x 1000 x 0.5 CNY/kWh x 2 = 40,000 CNY

Assuming these (admittedly over-optimistic) circumstances persist throughout the year, an energy storage installation would earn about 23m CNY per year:

Annual earnings = (24,000 CNY + 40,000 CNY) x 365 = 23.36 million CNY/a

Assuming this system costs 3000 CNY/kWh (~$460/kWh), a 40 MWh system would cost 120m CNY (not including construction costs, O&M, etc.), and have a payback period of about five years.

Given that the storage system only cycles twice per day, the number of cycles required to reach the payback date is only 3,744 cycles – a figure that lithium-ion, sodium-sulfur, and flow batteries can all achieve.

A new value stream

In the days when energy storage couldn’t earn money from downward regulation, the payback period might be 8.3 years or longer. This new value stream opens up opportunities for energy storage providers, and helps China achieve its policy goals of reducing renewable energy curtailment.

Admittedly, these simple calculations are missing a lot, from round-trip efficiency losses, to discounting, to assuming full discharge twice every day year-round, so real-world payback periods are likely to be longer. But it is clear that with a new value stream available, energy storage is moving closer towards wide-scale commercial feasibility in China.

China Announces Renewables Quota, But Is It Enough?

On March 3rd, the National Energy Administration released “Guiding Opinions on Establishing Renewable Energy Portfolio Standards,” which set renewable energy consumption targets for China. The country aims to rely on renewable energy for 15% of total primary energy consumption by 2020, and 20% by 2030. Non-hydro renewables should produce 9% of consumed electricity by 2020. The Opinions break down the non-hydro renewable electricity consumption requirements for each province and region, shown below.

Region		Region
Beijing	10%	Hubei	7%
Tianjin	10%	Hunan	7%
Hebei	10%	Guangdong	7%
Shanxi	10%	Guangxi	5%
Inner Mongolia	13%	Hainan	10%
Liaoning	13%	Chongqing	5%
Jinan	13%	Sichuan	5%
Heilongjiang	13%	Guizhou	5%
Shanghai	5%	Yunnan	10%
Jiangsu	7%	Tibet	13%
Zhejiang	7%	Shaanxi	10%
Anhui	7%	Gansu	13%
Fujian	7%	Qinghai	10%
Jiangxi	5%	Ningxia	13%
Shandong	10%	Xinjiang	13%
Henan	7%	Total	9%

Based on the government 2020 forecasts for power consumption and renewable energy capacity, we made a few simple calculations.

	2020 Installed Capacity	2020 Annual Use-Hours	2020 Generation
Wind	250 GW	1728 hours	432 TWh
Solar PV	160 GW	1133 hours	181.3 TWh

Sources: Renewable Energy Development 13th Five Year Plan (Draft Version); 2015 wind and solar generation statistics, NEA

Graph assumes 2020 generation patterns are similar to 2015. 2020 annual generation=Installed capacity*utilization hours. Annual use-hours (利用小时) is derived by dividing total generated electricity over the course of one year (GWh) by the total capacity of the generation fleet (GW). 

Assuming that the overall capacity factors for wind and solar in China don’t change from 2015 levels (I’ll get to that in a moment), wind and solar together are expected to produce 613 TWh annually in 2020. The National Development and Reform Commission anticipates that the entire country will consume 7390 TWh in 2020, meaning that solar and wind generation would comprise about 8% of the total. Once you factor in biomass and other non-hydro renewables, you can just about expect to meet the Opinions’ target of 9% renewable electricity production nationwide by 2020.

Is it Ambitious Enough?

While the target earns marks for realism, it struggles to make the grade in terms of ambition. We based our above calculation on wind and solar consumption for 2015. Thing is, wind and solar consumption was disastrous last year. Average solar and wind curtailment reached 10%, with some regions experiencing curtailment rates exceeding 30%.

Additionally, experts are mixed in their assessment of the strength of the new policy. Back in 2012, aware that existing mechanisms wouldn’t be enough to drive renewable energy consumption, the NEA drafted policies establishing renewable energy consumption targets, called the “Renewable Energy Quota Management Method.” The policies included robust assessment and enforcement mechanisms, but due to conflicts of interest, the policies never went into effect.

The newly-announced energy consumption policy published this month cover many of the same topics, but is believed to be pretty weak in comparison with the 2012 draft proposal. Industry players have even dubbed the new rules “Renewable Energy Quota Lite.”

The new energy consumption policy does suggest the creation of a “green certificate” trading mechanism, which would allow utilities unable to meet their renewable energy consumption targets to trade with utilities who consume above their own target. It’s an interesting idea, but it lacks an existing management mechanism, and it doesn’t get to the heart of the problem – that China’s dispatch rules, transmission infrastructure, and regulatory support for distributed energy are still inadequate.

Regulatory gridlock notwithstanding, the government has attempted to address this problem through a variety of channels:

1)       Promoting local consumption

Given that renewable energy resources are concentrated in China’s north, the National Energy Administration has been eager to encourage communities in that region to consume locally-generated renewable energy. To do so, the government has expanded direct electricity trading provisions for large consumers.

The results from this effort have been mixed, due to the fact that these areas have very few load centers to begin with. Even local consumers that do directly consume renewable energy often do so in a package deal that includes coal-fired generation to manage wind variability. In reality, these consumers are still buying very little power from renewable sources.

2)       Power-to-gas

One option that has been under examination since 2012 has been power-to-gas, in which electricity is used to power hydrogen reformers. This hydrogen can then be transported to load centers via traditional pipelines. A number of influential organizations have begun research or demonstration projects in power-to-gas, including State Grid, Shenhua Group, and China Energy Conservation and Environmental Protection Group.

This method faces challenges as well. A stable hydrogen market is a prerequisite for commercializing power-to-gas, and such a market does not yet exist in China. Additionally, pipelines are firmly under the control of China’s oil companies, who so far have not been proactive in exploring this business model.

3)       Energy storage

Combining energy storage with wind and solar production has already drawn significant attention in China. But regulatory barriers still stand in the way of making it a commercially-viable solution.

Let’s take a hypothetical lithium-ion battery energy storage system priced at 3000 RMB (US$460) per kWh, including all supporting equipment. If the battery operates to spec for 3000 cycles at 80% DOD, can the numbers pencil out?

The short answer is no. Such a system would have a lifetime cost of 1.04-1.25 RMB (US$0.16-0.19) per kWh discharged. China’s current feed-in tariff compensates wind generators at a rate between 0.47 and 0.54 RMB (US$0.07-0.08) per kWh. At these rates, generators using energy storage to store wind-produced electricity during times of grid congestion face the hard math that storing electricity costs more than it earns when fed into the grid.

Now, this math changes when those batteries can be dispatched to provide other services, particularly ancillary services to the grid. China’s ancillary services markets are still focused on generator responsibility, and are not yet open to the value that energy storage technologies can provide.

China’s grid is an institution with enormous inertia, so changes are bound to be slow. Nonetheless, we expect that China’s support for energy storage as an emerging technology and its concurrent power sector reforms are a positive signal that changes are on the way.

Divining China's Energy Future

Reading the “Internet+” Smart Energy Development Guidelines 

On February 29th, 2016, the NDRC, NEA, and Ministry of Industry and Information Technology released Guiding Opinions on “Internet+” Smart Energy Development.

This policy document focuses on the Energy Internet, a concept which has engulfed Chinese energy and grid circles for more than a year.

With the release of this document, we have an official take on the future of China’s grid.

The Opinions established a definition for this Energy Internet concept: “a new industry development model based on a deeply integrated network of energy production, transmission, storage, consumption and markets. It is characterized by device intelligence, energy diversity, information symmetry, distributed generation and demand, a flat structure, and open exchange.”

Until now, energy storage in China has been perceived as a set of technologies or devices used in certain links in the grid. But the Opinions take a different approach, describing energy storage as a standalone link in the energy chain, alongside production, transmission, and consumption. This is the first time that national government bodies have recognized energy storage as a separate and critical part of the future energy system.

The Energy Internet covers power, heat, oil and gas, and transportation. By highlighting energy storage as an independent link in the energy chain, policymakers are laying a foundation for the beneficial use of energy storage across the board.

The Opinions take a broad look at energy storage, calling for the development of “high-capacity, low-cost, high-efficiency and long-lived energy storage products and systems in electricity, thermal, and clean fuel storage.” This inclusive approach places energy storage at the center of the interconnections between power, heat, transportation and gas networks.

Bulk Energy Storage and Renewables Integration

The Opinions argue “suitably-sized energy storage facilities should be located in energy production centers to optimize grid and energy system operation."

At present, energy storage facilities used for renewables integration are generation-side resources, co-located with particular power stations. The Opinions call on years of operational experience and institutional input to suggest that energy storage functions better as a shared resource located in areas with high energy production. This maximizes the value of expensive storage installations by serving multiple stations at once.

Better sited energy storage would also gain value by giving grid operators the ability to tap into other operational benefits of the technology.

Some experts estimate that energy storage installations equaling 5-10% of the generation capacity in a renewable energy producing region would be sufficient to address intermittency issues. With China’s 12th Five-Year Plan calling for 200 gigawatts of wind by 2020, the grid would benefit from an additional 10-20 gigawatts of energy storage – an enormous opportunity.

Distributed Energy Storage – the Future of the Industry

The Opinions also promote the deployment of “distributed energy resources in communities, rooftops, and homes through the use of grid-friendly, effective and distributed energy storage.”

Distributed energy storage has attracted a lot of attention for its flexibility, low capital requirements, and value to the consumer by supporting on-site solar generation, demand response, and bill management.

The Opinions also bring up networked management of energy storage devices, calling for energy storage device databases, remote operation and control of distributed storage devices, and energy storage cloud platforms. It encourages modular system design, standardization, networked control over second-life batteries, and support for unhindered and flexible energy exchange. The document also promotes energy storage as a provider of backup power, peak shaving, frequency regulation, and other services.

But because China’s residential electricity rates are so low, residential energy storage is not yet profitable. However, in some industrial parks and among some high-energy consuming businesses, users are beginning to consider solar-plus-storage as a way to reduce electricity bills.

While the present opportunities for energy storage are limited, China remains committed to revolutionizing its energy system. This means that demand response, time-of-use rates and demand charges are likely to grow. As these policies spread and mature, distributed energy storage may well become an attractive market.

The Opinions also mention electric vehicles: “Promote the use of used EV batteries in stationary energy storage. Build an operational EV cloud platform based on elements of the grid, energy storage and distributed energy consumption. Explore the use of electric vehicles in networked platforms to participate in direct energy trading, demand response, and other models.”

According to official targets, China aims to bring five million electric vehicles to the road by 2020. Electric vehicle charging can have a serious impact on the grid, and so having effective control over distributed EV batteries to provide peak shaving, frequency regulation, or engage in demand response could help maximize the value of electric vehicles.

According to the Opinions, the rollout of the Energy Internet model is set to take place in two phases. From 2016 to 2018, the government will support pilot demonstration projects of different types and scales. From 2019-2025, the emphasis will be on diversification and scaled-up development, and establishing the Energy Internet as a driver of GDP growth. 

While its clear that China is a long way from achieving these goals, its telling that national decision-making bodies are endorsing such powerful language to describe their vision of the grid to come. What's most uncertain is how China's vested grid interests will adapt to -- or resist -- these changes. 

Power Retail Pilots Open in Guangzhou, Chongqing

Citic Tower, Guangzhou, Credit: wyliepoon / Flickr

This February, two major Chinese cities announced the launch of new electricity distribution pilot projects. In these projects, private electricity retailers will provide electricity services directly to consumers, representing a major step forward in China’s eagerly awaited power sector reforms.

The Guangzhou Development District

The first of these reforms takes place in Guangzhou. According to a policy released by the Guangdong Economy and Information Technology Commission, the Notice on Launching Retail Reforms in the Guangzhou Development District, entities within the Guangzhou Development District that consume at least 10 gigawatt-hours of electricity per year may participate in a direct electricity purchasing program. These entities may either purchase electricity in a bilateral agreement with generators or choose an electricity retailer.

As a result of these reforms, power plant owner Hengyun and Guangzhou Economic Technology Development Zone State-Owned Asset Investment Company, formed an electricity retailer, Guangzhou Suikai Electric Services. It’s important to note that the distribution grid is owned by the development district. As Hengyun owns generators that can serve the District and because the district itself – rather than China’s giant state-owned grid company -- owns the distribution grid, the entire value chain from generation to distribution is controlled by this newly-formed utility.

Although on paper it looks as if only consumers meeting a minimum consumption of 10 GWh will be able to participate in the retail market, it’s likely that smaller users will be able to participate by aggregating their loads.

Reforms in Chongqing

Retail reforms are also taking effect at an industrial park in Chongqing. On February 3rd, the Chongqing Liangjiang Changxing Electric Co. signed agreements with twelve businesses located at the Liangjiang New Area. Electricity sales to the first of these companies will begin this March.

This electric retailer was formed by four companies: Chongqing Liangjiang Group, Yangtze Power, Fuling Julong Electric, and Zhongfu Thermoelectric. Chongqing Liangjiang Group is a state-owned distribution grid developer responsible for the Liangjiang New Area. Yangtze Power, the country’s largest listed hydropower company, owns a number of large power stations including the Gezhouba and Three Gorges Dams. Fuling Julong is a state-owned enterprise primarily involved in power generation and retail, electrical equipment and transmission maintenance. Zhongfu Thermoelectric is a thermal generation owner.

The retailer formed by these companies covers each link in the power chain, from generation to retail. Although the distribution grid at the Liangjiang New Area is partly owned by the grid, any new additions will be built and owned by the retail utility.

The Role of Industrial Parks in Retail Reform

One reason that retail pilot projects are taking off in these two industrial parks first is the fact that the retailers in these cases are vertically integrated from generation to distribution. It’s important that in each case, the industrial park owner is a part owner of the utility, allowing the utility to gain control over the park’s assets – such as the distribution grid. Moreover, the utility is guaranteed to have customers in the companies that operate in the park. This vertical integration is expected to result in savings of 26 million yuan (US$4 million) in 2016.

It’s unusual for business and industrial parks to own their own distribution grids, which makes the Guangzhou Development District a special case. Though now that electricity retail is now opening up, yet-to-be-built industrial parks are likely to become a focus point in retail reform.

Where does energy storage sit in all of this?

For industrial parks with access to their own generation, retail reforms are likely to vastly reduce electricity prices. These reforms also open up possibilities for distributed generation and microgrid development, both of which do well when combined with energy storage technologies.

Additionally, now that retail companies are directly serving industrial parks, there is likelihood that consumers will have access to a wider range of services, including energy efficiency, energy management, and demand response. Freed from the shackles of the traditional grid system, energy storage has new opportunities ahead.