power sector reform

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.

Power Retail Pilots Open in Guangzhou, Chongqing

Citic Tower, Guangzhou, Credit: wyliepoon / Flickr

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.

A Look Ahead at 2016: A Message from CNESA Secretary-General Tina Zhang

2015 was a landmark year for energy storage in China.

Season's greetings from the China Energy Storage Alliance.

Season's greetings from the China Energy Storage Alliance.

In March, the government announced long-awaited power sector reforms that promise new opportunities for energy storage in an increasingly market-based power system.

Policymakers prepared the country’s next Five-Year Plan, the policy lodestone which will guide China’s development through 2020. This carefully crafted document is the key to meeting China’s ambitious energy and environmental targets.

And in the Paris COP21 talks, China emerged as a world leader by arguing that clean energy can be a tool to simultaneously address climate change and meet development goals.

Looking ahead, all indicators point to continued strong growth in clean energy and a greater role for markets and innovation in China’s transition to a more sustainable economy.

Of course, this transition is already well underway. As of September, China has installed 38 gigawatts of grid-connected solar, and the country reached 100 gigawatts of wind capacity earlier this year.

Now it’s our turn.

Energy storage is going to be a big part of China’s energy revolution, and policymakers know it. Last month, China’s national governing body called for increased deployments of energy storage and smart grids, higher penetrations of distributed generation, a greater share of renewables in China’s energy mix, more efficient and low-carbon dispatch, and greater numbers of electric vehicles on the road.

For now, China’s energy storage market remains dominated by pumped hydro: only 106 megawatts of China’s 21.9 gigawatts of energy storage capacity come from battery storage, according to CNESA’s Energy Storage Project Database. Nevertheless, this number still puts China among the top five countries in terms of grid-connected battery capacity, and installations are rising fast. On average, China’s battery storage capacity has more than doubled each year since 2010.

But it’s not just batteries making the news. In October, China’s top energy ministry collected bids for concentrating solar power generation demonstration projects -- most of which included molten salt energy storage. Several more gigawatts of CSP projects are in the pipeline, suggesting that thermal energy storage in China is finally starting to turn the corner. 

Where do we see the industry going in 2016 and beyond?

Microgrids and Distributed Generation

About half of China’s non-hydro energy storage capacity is paired with microgrids or distributed generation, and we foresee that these will remain strong growth areas in the coming year. Successful demonstration projects have proven that China’s islands and remote western regions are prime targets for energy storage deployments, while industrial parks, hospitals, data centers, and other urban buildings are now coming into the spotlight. And last July, the government announced a plan to promote renewable energy-based microgrids nationwide, a great sign for the development of solar-plus-storage in China.

Demand-side Management

There is enormous potential for energy storage in demand side management, thanks to policy commitments from the highest levels of government. Last year, Chairman Xi Jinping announced a campaign to promote efficient energy use in order to meet the country’s carbon emissions and air pollution targets. This drive – as well as our industry connections and technical knowledge – is why CNESA was selected by the Beijing municipal government to lead a demand response pilot program in Beijing. This past August, we helped reduce peak load by 70 megawatts just as demand was set to reach a new nationwide record.

Electric Vehicles

We’re also excited by the future of electric vehicle grid integration. It’s no secret that China’s EV market is booming; automakers sold over 130,000 plug-in electric vehicles in the first three quarters of 2015, double the number sold in the same period last year. This is a great step forward in the electrification of China’s transportation sector, but it also represents a huge challenge for Chinese grid operators – a challenge that energy storage and smart grid technology companies are well-positioned to solve.

While China's energy storage market is primed for growth, challenges still remain. 

China is still an emerging market, with all the risks that can bring. Regulatory changes are forthcoming, but there is still a great deal of uncertainty and a lack of well-defined value streams. That’s why our team works hard to keep you informed via our monthly newsletter, annual white paper, and customized market and policy insights.

Strong partnerships are also a must, which is one reason we organize China’s premier energy storage conference each year. In June, we held our fourth annual Energy Storage China Conference and Expo, our largest to date with over 700 attendees and 60 presentations from top policymakers, industry leaders, and energy researchers. The event is a great opportunity to learn more about China’s energy storage ecosystem and to make lasting partnerships in the world’s largest emerging market. I invite you to join us for next year’s event, to be held May 10-12th in Beijing.

Since 2010, CNESA has brought you the latest developments and opportunities for partnerships in energy storage. In 2016, I hope you’ll join us as we lead the way towards building a cleaner, smarter and stronger world.