In recent years, as installed capacities have expanded and technologies have advanced, the cost of renewable energy power generation has dropped significantly, gradually approaching that of fossil energy and in some cases even lower than that of fossil energy. The pairing of “renewable energy + energy storage” has gradually become the consensus for future renewable energy development.
In the past two years, many provinces, cities, and regions in China have issued ancillary services construction plans and operations regulations, such as updates to the grid regulations in northwest China, updates to grid regulations and ancillary services market regulations in northeast China, regulations for energy storage engaged in peak shaving in Shanxi, rules for third-party independent participation in the north China peak shaving ancillary services trial market, updates to grid regulations in southern China, and other regulatory updates. These rules have helped to promote the healthy and orderly development of the power ancillary service market, and have provided a platform for new market players and new technologies such as energy storage to participate in the power market. For example, Zhejiang has carried out transactions for ancillary services such as frequency regulation, voltage regulation, backup, and black start, explored a joint clearing model for ancillary services and the spot market, and optimized the marginal clearing of electricity and ancillary services.
In addition, over the past two years, more than ten provinces including Inner Mongolia, Hubei, and Henan have issued policies requiring new renewable energy projects to be equipped with 5%-20% energy storage systems to promote renewable energy + energy storage applications.
Renewable Energy + Energy Storage Application Business Models
Centralized wind/solar stations + storage application models typically engage in services such as peak shaving, capacity firming, grid support, and output smoothing. Current profit points include load shifting during limited power periods, priority dispatching, and reduction of thermal power spinning reserves. Potential profit points include revenue from solar-storage and wind-storage and from participation in frequency regulation and ancillary services. The advantages of these application models are that they can limit the risk of generators being penalized. However, the true value of lowering such risks is difficult to assess, and there is no compensation mechanism to measure the value created by energy storage. Economical projects are also difficult to guarantee. Additional challenges include a lack of rational investment undertaken by the power generation side, a lack of supporting policies, a lack of a market mechanism, and a lack of large-scale energy storage planning.
Xinjiang is one example. On May 26, 2020, the Xinjiang Development and Reform Commission issued the "Interim Regulations for Generation-side Energy Storage Management in the Xinjiang Power Grid," encouraging power generation companies, power sales companies, power consumers, and independent ancillary services providers to invest in the construction of energy storage facilities with a required charging power of 5000kw or more and continuous charging time of 2 hours or more. The interim regulations provide four basic principles or application models, namely, market bidding, inter-plant transactions, bilateral negotiations, and grid dispatch. Of these, the main operations rules which are used include market bidding by wind farms/solar PV as well as bilateral negotiations between power generation companies and energy storage. The regulations help to encourage the power grid to increase basic dispatching time by 100 hours annually.
These wind-storage and solar-storage stations enjoy two kinds of profit models. The first is the self-use of energy storage capacity at the wind or solar station where it is located, dispatching energy as if it were generated by the plant, and generating revenue according to the generator’s contracted price. The other type of profit model is generated when the energy storage facility enters a charging state according to the instruction of the power dispatch agency, and receiving compensation for the amount of power charged. Standard compensation for this model is 0.55 yuan/kWh.
In addition to the front-of-meter energy storage in Xinjiang, the industry has also taken note of the “shared energy storage” commercial operations model in Qinghai. This model allows renewable energy plants and energy storage enterprises to sign a transaction contract specifying time, quantity, and price of energy being traded, and cooperating with the power grid to allow dispatch of energy storage.
Rather than limiting energy storage applications to the generators at which they are co-located, a more flexible business model can be created which forms independent energy storage system operators. These specialized companies would engage in the selection, financing, design, construction, operation, and maintenance of energy storage power stations. In actual operation, energy storage operators would need to cooperate with power generation enterprises to form "virtual" connections, that is, energy storage systems would not need to be physically connected with generators, but could form a unified body of power generation enterprises at the grid-side so that generators and energy storage systems can provide high quality ancillary services. A win-win for energy storage operators and power generation enterprises can be achieved by sharing the compensation received for providing ancillary services.
Three models can be derived from this: In the first, a single power generation company and a single energy storage operator cooperate with a clear relationship and direct cost settlement. In the second model, one power generation company cooperates with multiple energy storage operators. In this model, power generation companies can make full use of the advantages of energy storage technology, and even use the variety of energy storage resources at their disposal to meet the demands of different ancillary services, thereby maximizing the quality of ancillary services provided. However, this type of cooperation model is technically more complicated, creating challenges for the operation and management of power generation. In the third model, multiple power generation companies cooperate with one energy storage operation company. The foundation of this business model is that the energy storage operator has built a larger capacity and module-divided energy storage station, and the energy storage operator may choose its best quality partner. However, this type of model presents a certain degree of complexity in business operations.
New Energy Storage Policies and Trends in China
Energy storage development in China is seeing new trends emerge.
First, energy storage technology is a multi-disciplinary, multi-scale integration of science and technology. Chemical and physical energy storage technologies involve electric power, machinery, control and other aspects. Energy storage materials, units, systems and other components require multi-disciplinary cross-integration. This cross-integration will become a major trend as new technologies are developed and existing technologies improve.
Second, there are currently a variety of energy storage technologies, which may become centralized on a handful of mainstream technologies in the future. At the same time, new technologies will continue to emerge. Whichever energy storage technology will dominate the market will be a matter of the market “voting with its feet.”
Third, the price of energy storage is rapidly falling. Only under the precondition that both renewable energy and energy storage prices continue to fall can renewable energy + energy storage become an established business model.
In the future, energy storage and renewable energy will see integrated development. Renewable energy development in China will pass through three stages, namely, the subsidy support stage, the renewable energy parity stage, and the renewables + storage parity stage. Only when the renewables + storage price (parity) and performance (dispatchability) become comparable to fossil energy will the era of mainstream renewable energy truly arrive.
Energy storage itself will also pass through four stages of development: a technical verification stage, an applications demonstration stage, an initial commercialization stage, and a large-scale development stage. Energy storage in China still faces some major challenges, such as safety concerns, a lack of clarity on what entity should be responsible for energy storage management, a lack of a reasonable price mechanism that can properly compensate storage’s value, an incomplete support mechanism for participating in the energy market, and other challenges.
To meet these challenges, we must first clarify what entity will be responsible for ensuring the safety of energy storage systems, and what entity will be responsible for overall management of energy storage projects. Comprehensive safety evaluations of energy storage systems should be conducted, identifying safety hazards at each segment of the energy storage system, and determining proper management methods for minimizing such hazards. In addition, we must also make use of project experience and our knowledge of current market development to improve standards and regulations for energy storage, and raise the threshold of entry for energy storage products in the market.
Second, we must clarify the identity of energy storage as a market entity. This includes defining the procedures for establishing energy storage projects, including fire safety approval, environmental assessment, land approval, facility approval, civil air defense approval, and other procedures. Grid companies must also clarify the procedures for grid connection of energy storage across various storage applications.
Third, a reasonable price mechanism must be defined. The value of the public good brought by energy storage is far greater than its cost. But if only a single market entity is responsible for the cost of energy storage, benefits are likely to be less than the total cost of investment. Therefore, we must look at the cost and value of energy storage from an overall perspective, making decisions at the national level and based on the principle that the beneficiary should be the one to pay for services. These actions will help to establish a reasonable market-oriented price mechanism shared by generators, the grid, and consumers.
Facing the challenged of energy storage commercialization across many fields, we must continue to accelerate the power marketization process, use market-based means to solve challenges in energy storage system applications, and rationalize market rules to adapt to new technologies such as energy storage. The ancillary services market and demand-side management, particularly the long-term demand response mechanism, are still waiting to be fully established in order to increase the value of energy storage applications across various fields. In the initial stages of marketization, it is also necessary to provide financial assistance to energy storage to support the social benefit it brings. We have three primary suggestions for the development of energy storage:
At the current stage, we must be engaged in forward-thinking planning and research to avoid ineffective allocation of resources. We must make clear the threshold of entry for energy storage in the market to ensure only high-quality energy storage applications are developed. We must also implement policies for paired energy storage applications which will support co-development of storage with renewable energy generation.
In the short term, with the power market and price mechanism still unable to reflect the value of paired energy storage systems, we must promote pumped hydro storage polices and introduce transitional polices which will support renewable energy and energy storage co-development. We suggest that an energy storage quota mechanism should be explored, and the importance of “green power” should be emphasized. China's green certificate trading and renewable energy quota mechanism should be used as a reference.
Finally, in the medium and long term, the price of renewable energy power generation and the cost of energy storage must be paid by its beneficiaries. Price compensation is also necessary to promote the co-development of renewable energy and energy storage. We suggest the establishment of a long-term market-oriented mechanism and an energy storage price mechanism which considers the holistic perspective to properly assign the payment for “green value” to those which benefit most from it.
