China Energy Storage Alliance Vice Chairman Johnson Yu recently spoke at a National Energy Administration forum on promoting the sustainable development of the energy storage industry. Vice Chairman Yu provided his thoughts and suggestions on some of the current challenges facing the industry. Last year marked the release of the Guiding Opinions on Promoting Energy Storage Technology and Development policy, which addresses industry questions regarding government regulations, demonstration projects, compensation mechanisms, social investment, testing and certification, system safety, and other topics. Yet, as the name suggests, the Guiding Opinions only serves as a guideline document. The industry is still in need of support from specific and practicable policies. China Electric Power News spoke with China Energy Storage Alliance Vice Chairman Johnson Yu to learn his thoughts on energy storage policy. The CNESA research department has provided a summary of the interview below:
The Storage Industry’s Most Pressing Issues and Suggestions for How to Resolve Them
Current energy storage applications are mostly centered on renewable integration, ancillary services (such as peak shaving and frequency regulation), grid-side applications, and behind-the-meter applications. Renewable integration projects have frequently been used to solve curtailment issues at aged solar PV stations where feed-in tariff prices are high. These projects have a certain economic value, though also hold potential future market risks (should lowering curtailment lead to decreased earnings). Investors for these applications have mostly been power generation companies themselves, such as Huaneng Group, Huanghe Hydropower Development, and Beijing Enterprises Clean Energy Group, who implement energy storage at solar PV and wind bases. Such projects help to verify the technology roadmap for storage while also helping to resolve renewable energy consumption issues.
Vendors are more likely to look at the opportunities brought by policies over the next three to five years, and if the policy roadmap will become clearer. If, in the short term, we can rely on current power policies to provide compensation to energy storage based on market prices, while in the long term taking the proper measures to anticipate the future power markets—including spot markets and ancillary services markets—the industry will be set on a positive development path.
Within the ongoing power market reforms, ancillary services such as frequency regulation and peak shifting have had an early start. As early as 2008 a quasi-market mechanism was created to pay for services based on their effectiveness, though at present it is generation companies who provide compensation funds.
Therefore, the first suggestion is to consider the sustainability of policies. Future compensation for storage should come from the end-user who creates the need for the service, benefiting the current “effectiveness-based compensation” model of energy storage in ancillary services. The second suggestion is that if energy storage should enter the ancillary services market as an independent entity, then it should be completely marketized so that it can compete fairly with other market services. The third suggestion is that regions which are in the early stages of marketization and are awaiting the government to set prices should have their prices set according to contribution value and avoid cost pricing. Early projects need to display a certain degree of profit margin and iteration. This includes safety issues, which although can be resolved through technical engineering, are often limited in effectiveness due to cost considerations. One of the major challenges for energy storage is determining how to ensure safety while at the same time maintaining reasonable technology costs.
According to CNESA research, since the beginning of 2018, Jiangsu, Henan, and Hunan provinces have shown the biggest proportions of new grid-side energy storage. From the perspective of industry development, grid-side energy storage should be encouraged through the construction of new demonstration projects that can clearly define development models and obligations of all stakeholders.
One possible suggestion for the short term is to review the pricing structures for pumped hydro storage. However, as CNESA experts have pointed out, from the perspective of the power market, grid-side energy storage investment and power station operations should be relaxed, and requisite measures should be adopted to encourage entities outside of the power grid to join in investment and construction of grid-side energy storage. When energy storage is operated by the grid itself, it is unable to participate in future power market transactions as doing so may cause distortions in the market. Future market mechanisms must be designed to ensure that all market players receive fair treatment, a task that will require careful consideration.
Current behind-the-meter storage projects have largely focused on energy arbitrage, relying on energy management contracts to save end users money. According to CNESA statistics, as of the 2017 year’s end, behind-the-meter electrochemical energy storage accounted for 59% of applications, though the first half of 2018 saw a slowdown in growth, with newly added capacity making up 19% of the total. Development of behind-the-meter projects faces three main issues. First, the source of earnings is singular, and the rate of return is low. In most cases, investment in such a project will have a rate of return of approximately 7-8 years or more. When considering the total costs of investment versus the rate of return, most projects will not be appealing unless they are among the small number of cases in which peak and off-peak price differences are extremely high. Second, investors are often focused on the potential risks brought on by future policies. It is not yet known how the mechanism for energy arbitrage will be restructured in the future. Such concerns have had a very real effect in causing recent behind-the-meter projects to be put on hold. Third, more focus must be placed on safety. Low earnings put a limit on the amounts that stakeholders are willing to invest, in turn meaning that less funding is allocated to safety measures, which can have potentially disastrous consequences.
In the future, related technologies such as electric vehicles, V2G, and demand response will also have room to develop. The use of demand response abroad has provided a bank of experience that we can learn from, giving priority dispatch to demand side resources like energy storage and renewables. Priority dispatch of demand-side resources is one of the most effective methods to save money and increase efficiency. In China, demand response development has seen some experimental use, but without much intensity or significant enthusiasm from customers.
From the perspective of energy storage, if a 100 RMB/kWh~400 RMB/kWh subsidy can be provided to demand-side resources based on response type, and if a sufficient dispatch is called for, then current user-side energy storage projects will increase earnings, providing greater motivation for new projects. One suggestion is to refer to trial subsidy programs and implement similar programs in areas of the country where power demand is strained.
Needed Market Mechanisms and Industry Regulations for Energy Storage Development
Generally speaking, all energy storage projects—whether they are behind-the-meter, ancillary services, grid-side, or renewable integration applications—are in dire need of a market mechanism that can help bring about sustainable development.
Furthermore, there are two points worthy of caution. First, policies can easily take the place of the market in determining the technology roadmap. Policies should be focused on increasing safety, verification methods, and standardization, not simply choosing which the technology roadmap on behalf of the market. Second, because power marketization is still in its early stages, many models including energy arbitrage and compensation for frequency regulation are currently managed under interim policies. Only certain regions have developed mechanisms that are capable of supporting such models, while many regions lack the capability to create such models and require subsidies in order to be implemented.
Areas with profitable energy storage projects are also facing uncertain and fluctuating policies. Detailed regulations for market reforms are urgently needed for long term energy storage investment to become a possibility. Short-term investment and operations development models rely too heavily on company credit, bringing them major operations risks.
From an economic perspective, our current hopes for policy support include: First, adjusting electricity prices in a way that is flexible according to varying regional conditions. We recommend the government consider reserving space within power price adjustment for “energy storage subsidy funding” to support energy storage development. Second, while the Guiding Opinions has laid out a framework for energy storage development, we recommend local governments examine their own capabilities and industry characteristics to create policies that will encourage energy storage development in their own regions.
Article originally published in China Electric Power News
Reporter: Qin Hong
Translation: George Dudley