In 2009, BYD constructed China’s first lithium-ion energy storage station in Shenzhen. In the ten years since that first project, the energy storage industry has seen ups and downs and all number of difficulties as stakeholders and leading enterprises have worked to bring energy storage from the demonstration project phase to the threshold of commercialization.
Over these ten years, and particularly with the help of the electric vehicle market, lithium-ion battery prices have dropped over 85%, and the kilowatt price of energy storage has decreased to just a third of what it once was. While energy storage may still seem like a small industry today, the changes over a decade have been massive. The next decade of energy storage is sure to see continued growth that will shape the entire energy industry.
Energy storage is a critical component of the global energy revolution. In many ways, renewable energy resources such as solar PV still have yet to reach their full potential. Combining energy storage with solar PV and other renewable energy sources for “renewables+storage” applications can help maximize the benefit of these resources. As costs continue to decline, so does demand rise, and global electrochemical energy storage continues to grow.
Despite global energy storage growth, China is losing its first-mover advantage. Although China is the world’s largest producer of electric vehicle batteries, its battery storage market is still far from mature. One significant issue is that a market mechanism and policy drivers are developing at a speed significantly behind that of what the industry needs. Though 2018 brought about a massive surge in growth thanks to new grid-side energy storage projects, many problems that have plagued the industry for years have still yet to be solved, while some have even intensified. Below, we explore five major problems that must be addressed.
1. The Problem of Policy
The release of the first national level policy on energy storage at the end of 2017 brought unprecedented interest to the industry. Optimistic market predictions brought waves of eager investors to a relatively small-scale industry, with over a hundred large and small companies competing in what soon became an increasingly narrow market space.
Over the past two years, numerous national and regional level policies have been released. Yet a review of these policies reveals that many are repetitive and similar, do not work cohesively, and/or take action only in small steps. The vast majority only serve to state the importance of energy storage without taking practical action. As a result, while researchers and private enterprise remain enthusiastic about energy storage, the response of regulators continues to be lukewarm.
Some regional policies and regulations can be bewildering. Frequent administrative adjustments can leave investors confused. The advancement of demonstration projects becomes more difficult. Many local governments also require local manufacturing of components or the use of local suppliers, putting even greater stress on energy storage companies.
Policy direction is of great importance to industry structure and the survival of energy storage companies. The current policy landscape is not sufficiently developed to bring about substantive results. In the past two years, many of the most active energy storage companies have found themselves in financial difficulty, particularly those companies who operate in a riskier “investment+operations” development model.
The experience of foreign energy storage markets shows that for energy storage to experience scaled development, stimulus policies and a developed market mechanism are essential. At the China Energy Storage Price Innovations Development Forum in August 2017, a representative from the National Development and Reform Commission Pricing Bureau stated that, aside from subsidies, the government has many ways of supporting industry development, with common methods including financing, taxation, and price setting. “We support the comprehensive use of financing, taxation, and proper pricing for the support of energy storage” stated one government official. Nevertheless, as of 2019, we are still waiting for the proper policies to appear.
2. The Problem of Power Market Reforms & the Market Mechanism
At present, both behind-the-meter and renewable integration applications rely on single business models. Many stakeholders feel that these applications are limited to a single business model due to the still high costs of storage. The industry is now in a type of “chicken or egg” scenario in which many wonder which should come first, scaling-up of projects or cost reduction.
In fact, the issue does not lie with energy storage costs, but with the lack of a market mechanism. Energy storage has many functions, yet without a fair market environment and price mechanism that compensates based on performance, there is no way to make use of the full scope of energy storage applications. In the words of CNESA chairman Dr. Chen Haisheng, “it’s as if four or five workers are being paid the salary of just one.”
Without a proper mechanism, cost reduction is next to impossible. Under current electricity prices, behind-the-meter project profits have become marginalized, with many even operating at a loss.
Yet simply reducing costs would mean that product quality could not be guaranteed, leading to the possibility of accidents which would have a negative impact on the industry. Only when the market has reached a certain scale can companies have the competitive environment that will allow them to continue to lower prices and be on a path to positive development.
China’s ancillary service markets and spot markets are still in the early stages of construction, and energy storage has limited room to participate. Only Shanxi, western Inner Mongolia, Guangdong, and the Beijing-Tianjin-Tangshan area have opened markets for frequency regulation provided by energy storage systems connected directly to thermal generators. These markets still do not allow for energy storage to operate as independent market entities.
Whether energy storage can reach its full potential will depend on the depth of power market reforms. If the next round of reforms is unable to create an effective mechanism for market allocation of resources, then energy storage will remain a niche market with limited ancillary service capabilities.
3. The Problem of Grid Definitions and Attitudes
Despite being one of the leaders of industry growth in 2018, grid-side energy storage has been met with setbacks in 2019. On April 22, the release of the Transmission & Distribution Pricing Cost Supervision Methods (Draft for Comment) dashed grid company hopes of including energy storage in T&D resource pricing.
Following the release of the draft, Tsinghua University professor Xia Qing wrote a letter to the National Development and Reform Commission expressing his objection. According to Xia Qing, policies should guide the grid to invest in energy storage. Only when the grid harnesses energy storage can the technology truly have a future.
Supporters of the policy believe that it will allow the grid companies to focus more on the main purpose of the grid, allowing other services which have not been monopolized to be marketized, thereby bringing us further towards the creation of a market system. Opponents believe that all grid planning has been designed based on the maximum load, and that energy storage’s greatest value is to serve as a substitute power source during peak periods. If energy storage is not able to join as a T&D resource, then the only other option is to convince the grid to invest in more substations, resulting in wasted resources that will ultimately be paid by consumers.
Earlier this year, China State Grid announced that they would be postponing grid-side energy storage construction. Many of the plans for further large-scale grid-side projects are now to be put on hold.
Many stakeholders believe that energy storage’s greatest value lies at the grid side. Though renewable energy and behind-the-meter load shifting can both make use of energy storage technology, only the grid can bring the system together. This is especially true of large-scale energy storage stations because of their fast response, accurate control, and bidirectional regulation, which help play an important role in power grid safety.
Many stakeholders are in a sort of catch-22, worrying that the power grid will either not step up to the plate, or that if it does, that it will end up bringing disaster. The value of energy storage must be recognized by the grid, but at the same time, we must not wish for excessive grid involvement. 2018 grid-side energy storage projects led by China State Grid were all almost entirely invested in and constructed by subsidiary companies. Nevertheless, dispatch is controlled entirely by the power grid, causing other market players to worry about unfair competition.
Market data reveals that grid-side energy storage can delay the need for feeder line upgrade or expansion by three years. In contrast to the construction of a new substation, investment and construction costs will be reduced by around 30%.
Grid loads have reached an all-time high in 2019. If low cost, high value, and high efficiency energy storage is used in place of traditional T&D network resources, how should this value be determined? If the investment is made through social capital, is the grid willing to pay? How should costs be channeled? All that is known for sure is that only by allowing energy storage to enter the power grid can its multi-faceted value be maximized. The power grid's movements will largely determine the future direction of the industry.
4. The Problem of Safety and Standardization
Since 2018, the energy storage industry’s biggest focus has been on the numerous electric vehicle and energy storage station fires that have occurred around the world. The series of fires at energy storage stations in South Korea have been alarming to many energy storage markets.
If energy storage is not safe, will it be impossible to develop? As an early stage technology, both stakeholders and the public should allow for a period of trial and error. With hundreds of thousands of researchers around the world studying lithium-ion batteries, technological improvements are inevitable, and safety concerns are certainly resolvable.
Given that energy storage stations operate in a much larger space than electric vehicle battery systems, there are more ways to solve safety issues. As Yantai Chungway founder Zhang Lilei states, “Energy storage is not as sensitive to issues of weight or volume as electric vehicles are. Energy storage stations can more easily install fire suppression systems and other safety measures at costs much less that of electric vehicles.”
In the views of Chungway, energy storage safety should put prevention first. System design should set guaranteed safety as the goal. Yet in practice, fire suppression systems still often have marginal status in an energy storage project. To save costs, some systems integrators choose to skimp on safety measures. Since fire safety systems are usually considered a supporting system, they are normally in the hands of a third party. It is up to the developer to decide whether the system should be installed.
Looking broadly at the domestic and international fires that have occurred, this author believes there are three major issues that China’s energy storage industry must consider:
First, the government, industry associations, and standardization groups must create greater numbers of detailed standards and regulations for industry development. These standards and measures must be used to raise the threshold for participation in the industry, barring those companies who do not meet reasonable standards from participating in the market.
Second, investigations into the cause of energy storage fires must be conducted by the state or independent industry, and the results must be made known to the entire industry. Accidents should be utilized as an opportunity for thorough study and learning without the spread of misinformation. They should also not be used as a chance for competitors or supporters of certain technologies to attack or place blame on fellow industry members.
Third, for many owners and investors, when faced with the current market in which quality can vary substantially, it is best to choose systems integrators with technical strength, particularly those who have been tested in the international market.
5. The Problem of Financing and Other Non-Technical Costs
Much like solar PV, energy storage is still a grassroots driven industry. Company capital reserves are weak, and most face capital pressure problems.
In comparison to wind and solar, energy storage does not have definite national policy support. Banks have high credit requirements for developers who wish to finance energy storage projects. Financial leasing has become one of the most popular and important methods for funding energy storage stations.
According to a source at CR Leasing, the primary business of financial leasing companies lies in the leasing of large-scale projects, though the majority of current commercialized projects are still small. For projects with better profit prospects such as energy storage combined with thermal generators for frequency regulation, the annual interest rate of financial leasing is around 9%.
In comparison to thermal generator combined energy storage, the financing of behind-the-meter energy storage is much more difficult. With industrial and commercial electricity prices continually dropping and systems integration capabilities uneven, many behind-the-meter project investments have generated lower than expected profits. According to project evaluations released on the World Bank official website, early energy storage projects earned an average investment return of 5-7%. In the current financial market, behind-the-meter energy storage projects are unlikely to receive a positive response from financing agencies.
In addition, land taxes, grid connection fees, grid linkage fees, and numerous other fees can cause energy storage investment costs to rise and swallow up expected profits. Although these non-technical costs have become a leading factor in restricting the development of the industry, energy storage companies have no say in lowering them. They can only hope that national policies will be released that will help to modify and regulate these costs.
Author: Energy Storage 100 Translation: George Dudley