In November 2020, the Central China Energy Regulatory Bureau released the “Jiangxi Province Power Ancillary Services Market Operations Regulations (Trial)” (referred to as the “regulations” below). In comparison to the earlier draft release, the trial regulations have added content which encourages independent energy storage systems to participate in the peak shaving ancillary services market.
Since the National Energy Administration’s 2017 publication of the “Improving Power Ancillary Services Compensation (Market) Mechanism Workplan,” multiple regions have followed with market operations regulations for ancillary services, providing support for energy storage technology applications. Considering these developments, what is the current status of the ancillary services market in China? What challenges remain to be resolved?
Independent Energy Storage Has Advantages
Industry experts believe that although the release of the Jiangxi regulations provides clarification of energy storage’s identity, the compensation mechanism and subsidies for energy storage provided in the regulations are not enough to cover the investment costs for storage. Market regulations help clear obstacles related to energy storage’s identity, but do not provide simple price compensation.
“Independent energy storage stations are an emerging trend. When energy storage is tied to other systems, it must share its earnings with those other systems,” China Energy Storage Alliance senior policy research manager Wang Si told reporters.
Wang Si believes that independent energy storage possesses two advantages. First, companies which invest and operate independent energy storage systems may operate projects on their own, collecting earnings for themselves with a greater degree of flexibility. Second, independent energy storage systems are better able to aggregate, creating greater value through energy storage sharing. This changes the conventional business model of providing service for just one user, allowing an energy storage system to instead provide service for multiple generation companies, users, and even the entire power system. “Therefore, it is necessary to not only design such systems, but also allow them to participate in the ancillary services market. This will increase the overall effectiveness of the systems,” said Wang Si.
According to Wang Haohuai, director of the China Southern Grid Power Dispatch Center, “with energy storage’s identity in the market defined, operator autonomy is increased. Otherwise, operations and settlement are limited by the entity to which the storage system is tied to, which will affect enthusiasm for investment.” As Wang Haohuai also stated, energy storage follows market service regulations. Implementation of a pay-for-performance mechanism should also be guided by a top-to-bottom evaluation or market mechanism. “For example, once large-scale renewable energy penetrates the grid, exactly how much peak shaving and frequency regulation resources are needed, and how fast, accurate, and stable must they be? Only when operations, market, and settlement provisions have established relevant indicators will energy storage be able to achieve a sufficiently fast regulatory speed and earn a higher level of compensation.”
The Energy Storage Cost Mechanism Continues to Face Challenges
Energy storage has yet to reach a fully commercial stage, making marketization of ancillary services a challenge to commercial operations of energy storage.
According to Wang Si, the key to solving the problem of ancillary services commercialization lies in the power market. Current market regulations and related policies do not support market entry of energy storage. This is especially true of ancillary services market and spot market regulations, which cannot support the full participation of storage in the market, nor allow it to receive full benefits. “Following power market reforms, barriers to energy storage’s participation in the market were removed, and new doors were opened for energy storage to earn profits. We predict that energy storage costs will continue to decline, particularly since the large-scale effect of energy storage in the power system has yet to be reflected.”
Wang Si went on to state that energy storage’s costs should not be incorporated in power costs, “in the current renewable energy quota system, it is the consumers who are made to bear the duty of using green electricity, and the corresponding costs are reflected in financial products such as green certificates. In the future, power generators will gradually transmit the cost to the consumer side, and receive payment from the beneficiary. To support the development of renewable energy and energy storage, corresponding policy support is needed to generate economies of scale, further reduce costs, and enhance competitiveness."
According to Wang Haohuai, the power market system is currently under construction, and the commercial value assessment of energy storage is undergoing major policy changes, creating both risks and opportunities. For example, in addition to the challenges of the “pay-for-performance” mechanism, there are also issues such as the inability to transfer energy storage costs to the consumer, preventing the beneficiary from being the one who pays. “Combined energy storage and renewable energy costs are still high at the current stage. In order to promote green energy consumption, consumers must take on the costs of green energy development.”
Policy Changes Bring Investment Risks
Ancillary services include frequency regulation, peak shaving, operating reserves, voltage control, blackstart, and other services. Among these, peak shaving is a unique service in China. Peak shaving is the practice of short-term regulation of power to match output generation with changing load, balancing power and encouraging greater consumption of renewable power. “Whether peak shaving and spot markets will be integrated in the future or will function in parallel is a matter of discussion among experts,” said Wang Haohuai.
Electricity market rules have not yet formed a long-term mechanism. Marketization is still at a transitional stage, which puts projects with a long investment payback period at risk when regulatory changes occur. “Everyone invests in energy storage projects under the current regulatory system, so they also face greater risks from policy changes,” said Wang Si.
Wang Si pointed out that the release of ancillary services market operations regulations across many regions has given energy storage an opportunity to expand profit margins to a certain extent, but that the vast majority of policies and regulations cannot offer compensation which fully covers investment costs.
“We have not yet completely entered the spot market stage. It is necessary to provide value compensation to combined renewable energy and energy storage through ancillary services market policies. This is the reason why many regions have released ancillary services market operations regulations,” Wang Si said, “we hope to see ancillary services market regulations gradually become a long-term mechanism, embodying the basic principle of paying for results, paying for revenue, or paying for accidents, and supporting transaction, grid connection, and settlement stages. Such regulations will help to clear away obstacles to energy storage’s participation in the market.”