Author’s note: 2020 is the final year of the “Thirteenth Five-year Plan,” and the launch year for the “Fourteenth Five-year Plan.” With the energy storage industry having experienced a period of slowdown and adjustment throughout 2019, many industry stakeholders looked forward to a 2020 which would bring a chance for new developments. Instead, the spread of COVID-19 throughout the globe brought an even bigger shakeup, affecting every sector of the energy storage market both domestic and foreign. But as we look toward the “Fourteenth Five-year Plan” period, it is clear that the current challenges are not enough to rattle the long-term prospects for energy storage. Energy storage in China has gone through many changes over the past ten years, with application trends shifting from a focus on behind-the-meter, to grid-side, and now generation-side applications. Energy storage has always been dependent on its environment and has yet to achieve the status of “independent entity.” Industry members have suffered many setbacks, yet they still persist in the hope that better days lie ahead. While the past ten years belong to history, as members of the industry, we must consider what we can do to achieve continued industry growth and progress.
Price is Not the Deciding Factor for Energy Storage Industry Development
In the energy storage development process, many stakeholders place their hopes in the continued decrease in energy storage system costs, believing that cost is the critical influencing factor in energy storage industry development. While system cost reductions are certainly beneficial to industry growth, they are not the core factor to development. If we take lithium-ion batteries as an example, over the past few years, system hardware costs have decreased rapidly. Even as recently as the first half of this year, bids for energy storage systems paired with wind power fell from 2.15RMB/Wh (PC price) to 1.699 RMB/Wh (EPC price) in just a few months’ time. Such a rapid drop in price was a surprise to many in the industry. While the influence of the COVID-19 epidemic cannot be ruled out as a factor which has caused companies to abandon profit in favor of cash flow, the overall price decrease trend across the entire industry is still obvious.
The components which make up today’s energy storage systems are nearly all mature industrial products. A mature market leaves little room for profiteering. If prices continue to rapidly fall, then it is very possible that product quality and/or guarantees must be sacrificed. If whether prices can continue to decrease rapidly is the critical determining factor for energy storage industry development, then shouldn’t current system prices have already brought us to the eve of a massive burst in industry development? This author believes that product prices are simply a guide for product value. Without a reasonable method for assessing value, blind reduction of costs to stimulate market growth is a fruitless approach.
But from the perspective of investors, are energy storage system prices in fact the critical deciding factor for whether a system will be developed? Most investors are aware of the four major factors affecting investment returns on an energy storage project: initial outlay, cost of capital (interest rate), grid electricity price, and amount of grid-connected electricity. A sensitivity analysis can be used to explore which of these factors will have the greatest impact on investment returns. A sensitivity analysis is an uncertainty analysis method for risk tolerance that determines which out of many uncertain factors will have the greatest impact on the economic benefit indicators of an investment project, then analyzes and measures the degree of impact of these factors to the economic benefit indicators, and finally assesses the project’s ability to take on risk. If we take as an example an energy storage project with initial outlay, cost of capital (interest rate), grid electricity price, and amount of grid-connected electricity at a market average price all of ±10%, the sensitivity analysis results (without describing the process in detail) would be as follows: grid electricity price and amount of grid-connected electricity are equally important, with minor fluctuations in either factor having a major impact on project rate of return. Initial outlay and cost of capital also have influence on rate of return, yet do not have as high of a sensitivity coefficient as grid electricity price and the amount of grid-connected electricity. Therefore, the energy storage system should be developed with the most priority given to producing the greatest amount of grid-connected electricity. These results highlight how in order to achieve maximum profits, the quality and lifespan of energy storage products that can provide profitable grid-connected electricity, as well as grid electricity prices are the most critical factors that affect revenue.
Four Areas of Focus for Energy Storage Industry Development
To promote long-term, sustainable industry development, this author believes that the following four areas should be emphasized: creation of a market mechanism, discovery of new applications, raising of capital, and development of new technologies.
Creation of a Market Mechanism: over these past few years of energy storage development, there has been no lack of polices in support of the energy storage industry. But a careful look at many of these policies reveals that many are simply guidelines, and few offer concrete action. The primary reason for this is that there is still no mechanism in place to determine the reasonable economic value of energy storage’s services. Energy arbitrage, frequency regulation, grid-side energy storage, and renewable integration applications are all major energy storage functions, yet still have yet to see the creation of stable earnings mechanisms. Additionally, some of the more specific policies which provide “one size fits all” solutions can be questionable, such as the many policies released this year which require renewable energy stations to deploy energy storage. Some provinces have required deployment of storage systems with capacity equal to 20% of a station’s power generation and with a duration of 2 hours. Other provinces have required storage system capacity to be at least 5% of a station’s power generation and with a duration of 1 hour. Perhaps a more suitable policy would focus on the index for assessing the effectiveness of an energy storage system’s adjustment capabilities rather than capacity ratios. Navigating through the “minefield” of a policy-oriented market is a necessary process for energy storage’s development.
Discovery of New Applications: The many varieties of energy storage services, such as peak shaving, frequency regulation, voltage regulation, demand response, black start, and many more allow energy storage to have value across a wide range of scenarios. But as industry stakeholders, we must make an effort to continue expanding the range of settings in which energy storage is used, keeping our eyes peeled for new opportunities in which our industry can link with specific application markets to solve customer issues, and transform energy storage from an “accessory” to the perfect solution for a variety of different scenarios.
Raising of Capital: the importance of capital to industry development in its early stages goes without saying. For the energy storage industry, we must try harder to obtain new sources of capital while lowering capital costs. Of course, when it comes to industry development, an industry which can bring its customers and investors sustainable and predictable incremental value is a good industry. Industry stakeholders must respect capital owners, and make a sincere effort to use capital to promote industry development.
Development of New Technologies: technology innovation is the foundation for furthering industry development. As discussed above, the amount of electricity which a system connects to the grid has a major influence on investment return. This ability is closely linked to the lifespan of a system—how much energy it can charge and discharge. Among current mature market technologies, we still have yet to see a perfect solution. Increasing energy storage system safety and efficiency, lengthening lifespans, lowering operations and maintenance costs, and increasing environmental friendliness are all challenges which must be resolved through the continued efforts of technology researchers and developers.
Conclusion
Energy storage is a technology which can change the time and space in which we use our energy, and stands at the intersection between the historical background of the energy revolution and the new era of energy system reforms. Energy storage industry stakeholders must brace themselves for the challenge, and work to move away from the trap of low-price competition by focusing on the value of energy storage functions, searching for new technology innovations, and reducing costs by extending lifespans and improving quality. These efforts will ensure long-term, sustainable development. System costs are not the critical factor to industry development, rather, market demands are the core driver to industry development. Technologies and market are at opposite ends of supply and demand, and policy mechanisms and capital are the intermediate bridge between supply and demand. Though there are still many challenges ahead of us, this author is confident that the persistence and dedication of industry stakeholders both new and experienced will bring brighter days ahead!
Author: Peng Kuankuan Wanke Energy Technology Co.,LTD
The views and opinions expressed in this article are the author’s and do not necessarily reflect those of Wanke Energy Technology or China Energy Storage Alliance.