Under the direction of the national “Guiding Opinions on Promoting Energy Storage Technology and Industry Development” policy, the development of energy storage in China over the past five years has entered the fast track. A number of different technology and application pilot demonstration projects have been launched, many key technical components have reached an advanced level of maturity, numerous key technical norms and standards have formed, and internationally competitive market players have entered the playing field. While it is true that the development of China's energy storage industry has moved from a technical verification stage to a new stage of early commercialization, the industry still faces many challenges which hinder development, and true "industrialization" has not yet materialized. As we enter the 14th Five-year Plan period, we must consider the needs of energy storage in the broader development of the national economy, increase the strategic position of energy storage in the adjustment of the energy structure, and make known the important role of energy storage in the social and economic development of China. While looking back on 2020, we also looking forward to the development of energy storage industrialization during the 14th Five-year Plan, as policy and market mechanisms become the key to promote the full commercialization and large-scale application of energy storage.
Build a solid foundation for the training of talents and increase the strategic importance of energy storage
In 2020, under the direction of the National Development and Reform Commission to promote energy storage and lay a solid foundation for industrial development, the Ministry of Education, the National Development and Reform Commission, and the Ministry of Finance jointly issued the “Action Plan for Energy Storage Technology Discipline Development (2020-2024),” proposing to create a number of undergraduate majors, secondary disciplines, and cross-disciplines specializing in energy storage technology over the next five years. Xi'an Jiaotong University, North China Electric Power University, and other colleges and universities have already added such energy storage disciplines. The “Suggestions on Accelerating the Reform and Development of Postgraduate Education in the New Era” also included the construction of an innovative platform for the integration of energy storage technology, industry, and education, and implements a special project for independent training of talents in core technical areas. The construction of a discipline system and the training of professionals through these policies will help to build a solid industrial foundation for energy storage.
Industry development guidance and pursuit of optimal energy prices
In July 2020, the National Energy Administration issued the “Notice on Organization and Application of Scientific and Technological Innovation (Energy Storage) Pilot Demonstration Projects.” The issuance marked the conclusion of a years-long solicitation of national energy storage demonstration projects with the shortlisting of eight large-scale energy storage projects in a range of applications. The demonstration projects will help to promote the introduction of new policies and market mechanisms through analysis and synthesis of successful experiences and current challenges relating to a diverse range of energy storage projects.
The National Development and Reform Commission and the National Energy Administration proposed a "two integrations" energy development strategy in the “Guiding Opinions on the Development of ‘Integrated Wind, Solar, Hydro and Thermal Storage’ and ‘Integrated Source, Network, and Load’ (Draft for Comment).” The proposal combines the advantages of different energy technologies with the rapid and flexible adjustment capabilities of energy storage. However, the pursuit of low energy costs through the "two integrations" strategy is not realistic in the short term. We must also consider the value and cost of the societal benefits of the green development which these projects bring. Promoting the construction of an intelligent, efficient, and green energy system requires the entire nation to accept and bear these comprehensive costs and set aside the single pursuit of only the absolute lowest energy costs.
Continued electricity market reforms create an open and fair environment
As electricity market reforms continue, market rules gradually tilt to new market players such as energy storage. The “Basic Rules of Medium-and Long-term Electric Power Trading” defines the identity of energy storage enterprises participating in market transactions. Jiangsu, Jiangxi, Shanxi, Qinghai, and other regions have released construction plans for electric power spot markets and proposed long-term development directions for ancillary services markets. Among these proposals, "establishing a market mechanism for ancillary service costs shared by users and power generators" has become the key for promoting the commercial application of energy storage in the future. The “Notice on the Signing of Medium-and Long-term Electric Power Contracts in 2021” proposes to promote medium-and long-term transactions with load curves on both the generator and user side. Because it is difficult to predict market supply and demand in the short term, it is still necessary to refer to the existing catalogue electricity price or guiding electricity price to determine the peak and off-peak price difference. Although China has carried out medium-and long-term trading for many years, and has also put forward the idea of transitioning to a new price model, there are still some regions where the price formation mechanism does not match the actual power supply and demand. The peak and off-peak price gap has also been reduced through medium-and long-term transactions, which also reflects the passivity of the market mechanism. In the future, the trend of widening the peak and off-peak price gap will continue according to power supply and demand. Behind-the-meter energy storage arbitrage business models will still have guaranteed value, though the ability of energy storage to participate in spot market bidding must also gradually improve.
Under the guidance of the “Work Plan for Improving the Power Ancillary Services Compensation (Market) Mechanism,” ancillary services markets have been constructed in multiple regions in recent years, and energy storage has also been commercialized in Guangdong, West Inner Mongolia, Shanxi, North China, and other regions. However, the high compensation brought by the provision of high-performance energy storage services also creates risks for market capital use, and the continued adjustment of policies has also impacted investment in energy storage projects. In 2019, adjustments were made to the compensation calculation in West Inner Mongolia and North China. In 2020, Guangdong also made an adjustment to its settlement process, while West Inner Mongolia once again adjusted its compensation calculation method. Shanxi, Qinghai, Hunan, and other regions have also made downward adjustments to the peak regulation compensation standards for energy storage participating in ancillary services. Policies have changed frequently in less than a year. This lack of a long-term market mechanism has become a prominent problem restricting the commercial development of energy storage.
Despite this, ancillary service market rules solve the basic identity problem of energy storage participating in the market. Energy storage receives a market subject status equal to that of power generation enterprises, power sales enterprises, and power users, and third parties are permitted to offer their services to the market. Independent energy storage providers in Fujian, Jiangsu, Shanxi and other regions are permitted to apply for power generation business licenses, and are permitted to participate in ancillary services provision.
Renewable energy + energy storage becomes a leading trend, but commercial development still faces difficulties
As large-scale renewable energy continues to expand, the pressure and responsibility to supply guaranteed power generation becomes more intense. In 2020, numerous local governments and power grid departments once again put forward a demand for renewable energy projects to be equipped with energy storage systems matching 5% to 20% of renewable energy generation capacity. Energy storage has also become a precondition for priority grid connection and priority consumption. However, under existing system costs and without a mechanism in place for assigning cost coverage responsibility, the development of integrated renewables and storage cannot be achieved overnight. Relying solely on the principle that "charge and discharge electricity prices and settlement shall be determined in accordance with relevant national regulations" cannot solve commercial development challenges, but instead shows that policy is oriented towards transferring responsibility. During the process of charge and discharge, energy storage switches identity from that of a user to that of a power generator. Peak-shaving compensation and feed-in charges cannot be paid repeatedly, while independent energy storage projects are also faced with the risk of double charges. In addition, policy must also gradually raise the threshold of entry for projects in the market to avoid the possibility of safety accidents inhibiting industry development.
It is not necessary to use market mechanisms and policy compensation to give specific support to energy storage. Instead, energy storage should be allowed a fair and open market in which it is allowed to compete with other market entities. A sound market environment is the core for comprehensive commercial development of energy storage.
Electricity prices are optimized and adjusted, and behind-the-meter energy storage prices becomes more reasonable
A new round of transmission and distribution electricity price and retail electricity price adjustments resulted in numerous regions reducing consumer electricity prices, adjusting peak and off-peak price differences, and adjusting the peak and off-peak price implementation period. With the large-scale deployment of renewable energy, the original mode of determining peak and off-peak electricity prices according to consumer electricity consumption habits has changed, and net load has become the basis for peak and off-peak price adjustment. In 2020, Jiangsu, Zhejiang and other regions further reduced the off-peak electricity price and widened the peak and off-peak price gap. Regions such as Hubei not only widened the peak and off-peak period, but also added a super peak electricity price and adjusted their peak and off-peak price differences. Shandong, Gansu and other regions implemented complete price adjustments for all TOU periods. While the widening of the peak and off-peak price difference is beneficial to behind-the-meter energy storage applications, energy storage charge and discharge strategies must also be adjusted to adapt to the changes to the peak and off-peak period.
At the same time, Beijing’s Chaoyang District continued to provide 20% initial investment subsidies for energy storage projects after energy storage was incorporated into the special funds for energy conservation and emission reduction in 2019. After Hefei, Suzhou, and other regions granted subsidies for distributed solar+storage and energy storage systems, Xi'an and Shaanxi begin providing 1 RMB/kWh charging subsidies for energy storage in solar+storage systems. Energy storage technologies are also needed in new applications such as 5G base stations, data centers, and EV support facilities. Consumers in these industries will rely on energy storage to help solve distribution capacity problems, provide emergency power backup, and reduce electricity expenditures. Related energy storage applications can also receive regional subsidies in Guangdong, Kunming, Hefei and other regions. With the increasingly widespread use of EVs, further integration of solar+storage+charging can also be expected.
Demand response and consumer peak shaving overlap, and adjustment resources require increased efficiency
The peak-shaving market is expected to connect with the spot market mechanism, using market-oriented price mechanisms to mobilize resources to respond to the demands of the power system. However, to mobilize behind-the-meter adjustment resources, power operations regulators in Shanghai, Jiangsu, Guangdong, Zhejiang, Shandong, and Henan launched the construction of a demand response mechanism based on the 2013 demand response trial program. Compensation comes from surplus capital pools such as super peak electricity prices and renewable energy transactions. In addition, energy regulatory departments in North China, Jiangsu, and Shanxi opened the door for third-party entities and consumer resources to participate in peak-shaving ancillary services, though peak-shaving compensation in some regions is still provided by power generation enterprises. In areas in which ancillary services costs are not transmitted to the consumer, there are policy change risks for non-generation entities which earn profits from ancillary services.
Due to the high overlap between demand response execution time and peak and off-peak electricity prices, there is still room for flexible design of the baseline, so the profits for energy storage participating in demand response are relatively limited. The existing peak shaving and demand response mechanism design provides energy storage charging and discharging compensation which can increase energy storage revenue. However, under the existing peak and off-peak price mechanism, independent energy storage charging and discharging for peak shaving is already in place. If peak shaving and demand response implementation are consistent with the implementation of peak and off-peak price periods, there will be some overlap in compensation. In addition, although peak shaving and demand response are directed by different departments, the response mechanism is basically the same, and there is still the problem of compensation payments duplicating. In some regions, peak shaving is frequently dispatched, with cumulative days equaling as much as half a year. A resource response that was originally a short-term emergency service has become a continuous demand. Rather than continue this practice, it would be better to flexibly change the peak and off-peak pricing period and prices, and allow users to cover the cost of energy storage. Therefore, it is necessary to integrate the process of spot market construction to effectively link consumer peak shaving, demand response, and market-based pricing mechanisms to avoid overlapping use of resources and invalid payment of funds. The baseline and response mechanism should be adjusted reasonably to support the energy storage technology as it provides services to the power system.
The power grid supports the development of energy storage and promotes its role in the energy system
In 2019, the national government made it clear that “costs unrelated to the power transmission and distribution business of grid companies,” including the cost of energy storage facilities, should not be included in transmission and distribution prices. China’s major grid companies followed by stating they would not carry out grid-side electrochemical storage investment, leasing, or contract energy management, nor would they construct new pumped hydro storage projects. Currently, due to the inability to match regulatory capabilities with the demand for grid investment in energy storage projects, it is reasonable to prohibit grid investment in energy storage projects under the principle of ensuring market fairness. However, this does not mean that the regulatory mechanism is not evolving. In 2020, the method by which the power grids promoted energy storage development changed. In the “Key Work Arrangements for Reform in 2020” and the “Opinions of State Grid Co., Ltd. on Comprehensively Deepening Reform and Striving for Breakthroughs,” the power grid expressed its intention to implement a new business plan for energy storage and cultivate new momentum for growth based on strategic emerging industries such as energy storage. The “Key Points for Professional Work on Smart Power Utilization in 2020" also suggested strengthening customer-side energy storage application research and gradually clarifying system access requirements. In addition, the “Energy Law of the People's Republic of China (draft for comment)” encouraged the development of smart grid and energy storage technology. The National Energy Administration's response to Recommendation No. 9178 of the Third Session of the Thirteenth National People's Congress stated that for some energy storage projects deployed to defer investment in new transmission lines and substation equipment, consideration will be given to include their construction and operations costs into T&D service costs. The response also suggested that continued research would seek to create an effective model for covering the costs of energy storage in order to support the orderly development of grid-side storage.
Implementing large-scale commercial development of energy storage in China will require significant effort from power grid enterprises to promote grid connection, dispatching, and trading mechanisms, and also share the responsibility of the regulatory authority for energy storage safety risks to ensure the high-quality application of energy storage.