China is proposing a policy to accelerate energy storage deployments, with its core a target to take the country’s storage capacity excluding pumped hydro to 30GW by 2025 – triple the level of Wood Mackenzie’s current forecast.
Although the five-year timeframe could prove challenging from an economic standpoint, China has good reason to push ahead and succeed.
Government support for the strategic battery market is strengthening against the backdrop of heightened US-China tensions and China’s pledge to peak emissions by 2030. The acceleration of its energy storage deployments is another example of China’s ambition to scale domestic strategic technology markets instead of diverting to exports, and to promote low-carbon technology and manufacturing.
A key point of the proposed energy storage policy is the pairing of renewables – wind and solar – investments with storage systems equivalent to 5-20% of renewable capacity in China’s still highly regulated power market. The pairing policy is causing a major shift in storage investment, moving from grid companies to state-owned renewables developers.
China’s large state-owned power generation utilities, such as China Energy, Huaneng, Huadian and SPIC, will play a much more significant role and take on more financial risk moving forward.
These companies can access low interest rates for project financing, and take the risks and uncertainties of project development and grid connection, with less concern for profit margins. Although there is no expectation for storage to be economically viable in the early development stage, the current business model will not be sustainable in the long term.
China’s front-of-the-meter (FTM) projects barely make money.
The lack of wholesale markets and difficulty in stacking revenue streams remain critical for the energy storage industry. China’s front-of-the-meter (FTM) projects barely make money as revenues rely on a fixed on-grid tariff. In 2020, China’s on-grid tariff for solar and wind hit a new low, staying in the range of 0.35-0.49 yuan/kWh (equivalent to $54-76/MWh). Under such low tariffs, adding storage assets to renewables could double the project capex while creating zero economic gains for developers as time-of-usage power tariffs are not available for the FTM market.
Currently, the incentive of adding storage is prioritised grid connection for solar and wind plants under local grid regulations. In 2020, this grid interconnection requirement contributed 468MW/812MWh of the renewables-plus-storage project pipeline.
Commercial and industrial solar-plus-storage provide better economic returns than FTM projects due to higher power prices on China’s east coast. But storage projects still face revenue uncertainties as power prices in China rely on policy and regulations instead of market fundamentals.
Since the US-China trade war and Covid-19 crisis, industrial power prices have been pushed down three times, reducing by 30% in total. Storage developers could lose money under such market conditions.
Light at the end of the tunnel
However, there is light at the end of the tunnel as the proposed policy discusses reforms to improve storage project revenue channels. As China’s wholesale market reform gradually looks to move beyond regional pilots, the potential exists for energy storage to enter the trading market. The overall goal is to ramp up the total capacity of new grid-connected renewables and storage, including lithium-ion batteries, compressed air, flow batteries, flywheels, sodium-sulphur batteries and hydrogen.
China had 1.2GW/1.7GWh of new non-hydro energy storage additions in 2020, reaching 2.7GW/4GWh of total deployments by the end of last year.
We expect China to add 430GW of new solar and wind capacity in the next five years, which could eventually spur 74GW of new storage capacity if up to 20% of the renewables-storage pairing ratio is applied. Under this grid regulation policy, China’s storage market demand could rise to 6GW a year in the next five years, seven times higher than our H1 2021 forecast.
The new policy could mean that China overtakes the US as the energy storage leader in gigawatt terms by 2030, while requiring $18bn investment to meet its 2025 target. Some uncertainties remain, including project economics, detailed policies and supply chain constraints, but we expect to see more policies backed with strong action to meet the goal.
In summary, energy storage is positioned as a strategic technology that will help China achieve its carbon neutrality target by 2060. We believe the new policy is a clear signal of political resolve, and the 30GW target could be reached by 2025. Under political pressure, state-owned enterprises will drive storage demand by building renewables-plus-storage projects in China.
- Le Xu is a senior analyst at Wood Mackenzie
Note: amends original version to correct to 6GW estimate of annual storage market demand