The Awakening of Energy Storage Deployment in China
PART I: Policy Support of Energy Storage System
Intermittent renewables, led by wind and photovoltaics (PV), figure remarkably in many countries’ energy plans and are expected to account for an increasingly significant share of the world’s energy structure in upcoming years. China, has pledged to increase the share of consuming non-fossil fuel energy to 25% by 2030, to reach the carbon neutrality goal set in 2060. With the emerging installation of renewable power plant, the energy storage industry is expecting to grow with riding on policy stimulus. Therefore, this article intends to discuss the role of energy storage system in three application sectors: 1) power generation side, 2) grid side, and 3) demand side. Apart from that, the article will further explore what have been offered by the central and provincial government of China in cultivating the energy storage market.
Energy storage is highly complementary for the large-scale deployment of renewable sectors and is commonly regarded as the missing link between intermittent renewable power and 24/7 reliability. It can mitigate the issues of fluctuated production of renewable energy, meanwhile providing power source between blackouts as well as offering power quality management for stakeholders of the power system. Given its indispensable role, the government of China has highlighted its importance and brought in national planning, while gradually exploring the business model and economic feasibility of energy storage system.
Main objective of energy storage system (see Figure 1)
Power generation side
The energy storage system mainly provides 1) energy management and 2) power quality management services for the power generation side which can ensure the stability and continuity of renewable energy power generation. For example, in wind power plants, energy storage can effectively regulate wind power’s fluctuated production and ensure the smoothness of wind power output. Likewise, in a centralized grid-connected PV power station, energy storage system can enhance the effectiveness of peak-shaving capability and reduce the curtailment rates of renewables to recover the electricity that may be potentially wasted. In addition, energy storage can improve the performance of power generator in the power ancillary service market. For example, frequency modulation service can be offered by storage system to conduct instant and rapid charge-discharge activities of electricity to ensure that power generator has completed the obligation where the power quality of the grid is maintained in a satisfied range.
For grid side, the main applications of energy storage system can be utilized in the following three scenes:
Congestion in transmission channel: energy storage system can be installed in the upstream transformer substation to store the electricity that temporarily cannot be transmitted. Similarly, it can discharge to the channel when the upstream electricity production cannot fill up the downstream demand.
Reactive power support: grid companies can utilize storage facilities to adjust the amount of reactive power output to manage the voltage of transmission and distribution lines with the assistance of dynamic inverters, communication and control equipment.
DC power supply for substation: adopted as the back-up power in substation to ensure the stable operation of signal equipment, relay protection, and automatic device.
For demand side, energy storage technology can be employed for two objectives:
Adapt as the back-up power to prevent power outage.
Help industrial and commercial users to manage capacity charges (容量费用). For large-scale industrial enterprises, due to the current two-part tariff system(两部制电价), the power supply department will charge a fixed monthly basic tariff based on enterprises' transformer capacity. Storage system, therefore, can be adopted for capacity cost management, i.e., to store electricity at low consumption period and discharge at peak hours to reduce capacity costs by achieving a lower maximum power consumption without affecting daily operation.
Figure 1: Application Scenario of Energy Storage System
National level - China mandates energy storage as it sets 16.5% solar and wind target for 2025
Driven by the national strategic goals of carbon peaking and carbon neutrality, energy storage, as an important technology and fundamental equipment supporting the new power systems, has become an inevitable trend for its large-scale development. In recent years, 34 policies (see Figure 2) mentioned energy storage applications or subsidies have been released, while these policies mainly refer to encouraging the deployment of energy storage on the power generation side and actively exploring the possibility of the utilization of energy storage on the grid side.
Figure 2: Energy Storage Policy at Power Generation, Grid, and Demand Sides
Power generation side: the strongest promotion field
Energy storage at power generation side has received the greatest attention among all sectors. In July 2021, the National Development and Reform Commission (NDRC) and the National Energy Administration (NEA) published the <Guiding opinions on accelerating the development of new-type energy storage 关于加快推动新型储能发展的指导意见>, indicating to strongly promote energy storage on the power generation side where a batch of system-friendly renewables power station paired with new-type storage system are under planning. New-type energy storage as highlighted in the policy refer to the storage technologies excluding pumped-hydro storage which commonly include physical energy storage (e.g., compressed air, flywheel), electrochemical storage (e.g., Li-ion battery, Na-S battery) and other chemical energy storage (e.g., supercapacitor). These projects are expected to provide capacity support and certain peak-shaving capability for the power system. Meanwhile, the policy also emphasizes to explore and utilize existing decommissioned thermal power plant sites as well as transmission and substation facilities to construct 1) storage system and/or 2) renewable energy + storage power plant. These indication on the one hand meet the current demand for energy storage in the development of renewable energy, and at the same time, they are in line with the previously issued <Guidance on Promoting the Integration of Power Sources the Development of Multi-energy Complementarity 关于推进电力源网荷储一体化和多能互补发展的指导意见> and <Notice: Regarding the Development of Wind Power and PV Power Generation in 2021 关于2021年风电、光伏发电开发建设有关事项的通知>.
It can be said that the introduction of energy storage system at power generation side is regarded as the bridge between the current power system and the development of renewable sector, that is, the current grid infrastructure in not comprehensive enough to digest the rising penetration of renewable energy where the unstable production of PV and wind power become a huge threat to the grid’s stability. In other words, the existing power system requires a slew of energy storage facilities to withstand the large-scale and high-frequency power fluctuations, as well as mitigating the issue of green electricity curtailment.
Grid side: the recovering economy
The grid-side energy storage economy is slowly recovering from when the grid’s development speed of comprehensive adjustment ability falls behind the rapid installation of renewable energy. In 2019, the NDRC issued the <Measures for Supervision and Examination of Transmission and Distribution Price Costs 输配电价成本监审办法>, stating that the cost of pumped-hydro storage power stations and other energy storage facilities should not be included in the cost of transmission and distribution pricing. For grid companies, this policy directly restricts the investmentin energy storage facilities (including pumped-hydro and electrochemical energy storage) which becomes difficult to obtain reasonable investment returns, therefore the autonomy of grid companies to employ storage facilities becomes sceptical.
However, due to the growing share of renewable energy in the power supply structure, the grid urgently needs to improve the flexibility adjustment capability to cope with the unstable supply of renewable energy and reduce the occurrence of power curtailment. Therefore, in April 2021, the NDRC issued the <Opinions on Further Improving the Price Formation Mechanism of Pumped-hydro Storage关于进一步完善抽水蓄能价格形成机制的意见> which proposes to incorporate pumped-hydro storage into the two-part tariff (两部制电价) policy to ease the system investment, in which energy price (电量电价) is formed in a competitive manner, and capacity charges (容量电价) is considered to be brought into transmission and distribution price for investment recovery (see Figure 3). It can be said that the policy has opened a pathway and re-pressed the start button of storage system at grid side by facilitating the price formation mechanism of pumped-hydro storage. As such, in the future, it is expected that grid companies can also adopt other energy storage methods (e.g., electrochemical energy storage) through significant cost reduction and improving technical maturity.
Figure 3: Price Mechanism of Pumped-hydro Storage
Demand side: the developing market with diverse application
In general, demand-side energy storage belongs to a sub-field of energy storage, where there is yet no specific policy to provide future indication for the industry. However, some national development plans or guidance have expressed the support for storage system. Relevant policies express support from two perspectives:
One is to firmly promote and improve price mechanisms such as peak-valley price difference (峰谷电价) and seasonal electricity price (季节电价) in the electricity reform project where peak-valley spread arbitrage is currently the major profitability source of user-side energy storage.
Taking <Notice of NDRC on further improving TOU pricing mechanism 国家发展改革委关于进一步完善分时电价机制的通知> as an example, the policy clearly stated that the time-of-use electricity price (分时电价) mechanism will be further improved to better guide end-users to participate in the peak-shaving activities, improve electricity supply and demand, and promote renewable energy consumption. Besides, the "Notice" encourages industrial and commercial users to adopt energy storage to reduce electricity costs by reducing on-grid electricity consumption during peak hours, while increasing its consumption during off-peak periods. Likewise, the policy also indicates to promote the time-of-use electricity price (分时电价) policy for residents to gradually widen the pricing difference between peak and valley hours.
Second is to introduce storage system to integrate with diverse application scenarios and encourage end-user to install energy storage system to participate into peak-shaving activities of the grid. For example, the <Guidelines on accelerating the development of new energy storage 关于加快推动新型储能发展的指导意见> encourages storage system to be integrated with end-users in terms of distributive energy, microgrid, big data center, 5G communication base station, charging facilities and industrial park. Meanwhile, the <Guidelines on ensuring energy security in 2020 关于做好2020年能源安全保障工作的指导意见> indicates to explore the relevant mechanism to escalate the enthusiasm of end-user to engage in peak shaving and ancillary services market. With the continuous development of the electricity market deepening, the demand side is expected to become the one of main force in energy storage business model innovation, which will bring vitality and surprises to the development of the industry.
The rise of the energy storage market, on the other hand, is largely driven by provincial governments. Local governments have made the deployment of energy storage a priority in their energy planning sector in addition to central indication (see Figure 4).
Figure 4: Installed proportion of energy storage system with new renewable power plant
From the perspective of government’s attention, energy storage required in the power generation side is much stronger than in grid and demand sides where compulsory installation + effective incentives + subsidy are the common tactic taken by local government to facilitate storage project’s enforcement. As such, two types of regional implementation policies have been concluded:
Provinces like Hunan, Hubei, Xinjiang, Shaanxi, Fujian require new renewable energy power plants to be configured with storage system with a certain power ratio; On the other hand, new renewables project is only encouraged to get paired with storage facilities with a certain power ratio, and at the same time, the project will be tilted during on-grid approval.
In addition, some regions, such as Qinghai and Ningxia, provide operation subsidies of RMB 0.1/kWh and RMB 0.8/kWh, respectively, to whom have installed energy storage on the power generation side to incentivize and improve its economies.
On the other hand, compared with power generation side, the incentive measures for grid and demand sides are still considred to be in the early stage of development, which mainly focus on conducting demonstration projects of demand side storage projects, as well as exploring economic measurement such as increasing peak-valley price difference and setting capacity charges (容量电价) for future implementation.
Energy storage is the indispensable adoption to complete China’s transformation of energy supply structure from a coal-dominated system to a greener renewable energy mix. The government of China, from central indication to provincial implementation, devotes major attention in power generation side at the current status. From central level, energy storage is strongly promoted to provide capacity support and peak-shaving capability for the power system in China, while provincial government adopts tactics of compulsory construction with on-grid incentives and subsidy to achieve regional installation target.
On the other hand, the central government has pressed the re-start button of grid side's storage economy, by bringing pumped-hydro storage into the two-part tariff mechanism which allows the investment of storage system to be digested by downstream users. Likewise, for the demand side market, the cultivation focus of storage segment lies across:
1) Diversifying the application scenarios with the emergence of distributive energy such as microgrid, charging facilities and industrial park;
2) Continue to verify and improve the pricing mechanism of peak-valley price difference in the electricity reform project to improve the profitability model of energy storage at demand side.