Analysis: China Struggles to Capitalize on Energy Storage Boom, Calls for Further Action – By Reuters

By Colleen Howe

BEIJING – In China’s Shandong province, rows of slender white structures resembling shipping containers are arranged neatly across a barren dirt field. These containers house batteries that together form a 795 megawatt (MW) energy storage facility, capable of storing up to 1 million kilowatt-hours of electricity—sufficient to power 150,000 households for a full day. This facility became the largest of its kind in China when it was connected to the grid last Saturday.

Developed by Lijin County Jinhui New Energy Co., this project signifies a surge in energy storage development within China, which has called for even more investments in this sector to enhance renewable electricity and mitigate grid congestion.

The government-led initiative has benefitted local battery manufacturers like CATL and BYD, yet some industry experts indicate that pricing reforms and technological advancements are crucial for the storage sector, which has faced challenges with low utilization rates and financial losses.

“Most companies in this sector are trying to figure out how to turn a profit,” stated Simeng Deng, a senior analyst at Rystad Energy.

Last year, investment in grid-connected batteries soared by 364% to reach 75 billion yuan (approximately $11 billion), establishing the largest storage fleet globally, amounting to 35.3 GW as of March.

In May, China set an ambitious target of installing at least 40 GW of battery storage by the end of 2025, representing a 33% increase from earlier goals as part of broader efforts to reduce carbon emissions.

Energy storage is essential for balancing supply and demand when renewable sources like wind and solar produce more electricity than the grid can accommodate, or conversely, when there is insufficient sunlight or wind to generate power.

To achieve governmental targets, local authorities have mandated that renewable energy plants incorporate storage solutions, leading to rapid expansion in capacity. However, the rigid nature of regulated power markets has made it difficult to encourage storage usage, particularly at solar and wind facilities, prompting the government to call for research on improving pricing mechanisms.

Last year, energy storage at renewable plants operated an average of just 2.18 hours each day, while independent facilities fared slightly better, with 2.61 hours. Comparatively, storage at industrial and commercial facilities operated for 14.25 hours per day.

Critics argue that mandated storage installations at renewable energy projects often lead to higher costs and idle facilities. “These projects struggle to be profitable because power prices are not flexible enough throughout the day,” remarked Cosimo Ries, an analyst at Trivium China.

The stakes remain high for China, which is at the forefront of energy transition technology. Its battery manufacturers are seeing faster growth in energy storage batteries than in electric vehicle batteries, especially as EV sales growth begins to slow.

While government mandates drive much of the storage expansion, large power consumers, such as industrial parks and electric vehicle charging stations, are also influencing adoption rates. As the country that accounts for 60% of global electric vehicle sales, China is concerned about the impact of EVs on its power grid, making storage a crucial strategy to mitigate demand surges.

Decreasing battery prices have improved the financial viability of storage projects, with the cost of batteries used in energy storage dropping by around 20% between late 2023 and mid-June, according to industry sources.

The increasing use of "peak-valley pricing," which discourages electricity consumption during peak demand periods by raising prices, offers storage providers an opportunity to profit by selling stored energy when prices are higher.

This shift has created price differentials of up to 0.9 yuan per kWh in coastal regions like Guangdong, where peak prices exceed four times the low rates, incentivizing the use of both battery and pumped hydro storage systems, according to Alex Whitworth, head of Asia Pacific power research at Wood Mackenzie.

Pumped hydro, while a well-established technology with more than 60% greater capacity than battery systems in China, does have geographical constraints and extended lead times.

Investor returns on solar-plus-storage projects are also improving as the cost of solar modules declines, making the pairing of renewables with storage economically viable in many regions of China, with internal rates of return reaching the minimum investment threshold of 8%, as noted by Citi analysts.

Industry stakeholders assert that further market reforms are essential to incentivize battery storage, advocating for broader adoption of capacity payments similar to those used for struggling coal plants, which would be funded by customers.

IMPROVING TECHNOLOGY

The development of battery technology is progressing as well. The new facility in Shandong features both lithium-ion and vanadium redox flow batteries, according to local reports. Vanadium technology promises longer storage durations and enhanced safety.

While the cost-effectiveness of lithium-ion batteries is expected to improve, many existing technologies are designed for short storage periods of four hours or less, and some experts suggest they are more suited for smaller-scale applications. Risks related to fire remain, particularly with lower-quality batteries.

Emerging technologies such as thermal energy storage, redox flow batteries, and sodium-ion batteries show potential for longer-duration storage but come with higher initial costs and less mature technology and supply chains.

China is strategically increasing its pipeline of pumped hydro projects, which typically require five to seven years for completion, while also promoting demonstration projects for emerging technologies.