Analysis – China, struggling to capitalize on energy storage boom, demands even greater investment

By Colleen Howe

BEIJING – Rows of thin, white shipping containers stand in a barren field in China’s Shandong province.

Filled with batteries, they form a 795-megawatt (MW) power plant and can store up to 1 million kilowatt-hours of electricity, enough to power 150,000 homes a day. It is the largest such facility in China since it was connected to the grid last Saturday.

The project, carried out by Lijin County Jinhui New Energy Co., comes amid the rapid growth of China’s energy storage sector, which has prompted even greater investment in the sector to increase the share of renewable energy and ease network bottlenecks.

While the state initiative has provided a boost for domestic battery giants such as CATL and BYD, some experts and industry insiders say pricing reforms and technological improvements are necessary for the storage sector, whose rapid growth has been hampered by low utilization and losses incurred by operators.

“Most players in this sector are trying to find a way to make money,” Rystad Energy senior analyst Simeng Deng said.

Investment in grid-connected batteries in China jumped 364% last year to 75 billion yuan ($11 billion), according to Carbon Brief, creating the world’s largest battery storage fleet at 35.3 GW as of March.

In May, China set a new target of installing at least 40GW of battery storage by the end of 2025, a 33% increase from its previous target, as part of a broader plan to cut carbon dioxide emissions.

Storage is key to balancing supply and demand when wind and solar farms produce more renewable energy than the distribution grid can handle, or when a lack of sun or wind means they produce too little energy.

To meet Beijing’s goals, local authorities have required renewable energy plants to build storage facilities, leading to a rapid expansion of their capacity.

But heavily regulated energy markets have struggled to find incentives to use energy, especially solar and wind farms, prompting the Chinese government to call for research to improve pricing mechanisms.

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Energy storage at renewable plants operated for just 2.18 hours per day last year, while independent plants operated for just 2.61 hours per day, according to the China Electricity Council. By comparison, storage at industrial and commercial plants operated for 14.25 hours per day.

Policy mandates requiring renewable energy plants to install battery storage have failed because they increase project costs and often sit idle, said Cosimo Ries, an analyst at Trivium China.

“Because energy prices are not flexible enough at different times, these projects simply cannot be profitable,” Ries said.

LARGE CONSTRUCTION

The stakes are high for China, a global leader in adopting energy transition technologies, and for China’s battery giants, which are seeing faster sales of energy storage batteries than those for cars, while sales of electric vehicles are declining.

While government mandates are a key driver of China’s storage boom, large energy users like industrial parks and EV charging stations are also driving adoption. China, where 60% of the world’s EVs are sold, is worried about the impact of EVs on its power grid, and storage could help smooth out spikes in demand.

Falling battery prices are improving the economics of energy storage in China, with the cost of batteries used in standard energy storage falling by about a fifth between late 2023 and mid-June, according to consulting firm Shanghai Metals Market.

In addition, the increasing use of “peak pricing,” which discourages the use of electricity during peak demand times by raising prices, gives storage providers a greater opportunity to profit by selling stored energy when they can charge higher fees.

That has led to daytime price differentials of as much as 0.9 yuan per kWh in coastal provinces such as Guangdong, where the highest price of 1.1868 yuan/kWh is more than four times higher than the lowest, providing ample incentive to use both batteries and pumped-storage, said Alex Whitworth, head of energy research for Asia Pacific at Wood Mackenzie.

Pumped-storage power is a proven technology with more than 60% greater efficiency than battery storage in China, but it is subject to geographic constraints and long lead times.

Industry representatives say further market reform is needed to encourage battery storage. Storage operators are calling for broader use of capacity charges, similar to those that are designed to keep ailing coal-fired power plants running, with the cost passed on to customers.

BETTER BATTERIES

Battery technology is also improving.

According to a report by local state media, the new Shandong plant will use both lithium-ion and vanadium redox flow batteries. Vanadium is a newer technology that promises longer storage life and improved safety.

While the economics of lithium-ion batteries are expected to improve, experts say most current technology is suited to shorter storage periods of four hours or less, and some say it works best in smaller-scale applications. Fire risk remains a concern, especially with lower-quality batteries, experts say.

New technologies such as thermal energy storage, redox flow batteries and sodium-ion batteries offer promise for longer storage but come with higher upfront costs, and the technology and supply chains are less mature.

China is hedging its bets by increasing the number of pumped-storage hydropower projects, which can take five to seven years to complete, and supporting demonstration projects for new technologies.

(Reporting by Colleen Howe, additional reporting by Zhang Yan; editing by Lincoln Feast.)