The "Four Horsemen" Behind the Surge in Commercial and Industrial Energy Storage

Industrial and commercial users are the main force behind China's electricity consumption. According to the National Bureau of Statistics, in 2022, the national industrial electricity consumption was 5600 TWh, accounting for 64.8% of the total social electricity consumption.

Under the "dual carbon" goals, favorable policies for industrial and commercial energy storage have emerged one after another, setting off a wave of industrial and commercial user energy storage. According to Gao Gong Industry Research Institute (GGII), the shipment volume of industrial and commercial energy storage in 2023 will reach 8 GWh.

Unlike overseas markets, the driving factors of China's industrial and commercial energy storage industry are more complex, mainly driven by policies, making it economically viable by continuously enriching the profit-making methods of industrial and commercial energy storage.

The application scenarios of industrial and commercial energy storage can be divided into stand-alone energy storage, integrated photovoltaic and energy storage (charging), and microgrid energy storage. The considerations for different industrial and commercial scenarios also vary. Specifically, the driving factors of industrial and commercial energy storage in China can be summarized into four aspects.

Frequent power outages highlight the need for power security

From a global perspective, China's overall power supply stability is high. However, under the influence of energy consumption dual control, soaring prices of power coal, and special climates, in 2021 and 2022, many regions in China implemented power rationing for industrial enterprises, including Liaoning, Shandong, Guangdong, Shanghai, Zhejiang, Jiangsu, Hunan, Shaanxi, Qinghai, Guangxi, Yunnan, Sichuan, and Inner Mongolia.

In particular, energy-intensive industries such as steel, building materials, chemicals, and textiles were significantly affected by power rationing policies, leading to reduced production and a significant decline in income.

It is reported that in the first half of this year, China's economic activity increased, coupled with the early arrival and wide range of high-temperature weather in the summer, driving rapid growth in national electricity demand. The national daily power generation and electricity load continued to climb, repeatedly hitting record highs, reaching 30.171 billion kWh and 1.339 billion kW respectively. The complexity and difficulty of ensuring energy and power security have significantly increased. However, the high level of coal supply played a role in ensuring supply, and the power shortage situation this year is relatively optimistic compared to last year.

The Power Planning and Design Institute released the "China Power Development Report 2023", which shows that the pressure on national power supply security is expected to remain high from 2024 to 2025. Extreme weather significantly increases the electricity load. Combined with the current progress of power generation and grid projects, it is expected that the number of regions with tight power supply and demand will increase to 14 in 2024.

Based on the urgent need to ensure power security, configuring industrial and commercial energy storage has become an important method for enterprises to provide emergency backup power and reduce energy costs. Industrial and commercial energy storage can guarantee short-term electricity demand, but for many regions where power rationing lasts for 15 days/21 days or even longer, distributed photovoltaic energy storage for industrial and commercial use has become the preferred solution. Data shows that in the first half of 2023, China added 19.44 GW of new industrial and commercial photovoltaics, an increase of 81% year-on-year.

The widening peak-valley price difference, midday valley electricity, and green certificate issuance enhance the economic viability of distributed photovoltaic energy storage.

On July 26, 2021, the National Development and Reform Commission issued the "Notice on Further Improving the Time-of-Use Electricity Pricing Mechanism", which mentions that in places where the expected maximum system peak-valley difference rate in the previous year or current year exceeds 40%, the peak-valley electricity price difference should generally be no less than 4:1; in other places, it should generally be no less than 3:1; the peak electricity price should be increased by no less than 20% based on the peak electricity price; and seasonal peak-valley electricity price differences should be reasonably set.

In addition, the notice also mentions encouraging industrial and commercial users to reduce peak-hour electricity load and increase off-peak electricity consumption through configuring energy storage, carrying out comprehensive energy utilization, and other methods, thereby reducing electricity costs by changing the electricity consumption period.

Since then, the time-of-use electricity pricing mechanism in various places has been continuously improved, and the peak-valley price difference has widened. Data shows that in 2022, the overall average maximum peak-valley price difference in 31 provinces and cities across the country was 0.7 yuan/kWh, with 16 provinces and cities exceeding the average, and 0.7 yuan/kWh is also the threshold price difference for industrial and commercial energy storage to achieve economic viability.

In August 2023, there were 22 provinces and cities with a maximum peak-valley price difference exceeding 0.7 yuan/kWh, with Shanghai ranking first with a maximum peak-valley price difference of 1.9 yuan/kWh. The average maximum peak-valley price difference in various provinces and cities was 0.757 yuan/kWh.

Currently, peak-valley price difference arbitrage is the main source of income for industrial and commercial energy storage in China. As the peak-valley price difference gradually widens, the economic viability of industrial and commercial energy storage has improved.

Since this year, 10 regions, including Qinghai, Ningxia, Gansu, Shandong, West Inner Mongolia, Xinjiang, Hebei, Zhejiang, Shanxi, and Liaoning, have introduced policies to implement valley electricity prices during certain months of the midday. This means that industrial and commercial energy storage in these regions can obtain greater returns by charging and discharging twice.

Among them, the valley electricity price in Qinghai, Ningxia, and Gansu lasts for 8 hours, and the peak electricity consumption and peak photovoltaic power generation time are basically consistent. In this case, the economic viability of stand-alone distributed photovoltaics is weakened to a certain extent. In addition to the fact that many local policies require distributed photovoltaics to be equipped with energy storage at 8%-30% of the installed capacity, the midday valley electricity policy will also promote the growth of distributed photovoltaic energy storage demand.

In addition, the "Notice on Doing a Good Job in the Full Coverage of Green Power Certificates for Renewable Energy and Promoting the Consumption of Renewable Energy Power" jointly issued by three ministries in August this year includes distributed photovoltaic power generation in the green certificate issuance scope. Green certificates can bring about an additional income of approximately 0.03-0.05 yuan/degree for wind power and photovoltaic projects. After the green certificate trading market becomes active, the relevant electricity is expected to obtain additional environmental premiums, which to a certain extent helps to improve the willingness to configure distributed photovoltaics.

Diversified profit channels, and "over-the-wall power sales" are expected to accelerate implementation.

Currently, direct subsidy policies for industrial and commercial energy storage are "blooming everywhere" in 12 provinces and cities across the country. Among them, Zhejiang, Guangdong, Jiangsu, and Anhui provinces have introduced more subsidy policies for industrial and commercial energy storage. Zhejiang Province's subsidy policies cover multiple cities and counties; Guangdong Province is mainly concentrated in the Pearl River Delta region; Jiangsu Province is mainly in Suzhou Industrial Park, Wuxi High-tech Zone, and Changzhou; Anhui Province is mainly in Hefei, Wuhu, and Bengbu.

The direct subsidy methods for industrial and commercial energy storage in various places are mainly capacity subsidies, discharge subsidies, and investment subsidies. Wenzhou's user-side energy storage discharge subsidy is the highest, reaching 0.8 yuan/kWh; Xiaoshan District, Zhejiang Province's one-time capacity subsidy is 300 yuan/kW; Guangzhou government's investment subsidy standard is the highest, reaching 30% of the industrialization cost, with a maximum amount of 10 million yuan.

The expansion of profit channels is an important driving force for the development of industrial and commercial energy storage. In addition to direct subsidy policies, local industrial and commercial energy storage industry support policies also include rewards or compensation policies for industrial and commercial energy storage participation in demand-side response, demand management, and auxiliary services.

It is worth noting that the reform of transmission and distribution prices will help the further implementation of the "over-the-wall power sales" policy. "Over-the-wall power sales" refers to the fact that distributed energy can directly sell electricity to surrounding users through the distribution network without having to sell it to the grid at a low price and then have users purchase it from the grid at a high price.

In October 2017, the "Notice on Conducting Pilot Programs for Marketized Transactions of Distributed Generation" proposed organizing pilot programs for marketized transactions of distributed generation, marking the official launch of over-the-fence power sales. However, disputes over grid connection fees have been a major reason for the slow implementation of over-the-fence power sales.

On May 15, 2023, the National Development and Reform Commission issued the "Notice on the Transmission and Distribution Prices of Provincial Power Grids and Related Matters for the Third Regulatory Cycle," marking the third reform of transmission and distribution prices since 2015. For the first time, it achieves full coverage of the same price for industrial and commercial users, expands the scope of implementation of two-part tariffs, and allows for the determination of capacity and demand charges according to voltage levels. Therefore, industrial and commercial users installing distributed photovoltaic and energy storage systems can simultaneously reduce both basic electricity charges and electricity consumption charges.

With Jiangsu and Zhejiang provinces taking the lead in clarifying grid connection fee standards, Ningxia and Guangdong have also successively introduced policies to actively promote over-the-fence power sales. The further promotion of over-the-fence power sales will broaden the profit margins for industrial and commercial photovoltaic and energy storage owners or operators. In addition, with the continuous exploration of virtual power plants and electricity spot markets, spot trading is expected to become a long-term profit growth point for industrial and commercial energy storage.

—Decreased initial investment costs, and long-duration energy storage shortens the investment return period

Batteries are the largest cost component of energy storage systems, accounting for approximately 60%, while lithium carbonate is a key cathode material, accounting for approximately 30%-40% of the cost of energy storage cells. Since the beginning of this year, lithium carbonate prices have been declining, recently hitting a new low for the year. Data shows that at the end of September 2023, the price of lithium carbonate had fallen below 170,000 yuan/ton, down approximately 400,000 yuan/ton from its highest point in November last year, a decrease of approximately 70%.

Based on the calculation that a single GWh battery requires approximately 600 tons of lithium carbonate, a decrease of 100,000 yuan/ton in the price of lithium carbonate will reduce the cell cost by approximately 0.06 yuan/Wh. In other words, the current cost of energy storage cells is approximately 0.24 yuan/Wh lower than in November last year.

With the decline in upstream raw material prices, the cost of energy storage cells has significantly decreased. Coupled with the large-scale release of production capacity leading to increased competition, the weighted average price of energy storage systems has dropped from 1.66 yuan/Wh in January this year to 1.051 yuan/Wh in September, a decrease of approximately 0.6 yuan/Wh.

Due to a certain lag in the transmission of upstream raw material prices to the end market, the price of energy storage systems is expected to continue to decline in the short term. For owners or investors, the high initial investment cost of industrial and commercial energy storage often makes it a deterrent. Reducing the initial investment cost of industrial and commercial energy storage can directly encourage owners or investors to increase their willingness to adopt it.

Long-duration energy storage technology will help to reduce the overall cost of industrial and commercial energy storage projects. According to the current peak-valley electricity price mechanism in various provinces and cities, the peak time generally exceeds 4 hours. Increasing the duration of energy storage will significantly expand the arbitrage space between peak and valley prices, effectively shortening the investment return period for industrial and commercial energy storage.

(Source: China Electric Power News)