Battery-based Energy Storage in China: New Infrastructure Investment Strategy Provides New Momentum Amid COVID-19

Our recent research on the battery-based energy storage sector suggests that the nascent market is still of great potential and may face a boom in the coming years, despite a policy last year that put a brake on power grid companies’ investment into the sector. 

And due to the COVID-19 global pandemic and the looming global recession, several policy-and-market factors have changed, which provide new momentum for battery storage to grow in the country.  [Read More About This Topic: Our Analysis of the COVID-19 Pandemic’s Impact on China’s Energy Sector]

We also shared our views on the six business models for BES to develop in China. 

Battery Storage, A Setback in 2019

Chinese manufactures have been enjoying the rise of a booming BES market already—but inn overseas. Domestically, however, 2019 was a year of setback.  

The country as a whole produced some 3.8GWh lithium-ion energy storage cell, which increased by 26.7% year-on-year. 

The growth, however, mainly thanks to the international market. Whereas sales for the domestic market, just 0.7GW, plummeted 75% YoY last year. Oversea and for domestic demand account for 82% and 18% of the total production mix. 

The sharp decline of domestic consumption is due mostly to a policy change introduced by last May. Beijing has been auditing cost of the power grid companies to develop transmission & distribution power pricing. The May policy set clear that the energy storage investment by the power grid companies— the largest investors in China’s electricity sector—will be disregarded in the transmission pricing audit. [Read More about China’s Reformative Measure Against the Grid’s Interest]

Soon after the policy, series of battery storage projects under planning were stranded, as grids ceased new investment. We have previously introduced this unexpected “casualty” triggered by Beijing’s power market reform (against the “monopoly” grids). 

Last year, the world added 1.58GW battery storage capacity, with a 56.98% decreased from 2018, mainly due to this policy change in China.  

While the Chinese market is likely to suffer from the retreat of grids’ investment in the near term, battery suppliers still anticipated robust development in the U.S., Australia, India and other countries with secure subsidy packages. 

Meanwhile, if the history of solar power tells us anything, the setback for BES may not be there for long. And the country is likely to revamp constructions that require the support of battery energy systems. 

Three New Incentives for BES to Grow

New policy factors may provide further incentives for growth. 

  • “New Infrastructure” Provides New Momentum 

As we mentioned, Beijing unleashed a “New Infrastructure” investment stimulation strategy in a bid to combat the economic downturn worsen by the global COVID-19 pandemic. If you have not heard of the buzzword “new infrastructure” before, you will hear about it a lot more in 2020. [Read More about China’s New Infrastructure Investment Strategy to Combat Economic Downturn]

The policy calls for state-owned enterprises (as well as local government) to invest in seven major “new” infrastructure sectors. These include 5G telecommunication network, data centres (IDCs), electric vehicle charging, ultra high voltage transmission grid, as well as new energy railway system.   

Construction in several of these sectors creates new demand, directly, for battery-based energy storage systems (BESS)—in particular, the expansion of China’s 5G network, data centres, new railroad, and E.V. charging all require BESS investment and construction. 

The expected heated 5G network development, as well as 4G upgrade, provide a significant growth momentum for BESS. 

On the other front, China’s building and upgrading its grid network bring indirect opportunity. Notably, part of the new UHV networks is to transmit the mega-production from renewable sources far away from the consumption hubs. For these power complexes, a hybrid solution combining renewable and BESS would become a desirable option.

And as the renewable penetration rate climbs, the grid operator must increase their dispatch capability, too, which would spar new business opportunity for battery-based auxiliary services providers.  

Overall, the new infrastructure policy is good news for the country’s BESS development.  

  • Renewable Power Market Slow-Down Could be Good News?  

Renewable and power market will embrace challenges as the global pandemic continues and disruption of economic activities deepen. 

In Jan-Feb Chinese power market is hit by a historical 7% consumption decrease (as well as a 12.2% decrease of consumption YoY growth). Amid global standstill caused by COVID-19, slow-down of consumption growth seems inevitable, and an overall consumption cut is likely. 

The decline adds insult to the injury of the power overcapacity in China. Severe renewable curtailment is likely to revamp soon. Already, we saw a handful of local governments in the past week to suspend new wind and solar power development in 2020 F.Y., under the mounting pressure of high renewable curtailment (waste) last year. [Read More: News about Hunan province’s announcement to suspend new wind projects in 2020]

The slow-down of renewable project development is barely good news in the short term. It does exhibit the market value of the hybrid solution of renewable and BESS in a longer run. 

In the coming years, Beijing is likely to prioritize the development of renewable complexes that combines energy storage and local consumption solution. Battery has a critical role to play. 

Meanwhile, distributed renewable plus battery storage system—a common model in the U.S.—has yet to develop in China fully. As the traditional power generation and consumption model is under-challenged, the market is slowly moving towards distributed and off-grid options, which is an opportunity for storage battery sector. 

  • Spill-over Effect of the Mobility Battery Supply Chain   

Cost reduction in the battery sector could be a game-changer in the energy market. Seemingly far-fetch, the booming E.V. sector could support storage battery development as well. 

Although the market deploys different battery technology for electric mobility and energy storage system (ESS), some leading Chinese E.V. battery providers have well prepared to set foot in ESS. 

The star company CATL, a supplier for Tesla now, is a good example. Our corporate research suggests the firm has recently set up a joint venture with China State Grid, which is tasked to develop BESS projects in China’s northwestern wind power production hub. CATL has already established its product line for the ESS market, we notice. 

Another rising trend in China is to research and deploy secondary (recycled) batteries in the ESS applications (such as 5G network’s stationary power). New business model would be opened up for recycling the LFP batteries commonly deployed in E.V.s.  

BESS Potential Business Model in China

To summarize, while grid companies’ reduction of investment in BESS may be a blow to the nascent sector. BESS industry is, in fact, at a crossroad and is looking to explore multiple business potential in China. 

Below is our summary and comments of the potential business logics for BESS in China.

  • BES Plants for Electricity Price Arbitrage: a determining factor is electricity pricing. It is well known that China has yet to fully develop a liberalized electricity market where demand and supply fundamentals would determine peak/off-peak pricing. However, the peak/off-peak pricing catalogue does exist in China–in a regulated fashion. And in provinces with steep peak-and-off-peak price differences, BES plant built for price arbitrage has become possible. Right now, Guangdong, Jiangsu, Shanghai region markets provide soil for the arbitrage model.  
  • Demand Side: Solar + Battery Model: yet to fully develop in China. But it faces some uncertainty as Beijing intends to curb and cut retail electricity prices. In 2020, some 9.9GWh demand for BES is expected.  
  • Stationary Power for 5G Network: a new a rising area. Between 2020-2023, equity researchers projected 7.6GWh, 9.9GWh, 10.8GWh, 11.9GWh demand. LFP batteries and the recycled battery will be the key technology. 
  • BES as Auxiliary Services Provider (teamed with Thermal Power): saw some booming development in 2018 but faces set back now, due to unclear policy preference.  
  • BES as Auxiliary Services Provider (invested by the grid): hit hard by the 2019-May policy of NDRD that disregard the investment into grid pricing audit. Logically speaking, BES remains a good option for grid frequency control and dispatch capacity expansion as renewable penetration continues to climb in China. 
  • Supply Side: Auxiliary Services or Hybrid Solutions: on remains in a demonstration stage. In the long run, this model faces many uncertain factors—are there alternative models to improve local renewable consumption (say, hydrogen production)? The policy preference on who should pay for the cost of the auxiliary service. 

The Deja Vu: China’s Battery-based Energy Storage and Solar PV

The situation facing China’s battery energy storage (BES) today resembles what happened in the country’s solar P.V. sector a decade ago. 

In both cases, Chinese manufacturers first benefit from the rising demand from oversea, as foreign governments introduced new subsidy and financial incentives. (i.e. then engiewende in Germany for China’s P.V. manufacturing market; now the ITC and MACRS policy for BES ) 

In both cases, the equipment suppliers initially faced a lukewarm domestic market, due to the absence of (or limited) policy support for project development. China only became the top solar installation market after 2013, while the global solar capacity growth was initially driven mostly by countries like Germany. 

Similarly, right now, the U.S. is by far the key BES market, while China lags behind.  

What happened since 2013 in the Chinese solar power market was well documented. The country witnesses a solar power boom in the past decade and become the largest photovoltaic builder—not just an equipment provides any longer.

Series of policy and market factors contributed to the boom. While the renewable feed-in tariff is undoubtedly a key factor, the quickly cost reduction of photovoltaic and the new business models are equally decisive. 

The question is: if history tends to repeat itself, should we expect a similar development path of China’s battery energy storage market soon?