China’s State Grid Corp (SGCC) delivered a shock to the market last week by the announcement to scrape investment on the energy storage capacity and establish higher return thresholds for future investment decisions.
The strategy came just a month after China Southern Power Grid unleashes a similar CapEx cap policy, reflecting a common trend of the two grid companies.
Still monopolies of the market, the dup are targets of an ongoing electricity market reform, which sets to reduce the grid’s dominance over the market. To do so, Beijing’s policymaker ordered the grids to cut transmission & distribution prices, while introduced rules to limit their investment scope. These reformative measures led to lower profitability of the networks, thus pushing the two to scale back from their aggressive business expansion approach.[READ our analysis on the causal relation of the power market reform and grid’s decision to scale back investment]
The reform, thus, brought unexpected impacts on some energy sectors that used to be fueled by grids’ funding. Battery energy storage and hydro-pumping, in that sense, could be the first casualty, as we mentioned in the previous analysis.
But it is not all “bad news.” Some other sectors are poised to benefit from grids’ transformation.
Tech & Digital Firms to Benefit from Grid’s Digitalization
Just days after the internal austerity policy, SGCC set off a 2020 construction plan for the construction of a “Ubiquitous Electric Power IoT” network (e-IoT, 泛在电力物联网).
The plan sets to increase investments in digitalization and information tech applications covering 47 areas—more than double this year’s 20 digitalization construction tasks.
The investment amount for completing these digitalization tasks is estimated to reach around ¥60bn next year, which is more than double of SGCC’s digitalization spending in 2019.
The 47 tasks point to a wide-range to digitalization procurements in 8 directions:
- Energy Eco-system Construction: set off demonstrative tests on software, digital platforms that aim at improving electricity dispatch, demand-side management, electricity spot trading, and energy efficiency; develop “big data” and cloud-computing-based applications in renewables, electric vehicles, electricity retail, and finance sectors
- Smart Services: look into deploying digital solutions to 1) integrate power distribution and retail trading; 2) innovate retail models; 3) develop an innovative “electricity trading platform.”
- Optimized Operation: deploy hardware and software to boost: 1)automation of the grid dispatch; 2) digitalization of grid construction and operation
- Smart Management: software that improves human resources and supply chain management
- Data Center Construction: as a top priority, to build both a group-level and multiple provincial-level data centers with transmission & distribution data as well as customer data; start to look into applications for data mining
- IoT: to construct IoT network regarding grid equipment, electricity users, and three other areas
- Cloud Computing the “Foundation”: to build an “SGCC cloud” and grid security cloud platforms; to achieve 100% cloud-based dispatch; to develop a cloud-based GIS platform
- Technology Research: push forward technology applications of 5G, Blockchain, and artificial intelligence on the operation of the grids
Various IT and tech providers with electricity market solutions could benefit from SGCC’s digitalization construction in 2020, as wide-range procurements to be involved.
New Emphasis on “Smart Grid”
Constructions to take place in 2020, however, is only the beginning of the Chinese grid companies’ digitalization transformation.
The industry is now expecting to see a spending increase of the two grids on hardware, software, and digital solutions, as the duo look to step up their game in smart grid development.
The term “smart grid” is nothing novel to the industry.
But the grids—especially SGCC—adopt a new business/investment focus for its smart grid development.
Formerly, SGCC’s smart grid is closely related to the ultra-high voltage grid (UHVs) network construction. In the realm of its former leader Liu Zhenya who steer SGCC for over 12 years, the firm mostly emphasized UHVs and physical electricity asset investment to boost business expansion and network stability.
Under that methodology, SGCC (as well as CSG) has surged to become the global leader in UHV investment. But other players in the market have been criticizing and doubting the necessity of the massive infrastructure spending. Many of the UHVs are criticized for the low utilization rate due to poor investment planning in the first place.
When Liu retired from the post, his methodology was followed by Shu Yinbiao during 2016-2018, who was quickly replaced by the current chairman Kou Wei.
Since taking over in 2018, Kou has drastically shifted the firm’s “smart” focus, introducing a new vision to build an electricity network plus IoT (e-IoT).
The e-IoT appears to be the new smart grid definition.
E-IoT, essentially, is to deploy blockchain, AI, cloud computing, 5G, edge computing, and other digital/tech solutions upon the physical grid operation. Kou believes there should be a paralleling online network on top of the physical grid operation.
Kou also set out a new positioning of the grid in the electricity market. Instead of a dominant single buyer and seller, the new head said SGCC would transform to serve the market as a shared “platform” and a “hub”. (平台型，枢纽型，共享型).
The new strategies are branded as “two networks and three functions” (三型两网), which won extensive support from the industry. The vision wisely fits into Beijing authority’s “internet plus” strategy and voluntarily reducing grids’ expansion and dominance in the market.
It is better to trust that SGCC’s new strategy appears to stay. It is not just a strategy using a bunch of buzzwords. Instead, it is a transformation strategy backed by Beijing’s top decisionmaker.
A clear proof is that, although Beijing’s authorities have been keen to talk about the “internet plus” electricity” strategy ever since 2014. There were a limited investment and business moves of the grids on adopting such vision— until now.
Establish an Electricity IoT by 2026
In 2019, SGCC has clearly stepped up its game in digitalization.
Earlier this year, Kou set off a landmark “white paper” for the e-IoT development, which set a grand vision to “establish an initial construction of the E-IoT network by 2021 and complete the E-IoT network development by 2026.”
In 2019, 27 demonstrative programs are ordered to kick-off, leading to four rounds of digitalization procurements. The total investment for digitalization is estimated to reach ¥30Bn in 2019.
But grander plan awaits in the coming years.