Challenges Facing China’s Stationary Battery Storage Market

Although 2018 saw enormous growth in new front-of-the-meter (FTM) battery storage projects (BES), many problems that have plagued the industry since its inception have yet to be resolved. Below, I explore four key challenges currently facing the Chinese BES market.

Weak Policy Direction

In 2017, authorities published China’s first national level policy on energy storage. As a result, optimistic market predictions resulted in droves of enthusiastic investors flocking to a rather small-scale industry. Soon, over one hundred companies were competing in an increasingly narrow market. In the past 2 years, the overwhelming majority of policies released are filled with rhetoric, failing to outline a practical course of action for the industry. Policy direction is paramount to industry structure and to the success of energy storage companies. More developed markets have shown that cohesive stimulus policies and market mechanisms are key for BES to scale. China, aside from subsidies, can support the BES market with tools including financing and taxation.

Inadequate Market Mechanisms 

Both behind-the-meter (BTM) and FTM BES systems have limited opportunities to participate in China’s energy markets. These limited opportunities are due to China’s ancillary service markets and spot markets still being in the beginning stages of development. As such, energy storage has limited room to participate. Only Shanxi, western Inner Mongolia, Guangdong, and the Beijing-Tianjin-Tangshan area have opened markets for frequency regulation provided by energy storage systems connected directly to thermal generators. These markets do not allow for energy storage to operate as independent market entities. In addition, without a proper mechanism, cost reductions are near impossible. For BES to reach its full potential, power market reforms that effectively allocate resources are crucial. 

Failure to Consider Battery Storage a T&D Asset 

In April 2019, the release of “Transmission & Distribution (T&D) Pricing Cost Supervision Methods (Draft for Comment)” omitted energy storage in T&D resource pricing. Supporters of the policy claim it allows grid companies to focus attention on other services that have not been monopolized to be marketized. Opponents of the policy claim that grid planning has been designed based on the maximum load, and that BES should be employed as a resource during peak periods of demand to prevent costly investments in traditional T&D infrastructure. 

Many questions remain. If energy storage is used in place of traditional T&D network resources, how should this value be determined? If the investment is made through social capital, is the grid willing to pay? The inclusion of BES as a T&D asset would enable grid companies to defer investments in more costly upgrades like feeder lines and substations. In the end, the power grid's movements are expected to largely determine the future of the BES market in China.

Lack of Financing Options

Since BES does not have strong national policy support in China, banks have high credit requirements for developers looking to finance BES projects. According to a source at CR Leasing, projects with better profit prospects (such as BES combined with thermal generators for frequency regulation) have an annual interest rate of financial leasing of roughly 9%. In comparison, BTM BES financing is much more difficult, since declining commercial and industrial electricity prices have resulted in lower than expected profits. In addition, land taxes and fees related to grid connection and grid linkage (among others) have pushed BES costs up—eliminating expected profits and becoming a leading factor in curbing the slow-down in the Chinese BES market.