New trend in energy storage: why is the future of industrial and commercial energy storage promising?

As China's new energy installed capacity continues to break through, the instability and uncontrollability it brings are impacting the balance of the power grid system. As a key flexible resource capable of supporting and ensuring grid security, energy storage has ushered in rapid growth in recent years. On March 15, 2021, General Secretary Xi Jinping proposed at the Ninth Meeting of the Central Committee for Financial and Economic Affairs the construction of a new power system, which pointed out the scientific direction for the development of energy and power in the new era and also provided a Chinese solution for the sustainable development of global power. On July 25, 2024, the National Development and Reform Commission, the National Energy Administration, and the National Data Administration jointly issued the "Action Plan for Accelerating the Construction of a New Power System (2024-2027)", which mentioned addressing "big problems" with "small incisions" to enhance the grid's ability to accept, allocate, and regulate clean energy. As a crucial part of the four major sectors of the new power system, the importance of energy storage is self-evident. What is energy storage? The definition of energy storage is easy to understand. Energy storage refers to the storage of energy through a medium or device, converting one form of energy into another or storing it in the same form, based on the need to release it in a specific form of energy during a cyclic process. Energy storage can be divided into three categories based on technology: electrochemical energy storage, electrical energy storage, and mechanical energy storage. In the past two years, China's new energy storage (referring to storage technologies other than pumped hydro storage, with the main form of output being electricity) has developed rapidly. The proportion of new energy storage in China's cumulative installed capacity of power storage has surged from 16% in 2022 to 40% in 2023. The achievements in the development of new energy storage are mainly attributed to the rapid development of electrochemical energy storage. By the end of 2023, the newly installed capacity of electrochemical energy storage reached 22.6 million kilowatts/48.7 million kilowatt-hours, with a year-on-year increase of 261% in power scale, which is three times the level of new capacity put into operation in 2022. Currently, electrochemical energy storage accounts for over 95% of new energy storage. According to the latest data released by the National Energy Administration, as of the first half of 2024, the cumulative installed capacity of new energy storage projects that have been completed and put into operation nationwide reached 44.4 million kilowatts/99.06 million kilowatt-hours, an increase of over 40% compared to the end of 2023.

China's industrial and commercial energy storage enters a rapid development stage

Energy storage can be divided into generation-side energy storage, grid-side energy storage, and user-side energy storage according to application scenarios. User-side energy storage is further subdivided into industrial and commercial energy storage and household energy storage, with the difference lying in the customer groups.

The main responsibilities of generation-side energy storage are to improve new energy consumption, smooth new energy output, etc.; the main responsibilities of grid-side energy storage are to alleviate transmission and distribution congestion, respond to grid dispatch, postpone the expansion of transmission and distribution equipment, etc.; the main responsibilities of user-side energy storage are to reduce terminal energy costs, consume distributed renewable energy, improve power quality, and ensure power supply reliability.

Due to the mandatory allocation of storage required by the state on the generation side, the current generation-side energy storage projects are the largest in scale and have the highest overall installed capacity. However, its problems have also become increasingly prominent. The utilization rate of mandatory allocated storage on the generation side is low, and the issue of "building but not using" is more prominent. Currently, most regions regard the allocation of energy storage as a prerequisite for grid-connected new energy power generation, but there is insufficient emphasis on how energy storage technology can coordinate and optimize operation with new energy power generation. Coupled with factors such as unclear business operation models and functional positioning, the utilization level of new energy storage allocation is generally low. According to the industry research results of the China Electricity Council in 2022, the equivalent utilization coefficient of new energy allocated electrochemical energy storage is only 6.1%, far lower than the average equivalent utilization coefficient of 12.2% for electrochemical energy storage across various application scenarios. The widespread construction of energy storage in new energy power stations without subsequent use is undoubtedly a waste of investment for the entire society.

The development of grid-side energy storage is also not smooth. The main sources of income for independent energy storage power stations rely on capacity leasing, spot electricity market transactions, capacity compensation, and auxiliary service markets. These sources of income are subject to long-term uncertainty and have a high dependence on local policies and grid dispatch. At the same time, due to the imperfect construction of the electricity market, some income models cannot be realized in many regions.

Due to its rich application scenarios, high utilization rate of energy storage systems, easy judgment of investment returns based on peak and valley electricity prices, and clear business models, industrial and commercial energy storage in user-side energy storage has received widespread market attention in recent years. It has achieved rapid development in regions such as Zhejiang, Jiangsu, and Guangdong, and has become the energy storage scenario with the highest degree of marketization development. According to incomplete statistics from the CESA Energy Storage Application Branch's industrial database, from January to June 2024, the total number of domestic commercial and industrial energy storage project filings exceeded 4,200, with a scale of 6.2GW/14.7GWh and an investment amount exceeding 24 billion yuan.

Profit Models of Commercial and Industrial Energy Storage

There are currently three main profit models for commercial and industrial energy storage: peak-valley arbitrage, demand management, and power demand response. Let's introduce them separately.

Peak-valley arbitrage: Peak-valley arbitrage is one of the main profit models for commercial and industrial energy storage. By purchasing low-priced electricity from the grid during low-price periods and storing it in an energy storage system, and discharging it to supply load during high-price periods or peak periods, enterprises can reduce their electricity expenses.

According to industry estimates, the internal rate of return (IRR) for commercial and industrial energy storage projects with a two-charge and two-discharge model in Zhejiang can exceed 30%. More than 20 provinces, including Guangdong, Jiangsu, Shanxi, Zhejiang, Henan, Chongqing, Tianjin, Hunan, Hainan, and Shaanxi, have the potential to implement the two-charge and two-discharge model. The general strategy adopted in these provinces is "valley charge and peak discharge + flat charge and peak discharge", while some regions can achieve two rounds of "valley charge and peak discharge", further amplifying the benefits of commercial and industrial energy storage.

Demand Management: China adopts a two-part pricing system for large industrial electricity consumption with a capacity of 315kVA and above. The electricity cost refers to the electricity price calculated based on the actual electricity usage of the user, while the basic electricity price refers to the electricity price charged based on the user's receiving transformer capacity (charged by capacity) or maximum demand (charged by demand).

After installing an energy storage system, factories that charge the basic electricity price based on demand can formulate scientific power charging and discharging strategies by monitoring the user's real-time power. During peak load periods, the energy storage system can stabilize the factory's energy consumption load fluctuations, reduce the user's demand electricity price, and reduce the factory's electricity cost.

Power Demand Response/Participation in the Electricity Market: Power demand response refers to obtaining subsidies by cooperating with local power grid demand response in the form of aggregation and virtual power plants. In addition, commercial and industrial energy storage can also earn profits by participating in spot electricity trading, frequency modulation services, voltage support, and other auxiliary services. Currently, the southern regional electricity market has started trial operation, and relevant policies have clearly stated that market entities such as energy storage will be introduced to participate in green electricity trading in a timely manner. With the continuous deepening and improvement of the electricity market construction, the ways for industrial and commercial energy storage to participate in the electricity market will also become more flexible and diverse.

Is industrial and commercial energy storage overheated or promising for the future?

As mentioned earlier, industrial and commercial energy storage experienced exceptional growth in 2023, with industry players flocking in. However, statistics from the first half of 2024 show a slowdown in the growth rate of the industrial and commercial energy storage market. Recently, I have observed articles published on some media platforms expressing concerns about the future development of industrial and commercial energy storage, even using terms like "recession" to express pessimistic expectations about its development.

People's concerns about the future development of industrial and commercial energy storage mainly manifest in two aspects. On the one hand, at the supply end of energy storage product equipment, intensified market competition has led industrial and commercial energy storage equipment manufacturers to engage in a price war, with prices in the industry chain continuing to decline and profits becoming increasingly meager. On the other hand, at the application end, a large number of industrial and commercial energy storage projects that rely on simple peak-valley arbitrage for profit are highly susceptible to the impact of adjustments in the peak-valley electricity pricing mechanism. Changes in the peak-valley price difference or even the peak-valley electricity pricing mechanism itself can greatly affect the economic viability of these projects. Indeed, there are hidden worries in today's continuously deepening marketization reform of energy and electricity.

However, we must also view the above issues dialectically. The development of the energy storage market has made great leaps forward, and market competition is fierce. Integrators and product suppliers use low-price strategies to seize the market, and industry profit margins continue to decline. This is a problem faced by the entire energy storage integration and manufacturing industry. Whether it is large-scale storage or industrial and commercial energy storage, it has become an industry consensus that not all players can survive in the cruel market baptism. This is not directly related to the scenario of industrial and commercial energy storage. As for the risk of earnings volatility brought about by adjustments in the peak-valley electricity pricing mechanism, objectively speaking, it does exist. However, in addition to the mechanical peak-valley arbitrage operation mode, industrial and commercial energy storage also has other profit points such as demand management and participation in demand response. Moreover, with the continuous deepening of the electricity marketization reform, industrial and commercial energy storage will also have more economic profit channels, such as electricity spot trading, frequency modulation auxiliary services, and participation in virtual power plants through aggregation. Facing the future energy storage operation strategies of new power systems and electricity markets, the requirements for energy storage project operators will be higher, and it will not just be a simple mode of peak-valley arbitrage.

Based on these two understandings, I believe that industrial and commercial energy storage remains the most promising direction in the future energy storage field.

Firstly, industrial and commercial energy storage is a key link in the construction of regional smart microgrids/virtual power plants and the integration of regional power source, grid, load, and storage. It will play an increasingly important role in the construction process of new power systems. The construction of a new power system with a high proportion of renewable energy penetration has made the demand for flexibility resources on the user side increasingly urgent. In August this year, the National Development and Reform Commission, the National Energy Administration, and the National Data Administration jointly issued the "Action Plan for Accelerating the Construction of a New Power System (2024-2027)", which clearly focuses on nine special actions to be carried out from 2024 to 2027 to promote the effective construction of a new power system. These actions, including the improvement of new energy system friendliness, optimization of power system regulation capability, and enhancement of demand-side coordination capability, all focus on the construction of distributed energy and demand-side flexibility. In the next stage, the construction of China's new power system will place great emphasis on the regulation and flexibility resource scheduling on the load side of electricity consumption. The main power grid, regional microgrids, and virtual power plants will support and interact flexibly with each other, which is an important morphological characteristic of future energy systems. On the other hand, industrial and commercial energy storage is one of the core devices for building an integrated source-grid-load-storage microgrid and virtual power plant flexibility. Currently, there are numerous practices in the construction of industrial and commercial enterprise/park microgrids, and energy storage is an indispensable component of the system. Secondly, industrial and commercial energy storage is an essential cost-reducing and efficiency-enhancing technical means for industrial and commercial users and their energy supply service providers in the electricity market. Following Shanxi, the south (starting with Guangdong), and Shandong, Gansu Province became the fourth province in China to officially operate the electricity spot market on September 5th. The pace of construction of China's electricity spot market is significantly accelerating, which is also a microcosm of the acceleration of China's electricity marketization construction. As the pace of electricity marketization accelerates, electricity price signals become stronger. For industrial and commercial electricity users and related service providers such as electricity sales services and integrated energy services, how to control the significant fluctuations in electricity usage costs in the rapidly changing electricity market, and even utilize electricity market transactions to obtain additional profits, is a question that must be considered. The peak shaving and flexible scheduling characteristics of energy storage are the key to solving these problems. It can be expected that the demand potential for industrial and commercial energy storage in the user-side market will continue to be further released in the future, which will also benefit the development of industrial and commercial energy storage formats. Admittedly, for industrial and commercial energy storage product suppliers, fierce market competition will eventually lead to a large number of players exiting the market. For energy storage operators, without advancing operation and management strategies, they will inevitably be eliminated by the future market. However, the industrial and commercial energy storage sector still has great potential in the future market. It will ultimately play a greater role in the construction process of new energy systems and power systems, creating greater value and providing a broader stage for future electricity users and energy and power service providers. Let us wait and see!