Crises Threaten China’s Booming Energy Storage Market

A Report on China’s Energy Storage Industry and the Sustainable Development Goals (SDGs)

Introduction

Authored by Kevin Shang, Senior Analyst, Wood Mackenzie

The Importance of Renewable-Based Power Systems for China’s SDGs

A renewables-based power system is key for China to achieve peak carbon emission and carbon neutrality goals. Energy storage is a critical technology that can make future power systems flexible by shifting supply and demand. For the 14th Five-Year Plan, the China State Council set a national target of installing 30 gigawatts (GW) of non-hydro energy storage by 2025, while provincial goals were more ambitious.

The Growth of Energy Storage in China

Clear policy guidance and strong renewables growth make energy storage a rising star in China’s clean energy technology industry. In 2023, China installed 22.7.5 gigawatts (GW) /48.7.6 gigawatt per hour (GWh) of energy storage, more than quadrupling the number in 2022, making it the global leader in deploying this technology. Staggeringly, more than 40% of energy storage-related companies in China were registered in 2023 alone. They span from traditional energy firms, renewable energy players and EV battery manufacturers to start-ups with little experience in the energy sector, all of which have realised the potential of energy storage.

Challenges Faced by China’s Energy Storage Industry

Despite this rapid growth, China’s energy storage industry is still in its infancy, and crises has arrived much earlier than expected.

A Persisting Price War and Overcapacity Weigh on Profits

Back in 2021 and 2022, battery supply was the biggest bottleneck for the energy storage supply chain. Stationery energy storage system (ESS) integrators and developers spent a considerable amount of time negotiating contracts with battery manufacturers who were instead prioritising automaker clients. Since the second half of 2022, battery cell plants dedicated to the ESS sectors have risen in China, with more than 20 plants announced by the end of 2023. However, less than half of the ESS battery cell capacity was utilised throughout the year. Within 2023, the ESS battery cell market went from a deficit into a surplus. Together with declining battery raw material prices, the price of ESS lithium iron phosphate (LFP) battery cells plummeted by more than 30% within 2023.

The energy storage system market is even worse. Wood Mackenzie’s ‘China grid-scale winning bid price tracker’ shows that the average bid price of 2-hour grid-scale battery energy storage systems reached US$106.4/kWh in Q1 2024, plunging by 45.1% compared to the same quarter in 2023. Domestic oversupply is forcing manufacturers to battle fiercely for market share with aggressive bid strategies and little margin.

Significant Hurdles for Chinese Energy Storage Companies with Overseas Ambitions

Facing intense domestic competition, Chinese energy storage companies are keen on overseas markets but face bigger hurdles, especially in the US, the largest energy storage market outside China.

The US Inflation Reduction Act is driving investment in localised energy storage supply chains. However, the rise of geopolitical rivals and trade policy uncertainty is pushing American energy storage system integrators and developers to give more weight to security factors, while navigating supply chain decision-making rather than sticking to cost-competitive products from China.

In December 2023, US lawmakers banned the Department of Defense from purchasing batteries produced by China’s six leading manufacturers, including CATL and BYD, beginning in October 2027. Amid growing protectionism and “Build America, Buy America” spirit in the US, many in the industry believe that there will likely be a ban on Chinese batteries once domestic ESS battery supply can meet the US demand, which is forecasted to be possible later this decade.

In sharp contrast, Europe’s energy storage industry remains hooked on Chinese low-cost and high-quality products. However, it remains to be seen how fast the European energy storage market can grow amid regulatory uncertainty and market saturation. In addition, the European Commission has eased rules on state aid to support home-grow battery plants. As a result, it may leave limited growth opportunities for Chinese suppliers.

Price Competition and the Need for Long-term Growth

While Chinese players are competing on price, Western companies are focusing on improving the safety, availability and performance of energy storage systems. This is being achieved by enhancing software expertise and upgrading system designs. Some others are actively calling for governments to revise the electricity market design to create more opportunities for energy storage.

Unfortunately, Chinese energy storage players have restricted opportunities to fully display and test their storage systems’ performance as a significant portion of these systems sit idle. Most Chinese provinces mandate that wind and solar projects be paired with a certain rate of energy storage between 5% to 20%, with the intention of enhancing power system flexibility and achieving high levels of renewable energy. But expectations are far from reality. In 2023, the utilisation rate of grid-scale battery energy storage systems (BESS) was only about 30% of the designed hours because of a lack of sustainable business models.

It’s no secret that many project developers purchase energy storage systems only to meet the mandatory integration policy. These developers are hungry for low-cost storage products on the market with little care about the quality and performance, as they know those systems may never be used.

As the competition continues to intensify, many newly established Chinese storage companies will collapse. It will be unfortunate, of course, but it may present a good opportunity for the Chinese energy storage industry to reflect on how to achieve long-term and sustainable growth.

SDGs, Targets, and Indicators

1. Which SDGs are addressed or connected to the issues highlighted in the article?

• SDG 7: Affordable and Clean Energy
• SDG 9: Industry, Innovation, and Infrastructure
• SDG 13: Climate Action
• SDG 17: Partnerships for the Goals

The article discusses the importance of renewable energy and energy storage in achieving China’s carbon emission reduction and carbon neutrality goals. This aligns with SDG 7, which aims to ensure access to affordable, reliable, sustainable, and modern energy for all. The article also highlights the growth of China’s energy storage industry, indicating progress in SDG 9, which focuses on building resilient infrastructure, promoting inclusive and sustainable industrialization, and fostering innovation. Additionally, the article mentions the need for energy storage to support climate action efforts, linking to SDG 13. Lastly, the article mentions the importance of partnerships and international cooperation in the energy storage industry, connecting to SDG 17.

2. What specific targets under those SDGs can be identified based on the article’s content?

• SDG 7.2: Increase substantially the share of renewable energy in the global energy mix
• SDG 9.4: Upgrade infrastructure and retrofit industries to make them sustainable
• SDG 13.2: Integrate climate change measures into national policies, strategies, and planning
• SDG 17.6: Enhance North-South, South-South, and triangular regional and international cooperation on and access to science, technology, and innovation

Based on the article, the targets identified include increasing the share of renewable energy in China’s energy mix (SDG 7.2), upgrading energy storage infrastructure to make it sustainable (SDG 9.4), integrating climate change measures into national policies (SDG 13.2), and enhancing international cooperation in the energy storage industry (SDG 17.6).

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

• Installed capacity of non-hydro energy storage by 2025
• Number of energy storage-related companies registered in China
• Installed capacity of energy storage in China in 2023
• Average bid price of grid-scale battery energy storage systems in China
• Restrictions on purchasing Chinese batteries in the US
• Growth of the European energy storage market
• Utilization rate of grid-scale battery energy storage systems in China

The article mentions several indicators that can be used to measure progress towards the identified targets. These include the installed capacity of non-hydro energy storage by 2025, the number of energy storage-related companies registered in China, the installed capacity of energy storage in China in 2023, the average bid price of grid-scale battery energy storage systems in China, restrictions on purchasing Chinese batteries in the US, the growth of the European energy storage market, and the utilization rate of grid-scale battery energy storage systems in China.

Table: SDGs, Targets, and Indicators

Behold! This splendid article springs forth from the wellspring of knowledge, shaped by a wondrous proprietary AI technology that delved into a vast ocean of data, illuminating the path towards the Sustainable Development Goals. Remember that all rights are reserved by SDG Investors LLC, empowering us to champion progress together.

Source: forbes.com

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