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In a major policy shift toward electricity market liberalization, China has introduced contract-for-difference (CfD) auctions for renewable energy plants and removed the energy storage mandate, which has driven up to 75% of the countrys demand to date. S&P Global expects the move to reverberate throughout the global battery energy storage supply chain, further depressing already historically low prices. New renewable energy plants in China will no longer be required to build storage systems to obtain development and grid connection rights. Since their introduction in 2022, policy mandates requiring solar and wind power projects to include energy storage systems have been crucial in accelerating storage deployment in China. To date, more than 20 provinces have issued such mandates, and some provincial governments have increased their mandatory ratios for energy storage projects to 20%, up from 10% a couple of years ago. These requirements have helped mitigate the renewable energy shortage in China. However, they have also increased the operating costs of renewable energy projects, and many project owners have reported low utilization rates of their storage systems. The new policy, enacted last month and set to take effect on June 1, redefines how renewable energy plants are remunerated in China. It introduces CfD auctions for wind and solar projects, opening the door to more market-oriented pricing and potential price cannibalization. Until now, renewable energy generators in China were compensated with a combination of a fixed payment based on the average price set by coal-fired power generators plus a small portion of market-based payments. However, with the rapid decline in renewable energy prices, this type of compensation is now considered overly generous. Chinas new CfD model will be similar to the UKs, with a strike price capped at the coal generation price. Renewables will be charged less, and all this energy will go into energy markets rather than being paid at a fixed purchase price. This is a major shift toward rationalizing renewables, but it masks the removal of the energy storage mandate, George Hilton, director of research and analysis at S&P Global, told ESS News . Impact on the global supply chain S&P Global estimates that the storage mandate has driven between 50 and 75% of domestic demand. Given that China will account for around 56% of global energy storage demand in 2024, the impact of this policy shift will be enormous. China was on track to install more than 60% of all the worlds utility-scale storage by 2025, so absent further policy changes, about 45% of global demand has just disappeared, Hilton says. The domino effect on the global supply-demand balance will put further downward pressure on energy storage prices. A broader base of cheaper suppliers will seek to expand abroad, pushing prices down. On the other hand, those with a strong position outside of China, such as Sungrow, will be less affected. What we can expect, and were already seeing in recent tenders in the Middle East, are very low prices. These are the prices from recent tenders in China plus export costs, which amount to between $70 and $80/kWh, Hilton says. Beyond the Middle East, similarly low prices can be expected in Southeast Asia, Latin America, and, to some extent, Europe. Looking ahead, China could introduce a policy of more direct support for storage and restore balance. In the short term, however, the cooling of demand in China under the new policy framework is likely to be felt starting next year. The price being paid right now is higher than what generators will be able to secure after these changes are introduced, so were seeing a rush to secure projects before June 1, Hilton says. Without a mandate in place, energy storage systems will have to be commercialized in electricity markets. However, making energy storage profitable in a market-based model is not an easy task in todays China. Beijing has set a goal of establishing a unified national electricity market with prices determined by supply and demand by 2030. However, only a limited number of provinces have launched wholesale market operations, making some of the main sources of revenue for energy storage, such as arbitrage, unviable in most parts of the country. |
