China’s North Now Open to Energy Storage

This month, Chinese policymakers passed the most substantial energy storage policy since power sector reforms began last year. The policy, “Announcement on Promoting Electrical Storage Participation in Ancillary Service in the ‘Three Norths’ Region” (the Announcement) opens up tangible regulatory pathways for energy storage deployments in China’s northeastern, north-central, and northwestern provinces, where high penetrations of wind power and must-run coal-fired power plants have created a need for better grid balancing.

During periods of grid oversupply, generators in China’s northern grids earn money when grid operators call on them to steeply reduce output or shut down, an ancillary service called “peak regulation (调峰)”. The Announcement now allows energy storage to earn money by absorbing this oversupply – allowing coal-fired generators to improve efficiency and reducing curtailment for wind and solar.

This is particularly valuable in China’s north because of the large deployments of combined heat-and-power coal-fired plants that provide district heating during the frigid winter months. Because these power plants must operate regardless of demand – homes have to stay heated – renewables end up getting curtailed during periods of low demand. The Announcement opens a new value stream for energy storage to address oversupply conditions and store the wind and solar energy that would otherwise be curtailed.

Interestingly, the policy allows both in-front and behind-the-meter energy storage to participate. Generator-side energy storage is required to be able to deliver 10 MW for four hours at a time. These installations will be compensated using existing payment schemes for coal-fired generators. The size requirements and compensation mechanisms for aggregated behind-the-meter installations have not yet been announced.

A little back-of-a-napkin number crunching suggests that this policy will significantly reduce the payback period for energy storage projects co-located with wind farms – to as little as five years under certain circumstances.

The (Rough) Math

Suppose that a 10 MW, four-hour energy storage system located at a wind farm fully charges twice during off-peak hours each day, and fully discharges twice each day during peak hours in the morning and evening.

This system can earn two value streams simultaneously: 1) “peak regulation” during charging, compensated at 300 CNY per MWh, and 2) electricity retail during discharge.

1. Charging: Although the compensation for downward regulation varies by region, we’re looking at the northeast grid, where compensation is highest at 300 CNY per MWh of downward regulation. The energy storage system can absorb 40 MWh, twice per day, so:

Daily regulation payment = 40 MWh x 300 CNY/MWh x 2 = 24,000 CNY

2. Discharge: Because the energy storage unit is co-located with a wind farm, it sells electricity at the on-shore wind feed-in tariff of 0.5 CNY/kWh. For simplicity’s sake, let’s assume 100% round-trip efficiency and full discharge:

Daily retail payment = 40 MWh x 1000 x 0.5 CNY/kWh x 2 = 40,000 CNY

Assuming these (admittedly over-optimistic) circumstances persist throughout the year, an energy storage installation would earn about 23m CNY per year:

Annual earnings = (24,000 CNY + 40,000 CNY) x 365 = 23.36 million CNY/a

Assuming this system costs 3000 CNY/kWh (~$460/kWh), a 40 MWh system would cost 120m CNY (not including construction costs, O&M, etc.), and have a payback period of about five years.

Given that the storage system only cycles twice per day, the number of cycles required to reach the payback date is only 3,744 cycles – a figure that lithium-ion, sodium-sulfur, and flow batteries can all achieve.

A new value stream

In the days when energy storage couldn’t earn money from downward regulation, the payback period might be 8.3 years or longer. This new value stream opens up opportunities for energy storage providers, and helps China achieve its policy goals of reducing renewable energy curtailment.

Admittedly, these simple calculations are missing a lot, from round-trip efficiency losses, to discounting, to assuming full discharge twice every day year-round, so real-world payback periods are likely to be longer. But it is clear that with a new value stream available, energy storage is moving closer towards wide-scale commercial feasibility in China.