The development of the energy storage industry is driven by both the market and policies, with the main body determined by energy storage investors and policy makers. Policy makers are considering energy transformation and the construction of new power systems to promote the development of the energy storage market, while energy storage investors are concerned about the economic benefits of energy storage. Currently, the application scenarios of large-scale energy storage in China mainly include auxiliary services such as wind and solar power distribution and storage, frequency regulation, independent shared energy storage, and industrial and commercial energy storage.
Wind and solar energy distribution and storage: new energy cost under policy pressure
The overall pressure on new energy consumption across the country has improved. In the early stage of the 12th Five Year Plan, there was a significant pressure on the consumption of new energy nationwide, with an overall high rate of wind and solar energy abandonment. The wind and solar energy abandonment rate reached 19% in 201. Subsequently, China attached great importance to the construction of a new power system to solve the problem of new energy consumption capacity, and the wind and solar energy abandonment rate was significantly improved.
The pressure of new energy consumption is showing a trend of regional differentiation. In terms of specific regions, North China, Northwest China, and Northeast China have abundant scenic resources and are the main construction areas for large-scale centralized scenic projects. According to the data from the National New Energy Consumption Monitoring Center, the phenomenon of wind and light abandonment in 2021 is mainly concentrated in these three regions, with wind abandonment rates of 1.9%, 5.8%, and 0.9% in North China, Northwest China, and Northeast China, and light abandonment rates of 6.2%, 5.2%, and 2.9%, respectively.
The proportion of wind and solar energy distribution and storage is divided into different regions, with a general range of 10-20%. From a national perspective, the allocation and storage of wind and solar projects have basically become a mandatory indicator, with a distribution and storage ratio generally ranging from 10% to 20% of the installed capacity of new energy projects; From a regional perspective, some regions in Northeast China, North China, Central China, and Northwest China have a relatively high proportion of photovoltaic distribution and storage, with a requirement of 20-30% in Inner Mongolia. The greater the pressure on new energy consumption, the faster the installation and promotion speed of new energy, and the higher the distribution and storage ratio. For example, Zaozhuang, Shandong Province, is a city that has been included in the entire county's rooftop distributed photovoltaic development pilot project, with a distribution and storage ratio of up to 15-30%.
The combination of policy pressure and an increase in the proportion of new energy is expected to increase the proportion of allocation and storage. New energy projects face strong policy pressure, and China attaches great importance to the consumption of new energy. Provinces with poor completion of the responsibility weight for new energy power generation consumption will be criticized. According to the report of the National Energy Administration on the completion of the responsibility weight for renewable energy electricity consumption in 2021, some regions such as Xinjiang and Gansu have been criticized in the report for not meeting the consumption targets. The installation of new energy continues to increase, and the difficulty of smoothing new energy power fluctuations increases. Therefore, in the future, the installation of new energy will continue to increase, and the distribution and storage ratio will also develop towards high capacity. The policy pressure and the increase in new energy installation are expected to increase the proportion of new energy distribution and storage in various provinces.
The revenue from wind and solar energy distribution and storage comes from improving the consumption rate and increasing the income from power generation and grid connection. For investors in new energy projects, the benefits of wind and solar energy allocation and storage mainly come from improving the consumption rate, which is equivalent to increasing the utilization hours. In most regions, the consumption rate of wind and solar energy is over 90%, so the increase in the consumption rate of allocation and storage is not high.
We separately calculate the economic benefits of wind power/photovoltaic projects without energy storage or with energy storage.
The core assumptions for wind power and distribution and storage are as follows:
1. The installed capacity is 200MW and the annual utilization hours are 2300 hours;
2. The investment of wind power units is 5.7 yuan/W, and the proportion of self owned funds is 30%;
3. The online electricity price is 0.37 yuan/kWh;
4. The investment in energy storage units is 1.75 yuan/Wh, and the battery replacement cycle is 10 years.
The core assumptions for photovoltaic and distribution storage are as follows:
1. The installed capacity is 50MW and the annual utilization hours are 1300 hours;
2. The investment of photovoltaic units is 4.4 yuan/W, and the proportion of self owned funds is 30%.
3. The online electricity price is 0.37 yuan/kWh;
4. The investment in energy storage units is 1.75 yuan/Wh, and the battery replacement cycle is 10 years.
Wind and solar energy distribution and storage is the cost item of wind and solar projects, which lowers the overall internal rate of return by about 1 pct. The revenue model of wind and solar energy distribution and storage is single, and the grid electricity price is relatively low, making the distribution and storage uneconomical. The internal rate of return for wind power projects without energy storage is 9.5%, while for photovoltaic projects it is 6.2%; With a 10% self built energy storage configuration, the internal rate of return for wind power projects decreased by 1.3 pct and for photovoltaic projects decreased by 1.4 pct. Assuming other conditions remain unchanged, the energy storage cost needs to be reduced to below 0.75 yuan/Wh in order to bring benefits to the wind and solar project.
Economically driven wind and solar energy distribution and storage projects drive down costs and greatly reduce energy storage performance. For investors in new energy projects, maximizing economic efficiency means reducing the cost of energy storage projects to a lower level. From the energy storage and electricity market tracking of energy storage projects in October 2022, the bid price for new energy distribution and storage is lower than other enterprises. The weighted average bid price for new energy distribution and storage projects is 1.43 yuan/Wh, while the weighted average quotes for independent energy storage and user side energy storage are 1.88 yuan/Wh and 2.07 yuan/Wh, respectively. The cost control of new energy distribution and storage involves purchasing equipment and battery cells that have poorer energy storage performance compared to other scenarios, resulting in a significant discount in energy storage performance. According to the "Research Report on the Operation of New Energy Distribution and Storage", under high cost pressure, some projects have chosen energy storage products with poorer performance and lower investment costs, increasing safety hazards. From January to August 2022, unplanned shutdowns of national electrochemical energy storage projects reached 329 times.
Shared energy storage has become a compromise solution for new energy distribution and storage. Shared energy storage is a large-scale independent energy storage project built by third-party investors. New energy project investors can meet policy enforcement requirements by leasing a portion of the capacity of independent energy storage, and pay a certain lease fee for independent energy storage annually. For investors in new energy projects, the annual payment of capacity leasing fees reduces the huge cash flow pressure on initial investments; For investors in shared energy storage, independent energy storage power plants have more profit models and higher investment returns. Therefore, the model of leasing shared energy storage has become a trend for new energy projects to meet policy requirements for mandatory allocation.
The cost pressure of new energy leasing and shared energy storage has decreased, and the demand for shared energy storage is expected to rapidly increase. We calculate the internal rate of return for new energy leasing and shared energy storage, and the parameters of the wind power photovoltaic project remain unchanged. The rental fee is assumed to be 300 yuan/KW * year. When the distribution and storage ratio is 10%, the IRR of wind power projects decreases by 0.1 pct (self built energy storage decreases by 1.2 pct), while the IRR of photovoltaic projects decreases by 0.9 pct (self built energy storage decreases by 1.1 pct), reducing the cost pressure on wind and solar projects. The installed scale of wind power is large, and the investment amount is large. Shared energy storage effectively reduces the cash flow pressure and cost pressure caused by the initial investment, resulting in a significant increase in profits. The demand for shared energy storage is expected to rise rapidly.
Industrial and commercial energy storage: high sensitivity to peak valley price differences, pay attention to the implementation of relevant policies
The profit model of industrial and commercial energy storage is peak valley price arbitrage and increasing the proportion of photovoltaic self use. The revenue model of industrial and commercial energy storage is similar to that of overseas household storage, which can be divided into:
1) Save electricity bills by increasing the proportion of photovoltaic self use. If industrial and commercial enterprises build distributed photovoltaic power plants, configuring energy storage can store the electricity originally used for grid connection for self use, increasing the proportion of photovoltaic power generation for self use;
2) Peak valley price spread arbitrage. Low electricity prices during valley hours, resulting in energy storage and charging; Peak hour electricity prices are high, resulting in energy storage and discharge. The larger the peak valley price difference, the better the returns. China's policy is promoting the expansion of peak valley price differentials, with some provinces such as Guangdong, Zhejiang, Inner Mongolia, and Hebei implementing peak electricity prices to further expand the peak valley price differentials.
The peak and valley price differences of industrial and commercial industries vary among different provinces, resulting in significant differences in the economic benefits of industrial and commercial energy storage. The electricity prices vary from province to province, with a large peak valley price difference of over 0.74 yuan/kWh in Beijing, Guangdong, Hubei, Jiangsu, Zhejiang, and other regions. Among them, the peak valley price difference in Beijing exceeds 1 yuan/kWh, so the peak valley price difference income of industrial and commercial energy storage in the above regions is relatively large. The peak valley price difference in Yunnan, Guangxi and other regions is relatively low, and the economy is generally poor.
We estimate the internal rate of return for energy storage in the industrial and commercial sector to be 5.3%. The core assumptions of the model are as follows:
1. The installed capacity of energy storage is 1MWh; 330 days of operation per year; The battery replacement cycle is 8 years
2. The investment of energy storage units is 1.75 yuan/Wh, and the proportion of self owned funds is 30%;
3. The peak, valley, and daily electricity prices are 1.03, 0.62, and 0.28 yuan/kWh, with a peak valley price difference of 61%.
The sensitivity of industrial and commercial energy storage to peak valley price differences is high, and expanding the peak valley price difference can effectively stimulate the energy storage capacity of industrial and commercial enterprises. We calculated the sensitivity of industrial and commercial energy storage to unit installation investment and peak valley price difference, and found that under other conditions remaining unchanged, 1) the unit installation cost decreased by 0.02 yuan/Wh, and the IRR increased by about 0.5 pct; 2) The peak valley price difference has increased by 5 pct, and the IRR has increased by about 4.1 pct. The increase in peak valley price difference has a significant impact on the economic efficiency of industrial and commercial energy storage. The peak valley price difference is determined by the time of use electricity price policies of each province, so the construction of industrial and commercial energy storage is highly correlated with policy guidance. We believe that with the improvement of the time of use electricity price mechanisms in each province (such as the implementation of peak electricity prices), the peak valley price difference will increase, and industrial and commercial energy storage is expected to grow rapidly.
The "selling electricity through partitions" is expected to promote the user side shared energy storage model and promote the development of industrial and commercial energy storage scale. 'Wall selling' refers to the trading of distributed power generation projects nearby. 'Wall selling' allows distributed energy projects to directly sell electricity to nearby users through the distribution network, reducing grid participation and intermediate costs. Since the end of 2021, "selling electricity through partitions" has appeared multiple times as a high-frequency term in important national policy documents. For the user side, the distributed power supply "wall sales" model can be considered as a whole near industrial, commercial or industrial parks, which is conducive to the large-scale and cost reduction of energy storage; For investors, large-scale user side energy storage is expected to expand business models, thereby improving economic efficiency; For the power grid, large-scale energy storage may become a flexible resource that can be utilized. We believe that in the future, with the continuous improvement and gradual implementation of the "partition wall electricity sales" policy, the industrial and commercial energy storage industry is expected to develop on a large scale.
Frequency modulation energy storage: Economic instability benefits the first mover
According to "Greenpeace: A Study on Multiple Ways to Improve the Flexibility of China's Power System", frequency modulation is divided into primary frequency modulation, secondary frequency modulation, and tertiary frequency modulation. When the power grid is impacted by load shocks or new energy fluctuations, the frequency fluctuations exceed the safe range of the power grid, and frequency modulation assistance is needed to help stabilize the frequency of the power grid. Frequency modulation resources can be divided into three types: primary, secondary, and tertiary control backup, corresponding to primary, secondary, and tertiary frequency modulation.
1) The primary backup capacity is activated within 5 seconds of interference, and its function is to stabilize the grid frequency with a start-up time of 30 seconds. Primary frequency regulation is generally responded to through the speed control system of the generator set;
2) Secondary control backup is to convene backup providers within 30 seconds after the first power change, balance the control area, and bring the grid frequency back to the nominal value, replacing primary backup. The startup time is 5 minutes. The secondary frequency regulation is regulated through the spontaneous generation control system (AGC);
3) The third control backup is manually activated 15 minutes after interference occurs, and does not completely replace the second control backup. The startup time is 15 minutes. Triple frequency regulation coordinates the economic distribution of loads among power plants for slow and regular changes in load.
Electrochemical energy storage has performance advantages in secondary frequency modulation, and the demand for frequency modulation energy storage is broad. The traditional automatic generation control (AGC) for thermal power has poor command tracking performance, and there are problems such as low frequency regulation accuracy, reverse regulation, long response time, and low regulation rate. Electrochemical energy storage has the advantages of fast regulation rate, high regulation accuracy, short response time, and bidirectional regulation, which can fully meet the power change requirements of secondary frequency regulation in the time scale. Secondary frequency regulation is superior to hydropower units, natural gas units, and coal-fired units. According to the "Application of Battery Energy Storage Technology", an energy storage system with a continuous charging/discharging time of 15 minutes has a frequency regulation efficiency of about 1.4 times that of hydroelectric units, 2.2 times that of gas units, and 24 times that of coal-fired units. And as the proportion of new energy generation increases, the impact of fluctuations in new energy on the power system increases. The tolerance for grid frequency changes is lower, and the frequency changes are more frequent. Therefore, we believe that the demand for electrochemical energy storage frequency modulation is greater.
The benefits of frequency modulation energy storage mainly come from capacity compensation and mileage compensation. According to the "Price Formation Mechanism and Cost Adjustment Optimization Method for Independent New Energy Storage Power Stations", 1) Capacity compensation is based on the fixed compensation of energy storage frequency regulation capacity, and the calculation method is: R capacity compensation=AGC capacity * capacity compensation price. 2) Mileage compensation is compensated through market-oriented bidding based on the actual energy storage mileage. The calculation method is: R mileage compensation=M FM market total service fee coefficient * MF FM mileage * K FM performance index * P FM market clearance price. M1 is generally between 0 and 2, with 1 selected in the initial stage; The K value is a comprehensive indicator of frequency modulation performance, which can be divided into three indicators: K1 adjustment rate, K2 adjustment accuracy, and K3 response time. The calculation methods for K, K1, K2, and K3 vary across provinces, with one calculation method being: K1=measured speed of this unit/average adjustment rate of all AGC units in the control area; K2=1- Response delay time of power generation unit/5min; K3=1- Adjustment error of power generation unit/allowable error of power generation unit adjustment. The higher the K value, the better the performance and the higher the mileage compensation. According to the rules of Southern Power Grid, K1 * has a height of 5, and K2 and K3 * have a height of 1, so the comprehensive indicator K value * is greater than 3.
The combined energy storage of thermal power units can significantly increase the K value and obtain higher mileage compensation. The main weakness of thermal power frequency regulation is the regulation rate. The main advantages are mature technology, high regulation capacity, and low cost. However, the electrochemical energy storage performance has obvious advantages. Therefore, the combination of the two can greatly improve the performance of thermal power frequency regulation, thereby obtaining higher mileage compensation. According to the performance indicators of the actual power stations in Guangdong before and after the installation of energy storage, after the installation of energy storage, the adjustment rate is increased to 4.95 (+4.09), the response speed is increased to 0.98 (+0.16), the adjustment accuracy is increased to 0.97 (+0.6), and the overall K value is increased to 2.96 (+2.23), an increase of *.
Policy determines capacity compensation, and market pattern determines mileage compensation. The core of capacity compensation is the price of capacity compensation, which is generally determined by policies. The strength of capacity compensation policies varies from province to province, with Fujian's capacity compensation being 960 yuan/MW within the province and Guangdong's winning capacity * 3.56 yuan/MW. Therefore, the disturbance of capacity compensation income policies is significant. The core of mileage compensation lies in the mileage clearance price and K value. The mileage clearance price is determined by the demand of the frequency modulation market and participating enterprises. The value of K value is determined by the relative position of the unit in the entire frequency modulation market. The performance of the frequency modulation unit is better than other units in the market, and the K value is larger. Therefore, mileage compensation is basically determined by the market pattern. The overall revenue model of frequency modulation energy storage is greatly affected by the external environment. Currently, the disturbance of policies and new entrants will greatly affect the yield of frequency modulation energy storage.
We estimate that the yield on frequency modulation energy storage is expected to reach 8.2%. The core assumptions of the model are as follows:
1. The installed capacity of energy storage is 150MW/300MWh; 290 days of operation per year; The operating time is 10 years.
2. The frequency modulation energy storage performance requires high requirements, with a unit investment of 2.3 yuan/Wh for energy storage and a self owned fund ratio of 30%.
3. The benefits include capacity compensation and FM mileage compensation. The capacity compensation price is 960 yuan/MW * month, the FM mileage clearance price is 9 yuan/MW, the FM cycle is 5 minutes/time, and the K value is assumed to be 1.5.

The sensitivity of industrial and commercial energy storage to peak valley price differences is high, and expanding the peak valley price difference can effectively stimulate the energy storage capacity of industrial and commercial enterprises. We calculated the sensitivity of industrial and commercial energy storage to unit installation investment and peak valley price difference, and found that under other conditions remaining unchanged, 1) the unit installation cost decreased by 0.02 yuan/Wh, and the IRR increased by about 0.5 pct; 2) The peak valley price difference has increased by 5 pct, and the IRR has increased by about 4.1 pct. The increase in peak valley price difference has a significant impact on the economic efficiency of industrial and commercial energy storage. The peak valley price difference is determined by the time of use electricity price policies of each province, so the construction of industrial and commercial energy storage is highly correlated with policy guidance. We believe that with the improvement of the time of use electricity price mechanisms in each province (such as the implementation of peak electricity prices), the peak valley price difference will increase, and industrial and commercial energy storage is expected to grow rapidly.
The "selling electricity through partitions" is expected to promote the user side shared energy storage model and promote the development of industrial and commercial energy storage scale. 'Wall selling' refers to the trading of distributed power generation projects nearby. 'Wall selling' allows distributed energy projects to directly sell electricity to nearby users through the distribution network, reducing grid participation and intermediate costs. Since the end of 2021, "selling electricity through partitions" has appeared multiple times as a high-frequency term in important national policy documents. For the user side, the distributed power supply "wall sales" model can be considered as a whole near industrial, commercial or industrial parks, which is conducive to the large-scale and cost reduction of energy storage; For investors, large-scale user side energy storage is expected to expand business models, thereby improving economic efficiency; For the power grid, large-scale energy storage may become a flexible resource that can be utilized. We believe that in the future, with the continuous improvement and gradual implementation of the "partition wall electricity sales" policy, the industrial and commercial energy storage industry is expected to develop on a large scale.
Frequency modulation energy storage: Economic instability benefits the first mover
According to "Greenpeace: A Study on Multiple Ways to Improve the Flexibility of China's Power System", frequency modulation is divided into primary frequency modulation, secondary frequency modulation, and tertiary frequency modulation. When the power grid is impacted by load shocks or new energy fluctuations, the frequency fluctuations exceed the safe range of the power grid, and frequency modulation assistance is needed to help stabilize the frequency of the power grid. Frequency modulation resources can be divided into three types: primary, secondary, and tertiary control backup, corresponding to primary, secondary, and tertiary frequency modulation.
1) The primary backup capacity is activated within 5 seconds of interference, and its function is to stabilize the grid frequency with a start-up time of 30 seconds. Primary frequency regulation is generally responded to through the speed control system of the generator set;
2) Secondary control backup is to convene backup providers within 30 seconds after the first power change, balance the control area, and bring the grid frequency back to the nominal value, replacing primary backup. The startup time is 5 minutes. The secondary frequency regulation is regulated through the spontaneous generation control system (AGC);
3) The third control backup is manually activated 15 minutes after interference occurs, and does not completely replace the second control backup. The startup time is 15 minutes. Triple frequency regulation coordinates the economic distribution of loads among power plants for slow and regular changes in load.
Electrochemical energy storage has performance advantages in secondary frequency modulation, and the demand for frequency modulation energy storage is broad. The traditional automatic generation control (AGC) for thermal power has poor command tracking performance, and there are problems such as low frequency regulation accuracy, reverse regulation, long response time, and low regulation rate. Electrochemical energy storage has the advantages of fast regulation rate, high regulation accuracy, short response time, and bidirectional regulation, which can fully meet the power change requirements of secondary frequency regulation in the time scale. Secondary frequency regulation is superior to hydropower units, natural gas units, and coal-fired units. According to the "Application of Battery Energy Storage Technology", an energy storage system with a continuous charging/discharging time of 15 minutes has a frequency regulation efficiency of about 1.4 times that of hydroelectric units, 2.2 times that of gas units, and 24 times that of coal-fired units. And as the proportion of new energy generation increases, the impact of fluctuations in new energy on the power system increases. The tolerance for grid frequency changes is lower, and the frequency changes are more frequent. Therefore, we believe that the demand for electrochemical energy storage frequency modulation is greater.
The benefits of frequency modulation energy storage mainly come from capacity compensation and mileage compensation. According to the "Price Formation Mechanism and Cost Adjustment Optimization Method for Independent New Energy Storage Power Stations", 1) Capacity compensation is based on the fixed compensation of energy storage frequency regulation capacity, and the calculation method is: R capacity compensation=AGC capacity * capacity compensation price. 2) Mileage compensation is compensated through market-oriented bidding based on the actual energy storage mileage. The calculation method is: R mileage compensation=M FM market total service fee coefficient * MF FM mileage * K FM performance index * P FM market clearance price. M1 is generally between 0 and 2, with 1 selected in the initial stage; The K value is a comprehensive indicator of frequency modulation performance, which can be divided into three indicators: K1 adjustment rate, K2 adjustment accuracy, and K3 response time. The calculation methods for K, K1, K2, and K3 vary across provinces, with one calculation method being: K1=measured speed of this unit/average adjustment rate of all AGC units in the control area; K2=1- Response delay time of power generation unit/5min; K3=1- Adjustment error of power generation unit/allowable error of power generation unit adjustment. The higher the K value, the better the performance and the higher the mileage compensation. According to the rules of Southern Power Grid, K1 * has a height of 5, and K2 and K3 * have a height of 1, so the comprehensive indicator K value * is greater than 3.
The combined energy storage of thermal power units can significantly increase the K value and obtain higher mileage compensation. The main weakness of thermal power frequency regulation is the regulation rate. The main advantages are mature technology, high regulation capacity, and low cost. However, the electrochemical energy storage performance has obvious advantages. Therefore, the combination of the two can greatly improve the performance of thermal power frequency regulation, thereby obtaining higher mileage compensation. According to the performance indicators of the actual power stations in Guangdong before and after the installation of energy storage, after the installation of energy storage, the adjustment rate is increased to 4.95 (+4.09), the response speed is increased to 0.98 (+0.16), the adjustment accuracy is increased to 0.97 (+0.6), and the overall K value is increased to 2.96 (+2.23), an increase of *.
Policy determines capacity compensation, and market pattern determines mileage compensation. The core of capacity compensation is the price of capacity compensation, which is generally determined by policies. The strength of capacity compensation policies varies from province to province, with Fujian's capacity compensation being 960 yuan/MW within the province and Guangdong's winning capacity * 3.56 yuan/MW. Therefore, the disturbance of capacity compensation income policies is significant. The core of mileage compensation lies in the mileage clearance price and K value. The mileage clearance price is determined by the demand of the frequency modulation market and participating enterprises. The value of K value is determined by the relative position of the unit in the entire frequency modulation market. The performance of the frequency modulation unit is better than other units in the market, and the K value is larger. Therefore, mileage compensation is basically determined by the market pattern. The overall revenue model of frequency modulation energy storage is greatly affected by the external environment. Currently, the disturbance of policies and new entrants will greatly affect the yield of frequency modulation energy storage.
We estimate that the yield on frequency modulation energy storage is expected to reach 8.2%. The core assumptions of the model are as follows:
1. The installed capacity of energy storage is 150MW/300MWh; 290 days of operation per year; The operating time is 10 years.
2. The frequency modulation energy storage performance requires high requirements, with a unit investment of 2.3 yuan/Wh for energy storage and a self owned fund ratio of 30%.
3. The benefits include capacity compensation and FM mileage compensation. The capacity compensation price is 960 yuan/MW * month, the FM mileage clearance price is 9 yuan/MW, the FM cycle is 5 minutes/time, and the K value is assumed to be 1.5.
The internal rate of return of FM energy storage is highly sensitive to K-value and mileage prices, benefiting first-movers, but it is easy to enter the "red sea" under market interpretation. Our K value is set to 1.5. In fact, in the early stage of frequency modulation energy storage, due to the fact that most of the original frequency modulation units were thermal power, electrochemical energy storage frequency modulation had a relatively high K value based on its performance advantages, resulting in higher profits. High returns promote an increase in new entrants to the market, while new entrants on the one hand lower the price of the frequency modulation process, and on the other hand improve the overall performance center, resulting in a decrease in K-value. For example, the K-value of a certain Guangdong thermal storage frequency modulation project has increased to 2.96, which is at the forefront of the industry. However, the relative position of the performance of Guangdong thermal storage frequency modulation projects will decrease with the large-scale construction of other frequency storage energy, that is, the K-value will decrease. The double reduction of FM mileage price and K value will significantly reduce the revenue of FM energy storage, but projects that have already started will not stop operating. In the future, the overall market will shift from high revenue to low revenue "Red Sea". Generally speaking, there are relatively few new market entrants, and the performance of electrochemical energy storage or thermal storage combined debugging is relatively high. The first mover has more compensation income and higher returns.
The construction of FM market rules is still incomplete, and attention should be paid to the implementation of relevant policies. The economic calculation and sensitivity analysis results indicate that the FM market is unstable and market rules need to be further improved. As an early province in the FM market, Guangdong experienced a "roller coaster" curve in the mileage compensation market throughout the year. From 2019 to 2020, the average compensation growth rate nearly doubled. Subsequently, in 2021, Guangdong changed the calculation method of K-value to the root of K-value, weakening the performance impact and suppressing the FM overheating market. In 2022, the comprehensive performance index K-value will be multiplied to the third power, further weakening the performance impact. We believe that the K value has a significant impact on economic accounting. Electrochemical energy storage or thermal energy storage combined debugging have good performance indicators, leading to higher initial project returns, resulting in an increasing number of new entrants, market frequency regulation resource overflow, and weakening the impact of the K value is mainly to prevent disorderly market expansion. At present, market rules are still being constructed, focusing on the calculation methods of performance indicators, market clearance rules, and the introduction of policies related to other benefits.
The FM market is in its early stages, and new markets are gradually opening up. The traditional advantage areas of the energy storage and frequency regulation market are Guangdong, Shanxi, Beijing Tianjin Tang, Mengxi, and other places. However, in 2021, only Guangdong has newly added frequency modulation energy storage projects, and more projects are being constructed in new provinces. According to energy storage and electricity market statistics, in 2021, new projects (planned, constructed, and put into operation) covered 15 provinces and cities including Guangdong, Jiangsu, Zhejiang, and Fujian, involving nearly 40 projects. The frequency modulation market is gradually opening up, and there are generally not many companies entering the new market in the early stages. The K value and clearance price of electrochemical energy storage are relatively high, resulting in higher returns. New markets are gradually opening up, and the FM market has broad prospects.
Independent energy storage: Diversified income models and increased investment potential
Policies continue to increase independent energy storage, and business models are emerging. Overall, relevant policies continue to promote independent energy storage to break free from commercial models, such as proposing that new energy projects can lease independent energy storage capacity, promote independent energy storage to participate in electricity market transactions, and leverage functions such as peak shaving and frequency regulation. From a trend perspective, improving the electricity market system and promoting independent energy storage to participate in spot trading in the electricity market are key policy concerns. In addition, various provinces are constantly trying to increase the revenue channels for independent energy storage. For example, the Shanxi Energy Regulatory Office has issued the "Implementation Rules for Shanxi Electric Power Primary Frequency Regulation Market Trading (Trial)", which states that starting from July 1, 2022, the electric power primary frequency regulation market will be officially opened. Independent energy storage stations can sign contracts with wind and solar enterprises for some of their capacity, and the remaining part can also participate in the primary frequency regulation market as an independent entity, effectively increasing the utilization rate of independent energy storage.
Independent energy storage is connected to the power supply and the power grid, with rich revenue models. Independent energy storage is invested and operated by investors, with a generally large construction scale and rich profit models: 1) Independent energy storage can lease a portion of its capacity to the new energy side, enabling new energy projects to meet policy allocation and storage requirements; 2) Independent energy storage can cooperate with peak shaving and frequency regulation scheduling on the power grid side to obtain compensation benefits; 3) Independent energy storage can be combined with traditional units, that is, fire storage combined regulation, to increase the frequency regulation performance of traditional units and obtain auxiliary service benefits; 4) Independent energy storage can participate in arbitrage in the electricity spot market, and in some provinces, it can obtain compensation benefits from capacity electricity prices.
The current revenue model for independent energy storage is: capacity leasing+spot electricity market+capacity electricity price compensation; Or capacity leasing+peak shaving auxiliary services; Or capacity leasing+FM service. The profit models for independent energy storage projects in some provinces have been basically established, and the business model of independent energy storage power stations in Shandong is relatively clear. The main sources of income are capacity leasing fees, electricity spot market, capacity electricity price compensation, etc; The profit model of independent energy storage power stations in Ningxia is mainly based on "energy storage capacity leasing+peak shaving auxiliary services" revenue; Shanxi proposes that independent energy storage power stations can contract a portion of their capacity with wind and solar enterprises, while the remaining portion can provide primary frequency regulation auxiliary services to the system through market bidding.
We calculated a yield of 6.7% for independent energy storage. The core assumptions of the model are as follows:
1. The installed capacity of energy storage is 200MW/400MWh; 330 days of operation per year; The operating time is 15 years.
2. The requirement for independent energy storage performance is high, with an investment of 2.00 yuan/Wh per energy storage unit and a self owned fund ratio of 30%.
3. The benefits include capacity leasing and peak shaving services.
The capacity compensation price varies from province to province, with Henan Province charging 260 yuan/kW · year, Shandong Province charging 350 yuan/kW · year for leasing, and Hunan Project feasibility study assuming 470 yuan/kW · year. Our neutral assumption is 330 yuan/KW · year, with a capacity lease ratio of 80%.
The peak shaving service price for energy storage is generally 0.2-0.6 yuan/KWH, and the energy storage pilot in Ningxia can reach 0.8 yuan/kWh. We assume that the compensation for peak shaving service is 0.5 yuan/kWh, and the number of peak shaving times per year is 300.
The internal rate of return of independent energy storage is highly sensitive to unit installation investment, capacity leasing prices, and peak shaving service prices. We calculated that the unit installed investment decreased by 0.1 yuan/Wh, and the internal rate of return increased by about 4 pct; The peak shaving service price has increased by 0.05 yuan/kWh, and the IRR has increased by about 4pct; The capacity rental price has increased by 30 yuan/KW * year, and the IRR has increased by about 3 pct. We believe that independent energy storage has already yielded benefits, and for some provinces with higher peak shaving service prices and capacity leasing prices, the yield on independent energy storage is higher than our calculation results. In addition, the status of independent energy storage in the power system is increasingly improving, and policies are constantly exploring and improving the revenue model. The profit margin of independent energy storage is improving in the future.
The investment potential of independent energy storage has significantly improved, and the overall large-scale development of independent energy storage has been achieved. In terms of installed capacity: In 2021, there has been a significant increase in new planned and ongoing large-scale energy storage projects. For projects with a capacity of over 10MW, China's newly added installed capacity is only 1.9GW, while the newly added and planned installed capacity reaches 23.2GW; For projects above 50MW, the total installed capacity of newly put into operation projects is 0.8GW, while the total installed capacity of newly built/planned projects is 20.3GW; For projects above 100MW, the newly added operational capacity is 0.74GW, and the newly added under construction and planned projects are 15.8GW; And the large-scale energy storage installation has reached a new level. In 2021, it is planned to build 5 projects with a capacity of over 500MW, totaling 5.6GW. In terms of the number of projects, the proportion of projects below 10MW has decreased. In 2021, 276 new projects will be put into operation, while the planned number is only 186. The number of new planned projects for projects with a capacity of over 10MW has reached 304.
Article source: Photovoltaic Energy Storage Network organized and edited by Xinda Securities
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