Summary of Key Points
Shandong has released new electricity market rules that allow qualified new energy storage facilities to participate in both the electricity trading market (selling electricity for profit) and the auxiliary services market (providing regulatory services to the power grid for profit) as independent entities. These rules also support the participation of virtual power plants and aggregated energy storage resources in transactions, which broadens the profit-making channels for energy storage in Shandong. Currently, Shandong ranks among the top in terms of energy storage capacity nationwide, but it faces challenges such as low utilization rates, unstable revenue models, and difficulties in expanding user adoption. In the future, it will need to improve mechanisms and innovate models to transform its energy storage from being large in scale to being strong in the market, thereby supporting the development of new renewable energy sources and the construction of a new power system.
I. New Rules in Shandong Open Up New Profit Opportunities for Energy Storage
Previously, energy storage facilities could only generate revenue through methods like leasing equipment or profiting from price differences between peak and off-peak electricity prices. The new rules now permit them to engage in two additional activities:
1. Electricity Trading Market: They can continue to charge during off-peak hours and discharge during peak hours to earn price differences.
2. Auxiliary Services Market: They can provide services such as frequency regulation (quickly charging and discharging to stabilize the power grid frequency) and ramping (rapidly supplying additional electricity when demand increases). For example, energy storage systems respond 10 times faster than coal-fired power plants, which can effectively address sudden power grid issues. These high-value services were not fully monetized before, but the new rules enable them to generate income, essentially creating an additional source of revenue.
II. Shandong's Energy Storage Performance and Challenges
Performance:
- Large Scale: By the end of 2025, Shandong will have 11.2 million kilowatts of energy storage in operation, accounting for 8.2% of the national total, a 56% increase from the previous year.
- Significant Role: In 2025, it will consume 3.657 billion kWh of renewable energy, helping to store green electricity.
- Composition: 70% of the energy storage is used on the grid side (mainly as a buffer), with 95% being electrochemical storage (such as lithium batteries), along with other technologies like compressed air and molten salt.
Challenges:
- Low Utilization Rate: The average energy storage duration (how long electricity can be stored) in 2024 was lower than the national average, and the equivalent utilization hours (actual operational time per year) were 30% less than the national average, and about 200 hours less than in Jiangsu and Zhejiang.
- Reasons: Most energy storage systems are designed for short-term use (up to 2 hours), and the power grid dispatching system and market mechanisms have not fully utilized their flexibility (for example, by not allowing them to participate more in auxiliary services).
III. Revenue Sources for Energy Storage
Currently, Shandong's energy storage revenue comes from three main sources:
1. Capacity Leasing (50%): Renting out energy storage capacity to the power grid or power plants for a fixed fee; however, this income will decrease as mandatory energy storage requirements are phased out.
2. Electricity Trading (40%): Profiting from price differences between peak and off-peak electricity prices using Shandong's tiered pricing system; however, fluctuations in spot electricity prices make revenue unstable.
3. Capacity Compensation (10%): Fixed subsidies from the power grid; these subsidies have been reduced multiple times, resulting in decreasing income.
Future Growth Areas: The auxiliary services market holds great potential for growth. Although there is no actual revenue yet from services like frequency regulation and ramping, as these systems become more mature, energy storage's rapid response capabilities can generate significant profits.
IV. Why hasn't Energy Storage on the User Side Become More Popular?
There are two main reasons why industrial and commercial users have been reluctant to install energy storage:
1. Blurred Electricity Price Signals: Most companies purchase electricity through power sales companies, which offer fixed price packages to ensure stable profits. As a result, companies do not experience the price differences between peak and off-peak times, reducing their incentive to invest in energy storage.
2. Negative Impact of Basic Electricity Fees: Electricity fees are based on both usage volume and maximum power consumption. If energy storage is installed and charges during off-peak hours, it may increase the basic electricity fee, potentially offsetting any profit from price differences.
V. How to Make Shandong's Energy Storage More Competitive
To strengthen its energy storage sector, the following approaches are recommended:
1. Top-Level Planning: Develop a provincial-level strategy for energy storage, with different development plans for various regions (such as the Jiaodong load center and northern Shandong renewable energy bases).
2. Market Improvement: Expand the range of auxiliary services offered to fully utilize energy storage's technical advantages (fast response times and accuracy), and simplify transaction processes.
3. Stable Revenue Sources: Establish a combination of fixed and variable revenues, ensuring that projects remain profitable while allowing revenue to fluctuate with market performance. Compensation standards should be linked to energy storage performance (e.g., higher payments for longer storage durations and faster responses).
4. Innovative Models: Utilize technologies like "cloud energy storage" to aggregate small-scale energy storage systems for market participation, and promote "village-level shared energy storage" to help store electricity from rural photovoltaic systems. Virtual power plants can also aggregate user-side resources for better frequency regulation, enabling more small energy storage systems to generate revenue.
In summary, while Shandong already has a large energy storage capacity, it needs to transform its system into one that is economically viable and effective. This will require improving market mechanisms to fully realize the value of energy storage, addressing issues related to utilization rates and revenue, and supporting the development of new renewable energy sources and the new power system.