Energy storage companies are currently experiencing a surge in interest, as evidenced by their increasing presence in the IPO market. Notably, Hithium recently completed its C round of financing, securing over 4.5 billion yuan in funding. The company has taken a step closer to its IPO by registering its listing counseling filing with the regulatory authorities on July 3rd.
In addition to Hithium, other energy storage firms are also making significant strides in their IPO endeavors. REPT filed a listing application with HKEX on June 30th, while Shuangdeng Group’s IPO application was accepted by the Exchange on June 28th. HyperStrong, on the other hand, unveiled its IPO prospectus in SSE Star Market on June 20th. These developments indicate a flourishing energy storage market, drawing substantial attention from investors. The escalating interest in the energy storage sector has led to an overwhelming number of inquiries for the directors and key personnel of these companies. Jiang Xinyu, one of the directors in an energy storage enterprise, finds himself facing the unexpected challenge of managing numerous phone calls from interested investors seeking to participate in the industry’s growth.
Jiang Xinyu, a director at Zhiguang Electric, boasts more than two decades of experience in the power electronics industry, with the last ten years focused on the energy storage sector. Over the past year, he has noticed a remarkable surge in investor interest in new energy storage. Notably, many energy storage directors, including Jiang Xinyu, find themselves engaging with investors more frequently, even at major exhibitions. New energy storage encompasses various technologies beyond pumped hydro storage, with lithium-ion batteries representing a significant portion of the electrochemical energy storage solutions. According to the Energy Storage Industry White Paper 2023, China’s cumulative installed capacity of new energy storage surpassed 10GW by the end of 2022, reaching an impressive 13.1GW/27.1GWh. The industry has witnessed a remarkable annual growth rate of 128% in power scale and an astounding 141% in energy scale.
The Installed Capacity of Energy Storage in the Electricity System in China in Recent Years Unit: GW/% (From GWAM Securities）
The deeper color stands for cumulative installed capacity, the light color for added installed capacity and the orange curve for the growth rate of the added capacity.
Public data indicates that by 2030, the total national new energy storage capacity is projected to reach 120 million kilowatts, accompanied by a total investment scale of nearly 900 billion yuan. This substantial investment has attracted numerous enterprises and capital into the current new energy storage market. However, in such a thriving market, the critical questions arise: How can one seize the market opportunities effectively, and which players will take the initiative to lead the way?
Amidst an overwhelming number of orders, the new energy storage industry is facing constraints due to limited production capacity.
Since the start of 2023, the industry has experienced a significant surge in production expansion. According to insiders, the production capacity has grown at an impressive rate of two to three times year-on-year, leading to a proliferation of projects this year. As a result, performance in the first half of the year is expected to exhibit three to five times year-on-year growth. This boom in the new energy storage sector is evident in the performance data of various companies. In interviews with reporters from the Daily Economic News, several industry experts express their enthusiasm about the output. They happily state that the capacity is set to experience substantial growth. Liu An, a director at Zhiguang Electric, reveals the company's proactive approach to meeting the demand. They are renting production sites, establishing new energy storage workshops in subsidiaries, and seeking land use rights for constructing a new industrial base in the development zone. Furthermore, an energy storage system integrator openly acknowledges that the company will prioritize larger projects over accepting all orders. This strategic decision reflects the challenges posed by the soaring demand and limited production capacity.
Established companies are ramping up their production capacities, and this growth has also attracted several new entrants. Interestingly, companies from various industries, such as education, Internet, home appliances, food, and even clothing, are venturing into the new energy storage domain. For instance, in early May, the clothing company Saint Angelo announced its subsidiary’s intention, Boxi Bird Venture Capital Co. Ltd, to invest 10 million yuan of its own funds in collaboration with Pingyang Yuanquan Company to support Wenzhou Chunquan Xinyuan Investment Partnership as a limited partner. This move allows them to target investments in the new energy storage solution and lithium battery testing field.
The newfound popularity of new energy storage can be traced back to a significant inflection point in 2021. During that time, compulsory installed capacity of energy storage was introduced to ensure power grid stability and address wind and solar consumption issues. Many local governments subsequently implemented new requirements for energy storage installation in wind, solar, and power generation projects.
As of June 2023, 25 provinces have established clear requirements on energy storage installed capacity during the 14th Five-year plan. Most provinces mandate that new energy generation projects allocate not less than 10% of their installed capacity to energy storage, with a minimum configuration time of two hours. This surge in demand has attracted sharp-sensed investors, leading to numerous directors of new energy storage companies reporting a continuous influx of investor interest since the beginning of the year.
Many founders in the energy storage industry even have selected investors. Some entrepreneurs prefer industrial investment over financial investment, as it brings valuable resources for industrial development. As companies strive to expand production, the industry is facing a shortage of skilled talents. Frequent job changes have become a norm in this field, according to Jiang Xinyu. To swiftly expand their teams, some enterprises have resorted to innovative methods like posting recruitment posters in their exhibition booths during industry offline events. Expanding the talent pool has become a priority for many. As a consequence, salaries in the energy storage sector have risen significantly, often reaching double the real value of an employee. This trend started last year and is expected to persist in the future. Liu Aihua, the general manager of KGOOER, attributes this phenomenon to a significant shortage of applied talents in the energy storage domain. Consequently, employees can command higher salaries, such as demanding 400,000 yuan annually when their real value may be 200,000 yuan.
Rapid Battery Capacity Growth Raises Concerns Over Life Cycle and Safety
With the energy storage industry entering a phase of large-scale development, the importance of energy storage batteries has grown significantly. Major battery companies like CATL, BYD, and EVE have introduced specialized battery products for energy storage, aiming to achieve larger capacities and lower costs. In the past, energy storage batteries were below 100AH, and until 2021, the 280AH battery was commonly promoted. However, this year, the 280AH battery has become outdated, and the new standard equipment for many mainstream battery manufacturers is 300AH and above, demonstrating their technological prowess at major exhibitions.
Battery manufacturers are racing to produce high-capacity batteries as they offer several advantages. A larger battery capacity means using fewer cells and modules during system integration, as well as a reduction in energy storage system connectors, ultimately leading to cost savings. However, it is crucial to consider whether larger battery capacity translates to better performance. Energy storage practitioners caution that while high-capacity batteries can help reduce costs, the focus should not solely be on increasing energy density. The challenge lies in improving energy density without compromising the battery’s life cycle and safety.
Jiang Xinyu elaborates that while large-capacity batteries can increase energy density and reduce unit costs, one must not overlook the impact of temperature on battery life cycles. Electrochemical energy storage tends to have a shorter life cycle at higher temperatures. Therefore, the key is to strike a balance between improving energy density and maintaining a long battery life cycle while ensuring safety. He emphasizes that although cost reduction is essential for the initial investment, the ultimate goal of energy storage power stations should be to achieve the optimal cost per kilowatt-hour.
According to Wei Qiong, chairman of MS Energy, the energy storage industry requires intensive technical expertise and has a high entry threshold. Companies competing in the current energy storage market must exhibit strong strategic determination and market strength to secure a leading position while prioritizing product quality.
The Booming Market Faces Uncertainty, Posing Challenges for System Integrators' Survival
In the midst of the energy storage industry’s booming market with a surge in capital and an influx of new and existing players, the reality is not as glamorous as it may seem. With the rapid advancement of energy storage technology, many companies are realizing that they lack the necessary system integration capability. This realization has led them to seek the services of professional system integrators, who play a crucial role in the progress and profitability of energy storage projects.
Operating as a middleman in the industry chain, energy storage system integrators directly engage with downstream customers and owners, making them a vital link in the entire ecosystem. The primary responsibility of energy storage system integrators is to effectively combine the various components of an energy storage system, leveraging their in-depth understanding of the performance of each part, including BMS (Battery Management System), PCS (Power Conversion System), EMS (Energy Management System), and the specific requirements of the downstream customer's application.
Jiang Xinyu emphasizes that system integration is not a mere labor integration process but a technology-driven endeavor. It involves skillfully and efficiently utilizing and managing hundreds of thousands of batteries. System integrators must possess their own core technology, and their role should not be underestimated. The efficiency of a 200MWh energy storage power plant, for instance, can be boosted by over 5%, leading to a more than 20% drop in electricity unit costs over the entire life cycle. The solution to such performance improvements and enhanced safety lies in the integrated technology provided by competent system integrators.
Paradoxically, the energy storage integration segment is currently facing a challenge of meager profits. An anonymous manager from an energy storage enterprise candidly stated that companies in the downstream industry chain may be closer to the customer but tend to earn less profit. According to a research report by Ping An Securities, the domestic average quoted price for a two-hour energy storage system was approximately 1.23 yuan/Wh from January to April 2023. Currently, energy storage battery and system prices remain at a low level. Jiang Xinyu elaborated on the cost distribution for a 2-hour (0.5C) energy storage system, highlighting that 65% of the cost lies in the battery, while the remaining 35% is used for system integrators, including outsourcing air conditioning, containers, fire, and other equipment. Even if integrators manage to earn a 20% gross profit from the modules excluding the battery, the overall gross profit they can achieve is only around 7%. Moreover, there are various costs that need to be amortized, adding to the industry’s challenging situation.
An anonymous person in charge of a system integrator explained that companies often participate in bidding competitions, and those who offer lower prices have a higher chance of winning the bid. If their quote doesn't rank among the lowest five bidding enterprises, they generally believe that their chances of securing the bid are slim. This competitive pricing strategy has become the norm in the industry. To navigate the industry’s price war, Wei Qiong advised companies to focus on scientific and technological innovation to address development issues and bring value to the community. For instance, improving battery life cycles from 5000 to 6000 cycles can lead to longer-lasting and cost-effective products, ultimately providing more value to the users. Ultimately, the market will favor solutions that prioritize user value.
The Return of Investment in Energy Storage is Still Uncertain
New technologies are continuously evolving in all segments of energy storage, but this does not necessarily mean that the business model has been fully established. In fact, the profit model for energy storage is still an imperfect aspect and remains a topic of open discussion among energy storage enterprises. Liu Yong, the secretary general of branch CESA, highlighted that the traditional profitability of energy storage primarily revolves around arbitraging the price difference between peak and off-peak electricity. This involves charging the batteries during low-price periods and selling the stored energy during high-price periods to capitalize on the price gap.
Research papers suggest that China boasts a wealth of energy storage application scenarios, which can be categorized into the power side, grid side, and user side. When comparing the profit models of energy storage in these scenarios, it becomes evident that the industrial, commercial, and user-side energy storage systems have the most mature and clear profit models, primarily relying on peak and off-peak electricity arbitrage.
The Price Difference of Peak and Valley Electricity in Guangdong’s five cities in the Pearl River Delta Region Unit: RMB/KWh (From GWAM Securities）
China’s energy storage applications can be categorized into three main scenarios: the power supply side, the grid side, and the user side. Currently, the user side of energy storage is proving to be profitable, especially in areas with significant price differences in industrial and commercial electricity. According to a research report by GWAM Securities, in March 2023, many provinces in China exhibited an average price difference of more than 0.7 yuan/KWh between peak and off-peak industrial and commercial electricity. In specific areas like Guangdong and Shandong, this price difference even exceeded 1 yuan/KWh. Notably, the threshold for achieving profitability in the user side of energy storage is exactly 0.7 yuan/KWh.
Guangdong’s five cities in the Pearl River Delta region, experiences a peak and valley price difference of more than 1 yuan/KWh for industrial and commercial electricity.
Regarding the profitability of energy storage on the power side, an article from MIIT can shed light on the matter. In some areas, supporting energy storage is made a precondition for new energy power generation projects. However, uncertainty remains about how energy storage can effectively participate in grid scheduling. The conditions for grid-side energy storage to engage in auxiliary services are not fully mature, and relevant policies are not yet perfectly implemented. Furthermore, the utilization rate of certain supporting energy storage systems is low, leading to a general lack of enthusiasm among new energy enterprises to invest proactively.
The purpose of configuring energy storage for new energy projects is to ensure better acceptance by the grid and power market. On the other hand, grid-side energy storage serves the overall regulation of the power system and ensures adequate power supply, acting as a secure backup for emergencies.
However, the current economics of new energy storage make it challenging to meet the aforementioned conditions. According to a report by China Merchants Bank Research Institute, the cost of grid-side energy storage is challenging to transfer to the user side through electricity transmission and distribution or other means. Consequently, investors on the grid side exhibit lower enthusiasm for investing in new energy storage. Currently, the profit model for grid-side energy storage mainly relies on a two-part tariff system, particularly for pumped hydro storage.
The business model in this field has not been completely tapped, while it is normal for increasing the installed capacity of energy storage by relying on compulsory requirements.
Jiang Xinyu shared with reporters that while many provinces have proposed numerous new energy storage projects, only a few of them have been actually implemented. The primary reason behind this is the lack of a clear Return on Investment (ROI) for these projects. When investing in an energy storage project, investors need to have a clear understanding of the project’s ROI. However, in reality, most investments in energy storage are based on expectations of future policies or due to mandatory energy storage allocations, making it uncertain whether there will be definite returns in this field. In Jiang Xinyu’s perspective, energy storage projects operate as a chain that runs through the upstream, midstream, and downstream segments. For instance, investing in developing energy storage on the new energy generation side can support supply-demand balance and grid stability, providing benefits to the grid company and end-users. However, calculating these benefits and determining how to obtain them is a challenging task. It is difficult to precisely quantify the contribution of energy storage within the grid system.