China’s Energy Storage Market Reform: Transitioning from Price Competition to Value-Driven Growth

In recent years, China’s energy storage industry has witnessed explosive growth; however, challenges such as price wars and insufficient investment returns have severely restricted sustainable development. The reform of energy storage pricing has become crucial for the industry’s breakthrough. As we enter 2025, with the release of the “Notice on Deepening the Market-oriented Reform of Renewable Energy Grid Pricing” (hereinafter referred to as the “136 New Policy”) in February, followed by the “Opinions on Improving Pricing Governance Mechanisms” and the “Notice on Accelerating the Construction of a Power Spot Market” (Document No. 394) in April, the future direction of the energy storage sector is becoming increasingly clear. Under the guidance of these policies, the energy storage industry is set to shift from mere “scale expansion” to “value cultivation”.

At this critical juncture of transformation, energy storage companies are reconfiguring their development strategies. Amidst the wave of market-oriented reform, these companies must evolve from being simple equipment suppliers to “integrated energy service providers”, deeply engaging in the design and operation of the electricity market to seize opportunities. Chu Pan, an expert committee member of the Energy Storage Application Branch of the China Chemical and Physical Power Industry Association, stated that Chinese energy storage enterprises urgently need to shift their mindset, actively seek innovation, and break free from path dependence.

The transition to a new stage of market competition involves mandatory energy storage requirements. This mandates that during the development, approval, or grid connection of renewable energy projects (such as solar and wind), a certain proportion or capacity of energy storage systems must be included, typically expressed as a percentage of the project’s installed capacity. Historically, this has been the core driver of growth in China’s energy storage capacity. In 2017, Qinghai Province mandated storage devices to be built alongside wind power projects, marking the beginning of mandatory energy storage in China. Over the next eight years, energy storage capacity surged. According to data from the National Energy Administration, by the end of 2024, the cumulative installed capacity of new energy storage projects in the country reached 73.76 million kW / 168 million kWh, approximately 20 times that of the end of the 13th Five-Year Plan, with a growth of over 130% compared to the end of 2023.

The increase in energy storage capacity has also led to the emergence of low-quality production and price competition, with energy storage system prices at one point dropping below 0.3 yuan/Wh, causing industry gross margins to decline to 8%. This year, significant policies have been introduced to guide the energy storage market into a new phase of competition. On February 9, the “136 New Policy” officially abolished mandatory energy storage requirements, marking China’s entry into a new stage of market-oriented competition. Chu Pan explained that the cancellation of these requirements does not indicate a lack of emphasis on energy storage but is intended to alleviate the burdens on the relatively weak renewable energy generation sector, promoting faster and better development.

At the end of April, the National Development and Reform Commission and the National Energy Administration jointly issued Document No. 394, which explicitly states that by the end of 2025, the power spot market will be largely covered, and continuous settlement operations will be fully implemented, providing a timeline for the operation of the electricity spot market across 20 provinces. This indicates that China’s electricity market reform will accelerate, transitioning energy storage from being merely a “technical tool” to a crucial flexibility resource with its own market entity status. For example, policies are now requiring paired capacity markets, allowing energy storage to earn fixed income through the provision of standby capacity.

Recently, various regions have introduced supportive pricing policies for energy storage. In terms of capacity compensation mechanisms, Inner Mongolia and Hebei have implemented independent energy storage capacity compensation policies. Inner Mongolia compensates for the discharge of independent energy storage included in its planning, with a fixed compensation standard set for one year, which is 0.35 yuan/kWh for 2025. Hebei continues to enforce an independent energy storage capacity price incentive mechanism, where energy storage plants compete for capacity compensation based on their grid connection times, with an annual tax-inclusive capacity price of 100 yuan/kWh. These policies aim to guide investment and construction in energy storage projects through pricing signals, enhancing the adjustment capabilities and economic benefits of energy storage within the power system.

The reform of the electricity system is gradually releasing the value of energy storage through market mechanisms, shifting the industry from scale expansion to high-quality development. The market-oriented reform of energy storage is currently at a critical stage of “breaking and establishing simultaneously”. In the short term, it needs to address market fluctuations and capacity clearing resulting from the exit of mandatory storage requirements, while in the long term, it must establish a pricing system centered around the power spot market, supplemented by a capacity market. “Policies will guide the industry to gradually shift from price competition to competition based on technology and quality, raising the overall commercial awareness within the industry,” said a representative from Shenzhen Kelu Electronics Technology Co., Ltd. (hereinafter referred to as Kelu Electronics). “Leading enterprises in the industry will further consolidate their market positions through technological innovation and market expansion, while small and medium-sized enterprises will need to survive and develop through differentiated competition or cooperative alliances.”

Short-term challenges are becoming apparent under the significant new policies such as the “136 New Policy” and “394 Document”. The China Energy Storage Industry Technology Alliance (CNESA) recently released data showing that in the first quarter of 2025, the newly installed capacity of domestic energy storage projects was 5.03 GW / 11.79 GWh, representing a year-on-year decline of 1.5% / 5.5%. Among this, the front-end new installed capacity was 4.46 GW / 10.57 GWh, down 0.2% / 4.4% year-on-year, while the user-side new installed capacity was 575 MW / 1124 MWh, declining 10.9% / 11.6% year-on-year. This marks the first negative quarterly growth in new installed capacity since the large-scale development of new energy storage began in 2020, with both front-end and user-side new installed capacities decreasing for the first time. Additionally, several listed companies in the industry have announced delays in energy storage project construction due to factors such as adjustments in market conditions and customer demand forecasts. While the pain is unavoidable, it is beneficial in the long run for correcting the industry’s disorder. “In past renewable energy project developments, the distribution of profits along the industrial chain was imbalanced, with most profits realized during the project development phase, leading to rising non-technical costs for renewable energy, and low profits for upstream and downstream sectors, ultimately hindering healthy industry development,” stated Tian Qingjun, Senior Vice President of Envision Energy and President of Envision Energy Storage.

According to a representative from Guangzhou Penghui Energy Technology Co., Ltd. (hereinafter referred to as Penghui Energy), “Our company has been involved in the energy storage battery field since 2011, making it 14 years now.” They noted that the full market entry of renewable energy generation and the adjustments to mandatory energy storage policies present significant opportunities for companies committed to technological innovation, driving the energy storage industry to evolve from price competition to value creation.

As energy storage enterprises independently navigate the path to marketization, they face numerous challenges. Previously, many energy storage plants primarily relied on charging capacity rents from renewable energy projects as their revenue source. Currently, the profit model for independent energy storage remains unclear. “With the cancellation of mandatory energy storage, energy storage must find new revenue streams in markets characterized by spot electricity price fluctuations and frequency modulation, which places higher demands on price mechanism design,” said Feng Siyao, Chief Analyst at the Energy Storage Application Branch of the China Chemical and Physical Power Industry Association. Historically, one major flaw in the energy storage pricing mechanism has been the insensitivity of price signals. In traditional electricity markets, the price fluctuations are limited, failing to adequately reflect real-time changes in electricity supply and demand, which hinders the full realization of the value of energy storage’s “peak shaving and valley filling” capabilities. In some regions, the discrepancy between peak and valley prices is too small, resulting in negligible profits from peak-valley arbitrage that cannot cover operational costs. Furthermore, the initial investment costs for energy storage projects are high. For instance, a typical 100 MW / 200 MWh lithium iron phosphate energy storage station has a total project investment of approximately 450 million yuan, with the battery system accounting for over 60% of that cost. Under the existing pricing system, it is challenging to effectively allocate these costs to electricity users, prolonging the return on investment for energy storage and dampening companies’ investment enthusiasm.

As this transformation unfolds, only those enterprises equipped with strong technological capabilities, market insights, and ecological integration abilities will succeed in the value-driven arena. Previously, companies focused on capturing market share through low pricing, resulting in severe product homogeneity. “With the emergence of a series of policies, the competitive ecology of the energy storage industry will gradually shift from ‘price competition’ to ‘value competition’,” stated Xiang Weili, Executive Director for Greater China at Sullivan. In the future, companies with core technologies, stable supply chains, and sustainable business models will stand out, and the industry will accelerate its evolution towards high quality, standardization, and differentiation. The maturity of the energy storage industry depends on advancements in technology, and the core of future market competition will be in technological innovation and product upgrades. “Innovation in energy storage battery materials is currently a significant focus in the market,” Feng Siyao commented. To reduce costs while enhancing lifespan and safety, major manufacturers are developing next-generation storage batteries, such as sodium-ion batteries and all-solid-state batteries, along with various long-duration energy storage technologies. These cutting-edge technologies are expected to significantly improve the performance of energy storage systems and broaden their application scenarios. Furthermore, the digitization, intelligence, and safety of energy storage systems are also key concerns for the industry. As large-scale energy storage systems are integrated into the grid, the complexity of operation and maintenance management increases, prompting the adoption of digital technologies like artificial intelligence in energy storage scheduling and battery management to optimize operational efficiency. Utilizing AI for load and battery state prediction, and making intelligent decisions on charging and discharging, has become a trend in the industry. A representative from Kelu Electronics disclosed, “In terms of technological innovation, we are integrating AI algorithms into the entire process of energy storage systems and electricity trading to enhance the ‘vitality’ of energy storage systems, enabling proactive revenue generation for our clients and delivering ongoing economic value.” A representative from Penghui Energy also mentioned, “Our strategic direction is very clear: we aim to extend upstream into materials and foundational research to build a more comprehensive industrial chain, while also developing differentiated solutions for diverse scenarios such as smart energy, mobile storage, and extreme environments.” With the rapid proliferation of AI in domestic manufacturing, energy storage products will significantly accelerate their smart integration process while ensuring high safety and energy efficiency.