Reforming Energy Storage Markets: Navigating Competition and Value Creation

In recent years, China’s energy storage industry has experienced explosive growth. However, it has also faced challenges such as price wars and insufficient investment returns, which have severely hindered sustainable development. The reform of energy storage pricing has become crucial for overcoming these obstacles.

As we enter 2025, the release of the Notice on Deepening the Market-oriented Reform of Renewable Energy Grid Tariffs (referred to as the “136 New Policy”) in February, followed by the Opinions on Improving the Price Governance Mechanism and the Notice on Accelerating the Construction of the Electricity Spot Market (referred to as “394 Document”) in April, has clarified the future direction of changes in the energy storage sector. Under the guidance of a series of policies, the energy storage industry is transitioning from scale expansion to value cultivation.

At this pivotal moment of transformation, energy storage companies are restructuring their development strategies. In the wave of market-oriented reform, these companies must shift from being mere equipment suppliers to becoming comprehensive energy service providers, deeply engaging in the design and operation of electricity markets to seize opportunities.

According to Chu Pan, an expert member of the Energy Storage Application Branch of the China Chemical and Physical Power Industry Association, Chinese energy storage companies urgently need to change their mindset, actively seeking innovation to break free from reliance on past pathways.

Mandatory energy storage, which requires a certain percentage or capacity of energy storage systems to be installed during the development, approval, or grid connection of renewable energy projects (like solar and wind), was previously the main driver of energy storage capacity growth in China. Since the introduction of mandatory energy storage requirements in Qinghai Province in 2017, the storage capacity has been on a steady rise. According to data from the National Energy Administration, by the end of 2024, the total installed capacity of newly operational energy storage projects nationwide reached 73.76 million kilowatts / 168 million kilowatt-hours, approximately 20 times that of the end of the 13th Five-Year Plan, with over a 130% increase from the end of 2023.

However, this surge in installed capacity has also led to poor quality production and low-price competition, with energy storage system prices temporarily falling below 0.3 yuan per watt-hour, resulting in industry profit margins dropping to 8%. This year, significant policies have emerged, guiding the energy storage market into a new phase of competition. The 136 New Policy, released on February 9, officially removed mandatory energy storage requirements, marking the start of a new era of market competition for China’s energy storage industry.

Chu Pan noted that the cancellation of mandatory energy storage does not mean a diminished focus on energy storage; rather, it aims to alleviate the burden on the somewhat fatigued renewable energy sector, enabling faster and better development.

At the end of April, the National Development and Reform Commission and the National Energy Administration jointly issued the “394 Document,” which indicated that by the end of 2025, the electricity spot market would be broadly implemented with continuous settlement operations. It also set a timetable for the operation of electricity spot markets in 20 provinces. This development signifies that China’s electricity market reform is entering a phase of rapid acceleration, where energy storage will gradually evolve from a mere “technical tool” to a key flexible resource with independent market status. For example, policies now encourage the establishment of capacity markets, allowing energy storage to earn fixed income by providing reserve capacity.

Recently, various regions have introduced pricing support 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 the discharging capacity of independent energy storage included in its plans, with a compensation standard fixed for one year, set at 0.35 yuan per kilowatt-hour for 2025. Hebei continues to execute its independent energy storage capacity pricing incentive mechanism, where energy storage stations compete for capacity compensation based on their grid connection timelines, with an annual tax-inclusive capacity price of 100 yuan per kilowatt-hour. These policies aim to guide investment, construction, and operation of energy storage projects through price signals, enhancing the adjustment capabilities and economic efficiency of energy storage within the power system.

The reform of the electricity system is also gradually releasing the value of energy storage through market mechanisms, driving 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,” where, in the short term, responses to the exit of mandatory energy storage may result in market volatility and capacity clearance, while in the long term, a pricing system centered around the electricity spot market, supplemented by a capacity market, needs to be established.

“Policies will guide the industry from price competition to competition based on technology and quality, and the overall commercial awareness within the industry will improve,” said a representative from Shenzhen Kelu Electronics Technology Co., Ltd. (referred to as “Kelu Electronics”). “Leading companies in the industry will solidify their market positions through technological innovation and market expansion, while industry concentration will gradually increase, compelling small and medium-sized enterprises to survive and grow through differentiated competition or collaborative alliances.”

Short-term pains are becoming evident. Under the impact of significant new policies such as the “136 New Policy” and the “394 Document,” the energy storage industry is experiencing short-term discomfort. Recently, the Zhongguancun Energy Storage Industry Technology Alliance (CNESA) reported that in the first quarter of 2025, the newly operational capacity of energy storage projects in China reached 5.03 GW / 11.79 GWh, representing a year-on-year decline of 1.5% and 5.5%, respectively. This decline includes a new installed capacity of 4.46 GW / 10.57 GWh on the grid side, down 0.2% and 4.4% year-on-year, and 575 MW / 1124 MWh on the user side, down 10.9% and 11.6% year-on-year. This marks the first negative growth in quarterly newly installed capacity since the large-scale development of new energy storage began in 2020.

In addition, several listed companies in the sector have announced delays in the construction of energy storage projects, often due to adjustments in market conditions and customer demand forecasts. While this discomfort is unavoidable, it is expected to help rectify industry irregularities in the long run.

“In previous renewable energy project developments, profit distribution across the industry chain was imbalanced, with most profits released during the project development phase, leading to sustained increases in non-technical costs and very low profits for both upstream and downstream sectors, ultimately affecting healthy industry development,” stated Tian Qingjun, Senior Vice President and President of Envision Energy Storage.

“Our company has been involved in the energy storage battery sector since 2011, and over the past 14 years,” said a representative from Guangzhou Penghui Energy Technology Co., Ltd. (referred to as “Penghui Energy”). “The complete market entry of renewable energy generation and the adjustments to mandatory energy storage policies present a great opportunity for companies focusing on technological innovation, pushing the energy storage industry from price competition to value creation.”

However, energy storage enterprises still face numerous challenges as they move towards independent marketization. Previously, many energy storage stations primarily relied on capacity rentals from renewable energy projects as their revenue source, and the current profitability model for independent energy storage remains unclear. With the cancellation of mandatory energy storage, these enterprises must seek new revenue sources in fluctuating spot electricity prices, frequency modulation, and peak regulation markets, which raises higher demands for price mechanism design. Feng Siyu, Chief Analyst of the Energy Storage Application Branch of the China Chemical and Physical Power Industry Association, mentioned that the insensitivity of price signals has long been a significant flaw in the energy storage pricing mechanism. In traditional electricity markets, price fluctuations are limited, failing to adequately reflect real-time changes in supply and demand, thus not fully showcasing the value of energy storage in peak shaving and valley filling. In some regions, the small price difference between peak and valley has resulted in minimal earnings from peak-valley arbitrage, making it difficult to cover operational costs.

Moreover, the initial investment costs for energy storage projects are relatively high. For example, a typical 100 MW / 200 MWh lithium iron phosphate energy storage station requires a total investment of approximately 450 million yuan, with battery systems accounting for over 60% of the total cost. Under the current pricing system, distributing these costs to electricity users proves challenging, leading to prolonged investment return periods and dampening corporate investment enthusiasm.

Focusing on technological innovation and product upgrades is essential in this transformation. Only enterprises with genuine technological strengths, market insights, and ecological integration capabilities can thrive in a value-driven landscape. In the past, many companies focused on competing through low prices, resulting in severe product homogenization. “With the introduction of a series of policies, competition in the energy storage industry will gradually shift from ‘price competition’ to ‘value competition,’” stated Xiang Weili, Executive Director of Sullivan China. In the future, companies with core technologies, stable supply chains, and sustainable business models will emerge as leaders, propelling the industry toward high-quality, standardized, and differentiated evolution.

The maturity of the energy storage industry relies on technological advancements. Hence, the core of future market competition will be technological innovation and product upgrades. “Innovation in energy storage battery materials is currently a significant focus in the market,” Feng Siyu commented. To reduce costs, enhance lifespan, and improve safety, major manufacturers are developing next-generation energy storage batteries like sodium-ion batteries and all-solid-state batteries, as well as various long-duration energy storage technologies. These cutting-edge technologies are expected to significantly enhance the performance of energy storage systems and expand their application scenarios. Furthermore, the digitalization, intelligence, and safety of energy storage systems remain key areas of industry focus. As large-scale energy storage systems are integrated into the grid, operational management challenges increase, prompting the adoption of digital technologies such as artificial intelligence in energy storage dispatch and battery management to optimize operational efficiency. Utilizing AI to predict loads and battery status, as well as making intelligent decisions on charging and discharging, has become a trend in the industry.

The representative from Kelu Electronics revealed, “In terms of technological innovation, our company is integrating AI algorithms into the entire process of energy storage systems and electricity trading to enhance the ‘vitality’ of storage systems and enable proactive revenue generation for customers, thus delivering continuous economic value.” Similarly, a representative from Penghui Energy expressed, “Our strategy is very clear: we aim to extend upstream to materials and fundamental research to build a more complete industry chain, while also developing differentiated solutions for diverse scenarios such as smart energy, mobile storage, and extreme environments. With the rapid adoption of AI in domestic manufacturing, energy storage products will significantly accelerate their smart integration while ensuring high safety and energy efficiency.”

As the marketization of energy storage and electricity market reforms enter a more profound phase, the energy storage industry is gradually transforming from a supporting role to a mainstream player. “The introduction of a series of relevant policies will reassure companies along the entire energy storage industry chain, helping the industry break out of the vicious cycle of ‘internal competition’ and establish a market ecosystem that rewards excellence and penalizes mediocrity,” Chu Pan concluded.