Electrochemical energy storage industry: a strategic choice that needs to be solved urgently

May 28, 2019, was a watershed in the development of electrochemical energy storage in my country, because on this day, the National Development and Reform Commission and the National Energy Administration jointly revised and issued the "Measures for the Supervision and Audit of Transmission and Distribution Pricing Costs" (hereinafter referred to as the "New Measures"). The New Measures require that the costs of energy storage facilities and other expenses that are not related to the transmission and distribution business of power grid companies shall not be included in the transmission and distribution pricing costs.

Although according to statistics, as of the end of June 2019, the cumulative installed capacity of electrochemical energy storage in my country was 1,189.6 MW, and the newly added capacity in the first half of 2019 was as high as 116.9 MW, in fact, the "Measures" have already caused a year-on-year decrease of 4.2% in the growth rate during the consultation stage. Considering the lag effect of the commissioning cycle of the planned and approved projects, the planning of projects in the next stage has slowed down significantly. In other words, as soon as the policy was released, after a brief burst of growth in 2018, which was known as the "first year of energy storage", the energy storage market quickly entered a period of deceleration and adjustment. Among them, there were no projects put into operation in the first half of the year for centralized renewable energy grid connection, with the lowest growth rate; user-side energy storage, which has been very active in recent years, fell into a downturn, down 50.4% year-on-year; energy storage participating in frequency regulation auxiliary service application projects, which had the largest expansion in 2018, also began to brake, and the wait-and-see sentiment of electrochemical energy storage investors who were originally eager to try increased sharply.

This almost dramatic change is closely related to the characteristics of electrochemical energy storage. On the one hand, among many energy storage technology routes, its flexible configuration, short construction period and fast response are considered to be the key to promoting energy substitution and power reform. On the other hand, the technical and economic characteristics of electrochemical energy storage also restrict its own industrial development. Once the policy protection and guarantee are lifted, the competitiveness problem will immediately become prominent.

Although the "2019-2020 Action Plan for Implementing the Guiding Opinions on Promoting the Development of Energy Storage Technology and Industry" was issued in July 2019, and some local governments have also issued relevant promotion policies, showing their affirmation of electrochemical energy storage as a development direction, for the electrochemical energy storage industry, if it is to develop in a healthy and orderly manner under a market mechanism environment, it is necessary to examine its goals and resources, find its correct positioning, and seek a development path.

According to the "Magic River-Death Valley-Darwin Sea" innovation theory model, the obstacles experienced in the transformation from scientific research to technological development are called the Magic River, which is caused by technological uncertainty. Although there is no technology that can fully meet the five key indicators of energy storage applications, such as cycle life, scalability, safety, economy and energy efficiency, considering the increasing maturity of lithium batteries, the uncertainty of the industrial technology route is relatively low. From development to commercialization, the obstacles experienced are called "Death Valley", which is mainly caused by customer uncertainty. With a period of exploration and running-in, the target customers of electrochemical energy storage have gradually solidified from centralized new energy bases, thermal power grid side, power grid side to user side. According to the model, the obstacles experienced from commercialization to industrialization are called "Darwin Sea". The key lies in whether a suitable business model can be found, which is exactly the stage currently faced by the electrochemical energy storage industry.

The electrochemical energy storage industry must choose the right development strategy if it wants to cross the Darwin Sea.

Strategic choices that need to be solved urgently

Michael Porter once divided corporate development strategies into three categories: total cost leadership strategy, differentiation strategy, and focus strategy, but this is mainly aimed at specific companies. For industries, the creation of industrial value chains should also be carried out.

Overall cost leadership strategy

The costs of electrochemical energy storage projects mainly include two categories: construction costs and operating costs. Construction costs involve civil engineering, procurement and installation of batteries, BMS, PCS and other supporting electrical primary and secondary equipment, as well as land occupation, construction design and other resource investments.

Taking the electrochemical energy storage system based on lithium iron phosphate battery with relatively high comprehensive performance in commercial application as an example, the overall energy cost of the system in the construction phase is currently about 1,800 yuan/kWh~2,300 yuan/kWh. Although different charging and discharging time configurations under the same battery capacity configuration will cause large fluctuations in the construction cost of energy storage projects, PCS and civil construction also account for a large weight in the construction cost and there are large differences in statistical samples. Battery cost is still the main cost, accounting for 40%~60%. Therefore, the key to the implementation of the total cost leadership strategy of electrochemical energy storage in the future is continuous technological improvement.

On the one hand, from the perspective of low cost, innovative battery structure and process development can improve production efficiency and expand the space for battery cost reduction through automation, flexible production lines or large-scale mass production, integrated supply chain and other means. On the other hand, through improvements in system engineering design, unnecessary costs and complexities of inverters, wiring, containerization, climate control and other components can be eliminated, standardized design, installation, commissioning and construction can be formed, on-site labor requirements can be reduced, land occupation can be reduced, and economies of scale can be achieved. Following the above industrial roadmap, by 2025, the unit construction cost and initial investment of electrochemical energy storage systems are expected to drop by more than 50%.

After the construction of the energy storage project is completed, the main operating cost is the operation and maintenance cost. Reasonable operation and maintenance investment plays an important role in the safe and reliable operation of the project and the economy of the whole life cycle. For operation and maintenance costs, due to the lack of sufficient cases and the great differences in operating conditions, it should not be simplified to the application of rates. As the core of electrochemical energy storage, the battery has a rough cycle life. Generally, the lithium iron phosphate battery is 2500~4000 times. Depending on the application scenario, the service life of the battery will also vary greatly. For example, peak-valley arbitrage, combined with the cycle of peak-flat-valley, can be charged and discharged once a day, or twice a day. During the entire operation cycle of the project, in order to increase the overall service life of the project, there is generally at least one battery replacement. Therefore, the electrochemical energy storage project must also reserve a certain amount of technical transformation costs to replace the original battery.

At the same time, the scale and technological progress of the new energy vehicle industry will continue to drive down battery costs, and energy storage, as an alternative application of the same technology route, will also benefit greatly. In addition, major battery manufacturers are also committed to increasing the number of battery cycles to keep pace with the operating life of the entire project. There is no need to replace batteries during operation, which will significantly reduce project costs and enhance project competitiveness.

The strategy of minimizing total cost is not only applicable to the establishment of the overall position of the electrochemical energy storage industry as a new business model in the power system, but also to the competition among various companies in the industry in the future.

Differentiation strategy

There is a demand for energy storage technology in all aspects of power generation, transmission, distribution, and consumption in the power system. The application scenarios of energy storage are complex and diverse, and each application scenario has different characteristics in different regions. The demand for energy storage in the eastern load-intensive areas and the western new energy delivery provinces is also very different. Different users have different requirements for energy storage technology energy density, power characteristics, cost, life, startup and response time, etc., so it is not appropriate to adopt a one-size-fits-all approach. Differentiation is the main strategy for the survival and development of the electrochemical energy storage industry.

Differentiated strategic choices for capacity-based electrochemical energy storage

Capacity-type electrochemical energy storage is mainly used for time shifting of energy, and the income is calculated through the price difference between charging and discharging. Capacity-type is widely used in promoting the consumption of new energy, auxiliary services such as peak load regulation on the grid side, and peak load reduction and valley filling on the user side. Generally, the energy storage duration is configured to be more than two hours at rated power.