China has rapidly become the world’s leading market for energy storage, driven by a combination of growing energy needs, substantial renewable energy production, and extensive government investment. The sector’s expansion is garnering investments worth hundreds of billions of yuan, equating to tens of billions of dollars. As a direct result, China’s capacity for “new type” energy storage systems, particularly batteries, witnessed a remarkable fourfold increase in 2023 alone.
This unprecedented growth aligns with China’s overarching strategy to balance its soaring renewable energy production and its substantial energy demands. The significant expansion, however, also presents challenges, including what one analyst highlights as “temporary structural overcapacity” and underutilization issues.
Soaring Deployment of Energy Storage Systems
China’s Leading Position in Energy Storage
Currently, China holds the title of the world’s largest energy storage market, followed closely by the United States and Europe. This position stems from a combination of market drivers, focusing on balancing renewable energy, and robust government initiatives aimed at constructing a “new power system.” In 2023, China installed a staggering 301 gigawatts (GW) of renewable energy capacity, encompassing solar, wind, and hydro — more than the total renewable generating capacity installed historically in several countries. By May 2024, clean energy constituted a record 44% of China’s electricity production, setting new benchmarks for the nation.
Despite such significant advancements, China’s power system faces challenges in absorbing the entirety of renewable generation. Energy storage serves as a critical tool to bridge temporal and geographical gaps between energy supply and demand, thereby enhancing renewable energy integration and grid stability. The majority of China’s storage capacity comes from large-scale projects such as hydropower with reservoirs, including the Yangtze River projects, and gigawatt-level battery systems in Inner Mongolia. By addressing variability in renewable production, these projects help ensure a constant power supply and reduce reliance on fossil fuels, furthering China’s ambitious clean energy goals.
The Role of Energy Storage in Grid Stability
The most common utility-scale storage system in China is pumped hydro storage, which involves pumping water uphill to a reservoir and then releasing it to generate electricity. By 2023, pumped hydro storage surpassed 50GW, constituting over half of the country’s overall storage capacity. Batteries and emerging technologies such as compressed air, flywheel, and thermal energy comprise the remainder, with lithium-ion batteries dominating the “new type” energy storage sector. The diverse range of storage technologies in China not only enhances the flexibility of the grid but also supports the integration of various renewable energy sources, ensuring a more resilient and adaptable energy infrastructure.
The deployment of “new type” energy storage capacity almost quadrupled in 2023, increasing to 31.4GW from 8.7GW in 2022. This surge enabled China to meet its target of 30GW of “new type” energy storage by 2025, two years ahead of schedule. This goal was established under the nation’s 14th five-year plan by the National Energy Administration (NEA) and the National Development and Reform Commission. Wang Shurui, a researcher at the Institutes of Science and Development of the Chinese Academy of Sciences, highlights that advancements in the storage sector will facilitate greater integration of renewable energy into the power grid, thereby enhancing grid stability and advancing China’s emissions reduction efforts.
High Deployment but Low Usage
Government Initiatives and Mandatory Storage Policies
China’s government has been promoting battery storage through several initiatives, most notably the mandatory allocation of energy storage (referred to as the “new energy plus storage” policy). This mandate, rolled out gradually since 2017 in various provinces, requires renewable energy companies to include energy storage capacity alongside new solar and wind generation projects, with storage allocation rates ranging between 5% to 20%. This policy is a significant driver of storage growth, fostering the construction of large-scale energy storage stations. While these stations may not be individually massive, their cumulative impact on the generation side of the grid is substantial.
Technological innovations and declining costs have also bolstered the adoption of batteries. Sun Yongping, a researcher of emissions trading and vice-dean at the Institute of State Governance at Huazhong University of Science and Technology, notes that the cost of battery storage has significantly decreased in recent years, enhancing its market appeal. The reduction in costs can be attributed to advancements in battery chemistry, increased manufacturing efficiency, and economies of scale. This trend is expected to continue, making energy storage solutions even more accessible and feasible for widespread adoption in the coming years.
Addressing Underutilization and Market Reforms
However, the mandatory storage policy has also led to unintended consequences. A considerable portion of installed storage capacity remains underutilized. In regions managed by the State Grid, the government-owned operator overseeing most of the country’s electricity transmission network, over four-fifths of storage systems operate less than 10% of the time, with many being used only once every two days. This underutilization reflects additional project costs and a lack of effective incentives. Many storage facilities, built or rented to meet government requirements, go unused afterward, leading to inefficiencies and financial burdens on stakeholders.
Both Guo Shiyu from Greenpeace East Asia and Sun Yongping argue that more profound electricity market pricing reforms are needed in China to create incentives for using storage. Dynamic electricity pricing could, for instance, encourage the adoption of storage technologies. By implementing mechanisms that reflect real-time supply and demand, storage systems could be more effectively integrated and utilized, thereby maximizing their potential benefits. Guo suggests that rather than a “one-size-fits-all” approach, each region should deploy new energy storage according to its specific needs and circumstances to maximize efficiency. Tailoring strategies to regional characteristics can help optimize the performance and utilization of storage systems, ensuring a more balanced and sustainable energy landscape.
Economic Opportunities and Overcapacity Risks
Local Economic Impacts and Industrial Development
In 2024, the NEA identified the energy storage sector as a “new driving force” for the country’s “new quality productive forces” initiative. This initiative recognizes the potential for energy storage to propel upstream and downstream industrial chains, drive technological innovation, and stimulate talent training, investment, and employment. Local governments are capitalizing on the economic opportunities presented by the energy storage sector. For example, Guangdong aims to make energy storage a “strategic pillar industry,” setting a target for annual revenue from the energy storage industry to reach 600 billion yuan ($85 billion) by 2025.
Guangdong, along with Zhejiang and Anhui, is pursuing ambitious local storage capacity targets of 3GW each by 2025, driven by the growing demand for energy transition domestically and internationally. The focus on energy storage not only contributes to grid stability and renewable energy integration but also fosters new job opportunities and economic growth in these regions. As more local governments and industries join the energy storage initiative, the cumulative impact is expected to be significant, driving China’s overall economic development and technological leadership in the global energy landscape.
Market Competition and Overcapacity Concerns
China currently leads the world in energy storage, trailed by the United States and Europe. This dominance is driven by market factors aimed at balancing renewable energy and strong government efforts to build a “new power system.” In 2023, China installed a remarkable 301 gigawatts (GW) of renewable energy capacity, including solar, wind, and hydro, surpassing the total renewable capacity of several other countries combined. By May 2024, clean energy made up a record 44% of China’s electricity production, setting new national benchmarks.
However, China’s power system encounters challenges in absorbing all renewable generation. Energy storage plays a crucial role in bridging the temporal and geographical gaps between energy supply and demand, enhancing renewable energy integration and grid stability. Most of China’s storage capacity comes from large-scale projects like hydropower with reservoirs, such as the Yangtze River projects, and gigawatt-level battery systems in Inner Mongolia. By addressing the variability in renewable energy production, these projects help maintain a steady power supply and reduce dependence on fossil fuels, advancing China’s clean energy goals.