Looking ahead to 2022 at the end of 2021, this article will outline the fundamentals of the energy storage industry and update investment recommendations.

1. From an industry perspective, what are the application scenarios and core driving forces of energy storage?



▶ Application scenario: In power generation systems, energy storage can be divided into front of the meter (referred to overseas as front of the meter), including the power generation side, grid side, and behind the meter, including industrial and commercial, and household storage. In addition, energy storage is also applied in fields such as 5G base stations, portable energy storage, yachts/RVs, etc.



▶ Core driving force: Energy storage plays a role in reducing wind and solar power waste and stabilizing the power grid before the electricity meter, while after the electricity meter, it saves electricity costs and provides emergency backup. There is no objection to the efficiency improvement effect of installing energy storage systems in various application scenarios. The core driving force comes from economic factors (economic benefits are difficult to achieve without policy subsidies, such as the ITC (Solar Energy Investment Tax Reduction) policy in the United States, preferential policies for household solar energy storage in Germany, investment subsidies for the Arena project in Australia, etc.), as well as China's policy side mandatory storage allocation.



2. From a market perspective, what is the current sales situation in the three major markets of China, Europe, and America?



▶ China, Europe, the United States, and South Korea are currently the main markets for energy storage. In 2020, China, the United States, Europe, and South Korea respectively added 2.4GWh/2.5GWh/1.9GWh/2.2GWh, corresponding to YoY+267%/+289%/+19%/+30%.



▶ The expected amount is expected to reach 40GWh/100GWh, and downstream demand in the industry is expected to double or increase in 2022. The energy storage market has preliminarily completed a 0-1 leap and entered a comprehensive explosive stage.



3. From an investment perspective, what investment opportunities will the explosion of the energy storage industry bring?



▶ Investing in energy storage is actually investing in industry beta. Currently, the technical barriers in the energy storage industry are relatively low, and the path to building barriers is unclear. It is difficult to judge and there is no need to overly care about the market landscape at the medium-term level. The high growth rate of the energy storage industry in 2-3 years has already brought sufficient performance growth space for related targets.



▶ Investment suggestion: Package stocks with a high proportion of energy storage and relatively high performance elasticity to achieve beta returns.



1) Downstream applications are wide and diverse, making the probability of short-term deterioration low (such as PCS Sunshine's big head in large power plants, Deye in home storage, Shenghong in industry and commerce, and Tuoban in portable energy storage, not directly facing competition).



2) Horizontal comparison shows that product barriers are relatively low, which means that companies with truly strong competitiveness may not necessarily have high short-term reserves (good companies may not necessarily have high flexibility in energy storage).



3) Based on the above two points, we believe that the investment opportunities for energy storage come from industry beta, that is, from performance elasticity (high proportion of energy storage revenue, high proportion of overseas sales, and high proportion of C-end product sales), which relatively weakens competitive barriers and patterns. It is not possible or necessary to heavily invest in individual stocks to obtain alpha excess returns, and package buying is the best choice.



1. From an industry perspective, what are the main application scenarios and core driving forces of energy storage?



1.1. Application scenarios: power generation side, grid side, power consumption side, 5G base station, portable energy storage



From the perspective of the power system, energy storage devices are mainly used in three scenarios: generation side, grid side, and consumption side. In addition, 5G base stations, portable energy storage, etc. are also application scenarios for energy storage:



1) Power generation side:



▶ New energy generation: reducing wind and solar power waste and smoothing power generation fluctuations.

Reduce wind and solar power curtailment: During peak periods of photovoltaic and wind power plant output, store energy that exceeds dispatch demand, and output energy during periods of insufficient photovoltaic and wind power plant output.

Smooth power generation fluctuations: Energy storage systems can store some of the electricity during peak periods of photovoltaic and wind power plant output, and output electricity when output is insufficient, achieving the effect of smooth power generation fluctuations.



▶ Traditional power generation such as thermal power: primary frequency regulation, peak shaving, etc.





2) Grid side: providing power auxiliary services to the grid, mainly for frequency regulation, peak shaving, and reserve capacity.

▶ Frequency Modulation (AGC): Adjusting the frequency of power generation equipment to supply power to users within a certain range (50 ± 0.2Hz) to maintain stable operation of the power grid and avoid damaging various electrical appliances.



▶ Peak shaving: Quickly providing power generation capacity to "peak shaving" when the electricity load is high, and reducing power generation or using it as electrical equipment to reduce the supply-demand gap to "fill in the valley" when the load is low, thereby improving the adequacy of power supply to the grid and enhancing the stability of grid operation.



▶ Reserve capacity: load reserve (rotating reserve) and accident reserve. Accident reserve capacity can ensure the safety and stability of power supply in the event of an accident in the power system, while load reserve can provide emergency increment when the impact load exceeds the maximum power supply capacity of the power generation equipment.



3) Electricity consumption side: mainly used for the combined use of solar energy and storage for power generation, peak shaving and valley filling arbitrage, reducing capacity electricity prices, and responding to power outages.



▶ Photovoltaic storage combined power generation: Through the combination of photovoltaic and energy storage, electricity can be self used spontaneously. The electricity generated by photovoltaic is used by users themselves, and excess electricity can be connected to the grid for resale.



▶ Peak shaving and valley filling arbitrage: After installing an energy storage system, users charge the system during peak electricity prices, without the need to purchase electricity from the grid during peak hours, and directly extract electricity from the storage battery to avoid peak electricity prices.



▶ Reduce capacity electricity prices: Some regions adopt a two-part electricity price system for industrial and commercial electricity, which requires payment of basic electricity fees (capacity electricity prices) in addition to electricity consumption based on electricity consumption. The unit of capacity electricity price is yuan/kW · month. After configuring energy storage, users can store electricity in advance during low electricity consumption periods, which can reduce the maximum power demand of enterprises during peak hours and thus reduce the expenditure on capacity electricity price.



▶ Dealing with power outages: There is an aging problem in overseas power grids, and the increasing integration of new energy generation has made the demand for overseas power grid renovation more urgent. Installing energy storage equipment on the power side can ensure power supply in the event of a power outage.



4) 5G base station storage:

The function of energy storage in communication base stations is to provide backup power and power during peak periods. The communication base station must be equipped with a backup power supply, usually assembled in a battery cabinet in the base station room to provide emergency power in the event of a power outage, ensuring the normal operation and smooth communication of the base station. In the 5G era, base stations still need to use power storage devices to provide power during peak hours.



5) Portable energy storage:

Simply understood as a "large power bank" with a charging capacity of 200Wh-2000Wh, it is mainly used for outdoor activities and emergency electricity, filling the gap between the power bank and diesel generators.

1.2 Driving force: The core driving force of energy distribution and storage in the power system still comes from the economy

Due to the different electricity pricing mechanisms and policy situations in China and Europe, the three regions also have different demands for energy storage application scenarios.

1) China

▶ Power generation side: It has not yet become economically viable, and the main driving force comes from policy requirements for wind and solar power distribution and storage. The future depends on the market-oriented reform of electricity prices.



Not yet economically viable: Based on a 25 year cycle, the IRR for domestic power generation and storage allocation is approximately 4.5% (assuming that energy storage can be fully utilized, working 1200 hours per year, with a total investment of 1.5 million yuan/MWh). However, for domestic investment in power generation, the IRR for photovoltaic and wind power generation is generally required to be around 8%, and after allocation and storage, the IRR is 6% -7%. Therefore, based on the current domestic electricity price (about 0.358 yuan/kWh), wind and solar power distribution and storage do not yet have economic feasibility.



Some provinces have issued mandatory requirements for wind and solar energy distribution and storage, becoming the main driving force on the current power generation side. In China, some provinces have mandated the construction of 10-15% and 1-2 hour energy storage facilities for wind and solar power as project grid connection conditions when setting the 2021-2022 wind and solar energy construction targets.



Looking at the market-oriented reform of electricity prices in the future: Currently, the economic efficiency of power generation side distribution and storage is poor, mainly due to the use of benchmark grid electricity pricing mechanisms in domestic electricity prices for many years. We believe that if the domestic electricity pricing mechanism can achieve market-oriented reform, the economic efficiency of power generation side distribution and storage will be improved in the future. In fact, the market-oriented reform of electricity prices in China has begun to show signs. In October 2021, the National Development and Reform Commission clearly stated that it will orderly release all coal-fired power generation electricity grid prices, and coal-fired power generation electricity will enter the electricity market in principle, forming grid electricity prices through market transactions within the range of "benchmark price+fluctuation".







▶ Grid side:

The profit model is better than the power generation side.



Peak shaving: With subsidies, the economy is predictable, and the future decrease in electricity costs will bring about economic benefits. The compensation price for peak shaving in China is around 0.5 yuan/kWh, while the current cost of lithium battery energy storage per kWh is between 0.5-0.6 yuan/kWh, achieving economic and predictable peak shaving; And as the cost of lithium batteries continues to decrease, cycle life improves, and battery capacity increases, the cost of lithium energy storage will continue to decrease, and the economy is expected to continue to improve.



Frequency modulation: It mainly relies on providing frequency modulation services to obtain compensation benefits and is currently economically viable. At present, the mileage cost of lithium iron phosphate energy storage power stations can be reduced to less than 6 yuan/MW, which has the competitiveness of equal participation in electricity market service transactions. Moreover, lithium energy storage has fast regulation speed, high regulation quality, strong configuration flexibility, and more advantages in profitability (AGC compensation fee=regulation depth * regulation performance * unit mileage frequency regulation price). It will be a priority choice for future independent or joint frequency regulation energy storage power stations.



▶ Electricity consumption side:

The main applications in China are industrial and commercial storage allocation, and arbitrage through peak valley price differences.



Household use: Domestic civil electricity prices are relatively low, and most residential buildings are high-rise, with limited space for developing household photovoltaic+energy storage.



Industry and Commerce: With economic viability, it is expected that the economic viability will further enhance in the future with the expectation of increasing peak valley price differences. The peak hours of industrial and commercial rooftop photovoltaic power generation are similar to the peak hours of electricity consumption, and the photovoltaic power generation is usually much lower than the daily electricity load. Therefore, there is no scenario where photovoltaic energy is used for energy storage and charging, and storage is only used for peak valley arbitrage. Under the calculation caliber, the LCOS of domestic industrial and commercial distribution and storage is 0.64 yuan/kWh, while currently, there are 16 provinces in China with peak valley price differences exceeding 0.7 yuan/kWh.



Due to the fact that the driving forces for certain application scenarios have been described in the Chinese market, we will only introduce the differences between the European and American markets and the Chinese market, without going into too much detail.



2) Europe: Taking Germany as an example, household photovoltaic distribution and storage have economic viability



▶ The flexibility stock of the German power system is sufficient, and the development space of the pre balance sheet market is limited, greatly reducing the demand for other market entities to participate in peak valley arbitrage and frequency regulation markets.



▶ High electricity prices and high household photovoltaic installed capacity make household energy storage highly economical:

The electricity price for German residents has been continuously increasing for 12 years, reaching 0.32 euros per kilowatt hour in 2020. Due to the continuous increase in renewable energy surcharges and transmission and distribution fees, the compound growth rate of electricity costs in the past 10 years is 2.78%. The cost of electricity for residents is too high and there is no peak valley difference;



In 2020, the cumulative installed capacity of household photovoltaics in Germany was 31.23 GW, with a total installed capacity of 1.3 million households, ranking first in Europe, laying the foundation for the development of household energy storage (by increasing the allocation of energy storage to improve the self use rate of evening electricity scenarios, the overall electricity cost level can be reduced);



The German state governments have introduced various preferential policies, such as allowing the cost of purchasing household energy storage equipment to be used to offset personal income tax or directly obtain subsidies, giving the household energy storage market economy;



According to our calculations, the current household solar energy storage LCOS is 0.28 euros per kilowatt hour, which is lower than the household electricity bill of 0.32 euros per kilowatt hour and has start-up economy.







3) United States: High growth in the pre meter market, with economic viability on both the generation and grid sides



▶ The US power grid has a weak foundation and needs to rely on auxiliary electricity services to complete the consumption of new energy. The infrastructure construction of the US power grid was mostly carried out decades ago, with problems such as outdated transmission lines and high renovation costs. Therefore, the federal government is currently unable to achieve nationwide scheduling, and the problem of new energy consumption needs to be solved by each region. Due to Independent Power Producer (IPP) being the largest investor in wind and solar power plants in the United States, accounting for 83%, and the insufficient natural gas peak shaving power stations in most IPPs, energy storage must be configured.



▶ Battery energy storage can participate in the electricity wholesale and auxiliary service market, and establish a profit model. With the passage of Act FERC841 in 2018, battery energy storage is allowed to participate equally in electricity ancillary services and wholesale markets. In December 2018, regional power grid operators submitted corresponding amendments. From then on, large-scale battery energy storage systems have a clear profit model, namely PPA or power auxiliary services, corresponding to the generation side and grid side, respectively. Since then, the installed capacity of battery energy storage has officially entered a period of high growth.



▶ Grid side light storage is superior to natural gas. 40% of the electricity generated in the United States comes from natural gas. With the reduction of photovoltaic and lithium battery costs, the peak shaving effect and economy of photovoltaic storage projects are currently better than natural gas on the grid side. According to Lazards data, the peak shaving cost of solar energy storage in 2020 was 143 $/MWh, lower than the 175 $/MWh of natural gas peak shaving.



▶ PPA for energy storage on the power generation side has become economically viable. Due to the low curtailment rate in most regions of the United States, the return on investment solely from eliminating curtailment losses is relatively low; The use of energy storage to turn photovoltaic power stations into sustainable PPA models for selling green electricity to electricity users (where the electricity user and the power supplier sign long-term purchase agreements, set electricity prices in advance, and the power supplier needs to meet the real-time electricity demand of the electricity user) is more advantageous. Unlike the 10% and 2-hour energy storage configurations in China, the current energy storage power ratio for most new energy+energy storage projects in the United States is between 20% and 50%. Based on different power ratios, it can be calculated that when the energy storage power ratio is controlled within 50%, photovoltaic power stations have a relative advantage over natural gas power stations.











2. From a market perspective, what is the current sales situation in the three major markets of China, Europe, and America?



2.1. Looking at Now:

China, Europe, the United States, and South Korea are currently the main markets for energy storage. In 2020, China, the United States, Europe, and South Korea respectively added 2.4GWh/2.5GWh/1.9GWh/2.2GWh, corresponding to YoY+267%/+289%/+19%/+30%.



▶ China: Policy support and reduced cost of electrochemical energy storage are the main reasons for the growth of domestic energy storage installed capacity in the past 20 years;



▶ Europe: Increments mainly contribute to the German and UK markets.

1) Germany: As mentioned earlier, household energy storage is the main growth point in the German market;

2) UK: Renewable energy generation continues to increase, national and local power grids are becoming increasingly restricted, and the pre - and post meter markets have become the main growth points;



▶ In the United States, the increment mainly comes from the energy storage economy brought about by the ITC (Solar Investment Tax Reduction) policy, which has led to the large-scale construction of independent energy storage stations and an increase in household energy storage demand under extreme weather conditions;



▶ South Korea: Driven by subsidy policies, it has become the world's first energy storage market with a significantly higher installed capacity in 2018 compared to other countries and regions; However, in recent years, due to the frequent safety accidents of energy storage power stations, the demand for energy storage in the market has declined, and the subsidy policy for energy storage in South Korea has declined since 2021. It is expected that the South Korean market will find it difficult to sustain high growth rates in the future.



2.2 Looking into the future:

It is expected that the three major markets in China, Europe, and the United States will continue to explode, and the global energy storage shipment volume is expected to reach 40GWh/100GWh in 2021 and 2022. Downstream demand in the industry will more than double in 2022.

We verify market prosperity from two dimensions: battery factory production scheduling and market demand.

1) Check the battery factory's production schedule:

▶ In 2021, the energy storage shipment volume of major domestic battery factories is expected to be around 30GWh. Considering the competitive landscape of foreign battery factories, it is expected that the global energy storage shipment volume will be around 40GWh;



▶ In 2022, the energy storage shipment volume of major domestic battery factories is expected to be around 74GWh. Considering the competitive landscape of foreign battery factories, it is expected that the global energy storage shipment volume will be around 100GWh.



2) Looking at the demand situation in various markets:

▶ China: Stimulated by policy support and electricity mechanism reform, the installed capacity of energy storage is expected to reach 8GWh (according to the National Energy Administration's caliber) in 2021, and 20GWh in 2022;



▶ Europe: It is expected that Germany and the United Kingdom will continue to be the main growth points for the European post meter and pre meter markets, and the installed energy storage capacity is expected to reach 2.1 GWh (EASE caliber) in 2021;



▶ United States: The newly installed capacity from January to September has reached 4.6GW, which is calculated based on 2 hours of configuration and has reached 9.1GWh; It is expected that the installed capacity of energy storage will exceed 12GWh in 2021 and reach 30GWh in 2022;



*Considering factors such as the ratio of installed capacity to production and the time difference in project confirmation of installed capacity, there is actually a difference of about 60% -70% between the shipment volume of energy storage batteries and the installed capacity of energy storage. Therefore, comparing the shipment guidelines of battery factories, we have a certain rationality for the demand in various markets.



3. From an investment perspective, with the explosion of the energy storage industry, what is the performance elasticity of related targets?

3.1 Introduction to lithium-ion energy storage system: It consists of battery, PCS, BMS, EMS, etc., among which the cost of battery accounts for the highest proportion

The cost of battery packs accounts for nearly 60%, PCS accounts for 10-20%, and other costs account for approximately 20-30%.

▶ Battery pack;

▶ Energy Storage Converter (PCS), responsible for bidirectional conversion of AC and DC;

▶ Battery Management System (BMS), responsible for monitoring, evaluating, protecting, and balancing batteries;

▶ Energy Management System (EMS), responsible for data collection, network monitoring, energy scheduling, etc;

▶ Other electrical equipment, including components, temperature control, etc.