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Pumped for the Future

Construction of pumped-storage hydropower has accelerated as China pushes forward its green energy goals

By Chen Weishan , Xu Ming Updated Jun.1

Chen Wei, a general manager at Shanghai-based Jumbo Consulting, says there is a new enthusiasm to invest in pumped-storage hydropower (PSH) stations, buoyed by government pronouncements of support in the past two years. “PSH is one of the few effective investment options recognized by the market, although infrastructure investment is warming up overall,” Chen said.  

Entering 2022, many local governments claimed their PSH projects were their biggest single investment ever, making no secret of their interest in future tax revenue and job opportunities. A project in Yanling, Hunan Province that started construction in September 2022, is expected to generate tax revenues of 100 million yuan (US$14.6m) and provide 2,000 jobs. 
Energy storage aims to address the imbalance in energy supply and demand, particularly renewable sources which can be unstable. As the capacities of wind and solar energy grow, increased energy storage is crucial for grid reliability and resilience, functioning like a giant battery to release electricity when needed.  

Pumped storage hydropower, the most common global energy storage method, exceeds alternatives like batteries. Excess power pumps water from a lower to an upper reservoir according to demand, which then drives turbines to generate electricity. Mature and cost-effective, it is the best solution for large-scale, long duration storage, although it generally consumes more electricity than it generates. However, using excessive renewable electricity to pump the water back up can address these issues.  

China has built pumped hydro facilities since the 1960s as its most widely used energy storage method.  

PSH construction slowed in the 2000s until 2021, partly due to viability. China had aimed for 40 gigawatts (GW) of PSH capacity by the end of the 13th Five-Year Plan (2016-2020), but reached only 31.49 GW.  

By the end of 2021, China led the world with 36.39 gigawatts (GW) of installed capacity, but still fell short of its 40 GW target. It accounted for only 1.5 percent of total power installation, far below the 5-10 percent in developed countries that experts suggest is needed for optimal grid support during peak demand.  

Over the past two years, the country’s commitments to carbon reduction and green energy have highlighted PSH’s role in energy security and mitigating the unreliability of renewables. However, PSH alone is not enough. Alternative techniques, such as electrochemical (batteries and supercapacitors), thermal, mechanical and compressed-air energy storage, are being developed quickly, and may encroach on PSH’s share as they have obvious advantages in cost, space and do not take long to build. 

Breakdown of China’s Energy Storage Projects in Operation (by the end of 2021)

How Pumped Storage Hydropower Works

Insufficient Storage 
Strategies to ensure grid stability include combining wind and solar – using solar during the day and wind at night – and supplementing the wind-solar mix with coal-fired power when there is no wind at night, Chen Haisheng, president of the China Energy Storage Alliance, told NewsChina.  

Thermal power, primarily coal-fired, supplements wind and solar energy when they underperform. But once renewable energy becomes dominant in a country’s energy generation mix, thermal power struggles to support them, Chen noted. “Adding flexible power resources like energy storage to the power system is the fundamental solution,” Chen said.  

To achieve peak carbon emissions by 2030 and carbon neutrality by 2060, China plans to increase wind and solar capacity to 1.2 billion kilowatts by 2030 and the share of non-fossil energy to 80 percent of the country’s power consumption by 2060. China’s 14th Five-Year Plan (2021-2025) for energy, released by the National Energy Administration (NEA) and the National Development and Reform Commission (NDRC) in early 2022, sets a goal of raising the proportion of flexible power resources to 24 percent by 2025, up from 18.5 percent in 2020. It is over 30 percent in developed countries.  

To provide a significant renewable energy contribution to the grid, storage capacity must reach at least 10-15 percent of total installed capacity, compared to the current 2 percent. “There’s a lot of room for growth,” Chen Haisheng said.  

In China, PSH accounted for 86.3 percent of power storage capacity in operation by the end of 2021. It grew rapidly in the 1990s to support thermal and nuclear power and regional power safety. But in 2002, China’s market reforms forced power generation and grid companies to split, leaving grid companies tasked with ensuring power stability, including PSH management. However, grid companies were reluctant to invest in costly and unprofitable PSH. There were also voices against PSH development, citing environmental concerns.  

PSH construction slowed. Chen Wei said the NEA tried to encourage private capital to invest in PSH in 2015. But at that time, PSH was mostly developed by State-owned enterprises (SOEs) and considered part of grid infrastructure. There was no clear business model for PSH projects, he said.  

Specifically, there is no pricing mechanism for investors to recoup the costs of building PSH stations. In 2019, the NDRC stipulated that PSH stations and power storage facilities should not be priced into the cost of electricity generation, further dampening investment interest.  

Things changed in May 2021, when the NDRC released guidelines for PSH pricing mechanisms, outlining two ways for recouping development costs.  

PSH stations can recover 20 percent of the spread between the selling price of generated electricity and the cost of pumping water, covering both pumping and power generation expenses. The cost of other services, like frequency and pressure regulation of grids, will receive fixed compensation based on capacity and fixed asset investment (with an internal rate of return of 6.5 percent). Paid by provincial grid companies, this compensation will be the primary profit source for PSH stations.  

Second, the guideline encourages PSH stations to offer power auxiliary services, utilizing surplus capacity to participate in the electricity market, and progressively recovering costs through market-oriented operations.  

“The proposed model in the guideline makes PSH projects darlings of banks,” Chen said, adding that currently it is quite easy to finance such projects as it means stable business models and government support. 

Expanding Capacity 
Between 2021 and 2022, the number of PSH projects provincial governments approved rose from 11 to 48, with potential capacity surging from 13.8 to 68.89 GW.  

In September 2021, the NEA released a development plan for PSH between 2021 and 2035, aiming to expand installed capacity to 62 GW by 2025 and 120 GW by 2030, as part of efforts to boost green energy and achieve carbon emission reduction goals.  

In April 2022, the NDRC pushed to accelerate PSH project approvals by the end of the year. This guaranteed government support led to more competition and eagerness to invest.  

The NDRC has the final approval of locations for PSH. But as of 2014, once a location is approved, provincial governments undertake assessments, put out bids and approve projects.  

Most PSH projects were built by SOEs. By early 2022, just two subsidiaries of State Grid and China Southern Power Grid accounted for over 90 percent of installed capacity of PSH stations in operation.  

In early 2022, six companies won bids in Jiangxi Province. Some are national SOEs like the State Power Investment Corporation Limited and China Huaneng Group, others are local SOEs like Jiangxi Provincial Investment Group. “Local SOEs and government-funded financing platforms invest in government projects for the public good. They are looking for new directions and no doubt have interest in PSH projects,” Chen said.  

PSH stations involve huge investment. For example, a project of 1.2 million kilowatts, a common size, requires about 7 billion-yuan (US$1.02b) to build, which is why SOEs play a leading role. 
Chen said that newcomers for PSH projects fall into several categories: power and new energy generators with storage needs, local SOEs and financing platforms, and infrastructure companies like China State Construction and China Communications Construction. “They’re all scrambling for PSH projects,” Chen said.  

PSH requires lots of land for an upper and lower reservoir, and a power generating station. It also needs to be accessible. Some suitable locations have already been approved, so room for expansion is limited, especially for big projects, Chen said. Existing PSH stations are mainly located in water-rich, mountainous areas in southern and eastern China, such as Guangdong, Zhejiang, Anhui and Jiangsu provinces, he said.  

Chen believes that hybrid stations, which generate power consistently rather than intermittently for load adjustment and power storage, have more potential for development, as well as smaller stations with a capacity to generate tens of thousands of kilowatts.  

Despite the seemingly rising enthusiasm for PSH, there is no need to worry about short-term over-investment, as the rapid growth of the installation capacity of renewable energy drives power storage popularity, industry insiders said. 

More Ways Out 
Yet building a PSH station takes at least six to seven years. Gu Yu, vice president of WeView, a new energy storage company, told NewsChina that due to an investment trough, projects that broke ground in 2022 will not come online until 2030, making it hard to match the ramped-up new energy capacity.  

“Some local governments we talked with expressed these concerns. After all, they can’t hold off on wind and solar installations until PSH stations come online,” Gu said.  

This brings new opportunities for energy storage solutions, notably electro-chemical storage, such as rechargeable batteries. By the end of 2022, lithium-ion batteries accounted for 94.5 percent of new power storage capacity in China, while compressed-air, flow battery and lead batteries accounted for 2 percent, 1.6 percent and 1.7 percent.  

“Before the many PSH stations under construction go online between 2028 and 2030, new types of energy storage will grow rapidly as it’s much easier to find locations for them and the installation and testing cycles are much shorter – mostly two to three months, or half a year at most,” noted Liu Yong from the China Industrial Association of Power Sources.  

What’s more, PSH cannot fulfill every demand. The China Energy Storage Alliance (CNESA) identified about 18 links in electricity generation, transportation, distribution and use that require power storage. Different storage solutions cater to different application scenarios.  

“Lithium-ion batteries with high energy density that last one or two hours, for example, are suitable for small-scale distributed energy and user-side power storage. PSH, in contrast, provides longer duration [at least four hours] and larger capacity, making it ideal for adjusting base and peak loads. They complement each other,” said a staff member from a power storage company who requested anonymity. “One solution is not enough for the whole market.”  

This person believes that with government encouragement, the scale of PSH installation will continue to increase, but its market share will gradually shrink. By the end of 2021, the share of PSH across the whole energy storage market fell below 90 percent. “Seven or eight years ago, it was 99 percent. At that time, PSH was a byword for energy storage.”  

In July 2021, the NDRC and NEA published a guideline for new energy storage development that set a goal of increasing the installed capacity of new energy storage, like batteries, to 30 GW by 2025, eight times more than that of 2020. Since the latter half of 2020, many local governments and cities have encouraged projects that combine new energy and storage. By December 2022, nearly 30 provinces had released plans for new energy storage and development, according to the CNESA. The goal surpasses 60 GW, twice that proposed by the NEA guideline.  

Liu Yong told NewsChina that in 2022 alone the new installed capacity of new types of energy storage increased from 2 GW to 5.6 GW nationally. Present capacity is already close to 10 GW. 

Chen Haisheng noted that the ambitious plan reflects the provinces’ increasing requirements for power storage. But he warned local governments should not rush into mass construction as the business mode for the energy storage industry is yet to mature. He suggested they choose solutions that suit them best.  

The dominance of lithium-ion batteries in the new energy storage market is challenged by surging costs, particularly the lithium carbonate needed to produce batteries, and the rise of other storage techniques.  

Gu Yu said this year power storage companies do not lack orders, but capacity is insufficient. His company is bringing forward construction of flow battery plants, which uses chemical components dissolved in liquids to store energy and generate electricity, in Yancheng, Jiangsu Province and Zhuhai, Guangdong Province.  

A person from a company engaged in compressed-air power storage (which works on a similar principle to PSH) revealed that compared to a few years ago, new technical solutions have gained more recognition. “There are already SOEs willing to invest in compressed-air stations. Such stations require high capital, so SOEs are the pillar of investment. But there are also private companies who hope to make initial investments and then transfer the project to SOEs,” said the person who spoke on condition of anonymity.  

He admitted that compared to PSH stations, financing new types of power storage projects, including compressed-air storage, is harder without a clear pricing policy and stable business prospects.  

In June 2022, the NEA and NDRC issued a notice encouraging developers of new types of power storage to participate in the market. Now many places are exploring possible business models. In Shandong Province, energy storage stations try to profit mainly from real-time trading of electricity and subsidies for providing load adjustment services.  

“The installation of energy storage lags behind mainly because it is still exploring business models, and there’s so far no mature mechanism to recoup the cost,” Liu Yong said.  

A report published by China Electric Power Planning & Engineering Institute in March shows that the installed capacity of new storage types is expected to surpass 50 GW by the end of 2025, four times that of 2022.  

But many are still waiting for the catalyst that sets the market into full swing, just like the 2021 policy did for PSH.

A compressed-air power storage station, Changzhou, Jiangsu Province, May 26, 2022 (Photo by Hu Ping)

A large hybrid PSH project begins construction, Garze Tibetan Autonomous Prefecture, Southwest China’s Sichuan Province, December 29, 2022 (Photo by Xinhua)

An aerial view of Fengning pumped-storage hydropower station, Zhangjiakou, Hebei Province, June 26, 2020 (Photo by VCG)