Deal focus: TH Capital identifies key niche in energy storage

As an investor that originated from one of China’s top universities, Tsinghua Holdings Capital (TH Capital) can claim unique insights into domestic innovation. This includes carbon neutrality, which has emerged as a key investment theme on the back of Beijing announcing plans to reach peak carbon usage by 2030 and achieve net-zero greenhouse gas emissions by 2060.

Over the past two years, more detailed policies and initiatives have coalesced around these big-picture goals, with local governments and state-owned enterprises issuing their own targets and roadmaps. Commercialisation opportunities are becoming clear, with energy storage among the most prominent.

“Clean energy could account for 80% of overall electricity generation under a carbon neutral scenario. Once photovoltaics and wind power play an important role in power generation, energy storage will become indispensable. Wind and solar electricity output depends on the weather – it is not stable, and it is not suitable for direct input to the grid,” said Chaowen Li, a director at TH Capital.

The private equity firm, which now operates independently of Tsinghua University under a traditional GP-LP structure, recently demonstrated its commitment to this trend by leading a CNY 320m (USD 48m) pre-Series A round for Zhongchu Guoneng Technology (ZGT), a local energy storage company.

CAS Star, which is controlled by the Chinese Academy of Sciences, CMB International, Legend Star, and Puhua Capital re-upped in the Series A. ZGT’s other backers include Gaorong Capital, Shanghai-listed China Three Gorges Renewables, Cuiwei Group, China-Belgium Direct Equity Investment Fund, and Xinding Capital.

Economic rationale

Renewable energy accounted for 45.4% of China’s overall power generation capacity in 2021, up from 27.7% in 2011, according to Wind, a data provider. Meanwhile, the era of power parity for solar and wind has arrived; they now cost the same – or even less – than traditional energy. Last year, the National Development and Reform Commission (NDRC) ended subsidies for new solar and wind projects.

These energy sources are becoming more economically viable, but they are still unstable, hence an increase in demand for energy storage. By 2021, cumulative installed and operational energy storage capacity in China was 46 gigawatts. Last year alone, newly installed capacity amounted to 10.5 GW, about the same as for the previous four years combined.

Regulation is the real game-changer. For approval of grid connectivity beyond a certain guaranteed scale, power generation companies are encouraged to build or purchase energy storage capacity equal to 15% of their power generation capacity. Those reaching 20% qualify for priority grid connections.

More than 20 provinces and municipalities have embraced this “new energy + energy storage” philosophy, in some cases through formal directives. Most regions require that new energy projects should have energy storage capacity not less than 10% of output capacity. In Henan province and Inner Mongolia autonomous region, it is 20%.

Creative shared storage models have emerged as well. Li noted that in Shandong, power generators with green energy projects can subscribe to use capacity brought online by dedicated storage project operators rather than build their own facilities. A 100-megawatt project can generate CNY 30m in revenue each year, excluding profits from price differentials between peaks and troughs in electricity consumption.

“We have conducted research and made site visits to various projects. Each has its own market and use cases. But we believe that compressed air energy storage (CAES) will occupy a very large market share in the future. Its medium is air, which is natural and low cost. It is not limited by geographical conditions like pumped storage power stations. The construction period is also relatively short,” said Li.

Founded in 2005, ZGT is a CAES specialist. Its core technology comes from a research unit under the Chinese Academy of Sciences, which was the first institution in the country to focus on large-scale CAES. To realize commercialisation, the technology was valued at about CNY 1.85bn.

ZGT claims to have built the world’s first demonstration systems for the technology at 1.5 MW, 10 MW, and 100 MW. It has 44 projects completed or under construction, with a total contract value of more than CNY 5bn. The company’s capacity under construction – actual and planned – exceeds 2,000 MW, which makes it number one in China for CAES and number two overall in new energy storage.

“To easily understand the process of CAES, look at it like inflating a balloon using electricity. When you open the outlet, compressed air rushes out, powering the generator and producing electricity. The stored electricity is therefore released,” Li explained.

Better than batteries?

While batteries are the best-known energy storage solution, Li believes this technology is unsuitable for large-scale wind and solar projects. Individual battery storage capacity is usually dozens of megawatts. The likes of CATL can build much larger projects, but they aren’t cheap and security and safety issues remain a concern. A small incident could easily result in a fire or explosion.

Moreover, although battery energy conversion rates are up to 90%, the lifecycle is relatively short – 8-10 years at most, with incremental deterioration in performance.

“CAES is safe. Air is not flammable; there is no risk of fire or explosions. And it is relatively low cost; we can even store it in excavated natural salt caves to further reduce cost. Finally, CAES can be used for 20-30 years without performance degradation,” said Li.

However, the technology has drawbacks. One is speed. The response time for a battery is a matter of milliseconds; it takes up to 10 minutes for CAES to start to work. Batteries also occupy less space than CAES because of higher energy density, and then the technology is more mature. Compressed air technology was invented in the 1940s but uptake was slow due to conversion rates of just 40-50%.

On efficiency, at least, China is making meaningful progress. Energy conversion rates on ZGT’s large-scale projects of 100 MW can reach as high as 70%.

“Energy storage is a large track opportunity with a market scale of several trillions of renminbi,” said Li. “It can accommodate many companies and there is a good chance that some significant ones will emerge. It is also a long-cycle track, while other tracks quickly reach maturity and then decline. This is important given China’s emissions won’t peak until 2030.”

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• Topics
• Greater China
• Cleantech
• Early-stage
• China
• energy
• energy storage
• renewable energy
• Tsinghua Holdings Capital (TH Capital)
• Legend Star
• Gaorong Capital