CITIC SEC: User time-of-use electricity pricing connects the market, industrial and commercial energy storage model changes

CITIC SEC has released a research report stating that the shortage of electricity system capacity may be further exposed in 2026, driving the growth of various types of electricity auxiliary services demand. The bank predicts that investments in energy storage in the Northwest region, where there is a wide spread in spot prices, strong demand for regulation, and strong policy support, are expected to rise. Operators with new energy storage-related layouts in this region are expected to benefit. In addition, the regulation value of hydropower and thermal power is also expected to increase, and demand-side virtual power plants, microgrids, and source-grid-load storage are also expected to usher in accelerated development opportunities. CITIC SEC's main points are as follows: Event Recently, the National Development and Reform Commission and the National Energy Administration issued a notice on the performance of long-term contracts for electricity in 2026, stipulating the proportion of long-term contracts signed between power generation companies and electricity users, cross-provincial transaction performance mechanisms, market price formation mechanisms, and contract performance guarantees. Peak-valley time-of-use electricity prices are connected with market trading results, further promoting electricity market reform. In terms of the long-term contract signing mechanism in this "notice," it is specified that both parties should sign contracts in no less than 24 time periods with curves, further connecting with the spot electricity market, and for the first time stipulating that users participating in the electricity market no longer follow the governments stipulated time-of-use electricity prices, and time-of-use electricity prices should be aligned with spot prices. The new policy means that the electricity prices of market participants will be affected by spot trading results, rather than accepting government-regulated peak-valley electricity prices. The bank expects that with the implementation of the new mechanism, user-side electricity prices will be linked to spot prices, and price signals will more accurately reflect market supply and demand, thereby guiding investments in regulating power sources, energy storage, and demand-side responses. Fundamental changes in the profitability model of industrial and commercial energy storage, with some existing projects facing profit pressure. Currently, in most provinces in China, the peak-valley electricity price policy, peak-valley periods, floating ratios, etc., are still regulated by the government, failing to reflect the actual peak-valley supply and demand situation. Therefore, industrial and commercial energy storage projects have been able to profit from large peak-valley price differentials stipulated by policies. With user-side time-of-use electricity prices linked to spot prices, the bank expects that in some regions with large peak-valley price differentials and long periods, industrial and commercial energy storage projects may face profit margin pressure, and profitability under the new mechanism will be related to factors such as spot price differentials and regulation demands in the region where the project is located. The problem of electricity system capacity shortage is gradually being exposed, and the demand for new energy storage development remains strong. Adjustments in electricity price policies may impact the profitability and future investment enthusiasm of existing industrial and commercial energy storage projects, but the bank believes that factors such as system capacity shortage and escalating absorption conflicts will continue to drive the continuous expansion of new energy storage, especially on the power source and grid-side storage capacities. Regionally, the bank believes that in the eastern and southern regions, new energy storage may face issues of limited spot opportunities, while the Northwest region, where the share of new energy supply is high, regulation demand is stronger, and capacity electricity price policy support is greater, provides a good foundation for the development of new energy storage and is expected to enter a phase of rapid growth. Risk factors Lower-than-expected electricity demand; lower-than-expected new energy installation; significant increase in wind and solar costs; slow progress in the construction of new power systems; slow progress in electricity market reform, etc.