[SMM Analysis] Three Questions to Help You Understand ESS in a Flash

Q1: What is energy storage system (ESS)? Why is ESS needed?

The essence of ESS lies in addressing the mismatch between electricity supply and demand over time, storing electricity when it is abundant and releasing it when it is scarce. Since electricity is difficult to store directly on a large scale, ESS technology stores electricity by converting it into other forms of energy (such as chemical energy, potential energy, momentum, etc.) and efficiently converts it back into electricity for release when needed. This "charge-discharge" process provides crucial flexibility to the power system. This system consists of four core components that jointly support the flexible regulation of the power system:

        1. Energy storage battery cell: The "treasury" of energy

As the core warehouse of the ESS, the battery pack determines the scale and efficiency of energy storage. Currently, LFP batteries dominate the market due to their high safety and long cycle life. Compared to lithium batteries, sodium-ion batteries exhibit superior performance in terms of high and low temperature resistance and cycle life, but their energy density is lower than that of lithium batteries. Currently, sodium-ion batteries are in the early stages of development.

        2. Power Conversion System (PCS): The "interpreter" of current

PCS enables real-time conversion between alternating current (AC) (power grid) and direct current (DC) (battery). Currently, the main applicable specifications for PCS in the market are around 5MWh. The new generation of grid-forming converters possess the capability of "active grid-building," which can replace traditional thermal power to stabilize grid frequency, serving as the "anchor" of the power system.

        3. Battery Management System (BMS): The "health steward" of batteries

It monitors the voltage and temperature status of tens of thousands of battery cells 24/7 and predicts failures through AI algorithms. When a battery cell "overheats" (experiences abnormal temperature), the BMS immediately isolates the risk to prevent a chain reaction—akin to installing an intelligent fire protection system for an energy bank.

         4. Energy Management System (EMS): The "brain" of ESS

 It automatically decides when to store and discharge electricity based on fluctuations in electricity prices in the power market.

Chart-1: Industry chain of ESS

Q2: How important is ESS?

The demand side of ESS mainly comprises three aspects: the power generation side, the grid side, and the user side.

       1. Power generation side

Currently, ESS on the power generation side is mainly used to enhance the frequency regulation response capability of thermal power plants and the utilization efficiency of new energy power generation. In the traditional thermal power sector, ESS (especially power-type batteries) is used as a key tool for auxiliary frequency regulation. By installing ESS in regions dominated by coal-fired power, such as Shanxi and Inner Mongolia, where power supply flexibility is insufficient, the response speed and accuracy of generating units to grid frequency regulation instructions can be significantly improved. In the new energy sector (wind power, PV), the role of ESS is crucial. The inherent randomness, volatility, and intermittency of new energy power generation significantly increase the difficulty of system balancing after its high-proportion integration into the power grid. Energy storage systems (ESS) effectively smooth the power generation output curve and reduce "curtailment of wind and PV power generation" by tracking power generation plans in real time: discharging to supplement power during low output periods of new energy and charging to absorb power during peak output periods. This enhances the consumption level and utilization efficiency of new energy.

        2. Grid-side

Grid-side ESS directly serves the safe, stable, and efficient operation of the power system. Its core functions include providing critical power ancillary services such as peak shaving, valley filling, reserve, and black start, as well as deferring or replacing costly investments in transmission and distribution facility upgrades (i.e., substitution-type ESS). So, what exactly is peak shaving and valley filling? "Peak" represents the peak electricity consumption period, typically occurring during daytime working hours. When the load curve climbs into the red peak zone, generators, transformers, and power transmission lines all approach their physical limits. This is akin to highway congestion during holidays, with electrical equipment continuously overloaded. Conversely, "valley" represents the low electricity consumption period, typically at night, when energy waste occurs. Simply put, peak shaving and valley filling adjust a fluctuating load curve into a flatter one by discharging during peak periods and charging during valley periods through the ESS.

    Chart-2: Typical Load Curve on Weekdays in Shanghai

Chart-3: Ideal Load Curve

Data Source: Chinese Government Website, Compiled by SMM

Compared to the power generation-side, the business model for grid-side ESS has gradually become clearer, forming multiple revenue sources: capacity rental fees from new energy power plants, capacity compensation provided by the government, revenue from participating in the power ancillary services market (such as peak shaving and frequency regulation), and arbitrage opportunities in the power spot market.

Chart-4: Functional Pathways of Grid-side ESS

        3. User-side

User-side ESS is located at the power consumption terminal. Its core driving force lies in achieving economic benefits through electricity price spreads (peak-valley arbitrage), supplemented by additional revenue from providing ancillary services such as demand response to the power grid. Users are highly sensitive to return on investment, and the degree of marketization is high. Revenue stability is a key constraint on its development. It is mainly divided into two categories:

Industrial and commercial ESS: Primarily serves factories, shopping malls, industrial parks, etc. Its advantages include diverse application scenarios (such as pairing with PV and demand management), high system utilization rates, and a clear calculation of the investment payback period through peak-valley electricity price spreads. It has developed rapidly in regions with large peak-valley electricity price spreads and high industrial and commercial electricity prices, such as Zhejiang, Jiangsu, and Guangdong, becoming the most market-oriented and commercially clear ESS application area. Additionally, some industries, such as data centers and 5G base stations, have extremely high requirements for the stability of electric power. Consequently, their demand for energy storage systems will grow the earliest.

Household Energy Storage: Typically integrated with household PV systems, the goal is to achieve "self-consumption and surplus electricity storage" for household power. Its value lies in reducing household electricity expenses, improving energy self-sufficiency rates, and enhancing power usage safety, while also providing benefits such as smoothing load fluctuations for the power grid. However, its development in China faces significant bottlenecks: Residential electricity pricing mainly adopts a tiered electricity tariff rather than time-of-use electricity prices, lacking supporting peak-valley electricity pricing mechanisms, energy storage electricity pricing, and compensation policies, making it difficult to alleviate costs. Meanwhile, the high initial investment (for equipment such as solar panels, ESS batteries, and inverters) also suppresses the installation willingness of ordinary households.

Q3: How is energy storage implemented?

As a key means of balancing power supply and demand and enhancing power grid resilience, energy storage technologies have developed in various forms. Pumped hydro storage is currently the most mature, economically optimal, and most suitable for large-scale development among green, low-carbon, clean, and flexible power regulation sources for power systems. It utilizes excess electricity to pump water uphill and generates electricity by releasing water during power shortages. The technology is mature but significantly constrained by geographical conditions.

 With the large-scale grid connection of renewable energy and the surge in demand for power system flexibility, new-type energy storage, represented by electrochemical energy storage, has experienced explosive growth. Among them, lithium-ion battery energy storage has become the absolute mainstay in the current new-type energy storage sector due to its advantages of high energy density, fast response speed, and flexible deployment.

The battery cell is the smallest energy unit in a lithium-ion energy storage system, and its performance directly determines the efficiency, lifespan, and safety of the entire system. Currently, the mainstream material system used is lithium iron phosphate (LFP), which perfectly meets the stringent requirements for safety and economy in energy storage scenarios due to its high thermal stability, long cycle life, and relatively low cost.

According to SMM evaluation data, global ESS battery cell shipments reached 334 GWh in 2024, with LFP ESS battery cell shipments reaching 317 GWh. In 2025, the global demand for energy storage continues to grow. From the supply side, considering safety and technological factors, the global production and sales of ESS battery cells are still dominated by China. Currently, the main market participants include enterprises such as CATL, EVE, Hithium, BYD, REPT BATTERO, and Gotion High-tech.

Large-capacity battery cells have become the core engine driving industry upgrades. In 2024, the large-scale deployment of 300Ah+ battery cells marked an acceleration in technological iteration. Among them, the 314Ah battery cell, with its core advantages of a 12% increase in capacity (compared to 280Ah) and a breakthrough in single-cabinet energy density exceeding 5 MWh, successfully simplified the integration process and reduced equipment and labor costs, significantly enhancing the economic efficiency of energy storage terminals. By the first quarter of 2025, the global penetration rate of 314Ah battery cells had exceeded 65%, completely replacing 280Ah as the absolute mainstream in the market.

The competition for battery cells with larger capacities has intensified, forming a parallel pattern of three technological paths:

    The 392Ah camp, represented by CALB (formerly known as China Aviation Lithium Battery) and REPT Battero, is compatible with existing production lines to achieve rapid mass production, adapting to 6.25MWh systems, and balancing both economy and compatibility;

     The 500+Ah camp is led by CATL, with its 587Ah battery cell featuring an energy density of 435Wh/L, a 25-year lifespan, and a 20% improvement in thermal stability. It reduces system costs by 15% by cutting down 40% of the parts;

     The 600+Ah camp is exemplified by Sungrow's (system integration) 684Ah laminated battery cell, paired with innovative thermal management technology to address safety challenges posed by high energy density.

Although the increase in battery cell capacity reduces connection complexity and land costs, it also highlights issues such as heat dissipation difficulties, amplified manufacturing defect rates, and system compatibility problems. Top-tier enterprises are breaking through safety bottlenecks through material and structural innovations. The future focus of competition will shift from a single capacity parameter to the full life cycle value: safety has become a fundamental consensus, with solid-state electrolytes, intelligent monitoring, and fire protection designs forming a multi-level protection system; economy requires balancing capacity increases with the levelized cost of storage (LCOS). Technologies with low resource dependency, such as sodium-ion batteries and LMFP (lithium manganese iron phosphate), are accelerating industrialisation to support long duration energy storage (LDES) demand.

SMM New Energy Industry Research Department

Wang Cong 021-51666838

Ma Rui 021-51595780

Feng Disheng 021-51666714

Lv Yanlin 021-20707875

Zhou Zhicheng 021-51666711

Zhang Haohan 021-51666752

Wang Zihan 021-51666914

Wang Jie 021-51595902

Xu Yang 021-51666760

Chen Bolin 021-51666836

Yang Le 021-51595898

Li Yisha 021-51666730