CITIC Construction Investment: The energy storage industry is expected to usher in non-linear growth, significantly improving the supply and demand of the lithium battery industry chain

According to the Zhitong Finance APP, CITIC Construction Investment has released a research report stating that over the past two years, the cost of battery cells has dramatically decreased, and technological advancements have driven down costs, leading to a significant reduction in energy storage system costs. On the revenue side, domestic benefits have arisen from the widening peak-valley price difference and the introduction of capacity electricity prices and compensation policies, resulting in a noticeable increase in IRR. The firm believes that the energy storage industry is at a similar industrial inflection point. Starting in 2024, overseas demand driven by economic viability and the urgent need for energy transition has shown a comprehensive blossoming state. The firm predicts that in the coming years, energy storage is expected to replicate the historical story of accelerated growth in penetration rates and demand, significantly improving the supply and demand of the lithium battery industry chain. It is core to focus on leaders in integration, battery lithium materials, inverters, and other segments, and to pay attention to leading companies in the energy storage industry chain and those with price elasticity.

The main points of CITIC Construction Investment are as follows:

By reviewing the explosive demand nodes in the photovoltaic, new energy vehicle, and smartphone industries, the firm found that after the emergence of industry inflection points driven by market factors, industry penetration rates often exhibit unexpectedly rapid growth, while demand shows non-linear growth:

1. In the history of photovoltaics, there have been three instances of accelerated growth in demand and penetration rates driven by economic improvements, including the second half of 2017, 2019, and 2020-2021. In all three phases, the IRR of photovoltaic power stations significantly increased after a period of declining photovoltaic system costs (2019 and 2020-2021 were also accompanied by significant interest rate cuts by the Federal Reserve), and this change became a key node for the accelerated growth of photovoltaic demand.

2. New energy vehicles, under the pressure of subsidy reductions, have achieved cost-effectiveness after two years of declining product costs. Starting in 2020, new models have flourished, and the model structure was further optimized in 2021, driving the penetration rate of new energy vehicles to rapidly exceed 20%, achieving a leap in penetration rates from 20% to 60% within four years, marking a period of accelerated penetration rate growth in the industry.

3. The smartphone industry experienced rapid growth from 2008 to 2011, benefiting from the open-source nature of the Android system, the maturity of core chip solutions, and the popularization of 3G networks, which propelled domestic smartphone brands to rise quickly, enriching smartphone products and further reducing costs. This led to accelerated growth in penetration rates and demand.

Currently, energy storage has a strong comparability to the states of the above three industries at that time. Over the past two years, with the reduction in battery cell costs and technological advancements driving down costs, energy storage system costs have significantly decreased. On the revenue side, domestic benefits have arisen from the widening peak-valley price difference and the introduction of capacity electricity prices and compensation policies, resulting in a noticeable increase in IRR. Starting in 2024, overseas energy storage demand has shown a comprehensive blossoming state, and the firm predicts that in the coming years, energy storage will replicate the trend of accelerated growth in penetration rates and demand.

Domestic: Market-driven policies will promote non-linear growth in demand at the economic inflection point

After the release of Document No. 136, the era of domestic energy storage relying on mandatory renewable energy storage has officially ended, and industry demand is gradually shifting from policy mandates to economic drivers. In the past few years, as battery cell costs have decreased and technological advancements have further reduced energy storage system costs, the investment costs for energy storage have significantly decreased. Meanwhile, after the large-scale integration of renewable energy, the peak-valley price difference in the electricity spot market has continued to widen. Following Document No. 136, renewable energy has fully entered the market, enhancing the effectiveness of electricity prices on supply and demand, and increasing the arbitrage space for energy storage peak-valley price differences The introduction of capacity electricity prices and capacity compensation policies has further boosted the domestic energy storage IRR, and this change will drive domestic energy storage demand to accelerate growth starting in 2026.

Overseas: Global demand blooming in multiple areas, AIDC new scenarios provide greater growth space

In fact, since 2024, overseas energy storage has already formed a situation of blooming in multiple areas, with the core driving factor being the significant reduction in photovoltaic and energy storage costs. The levelized cost of electricity for photovoltaic systems paired with a high proportion of energy storage has clearly fallen below that of other power sources, marking the arrival of an economic inflection point. For example, in addition to the United States, markets in Europe, Australia, the Middle East, India, and South America have seen accelerated demand growth since 2024. This year, AIDC capital expenditures have accelerated, and photovoltaic paired with energy storage, as one of the lower-cost power supply forms, will also benefit from the expansion of AIDC. Currently, some AIDC projects in the Middle East have adopted new energy paired with a high proportion of energy storage to achieve stable power supply. Additionally, the overseas interest rate reduction cycle will also lead to a decrease in financing costs, and the IRR of energy storage capital is expected to rise further.

Driven by the economic inflection point, the current energy storage industry has welcomed a comprehensive resonance of domestic and overseas demand, while new scenarios such as AIDC will provide further increments. The global energy storage penetration rate will rapidly increase. The institution expects that from 2025 to 2027, the newly installed capacity of domestic energy storage will reach 150, 260, and 380 GWh, respectively, while globally it will reach 272, 441, and 642 GWh.

Supply chain tightening, industry capital expenditure willingness has significantly decreased in recent years

In recent years, due to the lithium battery industry's profitability being in a downward cycle and the capital market financing tightening significantly, the willingness for industry capital expenditure has noticeably weakened. The institution estimates that under the assumption of a 75% growth rate in domestic energy storage demand (neutral expectation), prices for lithium iron phosphate cathodes, 6F, separators, and copper foil may all rise. If optimistic expectations (110% growth rate in domestic energy storage demand) are realized, material prices are expected to rise across the board, and lithium carbonate will also see a price reversal.

Risk warnings:

1. Demand aspects: Changes in national infrastructure policies leading to power investment scales falling short of expectations; grid investment scales falling short of expectations; a decline in new energy installation growth leading to decreased demand for power equipment; a slowdown in overall electricity consumption growth; the bidding progress of the two networks falling short of expectations; and the progress of ultra-high voltage construction falling short of expectations.

2. Supply aspects: Rising prices of bulk commodities such as copper resources and steel; tight supply of power electronic devices, with domestic production progress falling short of expectations.

3. Policy aspects: Insufficient support for the new power market; slower-than-expected progress in electricity pricing mechanisms; slower-than-expected progress in the electricity spot market; and electricity peak-valley price differences falling short of expectations.

4. International situation: Rapid alleviation of the energy crisis and a quick decline in energy prices; deepening international trade barriers.

5. Market aspects: Significant changes in the competitive landscape; intensified competition leading to lower-than-expected profitability in various links of power equipment; rising transportation and other costs.

6. Technology aspects: Slower-than-expected progress in cost reduction technologies; difficulties in further improving technology reliability