China Cracks Power Storage Profit Puzzle: Capacity Charges Post-2026 Policy Reduce BESS Costs by Up to 40% Compared to US/Japan

S&P Global China

Overview

China has enhanced its energy transition by improving power sector pricing mechanisms with “Notice 114,” a policy issued in January 2026, which introduces capacity charges for new energy storage systems like BESS. This policy results in a levelized cost of storage for standard 4-hour lithium-ion battery systems in China that is 28% to 40% lower than in the U.S. or Japan. China is actively promoting the growth of power storage through pumped hydro and batteries, mandating that new data centers in domestic hub nodes operate with at least 80% renewable energy, accelerating renewable integration and grid stabilization.

In Depth

Key Findings

China is actively driving its energy transition by vigorously promoting the growth of power storage through both pumped hydro and Battery Energy Storage Systems (BESS). The policy document “Notice 114,” issued in January 2026, has fundamentally improved pricing mechanisms within the power sector by introducing capacity charges for new energy storage systems, including BESS. As a result, the levelized cost of storage for standard 4-hour lithium-ion battery systems in China is now 28% to 40% lower than in the United States or Japan, creating a globally competitive environment for energy storage deployment.

Technical Details

“Notice 114” strengthens investment incentives for power storage projects by introducing a payment mechanism for storage capacity. This allows BESS to provide services such as grid peak shaving, frequency regulation, and smoothing of renewable energy output, for which they receive compensation. This enhances the economic viability of BESS and shortens payback periods for investors. Technologically, lithium-ion batteries, particularly Lithium Iron Phosphate (LFP) cells, dominate grid-scale storage due to their superior safety profile and cycle life (up to 8,000 cycles). China also mandates that new data centers in domestic hub nodes operate with at least 80% renewable energy, further accelerating the integration of BESS with renewable sources.

Background and Industry Context

As the world’s largest energy consumer and leading deployer of renewable energy, China faces the dual challenge of stabilizing its power grid and transitioning to cleaner energy. Power storage is critically important for enabling the integration of intermittent renewable energy sources (solar, wind) and enhancing grid resilience. Robust government policy support has spurred rapid growth in the BESS market, establishing China as a global leader in this sector. The low cost of BESS further reinforces China’s existing advantage in the clean energy supply chain. Such policies are also influencing the international competitive landscape, with the European Union, for instance, launching new strategies to reduce its dependence on China for battery supply chains.

Outlook

Policies like “Notice 114” are expected to accelerate power storage deployment within China, driving grid modernization and decarbonization. Cost-effective power storage solutions improve the economics of renewable energy projects, further reducing reliance on fossil fuels. This successful model could serve as a reference for other nations, particularly those looking to expedite their clean energy transitions. The mandate for renewable energy use in power-intensive facilities like AI data centers will generate new demand for the BESS market, further stimulating innovation and adoption of power storage technologies. Investors will continue to monitor the growth of China’s power storage market and the new business opportunities it presents.