China Shifts From Mandates to Market-Driven Battery Storage

From Mandates to Market-Driven Storage

For years, China’s battery energy storage system (BESS) sector grew under a straightforward regulatory regime: wind and solar developers were required to co-locate batteries with their projects. While this effectively forced a massive build-out, it often left assets underutilized. According to Ember, a significant policy shift arrived in February 2025 with the release of Document 136, which ended the mandatory co-location requirement. This move signaled a transition from policy-mandated capacity expansion toward deeper market integration.

The results of this shift are already visible in investment patterns. Between January and April 2026, standalone battery systems—those that operate independently to serve the grid—accounted for 84.7% of newly installed utility-scale capacity, as reported by Ember. In contrast, co-located systems represented only 8.4% of new installations during the same period. This trend marks a departure from the recent past, where co-located systems previously represented more than 70% of utility-scale BESS capacity, Ember noted.

The Utilization Gap and Efficiency Gains

Despite China’s massive fleet—which accounted for more than half of global BESS capacity by the end of 2025—the country is still optimizing how it uses these assets. Bloomberg reported that while utilization more than doubled between 2022 and 2025, co-located batteries continue to lag behind standalone projects by approximately 100 operating cycles per year. This discrepancy stems from the rigid operational patterns of co-located assets, which are often tied exclusively to their host renewable projects rather than broader grid needs.

The potential gains from closing this utilization gap are substantial.

Market Concentration and Manufacturer Performance

As the sector matures, the competitive landscape among battery manufacturers remains highly concentrated. In June 2026, CATL maintained its position as China’s largest power battery maker, though its market share fell 3.43 percentage points from May to 42.70%. Meanwhile, BYD strengthened its relative position, with its market share rising 1.92 percentage points to 18.49%.

Regulatory Hurdles to Revenue Stability

While the transition to market-based participation is underway, Ember emphasizes that energy arbitrage alone cannot yet support a strong business case for most BESS projects. Price caps and relatively weak spot market signals continue to restrict potential returns. To sustain long-term investment, the sector requires further reforms, such as expanded participation in ancillary service markets and more robust capacity remuneration mechanisms.

The government is already moving in this direction. In January 2026, Document 114 expanded national capacity remuneration to include standalone storage, aiming to provide a more stable revenue floor. As these market-based mechanisms evolve, the industry’s success will increasingly depend on whether these projects can successfully juggle multiple revenue streams—arbitrage, capacity payments, and frequency regulation—to support a system that is rapidly integrating more variable wind and solar power.