Energy Storage: When Will It Transition From "Pseudo-Growth" to "Genuine Growth"?

Energy storage is arguably the segment most likely to create "cognitive illusions" in the new energy track over the past five years.

Statistically, this industry has never stopped growing at a high rate. In 2021, domestic policies defined energy storage as the core link of the new power system. In 2022, the European energy crisis detonated the demand for residential energy storage. In 2023, the global installed capacity continued to climb. By 2026, the global installed energy storage demand is expected to reach 588.2GWh, a year-on-year increase of 62%; the market expectation will exceed 1TWh by 2028.

However, looking back on the investment experience of the past few years, the vast majority of participants have mixed feelings — the segment has experienced multiple rounds of drastic pricing logic shifts, with valuations falling from 100 times PE to less than 20 times. From September 2022 to the first half of 2025, the maximum drawdown of the energy storage index exceeded 60%, a large number of individual stocks fell by more than 70%, and many investors who entered the market at the high point in 2021 have not yet unwound their positions.

In the past year, both Sungrow, the leading large-scale energy storage enterprise, and Deye, the leading residential energy storage enterprise, have made investors go through a roller coaster ride with poor experience.

Why does an industry wearing the cloak of a growth segment bring such dismal returns to investors for a long time and show such prominent cyclicality? More critically, at the point of 2026, the market has repeatedly tried to embrace energy storage again. Is there an essential difference between the logic of this round and that of 2021 and 2022?

01

Lessons from History: The Digital Trap Behind High Growth

To understand the current investment value of energy storage, we must first answer a question: Why was it a "pseudo-growth" sector before?

1. Overly High Starting Point Leads to Valuation Overdraft

Like other new energy industries, China's energy storage industry is leading the world in development. As the first year of the launch of the energy storage segment, 2021 essentially stemmed from the resonance of top-level policy design and performance verification of industry leaders.

Since April 2021, the state has successively launched a series of policies such as the guiding opinions on the development of new energy storage and the improvement of the time-of-use electricity price mechanism. The guiding opinions officially issued in July put forward the goal of achieving a cumulative installed capacity of 30GW by 2025.

This is the first time the market has seen a clear industrialization goal, and the capital's valuation method for the energy storage track has shifted from thematic concepts to pricing based on high growth in the next three years.

However, the valuation at this stage has seriously overdrawn future growth. In early 2022, Sungrow's PE was 89 times, and Deye's was 79 times. A PE of 70 or 80 times means that the market has fully overdrawn the high growth of the next three to five years.

Another valuation indicator, PB, also exceeded 10 times. For the manufacturing industry, a PB of more than 10 times means that the industry has high barriers, and enterprises can continuously make huge profits (a representative case is TSMC, whose current PB is above 10 times).

In early 2022, the energy storage segment once corrected by about 20%, but the outbreak of the Russia-Ukraine conflict rekindled belief in the energy storage industry. What the market saw was: European electricity prices soared, demand for residential energy storage and distributed solar-storage exploded, enterprises deploying in the European market entered a stage of rising volume and profit, and under the background that new energy had cooled down, energy storage became the last bastion of group holding, and stock prices hit new highs again.

However, after September 2022, the main contradiction of the industry turned to overcapacity, sluggish overseas demand, and inventory backlog, and finally both volume and profit fell, and the energy storage index went all the way down. The market realized belatedly that energy storage is not a sector that can make sustainable profits, but a "cyclical stock" that only earned a round of supply-demand mismatch gains.

Figure: Changes in valuations of representative energy storage companies Source: Wind

2. The GWh-only Theory Overestimates the Market Growth Capacity

The first half of 2023 to 2025 was the most difficult period for energy storage investors. The shipments continued to grow at a high rate, but the feedback was a falling stock price.

Research institutions are accustomed to measuring industry prosperity by installed capacity, but energy storage is different from photovoltaic modules or lithium batteries. Its product form, price system and business model determine that high growth in installed capacity does not necessarily translate into revenue and profits for industrial chain companies.

In fact, the price of energy storage systems has experienced "halving and halving again" in the past two years. From 2022 to 2024, the price of energy storage systems fell from above 1.5 yuan/Wh to below 0.6 yuan/Wh, a drop of more than 60%. Essentially, this conforms to the first principle of the development of the energy storage industry: only by continuously reducing costs can the industrial chain have greater economy and more shipments.

In this process, the profit model of enterprises was broken, and a large number of links actually experienced the process of "growing shipments, falling unit prices, and under pressure on gross profit". Market research is accustomed to using GWh to measure industry growth, but if the short-term price drop exceeds the increase in volume, industry revenue may grow, but profits will shrink significantly instead.

Figure: Representative leading residential energy storage enterprise from 2022 to 2025, high revenue growth and plummeting profits Source: Company financial reports

To make matters worse, the drastic fluctuation of lithium carbonate prices further amplifies this uncertainty: for every 10,000 yuan/ton increase in lithium price, the corresponding cell cost increases by about 0.6 cents/Wh; when lithium carbonate exceeds 180,000 yuan/ton, the IRR of ordinary domestic energy storage projects may fall below 6%, and the demand side will be suppressed immediately.

3. Leading Industry Companies Have Not Formed a Stable Profit Model

When the market discusses energy storage, it often confuses large-scale energy storage, residential energy storage, and industrial and commercial energy storage, and measures them with a unified GWh growth rate and valuation framework. But in fact, the customer attributes, product forms, business models, and competition patterns of these three types of energy storage are very different, and they are essentially three completely different businesses. (Similar to the difference between household air conditioners and central air conditioners)

Large-scale energy storage is a toB power grid business, and its customers are mainly power grid companies, new energy power generation enterprises, and independent energy storage investors. The project scale is usually more than 100MWh, which has extremely high requirements for product stability, safety, and cycle life, and is also highly price-sensitive.

Therefore, the business model of large-scale energy storage is highly dependent on the policy environment and power grid relations. Generally, the entire industrial chain needs to be covered, and system integrators need to integrate multiple links such as cells, PCS, transformers, and EMS. Due to the large project scale and relatively high degree of standardization, the price competition for large-scale energy storage is the fiercest, with the lowest gross profit margin and slightly worse cash flow.

Residential energy storage is a toC consumer business, with household users as customers and strong consumer attributes. The product form is usually an integrated or split unit of "photovoltaic inverter + battery pack", which is used for self-generation and self-use, peak-valley arbitrage and power backup. The core competitiveness of residential energy storage lies in channels and brands, not just product performance.

The sales of residential energy storage in mature markets such as Europe and Australia are highly dependent on local installer and dealer networks, which is why the residential energy storage market pattern is relatively scattered but the gross profit margin of each company can remain at a high level of 35%-50% — channel barriers and brand premiums support profitability.

However, when European residential energy storage exploded in 2022, a large number of photovoltaic inverter enterprises crossed into the energy storage field, and the industry threshold was diluted in a short period of time. After the high prosperity in 2022, Europe entered a period of channel inventory digestion, and residential energy storage chain companies generally faced pressure from 2023 to 2024.

Industrial and commercial energy storage is a to-smallB project business, which can be understood as an upgraded version of residential energy storage. The customers are small and medium-sized enterprises, between large-scale energy storage and residential energy storage. The product form is usually energy storage cabinets of tens of kWh to several MWh, which are used for peak-valley arbitrage, demand management and power backup.

The outbreak period of industrial and commercial energy storage lags behind that of residential energy storage by 2-3 years, because the projects have a high degree of non-standardization, the enterprise decision-making cycle is longer, and the upfront investment scale of a single project is dozens of times that of residential energy storage. However, the value of a single unit of industrial and commercial energy storage is dozens of times that of residential energy storage, and almost 100% of the batteries are self-provided, which provides strong growth support for small energy storage companies. In the first half of 2026, the proportion of industrial and commercial energy storage in companies such as Deye and Ginlong has reached 35%-40%, and it is expected to exceed 50% by 2027.

In addition, from the perspective of the industrial chain, the competition is also fierce, and the market share of leading enterprises changes repeatedly amid turmoil. While CATL, Sungrow and other enterprises have a solid position, in the cell link, catchers such as Hithium Energy Storage and Sunwoda are rapidly eroding share with a growth rate of 50% or even more than 100%; in the system integration link, CR10 is only about 60%, and the competition intensity is much higher than that of the cell end.

For a high-growth industry where neither the industrial chain nor downstream applications have formed a stable pattern, the valuation anchor is easily erratic: when looking at the growth space, 80 times is considered reasonable, but when looking for a profit model, 20 times is considered too expensive.

02

What is the Current Industry Logic? The Overall Trend Is Relatively Smooth

After three years of adjustment and clearance, the growth logic of the energy storage industry has really started to run smoothly in the second half of 2025. The core driving force is no longer short-term factors such as policy subsidies or short-term shocks from the energy crisis, but the rigid demand of the power grid brought by the continuous increase in the proportion of wind and solar power generation, as well as the resonance of demand in multiple regions around the world, that is, returning to the original story it told — source-grid-load-storage — storage is the last short board of the power system.

1. The Proportion of Wind and Solar Power Increases, and the Power Grid Is Short of Flexible Resources

From global experience, the systematic increase in energy storage demand is affected by the proportion of VRE (wind power + photovoltaic), which roughly presents four stages: when the proportion of VRE is less than 10%, the system can still rely on existing thermal power for regulation; when the proportion is 10%-20%, the fluctuation of wind and solar power begins to impact the power grid substantially, and energy storage enters a growth period; when the proportion is 20%-80%, the system is highly dependent on energy storage to achieve intraday balance, entering a high-speed growth period; when the proportion exceeds 80%, the regulation demand shifts to a longer scale, and long-term energy storage such as hydrogen energy begins to occupy a greater proportion.

The inflection points of different countries vary according to the basic conditions of the system: China and the United States have experienced high-growth inflection points around 15%; due to strong cross-border interconnection and a high proportion of gas, the inflection point in Europe is delayed to about 20%; for Asian, African and Latin American countries with weak power grids and insufficient flexibility, they will enter a rapid growth stage in advance even if the VRE proportion is relatively low.

Therefore, the macro background for the recent rapid reversal of energy storage expectations is: global power grid investment has lagged behind power source investment in the past five years. In reality, the power grid needs more energy storage, but it has been delayed because the supporting storage is still expensive. At the same time, the cost of solar-storage has decreased by more than 70% in the past 10 years, and the improvement of economy has laid the foundation for the outbreak of demand.

CATL predicted in the mid-year financial report communication that the compound growth rate of the lithium battery industry in the next 5 years can reach 20-30%, and the main high growth will come from energy storage.

2. Domestic Market: Focus on the Smooth Operation of the Large-Scale Energy Storage Business Model

The domestic energy storage market ushered in a key policy inflection point in 2025. In 2025, Document No. 136 clearly stated that "mandatory energy storage allocation" has withdrawn from the historical stage; and Document No. 114 was officially issued in January 2026, which for the first time clarified the independent new energy storage capacity price mechanism on the power grid side at the national level, with a compensation standard of 165-370 yuan/kW·year.

The capacity price is equivalent to a stable basic annual salary, which can usually cover 20%-30% of the total investment cost of the project. On this basis, the revenue model of independent energy storage has shifted to a diversified structure of "capacity price + spot arbitrage + auxiliary services". In provinces with rich resources such as Northwest and North China and mature spot markets, the project IRR can reach 6%-10%, which has the economic value of independent investment.

This is a sign that the domestic large-scale energy storage market is truly maturing. When energy storage projects can recover their investment and obtain reasonable returns through market-based income, the growth of demand will no longer depend on policy compulsion, but endogenous growth driven by economy, and the logic will change from short-term to long-term.

Source: Soochow Securities

3. Resonance of Multiple Overseas Markets

Europe is the region with the most advanced new energy development second only to China in the world, and is experiencing a transformation from the dominance of residential energy storage to the all-round development of large-scale energy storage, residential energy storage, and industrial and commercial energy storage.

As the proportion of wind and solar power generation in Europe exceeds that of fossil energy for the first time, negative electricity prices occur frequently, and the power grid's demand for flexible resources has increased sharply.