Shandong Province has taken a significant step in reshaping its energy storage economics. The provincial Development and Reform Commission recently released a draft policy outlining electricity pricing rules for pumped storage power stations scheduled to begin construction between 2025 and 2027. This marks the first time the province has established a clear benchmark for capacity tariffs, defined the mechanism for energy pricing, and specified how market revenues will be distributed.

A key detail in the draft is the unified benchmark capacity price. Projects designed for six hours of full-power generation will receive 487.53 yuan per kilowatt-year (tax included), while those with a five-hour duration are set at 459.16 yuan per kilowatt-year. This standardized rate is calculated to recover average costs over the project's operating life, replacing the previous practice of assessing each station individually.

This provincial initiative is among the earliest local implementations following the national document on improving capacity pricing mechanisms for generation assets. It serves as a practical example of how the industry is transitioning from government-set pricing toward a more market-oriented framework.

The proposed revenue-sharing model introduces a tiered system designed to balance incentives with consumer protection. Stations can retain 100% of market revenues up to 100 yuan per kilowatt-year. For earnings between 100 and 300 yuan, the retention rate drops to 55%, and any revenue above 300 yuan sees the station keeping only 10%. This structure encourages plants to actively participate in the market while ensuring that excess profits from system regulation are largely returned to benefit electricity users.

Shandong's urgent need for flexible power sources stems from its substantial renewable energy capacity and the inherent volatility of such generation. By the end of 2025, the province had 4,000 megawatts of pumped storage in operation, with another 4,180 megawatts under construction and approximately 10,000 megawatts in early development stages. The province's formal spot electricity market, operational since then, has already incorporated rules for pumped storage units to bid on price and volume, creating the necessary conditions for this new pricing mechanism to function effectively.

The national framework for this transition was established in 2021 with a policy that set up a dual-recovery structure for capacity and energy costs. A subsequent 2026 document refined this approach, mandating a uniform capacity price per province for newly constructed plants, with adjustments for projects having shorter full-power generation durations. Market revenues are to be shared proportionally, with the remainder offsetting system operating costs and benefiting consumers. The new Shandong policy translates these national principles into concrete provincial action.

Under the previous system, capacity tariffs varied widely across the 48 operational and planned stations, ranging from 289.73 to 823.34 yuan per kilowatt-year. The shift to a single provincial benchmark price signals a clear move away from cost-plus guarantees. The national policy had pointed out that the old mechanism lacked sufficient cost constraints, hindering efficient project planning and development. By capping prices upfront, the new approach effectively compels stations to control costs and embrace market competition. For investors accustomed to government-backed, stable capacity payments, future earnings will now be more closely tied to market performance.

Compared to the older mechanism where stations shared 20% of market revenues with the rest deducted from future capacity prices, the new tiered system offers a more nuanced approach. It preserves basic market participation incentives through the full retention of initial revenues, while progressively returning larger shares of excess earnings to users. The policy encourages stations to generate income through market activities but prevents them from capturing excessive profits from system flexibility services.

For the investment community, this policy provides much-needed predictability, offering a measurable and stable revenue baseline that could attract non-grid capital. For electricity consumers, the sliding scale ensures that the more a station earns, the smaller its retention rate becomes, with the majority of surplus revenues channeled back to offset system costs and lower user bills. This design aims to prevent flexible resources from exploiting scarcity periods to drive up prices.

As one of China's leading provinces in pumped storage development, Shandong's pricing decision carries significant weight for national policy design. By putting a clear price tag on the services of these flexible resources, the province is helping establish a viable business model for capital-intensive, long-cycle storage projects in an increasingly market-driven era.