How should target prices for PV energy storage components be set? The core approach involves either using “target costing”—determining the market price first and working backward to derive the allowable cost—or using a “Should Cost” analysis to build up a reasonable price from the bottom up, followed by cross-verification to establish a negotiation range.
I.
Two Approaches: Cost-Plus vs. Target Costing
- Cost-plus is the traditional approach: adding profit to actual cost and passively accepting the resulting price.
Target costing reverses this: it starts with a market-acceptable price and works backward to set the cost target (Source: Tacto/Oxford Reference). - Target cost formula: Allowable Cost = Target Selling Price × (1 – Target Profit Margin).
The target cost is then broken down by component, effectively shifting market cost pressure onto suppliers (Source: Management Accounting Application Guideline No. 301). - Target costing is suitable for highly competitive environments, new products, and projects facing significant procurement pressure;
it can yield savings of 10–30% compared to traditional cost planning but requires cross-departmental collaboration and early supplier involvement (Source: Tacto). - Overly aggressive target costs can lead to quality issues or suppliers walking away from orders;
target prices must be grounded in realistic market analysis and reasonable profit margins. - After setting the target, track the achievement rate (Actual Cost / Target Cost; 95–105% is considered a healthy range) and monitor deviations using Purchase Price Variance (PPV) (Source: Tacto).
II. Should Cost: A Bottom-Up Approach to Determining a Fair Price
- Four-layer structure: Direct materials (input weight × current market price, including scrap loss) + Direct labor (labor hours × machine hour rate) + Manufacturing overhead (typically 150–200% of labor cost) + Reasonable profit (8–15% for manufacturing, 10–20% for general machining) (Source: Purchaser/augmino).
- Material costs are calculated based on input weight rather than the finished part’s net weight: for machined parts, input weight significantly exceeds output weight;
the difference represents the actual cost of scrap/chips, so estimating based on net weight would result in an undervaluation. - Machine hour rates vary by region: In the US, CNC machining is approx.
$65–100/hour, 5-axis machining is $100–150/hour, and assembly is $35–55/hour; in India, standard turning/milling ranges from 500 to 3,000 rupees/hour—rate differences can be several-fold. - Manufacturing overhead includes facility costs, equipment depreciation, quality inspection, and SG&A;
the US benchmark is approx. 150% of labor costs (breakdown: facility 30–60%, equipment depreciation 20–50%, quality inspection 5–15%, SG&A 15–30%) (Source: Purchaser). - Profit margins should not be cut to zero: a quote with no profit is either an error or implies costs will be recouped elsewhere;
for high-spec or low-volume projects, a margin of 15–25% is more realistic (Source: augmino).
III.
Cross-Verification and Target Price Ranges
- Three-source cross-check: Supplier-reported costs + your company’s internal historical purchase prices + public industry indices (LME for aluminum/copper, ICIS for plastics, PPI for standard labor hours). Cross-referencing these three sources allows you to clearly identify any “fluff” or inflated costs in the quote (Source: Caigoubang Business School).
- Ideal price range = Reasonable cost × (1 + Reasonable profit margin);
suppliers tend to quote based on worst-case cost estimates, while you counter-offer based on standard costs and ideal scenarios—the negotiation range falls somewhere in between. - Direct comparison with public indices: If a supplier quotes 65 RMB/kg for copper when the market price is 63 RMB/kg, pressing for volume discounts will immediately expose any inflated pricing.
- Do not accept the first quote: Make concessions strategically, use “if-then” scenarios to negotiate pricing (e.g., “If the order volume doubles, what is the unit price?”), and define the specific terms of the deal (Source: Caigoubang Business School).
- Leverage information to create competition: Inform the supplier that you are evaluating three qualified vendors and will award the contract based on overall value-for-money, emphasizing that the goal is a long-term, stable partnership rather than a one-off transaction.
IV.
Back-calculating component target prices based on system price and LCOS
- Work backward from the end product: First, set a target LCOS (e.g., $90–140/MWh) or system target price, then reverse-calculate the allowable cost for components layer by layer based on cost proportions, ensuring every part aligns with the system-level target.
- Reference cost breakdown for a European 100MW/400MWh containerized system: Battery system 50–58%, PCS 12–16%, BoP 6–9%, Civil works 6–9%, EPC profit 8–12%, Contingency 3–5%, Grid connection 4–7% (Source: howtostoreelectricity).
- Back-calculating cell costs based on this: If the system target is $125/kWh and the battery accounts for 50–58%, the target for the battery pack is approximately $63–73/kWh—close to the current floor price of $81/kWh for LFP packs.
- Three-tier quoting (FOB/CIF/Turnkey): Request separate quotes for the supply price, landed price (CIF), and turnkey price;
avoid conflating EPC profits and soft costs with the hardware target price. - Target Gross Margin as the Starting Point: Companies like Canadian Solar and Green Energy Huichong derive procurement costs by working backward from target gross margins and secure profits through bulk raw material purchasing;
the target price is the starting point of profit planning, not the end goal (Source: Shanghai Securities News).
V. Target Price Benchmarks for the 2026 Market
- Cells and Battery Packs: LFP packs ~US$81/kWh, NMC ~US$128/kWh, stationary storage packs ~US$70/kWh (45% price drop by 2025);
domestic bulk procurement for 314Ah cells ~0.42 RMB/Wh (Source: BNEF). - System Level: Utility-scale BESS ~US$210–390/kWh (2-hour: US$210–320; 4-hour: US$260–390), C&I ~US$280–560/kWh; LFP LCOS ~US$90–140/MWh (Source: langlide/solartodo).
- Raw Material Anchors: Official guidance range for lithium carbonate is 80,000–150,000 RMB/tonne, and for polysilicon, 45,000–75,000 RMB/tonne;
for 2026, lithium carbonate is projected to rebound from a low of 59,000 RMB to 200,000 RMB—a rise of over 250% in one year—necessitating a linked adjustment in target prices (Source: People’s Daily Online). - Tariffs and Landed Costs: EU import tariff on energy storage is 2.7% (HS Code 8507);
the US has raised composite tariffs; target prices must account for landed costs (FOB + ocean freight + tariffs + customs clearance + inland logistics). - Volume Discounts: Common tiers include 5% for 50+ units, 10% for 100+ units, and 15% for 250+ units;
these can boost IRR by 1–3 percentage points and should be locked in when negotiating target prices (Source: langlide).
VI. Implementing the Target-Setting Process
- Calculate target prices before negotiating: Use “Should Cost” analysis to break down reasonable costs and establish a concession plan (e.g., maximum percentage points to concede, conditions to swap) before starting;
this ensures confidence during negotiations. - Set targets by specification: Allow higher profit margins for special specifications (high capacity, long lifespan, high-temperature resistance, etc.) while driving down prices for commodity parts based on market averages;
apply specific pricing for each order to leave no blind spots. - Update via quarterly reconciliation: Target prices should not be fixed solely at the time of contract signing;
implement quarterly “true-ups” based on fluctuations in lithium, copper, and freight costs, and include price-linkage clauses in the contract. - Bundle warranty and capacity headroom: Incorporate warranty terms (calendar life + throughput) and capacity headroom provisions into the target price to avoid “false low prices” that result in cheap but prematurely degrading products.
- Cross-departmental alignment: Target prices must be jointly validated by Procurement, Engineering (BOM/tolerances), and Finance (gross margin/discounted cash flow);
decisions made by a single department often overlook key cost drivers.
VII. Procurement Recommendations
- Determine the methodology first: Use the “Target Costing” method (working backward from the target) for highly competitive scenarios or new projects, and the “Should Cost” method (bottom-up breakdown) for mature, commodity parts;
a combination of both offers the most stability. - Build a tripartite data repository: Combine public indices (LME/ICIS/PPI), internal historical pricing, and supplier quotes to cross-verify data and systematically strip out excess costs.
- Work backward from the system level: Establish LCOS (Levelized Cost of Storage) or system-level target prices, then reverse-calculate targets for individual components based on their cost contribution to ensure the total assembly meets the overall goal.
- Link to raw materials and tariffs: Update target prices quarterly based on lithium carbonate, copper, and freight rates;
lock in landed costs and volume discounts rather than fixing a static contract price. - Negotiate strategically: Do not accept the initial offer, pace your concessions, use “if-then” conditional exchanges, and leverage competitive data—relying on facts and figures rather than raising your voice.
Trends and Summary
- The 2026 target price approach is shifting from “bare cell/pack price” to a “deployment + full lifecycle” perspective; a three-tier pricing framework—LCOS (Levelized Cost of Storage), TCO (Total Cost of Ownership), and FOB/CIF/Turnkey—has become the standard for price comparison (Source: howtostoreelectricity).
- Intense cost competition coexists with skyrocketing raw material prices;
with lithium carbonate prices surging over 250% in a year, target prices must be dynamically linked to raw material costs and policies, as static pricing quickly becomes obsolete (Source: People’s Daily Online). - Target costing is being adopted by mainstream OEMs;
deriving procurement prices from target gross margins and locking in prices through bulk purchasing to protect profits are key strategies used by leading companies to counter cutthroat competition (Source: Shanghai Securities News). - High-capacity cells, liquid cooling, and grid-forming PCS continue to drive down unit costs;
pricing models must account for the LCOS benefits offered by these new technologies. - For purchasers, the key to target pricing lies in a rigorous process: deriving figures from market rates, breaking down costs via “Should Cost” analysis, cross-referencing three data sources, validating against LCOS, and performing quarterly updates—ensuring decisions are based on defensible cost data rather than arbitrary estimates.
