The UK Government has released its response to the Energy and Climate Change Committee’s (the “ECCC”) “Low carbon network infrastructure” report. In the response, the Government has consistently sought to balance the energy trilemma of providing a secure, cost-effective electricity supply which allows the UK to meet its carbon targets. In particular, the response suggests that the Government shares the ECCC’s desire to accelerate the level of interconnection with other markets and deploy new technologies (such as storage and demand side response (“DSR”)) to help facilitate a move to a “smarter”, more flexible and secure system. It will be interesting to see whether such indications of support result in the policies and reforms to the existing framework required to facilitate such a move.

Storage

The Government recognises the report’s call for further study into the future role of large-scale storage in the UK. Funding has already been provided to a study for the identification of potential pumped storage sites across the UK, whilst compressed air and liquid technologies are also seen as having a role to play in creating a more resilient, affordable and low carbon energy system.

Though supportive of the utilisation of storage technologies by network operators in the short term, the report is concerned of the potential damaging effects of the networks’ ownership of storage (rather than procuring these services from third parties). In the response, the Government highlights the RIIO framework and Ofgem’s funding of a number of innovation projects, encouraging Distribution Network Operators (“DNOs”) to trial storage as an alternative to traditional network reinforcement, as mitigants against this concern.

The Government states that they and Ofgem have been working with key stakeholders to develop the right regulatory framework around storage following on from its paper “Towards a Smart Energy System” (please also see CMS’ Law-Now on the paper here). A Call for Evidence to address these issues (such as double charging, network charges etc.) is expected to be published in the near future.

In a second recent report entitled “The energy revolution and future challenges for UK energy and climate change policy”, the ECCC reiterated its call for the Government to update the legal framework and address regulatory barriers currently facing storage. Most notably this second report calls for:

  • the implementation of a formal definition of storage;
  • the creation of a separate asset class for grid-level electricity storage; and
  • the end to the “double charges” levied on storage facilities for both importing electricity and supplying it back to the grid.

Demand side response

The report calls for a more detailed Government strategy on DSR, which also addresses the consumer protection issues raised (e.g. data privacy, adequate consumer information, social impacts and abuse of the system). The Government sees smart meter mass roll-out and the enabling of half-hourly settlement as two key pillars facilitating DSR and it will seek wider views and evidence on the consumer protection issues identified.

In its second report, the ECCC has stressed the need for change to the regulatory framework and the introduction of improved incentives for DSR aggregators, before the full potential of DSR can be unlocked. The three main suggestions of the second report are for the Government to:

  • reduce, or completely remove, the bond requirements for DSR providers bidding in the Capacity Market;
  • update its evidence base to justify why it thinks that DSR projects should be limited to one year contracts; and
  • reconsider its decision to reduce the volume of the T-1 auction (seen as the primary route to market for DSR).

Network charges and connection costs

The report considers the UK’s renewable generators to be disadvantaged versus their European counterparts in the face of increasing interconnection, citing the fact that the UK’s transmission charges are relatively high and many of the UK’s renewable assets are (or will be) located long distances from demand. The Government, however, believes that the increasing interconnection of the UK will allow intermittent generators to continue to sell their power at times when, in the absence of interconnection, they would otherwise be curtailed.

The response rejects the proposal for a cost benefit analysis around the levelling of connection costs across the UK, stating that this would result in some customers bearing an unfair proportion of connection costs. It is considered that the current system sends an important price signal and helps utilise existing assets more effectively.

System operation

The report highlights that the ever increasing interaction between the electricity transmission and distribution networks, through bi-directional power flows, has created the need for more active management of the networks.

The Government acknowledges that new roles may need to be taken on by different bodies, including a wider remit for DNOs. The Government, Ofgem and the Smart Grid Forum have been working closely (for example, please see Ofgem’s paper “Making the electricity system more flexible and delivering the benefits for consumers” here) and will publish their thinking on this topic soon.

Interconnection

The Government views ever greater interconnection as an important part of addressing the energy trilemma. Interconnectors are noted as allowing access to cheaper overseas markets, driving greater competition and improving efficiency whilst providing the flexibility to export low-carbon generation during periods of surplus.

Gas and heat networks

The response acknowledges that decarbonising heat forms an essential part of the UK’s 2050 carbon reduction target under the Climate Change Act. A number of technologies, including low carbon gases such as hydrogen and biomethane, are seen as having the potential to help meet this target. Nevertheless, for the Government, it is not clear as yet which of these technologies will work at scale and it wants to see different approaches tested to determine which are the most effective whilst delivering value for the end consumer.

The Government shares the ECCC’s desire to accelerate the deployment of heat networks across the UK, and is seeking the creation of a sustainable market framework to facilitate a move away from the current level of public funding towards a permanent, more market based industry.

Distributed generation

The Government recognises the importance of a transparent and standardised connection application process, but does not support the establishment of a “cross-departmental working group” to investigate and report on the topic as there are already a number of initiatives in place seeking to address this issue.

With regards to anticipatory investment, the benefits and risks raised in the Report (i.e. timely and cost-effective connections versus the danger of creating stranded assets) will form an important part of any future discussions between Ofgem, DNOs and other stakeholders.

Smart meters

In response to the report’s concern that smart meters are not being rolled out fast enough, the Government has re-stated its commitment to increasing smart meter roll-out.