Summary: On 10 November 2016, Ofgem and the Department for Business, Energy and Industrial Strategy (“BEIS”) published its long-awaited call for evidence into the future of smart energy systems (referred to in this blog as the “Consultation”).

This is industry’s formal invitation to tell the Government and Ofgem how they can help improve the electricity market in key certain areas, particularly in relation to smart and flexible systems. The deadline for responses is 12 January 2017.

Background

Ofgem and BEIS recognise that the potential consumer benefits of a smart, more flexible system are significant. In fact, a Government-commissioned study found that a combination of flexible solutions could save GB consumers £17-40bn (cumulatively) by 2050.

The Consultation seeks to:

  1. remove barriers to storage and demand side response;
  2. improve price signals to allow more flexibility;
  3. catalyse innovation, so that new solutions can emerge and compete in the market; and
  4. assess changes to roles and responsibilities in the energy system.

The Consultation acknowledges the huge increase in interest in the deployment of storage, a result of falling battery costs as well as the many benefits storage can bring to various electricity market participants (e.g. see our article on the benefits of behind the meter storage here). This blog focuses on the implications of the Consultation on energy storage in particular.

Barriers to Storage and Consultation Proposals

The Consultation identifies a number of barriers to deployment of electricity storage, as well as possible solutions.

a. Securing a timely and fairly priced network connection

Although securing an adequate grid connection is already often an issue for generators (primarily due to system constraints), storage connections are more complex (e.g. requiring both significant import and export capacity) and can, therefore, be even harder to obtain. There is also uncertainty for network operators on the impact storage will have on their networks.

The Consultation recommends that:

  • network operators provide more clarity on the process for storage connections;
  • network operators carry out further analysis on how to treat storage for the purposes of the network security of supply standards;
  • the Electricity Networks Association and network operators work with industry to understand how storage paired with current connections will affect the network and define processes for new or modified connections; and
  • network operators continue to innovate to provide better information to storage customers (e.g. providing demand heat maps).

b. Use of system charges

Network charges should represent a cost reflective and fair recovery of network costs. BEIS and Ofgem’s view is that storage should pay network charges for both import and export (as it uses the network for both). However, because the cost recovery mechanism for use of system charges is based on peak demand, storage users may be at a competitive disadvantage if they charge the battery during peak times, when compared to an equivalent sized generator.

The Consultation recommends that:

  • further examination is carried out on use of system charges to ensure they do not act as a barrier, while not unfairly subsidising storage and other providers of flexibility;
  • clear guidance is issued on whether storage should be classified as intermittent or non-intermittent for the purpose of network charging. The Consultation states that this can be addressed immediately at both transmission and distribution level (and Ofgem will actively engage with industry parties to ensure this happens); and
  • network operators provide flexible connection and charging agreements in line with the actual operation of the storage facility.

c. Final consumption levies for storage which purchases power from suppliers not for onsite consumption

Storage consumes energy in order to store it, but then passes this stored energy to end consumers. This can result in a ‘double counting’ of the supply of electricity to the end consumer and a payment of levies by both the storage provider and the consumer on the same electricity. This could include double charging under the climate change levy, renewables obligation, feed in tariff and capacity market.

This double counting may prevent a level playing field for storage developers relative to other flexibility providers. Government plans to:

  • align relevant legislation and guidance with the regulatory clarity for storage hopefully achieved under point (f) below; and
  • ensure Ofgem and BEIS work to ensure clarity for those seeking to co-locate generation and storage assets on sites which benefit from renewable subsidies.

d. Planning

The planning system has national and decentralised elements, as well as individual planning systems operating in Wales and Scotland. As storage is yet to be classified or defined, it is unclear how storage fits within the planning framework. The Consultation calls for clarity within the planning framework about how to classify and treat storage projects.

e. Use by network operators

Storage could prove a valuable source of flexibility for network operators, allowing them to avoid or defer the need for reinforcement. The National Infrastructure Commission recently recommended that “network owners should be incentivised by Ofgem to use storage (and other sources of flexibility) to improve the capacity and resilience of their networks as part of a more actively managed system”. However, the current licensing and regulatory framework is a barrier to this.

The Consultation seeks feedback on whether the current arrangements are sufficient to address the National Infrastructure Commission recommendation and Ofgem and BEIS’s commitment to ensuring a competitive market.

f. Provide regulatory clarity

The Consultation acknowledges that a separate definition for electricity storage could help to resolve some of the barriers identified and sets out the following four options on how best to achieve this:

  • continue to treat storage as generation for licensing purposes;
  • define storage as a subset of generation in a modified generation licence;
  • define storage in primary legislation as a subset of generation in the Electricity Act, with modified generation licence for storage; or
  • define storage in primary legislation as a new activity with separate storage licence regime.

The first option would not require any changes to the licensing framework. The second option could be introduced on a shorter timescale (approximately two years) than the latter two options (which would require primary legislation).

The Consultation also seeks views on whether a more technology neutral licence model should be considered, which could be applicable to other providers of flexibility, such as aggregators.

Next Steps

The Consultation seeks industry’s views on the above, with responses required by 12 January 2017. Responses will help shape the plan that Ofgem and BEIS plan to publish in Spring 2017.