During November 2016 the Department of Business, Energy & Industrial Strategy (BEIS), in partnership with Ofgem, published its open consultation call for evidence 'a smart, flexible energy system'.

It is clear that the intention is to create a system that allows for disruptive innovation. The Government and Ofgem are committed to ensuring that on the one hand new technologies can compete and on the other that consumers are both empowered and protected.

At the centre of the policy ambition is the commitment to enabling new and existing forms of flexibility to compete efficiently within the energy market. The intention is that flexibility providers are able to access revenues which reflect the true value of their flexibility. To this end, the call for evidence provides a focus for ensuring undue regulatory, commercial and legal barriers do not create obstacles in the system and hinder energy storage technology and market development.

Barriers to energy storage

BEIS and Ofgem have confirmed that the market and its structures must recognise and reward energy storage for the value it brings to the energy system. The main barriers identified in relation to energy storage are:

  • Network connections: A need for increased clarity on how the connection process works for energy storage, given the variable characteristics on use, size and location of the connection and the requirement for both import and export capacity. These existing complexities create uncertainty for the storage connection process for both developers and network operators. Further clarity is also required on the impact storage will have on networks where storage is added to existing demand or generation connections.

  • Network charges: A need for clear guidance in the charging methodologies (which were not designed with storage in mind) applied by network operators on whether storage be classified as intermittent or non-intermittent; current inconsistency in treatment may not accurately reflect the value and costs storage imposes on the network and can lead to uncertainty for storage developers in estimating their network charges. To ensure that network charges better reflect the value and costs of storage, one option is to ensure network operators provide flexible connection and charging arrangements allied with the actual operation of the storage facility. Flexible connections can lower network charges and could be used to provide a revenue stream to storage based on avoided network reinforcement costs for network operators. BEIS/Ofgem also consider the amount paid towards network cost recovery (and for 'balancing services use of system' charges) by storage (compared with other network users) warrants review to allow fair competition for storage.

  • Regulatory clarity: A requirement for a future definition of electricity storage within the regulatory framework that can have a broad application across differing policy areas. The intention is to avoid the existing conflicts storage has when it interacts with other legislation and regulations. BEIS/Ofgem outline non mutually exclusive approaches for regulatory treatment including:

    • a continuation of the existing regulatory approach (i.e. viewing storage as generation for licensing purposes);

    • defining storage as a subset of generation in a modified generation licence that takes account of the non-generation side of storage (no primary legislation required);

    • defining storage within primary legislation as a subset of generation under the Electricity Act 1989; or

    • defining storage as a completely new activity with a separate licence regime under the Electricity Act 1989.

BEIS/Ofgem highlight that options (c) and (d) would have a modified generation licence developed in parallel with industry, ultimately giving the storage industry its own regulatory regime, operating with greater legal certainty. However, this raises further questions on how any new framework may impact on early mover incumbent storage operators (already licensed as generators) and current storage developers.

  • Planning regimes: A need within planning frameworks, which operate with national and decentralised elements, about how to classify and treat storage projects, given the emerging nature of the market and new technologies. This may, for example, impact how consent is required for a >50MW capacity storage facility under sections 15 and 31 of the Planning Act 2008 or how smaller storage projects (≤50MW) seek permission under the Town and Country Planning Act 1990.

BEIS/Ofgem welcome evidence on how current planning regimes affect storage projects in order to inform the definition and classification designs of the new regulatory framework outlined above.

  • Final consumption levies: A need to level the playing field for storage with respect to the uneven applications of levies. Energy suppliers are impacted by a collection of policy-driven costs (e.g. the Renewables Obligation, Feed-in-Tariffs and the Climate Change Levy) and currently storage is hit by double counting - being charged once for 'consuming' energy in order to store it, and then being charged again for suppling the same energy to end consumers. This stems from the lack of a discrete legislative definition and the impact varies, according to the location of the storage within the grid.

BEIS/Ofgem appear open to the idea that amendments may well be needed to the applicable legislation and recognise that clarity will be required in relation to co-located renewable energy and storage sites that benefit from Contracts for Difference payments.

  • Network Operators use of storage: The National Infrastructure Commission's recent recommendation was that 'network owners should be incentivised by Ofgem to use storage (to improve the capacity and resilience of their networks as part of a more actively managed system)'. The issue is any asset owned or operated by a regulated monopoly has the potential to distort competition or deter entry to new markets, where unbundling does not occur. The operation of storage involves both “generation” and “supply” and is both for the purposes of the Electricity Directive (Directive 2009/72/EC). Therefore, currently under the Directive’s unbundling rules Distribution Network Operators (DNOs) and Transmission System Operators (TSOs) cannot lawfully operate storage facilities on a commercial basis except where they can demonstrate that there is no relevant control (i.e. show compliance with unbundling rules).

BEIS/Ofgem are interested to understand if Ofgem's RIIO (Revenue = Incentives + Innovation + Outputs) framework for setting price controls for network companies is sufficient to ensuring a competitive market.

Additional keys to flexibility and innovation

The call for evidence recognises a smart, flexible energy system offers significant benefits for consumers and the economy, helping to use energy more flexibly and increasing the efficiency of the whole energy system.

To enable flexibility and catalyse innovation, other aspects covered by BEIS/Ofgem that will also impact on energy storage are:

  • Price signals: A need to provide improved price signals that reflect the value in flexible energy services (i.e. provided by storage) using 'system value pricing', where services are priced on their value to the whole system. BEIS/Ofgem see important roles for:

    • 'price' flexibility (e.g. half-hourly settlement, smart tariffs and smart distribution tariffs); and

    • 'contract' flexibility (e.g. allowing flexibility providers to sign up to multiple contracts and "stack" revenue streams, which enables providers to extract maximum value from their assets).

  • Storage costs: An increase in commercial and residential trials where targeted funding activity support pilots which explore new processes and business models to catalyse the development of larger (even inter-seasonal) grid-scale storage technologies that have the potential to be more cost effective than existing, more mature technologies.

Ofgem also highlight that in late 2016 there will be the launch of a new "Innovation Link" service to promote beneficial innovation in the energy sector and inform how regulation is formed in the future. It is promoted as a point of contact for energy innovators to bring new ideas to receive fast, frank and useful feedback on the regulatory implications.

The consultation closes on 12 January 2017. Responses to the document will shape the BEIS/Ofgem plan which will set out the specific actions to be taken and this plan is due to be published in Spring 2017.