Ofgem has released two consultations which seek to clarify the role storage will play in the energy market over the coming years. This follows on from the Smart System and Flexibility Plan as Ofgem seeks to remove regulatory barriers to storage in order to ensure a competitive market for the development of storage and other flexibility services. Both consultations are open until 27 November and Ofgem welcomes stakeholder feedback and proposals.

Due to the shared characteristics and functions performed by both generation and storage (primarily in terms of exporting electricity to the grid), Ofgem considers (having looked at alternative options) that modifying the existing electricity generation licence is the best way to clarify the regulatory framework for storage. The consultation also appends the proposed modified licence.

In this consultation, Ofgem:

  • Sets out the proposed definition of 'electricity storage' and 'electricity storage facility' in the modified electricity generation licence: Electricity Storage in the electricity system is the conversion of electrical energy into a form of energy which can be stored, the storing of that energy, and the subsequent reconversion of that energy back into electrical energy. Electricity Storage Facility in the electricity system means a facility where Electricity Storage occurs. Ofgem proposes to use these terms where appropriate throughout the licence and explains that the intention is to ultimately amend the Electricity Act 1989 to include the same definition.
  • Clarifies expectations for compliance with standard licence conditions:
    • SLC5/SLC6 Compliance with Grid Code/Distribution Codes: obligations apply depending on what services storage provides (e.g. whether or not in order to operate it is connected to the national energy transmission system or the distribution network, or would use the national energy transmission system for trading purposes; and
    • SLC9/SLC19 Compliance with BSC/CUSC: these conditions apply to generation stations as defined in SLC14 (i.e. storage installations with a capacity no less than 50MW), meaning that for storage installations above 50MW it is likely that such a facility would carry out activities in the wholesale market and would therefore be expected to sign up to and comply with the BSC/CUSC. For storage installations below 50MW there is no prescribed obligation to comply with the BSC or CUSC (unless required for providing services to the grid.)
  • Consults on introducing a new licence condition into the generation licence to ensure electricity service providers do not have self-consumption as the primary function when operating their storage facility. The aim of this is to prevent the storage installation from being classed as an 'end user' and clarify that licenced storage providers will not be subject to payment of final consumption levies. Condition E1: Requirement to export The licensee shall not have self-consumption as the primary function when operating its storage facility." This proposal does mean that if a storage facility's main purpose is not to export back to the grid, it will not be classified as storage from regulatory perspective and will consequently remain subject to final consumption levies. The proposal also includes a paragraph requiring storage providers to notify Ofgem of any changes that may affect their ability to comply with this new condition E1.
  • Sets out changes to the application form requiring the applicant to describe the proposed storage activities.

2. CHANGES TO THE ELECTRICITY DISTRIBUTION LICENCE: PROHIBITION ON DNO OPERATION OF STORAGE

The aim of the second consultation is to clarify the regulatory position on ownership and operation of storage by distribution network operators (DNO).

Ofgem is concerned that because network companies control the infrastructure needed to trade energy and provide flexibility services, they have the ability to impede the activities of other market participants or gain an unfair advantage over their rivals, thereby distorting competition. Ofgem considers that the prohibition on DNO operation of storage facilities proposed in this consultation would serve to ensure potential conflicts are managed effectively, while still allowing DNO operation of storage in specific circumstances.

Prohibiting DNO operation of storage

The new condition 43B proposed for the Electricity Distribution Licence is intended to ensure DNOs are legally separate from the operation of storage facilities, regardless of whether they are required to have a generation licence. DNOs would require consent from Ofgem in order to carry out any generation activities including storage. This would be replicated in relation to Independent DNOs.

The new condition would allow DNOs who currently own storage and generation assets to place a legally separate party, which could be an independent third party or a legally separate affiliate of the DNO, as operator of the facility.

Exceptions to the prohibition under the new condition

Ofgem proposes to exempt small-scale applications of DNO-operated generation, including storage, that help to ensure the safe and reliable operation of the network and which could be considered to be within the normal business activities of the DNO. The exempted applications are:

  • Uninterruptible power supplies: devices used on DNO sites to ensure critical equipment remains energised in the event of a system outage. These devices do not export electricity to the network and are necessary for the safe, efficient and reliable operation of the DNO's networks.
  • Emergency response and maintenance fleets: ensure continuity of supply to customers in an outage such as small (50kW-1.5MW) generator units. These applications improve reliability and security of supply for customers.

Specific consents for other applications of storage

Specific consent may be granted in exceptional circumstances where the system is under transition and it is considered acceptable for DNOs to operate storage. The DNO will have to demonstrate that every effort has been made to seek a third party solution on a competitive basis, and that a DNO-operated storage facility is the most economic and efficient solution. Consent will be granted via an Ofgem Direction, which may contain conditions in relation to time limits on consent, additional monitoring or reporting, and additional measures to manage potential conflicts of interest.

Treatment of existing islanded network generation

Existing arrangements where DNOs own and directly operate a small number of generation assets on islanded networks would not need to be altered under this proposal. However for new sites the DNO will need to apply to Ofgem for permission to operate the assets directly.

Treatment of existing DNO-owned and operated storage

Ofgem will work with DNOs which own and operate storage facilities built under the Low Carbon Network Fund (LCNF) innovation funding to find the most appropriate treatment of these existing storage assets, many of which are coming to an end. They are mindful that these facilities were intended to trial new technologies and operating arrangements to help all DNOs understand how to most efficiently provide security of supply and delivery value for money.