Draft proposal of the Electricity Supply Act

The Ministry of Infrastructure of Republic of Slovenia has recently put out for public consultation a draft proposal of the Electricity Supply Act of 6 October 2020 (the ‘ESA’). ESA is supposed to implement into the Slovenian legislation the EU regulations from the so-called ‘Clean Energy for All Europeans’ package that refer to the functioning of the electricity market (Directive (EU) 2019/944 on common rules for the internal market for electricity). In addition, ESA will regulate the implementation of Regulation (EU) 2019/941 on risk-preparedness in the electricity sector, Regulation (EU) 2019/943 on the internal market for electricity, and Regulation (EU) 2018/1999 on the Governance of the Energy Union and Climate Action. Public consultation is open until 12 November 2020.

In accordance with the Directive (EU) 2019/944, some areas will be regulated by the ESA entirely anew, e.g. aggregation services, advanced metering, active customers and energy communities, energy poverty, end user rights, and system service obligations. From the aspect of encouraging transition to a green and carbon-neutral economy, one of the important novelties introduced by the new regulation is legal regulation of electricity storage activity.

Electricity storage

For the stability of the energy network and the security of electricity supply, it is important that electricity production and consumption are balanced all the time. In establishing and maintaining such balance, storage of electricity plays an important role in the field of modern energy. It allows us to regulate deviations between production and consumption: when there is a surplus of production over consumption, excess electricity can be stored (for different time periods – from very short storage (only for a few seconds) to longer, multi-day storage). On the other hand, when demand is greater than production, the electricity thus stored can be used to meet that demand. 

Electricity storage plays an important role in the process of transition to a carbon neutral economy and represents a specific means of improving energy efficiency and integrating more renewable resources into the electricity system.[1] As it follows from recital (64) of the Directive 2019/944/EU, progress in the seasonal energy storage is necessary in order to achieve the electricity sector that is fully free of emissions. Such energy storage is an element that would serve as a tool for the operation of the electricity system to allow for short-term and seasonal adjustment, in order to cope with variability in the production of electricity from renewable sources and the associated contingencies in those horizons.

If until recently it was considered practically impossible to store electricity in significant quantities, technological development brought solutions that enable such storage. In Slovenia, for example, we already have providers of battery storage systems that have implemented such solutions in practice. In 2019, N-GEN installed a 12.8-megawatt battery in Jesenice, which was according to media the biggest battery in Europe at the time.[2] Recently they have also installed a new one, this time 15-megawatt battery in the Talum area in Kidričevo. Both batteries are connected to the transmission network and cover half of Slovenia's demand for so-called secondary regulation.

A study made by the European Commission on energy storage in relation to the security of electricity supply (May 2020)[3] finds that currently pumped hydro storage is still by far the largest method of energy storage in the EU. Lithium-ion batteries are gaining in importance due to the ever-improving efficiency and flexibility of use. Various new storage technologies are evolving rapidly and becoming commercially interesting, although they still face many challenges regarding network access and excessive charges (network charge). There are also high hopes of using hydrogen for the storage of electricity (especially electricity produced from renewable sources) which could be produced by electrolysis from water and which could act as an energy carrier and means to store large amounts of energy on a long term.

The new legal regulation of electricity storage, introduced by the Directive 2019/944/EU and the national regulations adopted on the basis of the Directive, will also play an important role in promoting progress in the field of electricity storage.

Legal regulation of electricity storage in ESA

Legal classification and definition of energy storage

One of the most important novelties introduced by the ESA is the classification of energy storage as one of the electricity activities (in addition to generation, supply, trade, aggregation, system operator activities, distribution system operator activities, and electricity market operator activities).

Currently, there is a legal gap regarding the regulation of energy storage in Slovenia, because the Energy Act does not regulate the field of energy storage. Often, we were facing a legal challenge – how to qualify energy storage in the context of traditional electricity activities. In practice, energy storage was often classified as generation (although it may be classified as consumption at one point and as a generation at the next). This legal issue will be addressed by the new legislation, thereby improving legal certainty and predictability for market participants.

ESA defines energy storage in accordance with Article 2(59) of Directive 2019/944/EU as:

  • deferring the final use of electricity to a moment later than when it was generated, or
  • the conversion of electrical energy into a form of energy that can be stored, the storing of such energy, and the subsequent reconversion of such energy into electrical energy or use as another energy carrier.

The definition of energy storage is technologically neutral, which is essential for the development and implementation of various new technologies. For example, it includes previously mentioned technologies for the conversion of electricity obtained from renewable sources into hydrogen, the storage of hydrogen, and its re-conversion into electricity.

Energy storage activity will be carried out freely on the market, i.e. in the same manner as production, supply, trade, and aggregation. The person engaging into energy storage will, equally as a producer and final customer, be considered as ‘system user’ for the purposes of the ESA.

Active customers and electricity storage

Recital (42) of Directive 2019/944/EU emphasizes that consumers should be able to consume, to store, and to sell self-generated electricity to the market and to participate in all electricity markets by providing flexibility to the system, for instance through energy storage, such as storage using electric vehicles, through demand response or through energy efficiency schemes.

Therefore, Directive 2019/944/EU introduces the concept of an active customer who will likely have an important role in relation to electricity storage. An active customer is defined as a final customer, or a group of jointly acting final customers, who consumes or stores electricity generated within its premises located within confined boundaries, or within other premises, or who sells self-generated electricity or participates in flexibility or energy efficiency schemes, provided that those activities do not constitute its primary commercial or professional activity. An example of such active customer is the owner of a house that has a solar power plant installed on the roof, as well as a battery system for storing electricity. Such customer will be able to meet its demand from its own stored electricity at critical moments when there is too much or not enough energy in the system, thus reducing the burden on the network and contributing to the reliability of the system.

According to the ESA draft, active customers that own energy storage facilities shall have the right to a grid connection within a reasonable time after the request provided that all necessary conditions, such as balancing responsibility and adequate metering, are fulfilled, whereby they should not be subject to disproportionate licensing or fee requirements.

Directive 2019/944/EU requires (Article 15(5)b) that the Member States shall ensure that active customers who own energy storage facilities are not subject to any double charges, including network charges, for stored electricity remaining within their premises or when providing flexibility services to system operators. Thus, ESA proposes that active customers who own energy storage facilities shall not be charged with network charges and other costs for transmitted energy that was previously stored on their premises. When providing flexibility services to system operators network charges and other costs will not be charged for transmitted or received energy stored on the premises of active customers.

Ownership of energy storage facilities

The new design of the electricity market introduced by the Directive 2019/944/EU requires that energy storage services be market-based and competitive and that cross-subsidisation between energy storage and the regulated functions of distribution or transmission should be avoided. Therefore, Directive 2019/944/EU (Articles 36 and 54) and consequently, the ESA introduces specific limitations on the ownership of energy storage facilities. These limitations aim to prevent distortions of competition, eliminate the risk of discrimination, ensure fair access to energy storage services for all market participants, and foster the effective and efficient use of energy storage facilities, beyond the operation of the distribution or transmission system (recital (62) of Directive 2019/944/EU).

Thus, according to the ESA, the system operator[4] will not be allowed to own, develop, operate, or manage energy storage facilities. Exceptions will be allowed only under certain strict conditions and with the prior permission of the Agency as a regulatory authority (e.g. when the facility is a fully integrated network element,[5] or when a tender proves that there is no interest of other persons to invest in such facilities).

Even if the Agency allows an exception, it is envisaged that it shall perform, at regular intervals or at least every five years, a public consultation on the existing energy storage facilities in order to assess the potential availability and interest in investing in such facilities. Should the public consultation in Agency’s view indicate that third parties are able to own, develop, operate or manage such facilities in a cost-effective manner, the Agency will ex officio initiate the procedure for revoking the system operator's license and set a deadline after which the system operator will have to sell the facility or device for energy storage or stop using it. If, after serious efforts, the system operator should fail to recover the residual value ​​of its investment in energy storage facilities by the expiry of the deadline, the unrecovered part of the value of this investment may be reimbursed within the network charge for the transmission system.

These rules should not apply to existing facilities or energy storage devices owned by the system operator, for which the investment decision was made before 4 December 2019 and which are part of demonstration projects – this would be assessed by the Agency.

According to the ESA, similar rules will apply to distribution operators and owners of the electricity distribution network. At first sight, the proposal to transpose the provisions of Directive 2019/944/EU seems to be deficient in this part, as certain provisions from Article 36 of Directive 2019/944/EU are not transposed into the ESA, as is the case with system operators.

With regard to the proposed provisions of the ESA relating to exceptions for electricity operators, it will be interesting to observe how they are applied in practice, in particular as regards the criteria to be used by the Agency in assessing third persons’ ability, cost-effectiveness and required seriousness of the system operator’s efforts to recoup the residual value of its investment.

Connecting to the system

Person engaged in energy storage will be treated as a system user and will thus be subject to the general provisions on connection to the transmission or distribution system which require obtaining consent for connection. In relation to the connection of energy storage facilities and RES generation facilities, it will be specifically required that conditions for connection be non-discriminatory and that they assure easy connection of such facilities. Conditions might differentiate for different groups of facilities according to type or size, where appropriate.

The ESA specifically envisages that the system operator shall not be entitled to refuse connection of a new production facility or energy storage facility on the grounds of possible future limitations to available network capacities, such as congestion in distant parts of the transmission system. However, the system operator shall retain the possibility, with the approval of the Agency, to limit the guaranteed connection capacity or to offer connections subject to operational limitations, in order to ensure economic efficiency regarding new generating installations or energy storage facilities.

Conclusion

Due to the anticipated high demand in the coming years, the market of batteries as electricity storage facilities is expected to be one of the most dynamic and strategically important in the EU.[6]

In addition to the advantages that energy storage brings to the electricity system and the reliability and security of the network, investments in energy storage can also be a driver of increasing the productivity of the economy. That aspect has also been recognized in Slovenia. In this regard, Action Plan for Higher Productivity Growth of 20 September 2020 should be mentioned, which was prepared by the University of Ljubljana, School of Economics and Business, the Ministry of Economic Development and Technology of the Republic of Slovenia, and the Observatory of the Managers’ Association of Slovenia.[7] Among the key recommendations and guidelines in the field of energy, the action plan emphasized the construction of various energy storage facilities.[8]

It will certainly be interesting to follow developments in this field, also from the aspect of the legal and regulatory challenges that have already arisen and will arise in relation to electricity storage activities.