Summary: There continues to be growing optimism and appetite for the benefits that can be delivered by behind the meter ("BTM") energy storage, but significant challenges remain. We explain the key challenges in this article, as well as making recommendations for how these challenges could be addressed.

This is the third and final part of our series on BTM energy storage. Part 1 looked at the benefits and Part 2 focused on the additional revenue that can be generated by providing ancillary services to National Grid.

The Challenges

Licensing

As a relatively new technology, relevant legislation and regulations were not drafted with energy storage in mind. Consequently, energy storage does not neatly fit within the current UK legislative and regulatory framework. Given the treatment of traditional storage technologies (i.e. pumped hydro) as electricity generation, energy storage is generally regarded as a form of power generation, rather than an asset class in its own right.

Although most BTM energy storage assets are likely to fall within the small generator exemption, the treatment of storage as generation leads to uncertainty over whether larger storage assets require a generation licence. The need for a generation licence would bring a number of unwanted issues, primarily the burden of complying with additional industry codes.

We would recommend that this should be clarified as soon as possible, ideally with a specific exemption or separate licence category for energy storage created. In our view, this would remove potential uncertainty and facilitate investment in the sector.

Use of System Charges

Energy storage assets may be charged use of system charges by distribution network operators (“DNOs”) both when charging and when discharging electricity (to the extent the discharging involves exporting power).

Charging the BTM operator both as a generator and a consumer in this way fails to recognise the benefits that storage can provide to the grid, such as network reinforcement deferral. We would recommend an evidence-based assessment of the impact of existing charging arrangements for storage and, ideally, the DNOs should put in place bespoke charging methodologies which reflect the unique nature of storage assets and the benefits they can bring. For example, DNOs could permit power discharged to be offset against the energy consumed when charging.

Planning

There is currently a lack of guidance in relation to the treatment of storage assets in the planning system. Whether planning permission is required for the installation and operation of a BTM storage asset will depend, therefore, on the nature, scale and location of the asset and its associated housing and infrastructure, as well as the relationship between the asset and the existing use of the land and buildings in which it is located. As a result, many developers of energy storage assets require bespoke and complex advice on planning risks before they can commence work. This deters some developers and adds expense to others. We would recommend that clear guidance specific to energy storage assets should be introduced to help developers put in place new storage assets more efficiently.

Health and safety

Standards for abuse testing of utility scale energy storage systems are not currently available. Current standards generally involve the testing of individual cells or are designed for testing electric vehicle batteries. Standards for utility scale storage assets would assist in the development of a rigorous safety case for storage systems and there is work being carried out within the industry on developing standards of best practice on an industry-wide basis.

Reinforcement

The connection of BTM storage to a constrained network could potentially trigger reinforcement under DNO rules, even though such systems may actually help resolve existing constraints. In our view, there is a need to distinguish between storage that is being used in a way that may help to avoid reinforcement, and storage that is being used for other purposes. The Government has recommended that DNOs expand flexible connection terms to address storage connections.

Renewable incentives

Adding BTM storage to a site which has existing generation in receipt of renewable subsidies (e.g. under the renewables obligation) may trigger a requirement to reaccredit the renewable installation. This is not necessarily a quick process and, whilst the process is ongoing, the installation will not be eligible to receive the relevant renewable benefits. This uncertainty is likely to prove prohibitive to assets in receipt of third party finance.

Changes to Ofgem’s accreditation rules to allow the addition of storage to existing accredited stations would allow the deployment of storage across all BTM sites, irrespective of the presence of existing renewable generation. This is particularly important given the wider benefits of storage when co‑located with generation (such as smoothing export profiles).

Ancillary services

As explained in Part 2, contracts for the provision of ancillary services are generally short term, with the longest currently being four years (in the case of enhanced frequency response). These are far shorter than the typical useful lifespan of a storage asset. The pricing for short term debt means that most storage assets are being equity funded. If National Grid were in a position to offer longer term contracts, this would be a significant boost to the bankability of storage projects.

The various ancillary services available to storage are not well coordinated at present. For example, each has different technical requirements and most have tender timelines which do not align with other services. This means it is not straightforward to determine which services can be stacked and, where services can be stacked, the misalignment of timings makes it difficult for storage operators to maximise revenues from such services.

An alignment of tender timings and more consistency across technical requirements would allow BTM storage operators to stack available revenues more efficiently, increasing revenue and the bankability of projects.

Lack of transparency in the market has made it difficult for a number of otherwise interested parties to put together a compelling business case. Some ancillary services are procured through bilateral contracts, the terms of which are not necessarily readily available. Accordingly, it may be difficult for new developers to ascertain the risks, security and flexibility involved in ancillary services contracts in order to determine whether an investment in BTM storage is viable.

For those participants who are able to develop a model and suite of contracts that allow them to realise the potential revenues, those difficulties create an opportunity to establish a market position with relatively low competition. As other developers catch up, we would expect pricing to become more complex too.

Work is being done to increase transparency in this market, with National Grid tendering for ancillary services and publishing price information in market reports. However, more is needed to provide investors with increased certainty to encourage investment in BTM storage.

Long term policy uncertainty

There remains a significant amount of uncertainty over future changes to the electricity market and network charging in particular. In our view, a clear vision for storage with a view to avoiding regulatory reviews and policy changes which inadvertently impact on storage may be one of the biggest boosts to the bankability of storage.

Looking Forward

As explained above, there are currently a number of challenges to investing in BTM energy storage, particularly due to the lack of clarity as to how the technology fits within the current legal and regulatory framework in the UK. In our view, the Government, Ofgem and National Grid need to work together to engage in reform of the rules, in order to reduce the perceived uncertainty and risk associated with investing in BTM storage. Clear definitions and categorisations will be vital in facilitating the development of a market in energy storage.

Ofgem and BEIS published a call for evidence on the future of smart networks on 10 November 2016 (see our blog on this here). Responses are required by 12 January 2017 to help shape proposals to be issued in the Spring. We would encourage all market participants to contribute fully to this exercise to help ensure existing barriers and challenges are adequately addressed.

Although BTM energy storage faces many regulatory and commercial challenges, there are also significant rewards available to those who are able to best meet those challenges, and there is plenty of appetite among businesses to do so.

A recent report by Energy UK stated that ‘electricity storage is widely regarded to be the single most important technological breakthrough likely to happen over the period to 2030 and a complete ‘game changer’ in the way that the power system operates’. BTM energy storage is likely to become less risky as the Government moves to create more commercial certainty, transparency and legislative clarity in the market.