17 November 2016

The Department for Business, Energy & Industrial Strategy (BEIS)/Ofgem call for evidence on creating a smart, flexible energy system is a big moment for storage in the UK – as it is the first time there has been a focused look at the regulatory and commercial arrangements.

When we published our paper on “Storage: Towards a Commercial Model” we set out what we felt was needed for the sector to flourish. So how does BEIS’s proposals stack up?

Investor confidence

Our storage paper concluded ‘The storage Rubik’s Cube is not quite solved, but with greater re-alignment between energy storage technologies, regulatory framework, revenues and costs, the global and UK energy storage market is poised to achieve substantial market growth.’

The call for evidence has 12 pages on storage, over 100 mentions and some specific policy proposals. The focus on the detail should help give investors confidence that the UK government recognises the role of storage in the energy system and aims to ensure there is a policy and regulatory framework that helps to solve the storage Rubik’s Cube.

That said, this is not a ‘storage strategy’. There are no proposals for subsidies for example. Predictions of cost falls of 6 per cent per annum (drawn from a US Whitehouse report) to 2020 are on the cautious side. The focus is enabling all forms of flexibility to compete in the energy market.

In our view, this approach is to be welcomed. Generally policy is clearer and more consistent when it focuses on outcomes and leaves technologies and business models to compete. After the experience of recent years few people want to develop an industry driven by subsidies.

Any disappointment felt by investors is more likely to be due to the fact that this is still an early stage document with more questions than answers.

Accessing value

If storage is to be able to compete, it does need to be able to access the value it creates for the system. In our view, one of the critical issues will be the way ‘use of the network’ is charged, as we set out in a recent blog here.

Unfortunately, network charging is heading in the opposite direction of what is needed to encourage storage (and flexibility generally). One could almost hear the sound of business models crumbling as people read Ofgem’s ‘Embedded Benefits’ review and recent changes to distribution charging. Ofgem have confirmed to us in answer to questions that they plan a full review of network charging. Whilst this will be a long process the current make do and mend approach driven by proposals from incumbents in the energy system is clearly not fit for purpose anymore.

There is a whole section in the document on “Providing Price Signals for Flexibility” which introduces concepts such as ‘System Value Pricing”. This section discusses how ‘contractual terms should allow flexibility providers to sign up to multiple contracts where possible, thus “stacking” revenue streams and extracting more value from their assets’. We welcome this clear signal of direction, however it’s clear that there is a lot of work to do by all involved to work out how these ‘price signals’ can be designed and put in place. Our view is that in the short term the shift by DNOs to taking an active role in local balancing of supply and demand, will be a key driver and opportunity for storage.

Network connections

There is more clarity in the direction set out on getting a connection to the grid for distribution connected storage. The current system of an avalanche of applications to DNOs for quotes for connections for storage, leading to a handful of actual projects is, frankly, daft. Most storage currently being installed directly onto the network are to provide support to the grid in one way or another, such as the National Grid EFR tender - so it would seem obvious that there must be a better way of signalling where storage should be located, to be useful for the system. This is not to underestimate the scale of change for the networks to get to a point where such a proactive approach is possible.

The call for evidence has an important discussion on how DNOs could be proactive in encouraging storage to connect where it would provide benefits for other connecting customers. It used to be said that the governor of the Bank of England raising his eyebrows was sufficient enough to send a signal to the markets. Whilst it might take a bit more than that in the energy sector, DNOs can be expected to respond to the clear signal from BEIS and Ofgem in the call for evidence. We expect market platforms to begin to emerge from DNOs that will enable storage to bid to provide services to the distribution grid in a particular location. A key challenge will be how to line up the DNO need for local balancing of supply and demand to address network constraints and the role of the National Grid to balance the system as a whole.

Definition and double charging

One of the key issues we identified in our report was ‘The end user licence definition of energy storage and how it is treated within the charging, regulatory and policy framework needs to be clarified.’

The call for evidence has a clear statement ‘for the time being’ as: 'a storage facility is a form of electricity generation station’. However, it then goes on to set out a range of options for a new definition of storage in secondary or primary legislation, which would clarify how storage should be licenced in the future to take account of its characteristics, as demand as well as generation. It also essentially proposes adopting the Electricity Storage Network proposed definition:

  • “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.

A key reason for a clear definition of storage is to help address instances of double charging of storage for use of the network and on ‘final consumption levies’. These don’t affect storage where it is used to shift demand behind the meter but do affect distribution connected storage. BEIS states that ‘our view is that storage should pay network charges for both import and export, as it uses the network for both’. There is a more positive commitment to resolve issues around ‘final consumption levies’ with a commitment ‘In the longer-term, government will align the relevant levy legislation and guidance with the regulatory clarity we provide for storage.’

Response to the call for evidence has been fairly muted so far. Investors like clear answers and this document definitely does not provide that. Many are waiting for concrete proposals before engaging. However, Theresa May has signalled a more traditional approach to policy with green papers and white papers, so we can’t really complain when BEIS takes a step-by-step approach. Regen’s approach will be to take up the offer to engage and help BEIS tackle the complex challenges posed by a rapidly changing energy system – starting with our joint seminar with them at Renewable Futures.

Authour: Merlin Hyman

Contact: samaa@regensw.co.uk