On Monday, the Department for Business, Energy and Industrial Strategy (“BEIS”) and Ofgem jointly launched their “Upgrading our Energy System” plan on smart systems and market flexibility (the “Plan”). The Plan represents the government and the regulator’s response to the Smart, Flexible Energy System call for evidence (the “Call for Evidence”) announced in November 2016, which we previously reported on here.
According to a study commissioned by the government, consumers could save as much as £40 billion in energy costs by 2050 with the successful deployment of technologies that provide flexibility (such as storage, demand-side response (“DSR”) and smart grids), providing benefits through avoided or deferred network reinforcements, avoided curtailment of renewable generation and optimised operation of the system.
The Plan outlines a raft of measures focusing on three key areas:
- removing barriers to smart technologies (such as storage and DSR);
- enabling smart homes and businesses; and
- making markets work for flexibility.
Some of the more notable decisions announced by the Plan are outlined in further detail below, which mostly seek to address the barriers to storage and other smart systems that were identified in the Call for Evidence.
- Removing barriers to smart technologies
In relation to electricity storage, the Plan aims to clarify the wider regulatory regime, ensuring it is fit for purpose for storage. The Plan outlines:
- Definition for storage: a new legal definition for storage will be introduced by virtue of an amendment to the Electricity Act 1989 and other relevant legislation. This was an explicit recommendation in the Call for Evidence, and will be enacted when parliamentary time allows. It is interesting to note that storage will be considered “a distinct subset of generation” as a result of these amendments, despite the fact that storage displays other technical characteristics. It is not clear how comprehensively such definition for storage will be embedded within existing legislation, for example whether it also be included in all relevant underlying secondary legislation. Further, the coordination with any changes to other industry documents, such as industry codes, is also not set out in the Plan.
- Storage licence: A proposed licence for storage (which will be based on the existing generation licence) will be the subject of an Ofgem consultation in the coming months, with a view to its introduction in the summer of 2018. It is not clear how this new storage licensing regime will apply to smaller scale projects, for example, will an equivalent generation class and specific exemption regime be available? If not, then will storage licensees be required to be a party to the BSC and the CUSC?
- Final consumption levies: In order to address the current situation where final consumption levies (such as the Renewables Obligation, Feed-in Tariffs etc.) are charged on the electricity imported into storage facilities, the Plan proposes that storage facilities holding either a generation licence or a storage licence will not be liable for these levies. However, it is unclear whether this means that smaller scale projects must hold a licence with its attendant obligations as opposed to only small-scale exemption.
- Network charging: We reported about Ofgem’s earlier consultation to the Targeted Charging Review here, which suggested that storage facilities should not face demand residual charges at transmission and distribution level or be double charged balancing system charges. The Plan states that Ofgem will be announcing details shortly regarding the scope of the Targeted Charging Review. Further, the network operators are expected to publish guidance on the treatment of storage as intermittent or non-intermittent in the relevant charging methodologies by the end of the year. Such reforms and further clarity are welcome as these are likely to reduce the costs faced by storage facilities.
- Co-location: Clarification will be provided on how the co-location of storage with renewable generation impacts on existing Renewable Obligation and Feed-in Tariffs accreditations. Ofgem is due to publish further guidance later in 2017. However, it seems there is limited appetite to provide further clarity in the enabling legislation for these schemes.
- Storage ownership: One of the more contentious issues addressed by the Plan is the issue of whether network companies should be allowed to own and operate storage facilities to cater for their own flexibility needs. Ofgem is clearly against network companies doing so in the Plan, as network ownership could distort the competitive storage market, for example due to such companies having access to a lower cost of capital and information that is not publicly available. Ofgem will provide further clarity on the regulatory position regarding such ownership and operatorship of storage in due course, in particular to ensure that the relevant Third Package unbundling requirements are complied with. The Plan also proposes the introduction of new reporting requirements for distribution network operators that already own storage.
- Grid connections: The Call for Evidence highlighted the need to create more clarity on the connection process for storage, provide transparency on where to connect, and implement better queue management. As a consequence, Ofgem will use the Incentive on Connections Engagement (a consultation about which is ongoing) to assess the extent to which distribution network operators are working to improve network connections for domestic and co-located storage.
- Planning: The Plan also sets out BEIS’ intention to engage with industry and planning authorities in order to review the planning framework in relation to storage, which might include guidance on storage, along with a national planning threshold for storage facilities.
- Funds for smart energy technologies: The Plan contained an announcement of a major £246m investment by BEIS in battery technology over the next four years, the first element of which (dubbed the Faraday Challenge) will be a £45m competition aimed at reducing the cost of battery storage technologies.
Smart homes and businesses
Having already committed to offer every home and small business a smart meter by 2020 and the introduction of half-hourly settlement, the Plan states the intention to consult on standards for smart appliances and the possibility of more formal protections for consumers in relation to data protection, consumer rights and cyber security.
New standards are also outlined for electric vehicle charging points, allowing consumers to charge their cars when demand is low and be paid for feeding electricity back to the grid, while the introduction of “smart tariffs” by suppliers under which consumers can pay less for off-peak power is encouraged.
Markets which work for flexibility
The flexibility provided by technologies such as storage and DSR can help deliver reliable power at lower cost, in turn allowing new and disruptive technologies to flourish, and the Call for Evidence identified the need to create price signals that reflect the true value flexibility brings to the system. In response, amongst other things, the Plan refers to a number of ongoing initiatives including:
- National Grid’s Future of Balancing Services and System Needs and Product Strategy;
- P344 modification to the BSC and Ofgem’s letter on the participation of aggregators in the Balancing Mechanism; and
- The Open Networks project run by the Energy Network Association.
The Plan has been widely welcomed by industry participants and market commentators. Nevertheless, there is a prevailing sense that the Plan does not contain the required detail to represent a comprehensive roadmap to the introduction of a smart and flexible system in GB. There will be a number of further consultations and other industry engagement required to maintain the momentum created by the Call for Evidence and the Plan prior to the implementation of the measures included in the Plan. In the interim, ensuring that there is a consistent stable approach to the regulatory framework and investment environment will remain vital to ensuring the development of such smart, flexible projects.
 The Call for Evidence included the following proposed definitions:
“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; and
“Electricity Storage Facility” in the electricity system means a facility where Electricity Storage occurs.