On 20 July 2021, the Department for Business, Energy & Industrial Strategy (“BEIS”) published a call for evidence on “Facilitating the deployment of large-scale and long-duration electricity storage” (the “Call for Evidence”). The purpose of the Call for Evidence was to consider the role that large-scale and long-duration energy storage (“LLES”) may play in the UK’s transition to net zero, and sought stakeholder feedback in relation to the pipeline of LLES projects, existing challenges to deployment and what can be done to overcome these barriers. Our summary of the Call for Evidence can be found in our previous article here.
On 3 August 2022, BEIS published its response and a summary of the responses received to the Call for Evidence (the “Response”). In this article, we provide an overview of the key findings and next steps set out in the Response.
In summary, the Response recognises that LLES projects:
- have an important role to play in achieving net zero, helping to integrate renewables, maximising their utilisation, contributing to security of supply, and helping manage constraints in certain areas; and
- face significant barriers to deployment under the current market framework due to their high upfront costs and a lack of forecastable revenue streams.
To that end, the Government commits in the response to ensuring the deployment of sufficient LLES to balance the overall system by developing appropriate policy and regulatory frameworks with Ofgem to enable investment by 2024.
1. Defining LLES
In considering the different capabilities of LLES, range of LLES technologies and current pipeline of LLES, BEIS asked the question as to whether respondents agreed with its definition of LLES as “storage technologies than can store and discharge energy over 4 hours and have a capacity of at least 100MW”. The definition of LLES (particularly as relates to duration of discharge) is a matter of considerable discussion in the industry at present.
83% of respondents disagreed with the proposed definition – opposing either the duration of energy discharge, or the capacity suggestion, rather than both. Almost all respondents who disagreed with the duration of energy discharge believed it should be extended (with responses ranging from above 5, 6, 8 and 24 hours) on the basis that:
- 4 hours could risk battery projects operating in a non-optimal manner to gaining support, which is not the policy intention;
- 4 hours is likely to mean operating intra-day, which batteries can do more cheaply;
- 5 hours aligns with the Capacity Market or Short Term Operating Reserve service contracted by National Grid ESO; and
- 6 hours can displace some of the gas generation and could meet the duration of peak periods.
Most of the respondents who disagreed with the capacity floor limit thought that there should be a smaller or no capacity requirement. A few respondents suggested a larger capacity requirement because the scale of storage required means that transmission connected assets should be prioritised, creating economies of scale for bigger projects.
2. LLES technologies and projects
When asked whether there will be a need for a range of different LLES technologies, alongside other technologies that may be able to deliver similar system benefits such as hydrogen production and generation, and carbon capture, usage and storage, 92% agreed, with the reasons most cited being:
- the need to reduce risk in delivering net zero;
- geographical requirements limit the quantity deployable of certain LLES technologies (eg. Pumped hydro); and
- different storage technologies are more suited to different storage needs.
Respondents also provided details on a range of specific LLES projects that could begin development in the next 5 years, ranging from large pumped hydro storage to flow batteries.
3. Existing barriers to LLES deployment
The Call for Evidence identified several financing barriers that are hindering deployment of LLES at scale, notably:
- high upfront capital costs and long lead times;
- lack of track record;
- revenue uncertainty; and
- lack of market signals.
98% of respondents agreed with these barriers, though there were a few respondents who pointed out additional barriers faced by LLES including:
- the network charging regime (TNUoS charges) treating storage unfairly, disincentivising deployment;
- the general uncertainty about the future of the electricity system, the policies for storage, future network charging, future market landscape, and future regulatory framework;
- lengthy grid connection lead times;
- scale of manufacturing novel technologies is not big enough to reduce costs of some LLES technologies at present; and
- support for interconnectors (through their dedicated Cap and Floor) distorts the market for flexibility, including LLES.
4. Addressing the barriers to LLES deployment
When asked whether the market reforms outlined in the Call for Evidence (such as stability pathfinders and NGESO services, Capacity Market reforms and changes to network charging) support the investability of LLES, 60% of respondents thought that they were not sufficient.
Respondents suggested a wide variety of reforms that could take place in current markets to improve investability of LLES, including: better accounting of carbon in electricity markets (such as the Capacity Market, pathfinders and the balancing mechanism), supporting LLES through a de-risking mechanism, and reducing network charges.
5. Bringing forward investment in LLES
The Call for Evidence identified four main mechanisms that could help bring forward investment in LLES:
- regulated asset base (“RAB”);
- cap and floor mechanism;
- contract for difference (“CfD”) regime; and
- reformed Capacity Market.
Just over half of respondents thought that some form of cap and floor mechanism was the most appropriate to help bring forward investment in LLES. Respondents noted risks that may arise in delivering a cap and floor, including: assets not responding to market signals because of a cap, assets behaving sub-optimally if there are not sufficient requirements to receive floor payments, difficulty in setting the right floor level and cap level, and market distortions for existing LLES to the detriment of customers.
However, suggestions were made to design and implement an intervention to enable benefits to outweigh these risks, including: a soft cap or no cap, a positive cost-benefit analysis to ensure the project brings value to the system, a competitive process for allocation, an exposure to market signals, and incentives on developers to deliver projects on time.
Next steps and comment
BEIS recognise that a cap and floor mechanism may be most suitable in theory to bring forward investment in LLES, though detailed design work is needed in order to assess the benefits and interactions of this scheme with the energy system. BEIS propose to carry out further analysis on the costs and benefits of intervention in the market for LLES, as well as working with Ofgem to develop an appropriate policy to enable investment in LLES to meet their commitment in the British Energy Security Strategy. BEIS are considering options such as a Cap and Floor, and a reformed Capacity Market, alongside wider flexibility operational signal sharpening that is being considered under the Review of Electricity Market Arrangements (“REMA”), which we discuss in out Law-Now here.
Further consultation with stakeholders on mechanism design to enable investment in LLES is anticipated in 2022 and 2023.
It is positive that the Response recognises that it is necessary to accelerate the deployment of LLES in order to deliver on net zero targets and wider system benefits. While evidently further work is needed in respect of the design of any revenue mechanisms that can support investment in LLES, Government should consider any such mechanism against the backdrop of wider reforms that are needed to drive investment in LLES such as reforms to TNUoS charging and markets for constraint management.