Electricity storage licensing: Finally, some clarity

Electricity storage licensing: Finally, some clarity

Ofgem’s statutory consultation (2019 Consultation) Clarifying the regulatory framework for electricity storage: Statutory Consultation on electricity generation licence changes and next steps – closed last week and their final decision is expected to follow shortly to enable implementation of the modifications this autumn.

Why was this change needed?

A lack of a clear definition created unchartered territory for a technology class that wasn’t benefiting from correct pricing signals: inserting a definition of ‘electricity storage’ into the electricity generation licence standard conditions is not new news – don’t forget the Smart Systems and Flexibility Pan (2017) and Ofgem’s consultation on Clarifying the regulatory framework for electricity storage: licensing (2017)the precursor to the 2019 Consultation.

However, this proposal is significant as having a formal framework in place for storage assets will make clearer the treatment of such assets under the network codes, under taxation rules and in payment of final consumption levies. The latter is probably the one that has been at the forefront of arguments put forward for the licensing change; the unique functionality of electricity storage assets means that, to date, charges have been applied to such assets on both the import and export of power – the so called ‘double charging’ conundrum.

What’s now happening?

Following input from the industry, Ofgem is proposing to modify the electricity generation licence standard conditions in two ways:

Inserting definitions of ‘electricity storage’ and ‘electricity storage facility’ to make clear that such assets will fall as a subset of generation

Inserting a new licence condition E1 – requiring operators of such electricity storage facilities to relay to suppliers, and publicly disclose on their website, certain information about their operations, namely (i) the technology type, power and capacity of their asset (ii) whether such asset(s) is connected to the transmission or distribution system (iii) if co-located, the relationship with the final consumer and (iv) the metering arrangements in place with such final consumer

Transparency is key to avoid gaming

Including the proposed definitions in the generation licence standard conditions will mean storage assets will be classed as a generation asset and therefore no longer subject to final consumption levies.    

But, this doesn’t avoid the need to ensure that suppliers can correctly identify storage assets, correctly identify the parties who are required to pay final consumption levies and also correctly calculate the amount of final consumption levies payable. Ofgem has moved away from its position in the 2017 consultation which would have seen licenced providers prohibited from having self-consumption as the ‘primary function’ of their storage facility. Ofgem has understood that at this early stage of deployment and complex revenue stacking of storage assets, it would be difficult for electricity storage providers to determine ex-ante what their primary function is. Furthermore, and perhaps more crucially, it would have created ambiguity within the industry as to what is, and how to measure, a provider’s ‘primary function’.

As an alternative, and in an effort to prevent people from gaming the system, Ofgem is advocating for increased transparency by requiring providers, through Condition E1, to report on the volumes of electricity exclusively related to the storage facility. This will help suppliers correctly identify storage facilities and therefore the accurate estimation of supply volumes necessary for calculating final consumption levies where co-located with a final consumer. So, where an electricity storage facility is co-located at the same premises as a final consumer, that final consumer will not be able to otherwise claim decreased consumption – and therefore avoid paying its fair share of the final consumption levy – as a result of importing electricity from the on-site storage facility.

What next?

The consultation closed at the end of last week and we expect Ofgem to provide its final decision soon to enable the modifications to take effect this autumn. Assuming Ofgem’s proposed modifications are implemented as drafted, those electricity storage asset providers who already hold a generation licence will need to comply with the new licence conditions from the date the modification takes effect, which will be 56 days from the date Ofgem publishes its decision.  Those seeking a licence will need to comply upon being granted a licence.

In either case, electricity storage providers should ensure they have the appropriate consents from confidentiality undertakings in place from their final consumers to whom they export electricity, permitting them to disclose the information – which could otherwise be commercially sensitive – required under the proposed Condition E1. If not already in place, metering arrangements will also need to be given some thought to comply with Condition E1, so as to enable correct identification of electricity consumption associated with storage.