Removing barriers to electricity Storage
Battery storage is currently attracting much publicity and significant levels of investment.
However, the Call for Evidence on a smart flexible energy system and the subsequent joint HM Government and Ofgem publication Smart Systems and Flexibility Plan published last July identified a number of areas where action is required to overcome barriers for energy storage.
The Plan reiterates Ofgem’s views that storage facilities should not pay the ‘demand residual’ element of network charges at transmission and distribution level, and that storage providers should only pay one set of balancing system charges. Ofgem has followed this up by launching a Significant Code Review to address these issues. Other key areas identified for action include clarifying the regulatory status of storage, the liability of storage for final consumption levies and the extent to which DNOs may participate in storage activities.
Ofgem has recently launched two consultation exercises in relation to the latter issues. In the first consultation, Ofgem addresses the issue of the regulatory status of storage under the Electricity Act and the question of whether electricity supplied to storage facilities should be subject to final consumption levies. The second consultation paper addresses the ownership of storage facilities by distribution network operators.
Regulatory status of storage: Ofgem is proposing to modify the standard licence conditions for generation to define electricity storage as a subset of generation. The aim is to firmly establish the regulatory status of storage under the Electricity Act (including clarity on the extent to which the generation SLCs apply to storage) and also for the purposes of legislation in other areas such as planning. In time, it is intended that primary legislation will be introduced to reflect the activity of storage in the Electricity Act. Changes to the regulations governing licence applications are also being consulted upon.
Final consumption levies: the proposals also include a new SLC E1 providing that self-consumption cannot be the primary function of a storage facility. The aim is to avoid the facility being treated as an ‘end consumer’ and thereby becoming liable for final consumption levies (covering the Renewables Obligation, Contracts for Difference, Feed-in Tariffs and the Capacity Market). This avoids the potential for double-counting that arises when the end consumer pays the levies on the same electricity thereby making storage less competitive. Ofgem acknowledges that alternative approaches to avoiding the double-counting of levies might be considered.
DNOs’ ownership of storage: the Smart Systems and Flexibility Plan identified the need to ensure that the operation of storage facilities owned by DNOs is unbundled to maintain a level playing field and to comply with the EU’s Third Package. In the second consultation Ofgem therefore proposes a new distribution licence condition to ensure that DNOs that own storage facilities are legally separate from the operators. Whilst a proposed new licence condition 43B would not prevent a DNO from owning a storage facility, it would ordinarily need to be operated by a third party. If the third party operator is not fully independent but an affiliate of the DNO, then the existing business separation rules of the distribution licence will apply to ensure that there is effective management and operational separation between the DNO and its affiliate.
The consultations close on 27 November and Ofgem is aiming to introduce the licence changes in the first half of 2018. In the case of the distribution licence changes, a statutory consultation on the modification of DNO licences and final decision are expected in the Spring.
Battery storage is a flexible technology with a variety of uses. Operating “in front of the meter” it’s ability to respond very quickly to changes in system frequency can help the system operator to maintain a balance between generation and demand. Fast-acting frequency response is becoming increasingly important due to the reduction in system inertia resulting from the changing capacity mix as more intermittent renewable technologies are connected and older thermal plant is retired. The value of battery storage for frequency control was highlighted by National Grid’s recent tender for Enhanced Frequency Response in which the majority of contracts were won by battery facilities. Batteries can also be used “behind the meter” in order to reduce energy costs by reducing imports at times of peak prices, especially for larger industrial and commercial customers. Behind the meter, batteries may also help to maintain security and quality of supply.
The importance of energy storage and the need to facilitate its development as a matter of policy seems clear from the Smart Systems and Flexibility Plan. We are continuing to monitor and comment on action to remove barriers in this important area.