Ofgem consults on electricity storage licence

Licensing for electricity storage: Ofgem consultation

On 29 September 2017, Ofgem released its consultation on modifying the electricity generation licence to accommodate electricity storage (the “Consultation”).

Background

This Consultation follows on from Smart Systems and Flexibility Plan published jointly by Ofgem and the Department for Business, Energy and Industrial Strategy (“BEIS”) in July, which sought to address, amongst other things, the regulatory barriers faced by electricity storage. Having considered the options for the licensing of storage, Ofgem and BEIS stated in the Plan that:

• “Ofgem will consult on the form of a modified generation licence for storage in summer 2017.
• the licence changes will be designed to enable storage facilities to identify themselves as exempt from so-called final consumption levies, as storage facilities are not end consumers of energy.”

The Consultation states that Ofgem considers that generation and storage are sufficiently similar in terms of technical characteristics that they should be treated consistently. Further, Ofgem believes a modified generation licence is the most practical way to provide the required regulatory clarity.

As a result, the Consultation proposes for storage provisions to be subsumed into the existing generation licence; this approach avoids the unnecessary duplication of regulations while allowing bespoke conditions to be included for storage assets. The Consultation also notes that this approach provides certainty to those storage developers that already hold a generation licence.

Definition of electricity storage

As expected, the Consultation adopts the Electricity Storage Network (“ESN”) definition of electricity storage as “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”. Further, the Consultation asks respondents to provide their views on whether this definition should be further clarified by adding “in a controllable manner” to this definition, which would be consistent with the current Grid Code proposals.

The Consultation provides an indicative list of which technologies should be considered electricity storage, such as electro-chemical batteries, air based storage systems like compressed air energy storage, and electromagnetic storage. However, capacitors, transformers, inductors and thermal energy storage should not be considered electricity storage. Furthermore, Ofgem state that the energy stored and converted back into electricity must be the “same” energy so power-gas-power systems, such as those based on electrolysis to create hydrogen, are not captured by this definition. A full list of technologies being considered are listed at Appendix A to the consultation.

Licence conditions

The Consultation suggests that all of the existing generation standard licence conditions, which apply to existing generation assets will apply to electricity storage.

In terms of code compliance this means as follows:

• Grid Code: The obligation to comply with the Grid Code depends on what services storage provides, for example, whether it is connected to the national energy transmission system or it is used for trading purposes.
• Distribution Codes: This is also dependent on the services storage provides and whether it would operate through use of the distribution network.
• BSC: The Consultation confirms that storage facilities below 50MW would not need to accede and comply with the BSC. However, any facilities exceeding this capacity will need to do so.
• CUSC: The Consultation confirms that storage facilities below 50MW would not need to become a party to and comply with the CUSC. However, any facilities exceeding this capacity will need to do so.

Overall, this approach may have some benefits for storage facilities e.g. having access to compulsory purchase powers. Nevertheless there a number of licence obligations that storage developers will need to consider going forward, e.g. how SLC 11 (Ancillary Services) ties in with their commercial ancillary and balancing services offerings.

Exemption from requirement to hold a generation licence

The Consultation confirms that the Electricity (Class Exemptions from the Requirement for a Licence) Order 2001 will apply equally to electricity storage. As a result, facilities with capacity below 50MW will automatically be exempt from the requirement to hold a licence and facilities above 50MW up to 100MW could apply for a specific exemption with the approval of the Secretary of State.

However, facilities that seek to operate under such an exemption would still be subject to Final Consumption Levies in respect of the Renewables Obligation and the CfD for example (“FCLs”), which represents a significant barrier to the emergence of small-scale storage assets. As a result, we anticipate in very small storage systems seeking to hold a generation licence.

Self-consumption

Ofgem is proposing to introduce a supplementary licence condition for electricity so that the licensee does not have self-consumption as the primary function when operating its storage facility. The Consultation confirms that the storage facility’s primary purpose must be to export to the relevant distribution or transmission system. This licence conditions is designed to prevent to potential abuse of the regulatory regime by customers avoiding FCLs by putting storage “behind the meter”.

The use of the term “primary purpose” has already been criticised by some commentators as too broad and introducing uncertainty. Interested parties will observe closely whether the intended flexibility of this phrase, and indeed the government’s energy strategy, is sacrificed for increased precision going forward.

What next?

The deadline for responses to the Consultation is 27 November 2017. Subject to this Consultation, the changes to the licence will come into effect in the first half of 2018.