On 10 November 2016, the Department for Business, Energy and Industrial Strategy (“BEIS”), in coordination with Ofgem, issued the long awaited call for evidence on “A smart, flexible, energy system” (the “Call for Evidence”). Amongst other policy workstreams, this Call for Evidence builds upon Ofgem’s position paper on Flexibility published last year and the National Infrastructure Commission’s (the “NIC”) report on Smart Power (please see CMS’ Law-Now on the NIC’s report). It outlines the detailed work required to tackle policy and regulatory barriers hindering the transition to a more “flexible” and “smart” energy system. It also provides an opportunity for stakeholders to engage with the Government on its strategy on how to manage this transition.
Removing regulatory barriers for storage
There are a range of benefits that storage can provide the electricity system (for more information on this topic please see CMS’ e-guide on energy storage). One of the overarching aims of the Call for Evidence is to create a level playing field that enables storage technologies to compete with other forms of flexibility and more traditional technologies. The Call for Evidence identifies several barriers currently facing storage technologies, these include:
- Use of system charges – As network charging methodologies were not designed with storage in mind, reform is needed to refine the way storage is treated. The Call for Evidence highlights a lack of clarity in the charging methodologies as to whether storage is classified as intermittent or non-intermittent, which could lead to differences in treatment (non-intermittent generators tend to be charged less than their intermittent equivalents). It is also noted that network charges do not adequately take account of storage’s ability to help reduce the stresses on the system, as it is mostly likely to export at times of peak load and import at times of peak generation. Network charging has come into focus recently following Ofgem’s open letter on embedded benefits (please see CMS’ Law-Now on the open letter).
- Final consumption levies – As mentioned above, storage can both import and export electricity. Where a stand-alone storage device has a relationship with an energy supplier, it is charged final consumption levies (such as Renewable Obligation and Feed in Tariff costs) on its imported electricity. The Call for Evidence recognises that such costs are set to rise to over 40% of the cost of electricity for storage operators in 2020 due to the increase in CfD and Capacity Market costs. The Call for Evidence recognises that this creates a distortion in the market for storage operators when compared with generation and states that amendments in the underlying levy legislation are required to address this issue.
- Defining storage – The absence of a regulatory definition for storage results in a lack of clarity in where storage sits within the legislative and regulative framework, and also the role that various industry participants can play in relation to storage. As storage becomes more prevalent this will become an increasingly difficult situation to manage. The Call for Evidence includes the current Capacity Market legislative definition and the definition suggested by the Electricity Storage Network and asks for stakeholder’s views on how storage should be defined. The Call for Evidence further considers how storage should be treated for the purposes of licensing. The options include:
1. continuing to treat storage as generation for licensing purposes;
2. defining storage as a subset of generation in a modified generation licence;
3. defining storage in primary legislation as a subset of generation in the Electricity Act 1989 with a modified generation licence for storage; and
4. defining storage as a new activity with a separate storage licence.
The Call for Evidence covers the timing and other potential implications of each approach and notes that further consideration is required in this area.
Price signals for flexibility
The Call for Evidence recognises that the UK’s energy system has some well-functioning price signals that shape both generation and demand. However, it is acknowledged that to deliver the full benefits of flexibility, it is necessary to refine these signals so that they recognise the benefit to the energy system of both smart technologies and processes.
For example, the Call for Evidence focuses on the implementation of half-hourly settlement to incentivise suppliers to assist their customers to use electricity when it is at its cheapest. It is suggested that this would be particularly effective in combination with smart meter roll out. New “smart” tariffs which allow consumers and suppliers to respond to price signals are also outlined.
The role of the consumer, smart appliances and electronic vehicles
The Call for Evidence discusses smart appliances (e.g. demand response enabled white goods and domestic battery storage) and their potential to help consumers optimise their energy use. In order to build confidence and incentivise consumers to make the switch to smart appliances, a range of options from voluntary schemes to regulation (e.g. regulation of smart appliances and their labelling) have been put forward.
The Call for Evidence is also requesting evidence on the future role of Electronic Vehicles (“EVs”) in the electricity system. Through “smart” charging BEIS envisages that customers with EVs could utilise off-peak pricing, and also potentially provide other functions, such as vehicle-to-grid storage.
The roles of different parties in system and network operation
The changing energy landscape is driving ever-increasing interaction between the transmission and distribution networks, for example increased bi-directional power flows between them requiring more active management of the electricity system. BEIS considers how the roles of different parties need to evolve to ensure that the networks, and the electricity system more broadly, are managed efficiently. In the short term, BEIS emphasise that distribution network owners need to transition to distribution system operator type roles, and have also called for increased interaction between DSOs, the system operator and transmission owners in relation to network planning, information sharing and the use of resources in general.
Despite the barriers identified in the Call for Evidence, the storage sector in the UK is rapidly developing as demonstrated by the success of National Grid’s EFR auction (please see CMS’ Law-Now on the auction) and the significant amount of storage that is prequalified in the Capacity Market (please see CMS’ Law-Now on the subject). Nevertheless, the Call for Evidence is the first step on the road to addressing these barriers and signals the Government’s desire to facilitate a more flexible, decentralised energy system with the primary goals of increasing competition and reducing costs for the end consumer. However, given that legislative changes look likely, it may be a significant amount of time before these areas are satisfactorily resolved.
The deadline for responses to the Call for Evidence has been set for 12 January 2017 and BEIS are expected to publish their findings in the spring of 2017.