Progress, but still much to do: An update on the Smart Systems and Flexibility Plan

United Kingdom

On 16 October 2018, the government Department for Business, Energy and Industrial Strategy (“BEIS”) and Ofgem released a progress update (the “Update”) in relation to their July 2017 joint paper Upgrading Our Energy System: Smart Systems and Flexibility Plan (the “Plan”). Having considered the Plan in a previous article, we examine here the key points arising from the Update.

The Update

Since July 2017, the Update states that BEIS and Ofgem have:

  1. implemented 15 of the 29 actions set out in the Plan;
  2. made significant progress against many of the others; and
  3. begun to deliver some new actions that go beyond those issues identified in the Plan.

We draw out the more notable points from the Update below.

Removing barriers to smart technologies

The Update discusses the steps that have been taken, and those that are yet to be taken, to improve certainty over the treatment of storage in the current regulatory regime with the aim of providing further clarity for developers of storage facilities:

  1. Regulatory definition of storage: on 29 September 2017, Ofgem consulted on proposed modifications to the generation licence to acknowledge storage as a subset of generation and clarify its treatment in the applicable industry codes (see our previous article on the consultation). While the modifications were expected to take effect in summer 2018, Ofgem is yet to launch the necessary statutory consultation. Meanwhile, BEIS has prepared a definition of storage to insert into primary legislation when the Parliamentary schedule permits.
  2. Planning: BEIS is collaborating with local planning authorities to ensure that they consider electricity storage as a subset of generation when considering proposed or existing development involving the construction, extension or operation of electricity storage facilities. This includes instances where such facilities are co-located with other forms of electricity generation or sited within existing buildings. BEIS plans to launch a consultation on the treatment of electricity storage facilities with respect to the national planning threshold.
  3. Final consumption levies: In terms of ensuring that electricity storage providers avoid overpayment of “final consumption levies”, the Update confirms that providers holding a generation licence will be excluded from requirement to pay levies on their imports towards the Renewable Obligation (“RO”) and the Feed in Tariff (“FIT”). BEIS and Ofgem are working with the Capacity Market and CfD authorities to ensure that the import volumes used to settle amounts due under the CfD scheme and Capacity Market auctions are calculated appropriately for storage.
  4. Co-location: Ofgem has published guidance on how to co-locate electricity storage facilities with RO generating stations and FIT installations without risking their existing accreditation. For further details of the legal issues in respect of co-locating storage and renewables, please refer to our Co-location Guide.
  5. Grid connection: The Energy Networks Association has established a working group that consulted on whether to promote flexibility providers, including storage, within the queue. This work aims to reduce the cost and time of connecting to the distribution network.
  6. Network and balancing charges:  Industry-led code modifications have been raised on transmission, distribution and balancing charges for storage and Ofgem is expecting these to be submitted for approval imminently. These code modifications will address potential overpayments of residual charges by storage providers and consider whether certain elements of the balancing charges should be split into residual and forward-looking elements so as to ensure that storage is charged appropriately. We have reported on Ofgem’s network charging reviews here and here.

Smart homes and businesses

The Update demonstrates a number of developments in relation to smart networks and the removal of barriers to demand side response:

  1. Electric Vehicles: Following the enactment of the Automated and Electric Vehicles Act in July 2018 (we commented on this in a previous article), BEIS plans to consult on the secondary legislation required to substantiate the Act by early 2019. Separately, BEIS has been working with the British Standards Institution to review the current technical standards for electric vehicle chargepoints.
  2. Removing barriers for smart tariffs: Ofgem’s measures to facilitate the uptake of smart tariffs by suppliers, including the smart meter roll-out and the Significant Code Review in relation to the introduction of market-wide half-hourly settlement, are continuing. Elexon is leading a working group considering options for the Target Operating Model which sets out how settlement arrangements will need to change to deliver market-wide half-hourly settlement, and it plans to deliver a final model to Ofgem in spring 2019.
  3. Smart appliances and homes: BEIS has consulted on proposals to regulate smart appliances to ensure interoperability, data privacy and cyber security. It plans to consult on proposed next steps to deliver the Clean Growth Buildings Mission, including measures to encourage smart appliances, in early 2019.
  4. DSR in the public sector: Crown Commercial Service (CCS) launched a new framework to enable public sector consumers to access DSR.

Making markets work for flexibility

The Update confirms that the following progress has been made towards improving market access for providers of flexible services such as storage and DSR and ensuring that they are rewarded for the value they provide to the electricity market:

  1. Ancillary services: National Grid ESO is working on improvements to the way it procures balancing services (see our previous article on this). It has published a number of “roadmaps” sketching out proposed milestones for reform of its portfolio of ancillary services products and its plans to widen access to the balancing mechanism. Ofgem is planning to consult on amendments to distribution licence conditions to facilitate the transition from distribution network operators to distribution system operators that procure ancillary services in co-operation with National Grid ESO.
  2. Balancing Market: Ofgem has issued a view on market design for independent aggregators of balancing units and approved modifications to the Balancing and Settlement Code and the Grid Code to facilitate the implementation of Project TERRE, a Europe-wide balancing mechanism project.
  3. Capacity Market: Ofgem and BEIS have simplified the metering requirements in the Capacity Market so as to enable the stacking of value between the Capacity Market and balancing services.

Comment

The actions summarised above are positive steps, but there remain significant challenges for providers of flexible energy solutions, particularly around revenue stream certainty and the confidence in the future value of flexibility. Nevertheless, we are seeing continued interest from developers, investors and debt providers in the sector, who would all welcome greater certainty in relation to the regulatory landscape for flexibility.