Electricity storage licensing – another step closer to regulatory certainty

On 26 June 2019, Ofgem published its statutory consultation notice and covering letter on electricity generation licence changes (“2019 Consultation”), which sets out the regulator’s proposed framework for electricity storage regulation. The consultation confirms Ofgem’s intention to modify the existing generation licence conditions to put electricity storage on a licensed footing, thus ensuring storage providers avoid paying final consumption levies on electricity that is imported from the electricity network into the storage facility.

Background

The 2019 Consultation represents one of the final stages of the regulatory reform of electricity storage which began with a call for evidence in November 2016, followed by the joint-Ofgem-Government Smart Systems and Flexibility Plan (“SSFP”) and Ofgem’s specific licensing consultation (“2017 Consultation”) in July and September 2017 respectively. Our Law-Now on the 2017 Consultation is available here.

The SSFP and 2017 Consultation identified a number of regulatory difficulties facing electricity storage, including uncertainty as to the technology’s status under regulation (which makes electricity storage operators’ obligations unclear) and the treatment of electricity storage facilities as end consumers by regulation, resulting in final consumption levies (such as Renewables Obligation, Feed-in Tariffs, Contracts for Difference and the Capacity Market charges) being payable on imported electricity, notwithstanding that the electricity is subsequently exported.

In accordance with the actions under the SSFP, the 2019 Consultation finalises the regulator’s proposals for addressing the above issues by way of amendment to the existing generation licence and seeks comments on the proposed drafting.

Proposed amendments to the generation licence

The proposed modifications to the generation licence conditions are twofold:

1. inserting definitions of ‘electricity storage’ and ‘electricity storage facility’, therefore clarifying that storage operations fall within the ambit of the generation licence; and

1. inserting new licence condition E1, which requires licensed operators of electricity storage facilities to publish information relating to their electricity storage operations and share information with their supplier to support identification of storage facilities.

Definition of electricity storage and electricity storage facility

As anticipated, the 2019 Consultation proposal 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”.

In 2017, Ofgem had consulted on whether the words ‘in a controllable manner’ should be inserted at the end of the ESN definition of ‘electricity storage’. The 2019 Consultation states that Ofgem agrees with industry that such words would add little value, and as such the words are not included.

Information obligations on licensees

The second modification above replaces the previously proposed supplementary licence condition that the relevant storage facilities do not have self-consumption as their primary function. The original proposal drew criticism for being ambiguous and difficult to ascertain compliance with in advance.

The replacement proposed licence condition will broadly require electricity storage operators both provide to their electricity suppliers, and publish on their websites, information relating to:

• Storage technology type, power and capacity;

• How the storage is connected to the electricity system;

• The relationship with any end consumer located at the same premises as the storage; and

• Metering arrangements that are in place at the storage facility.

The above information requirements are intended to facilitate the accurate calculation of charges levied against storage operators and other parties, and will apply to all electricity storage operated by a storage licensee, regardless of the nameplate capacity of the individual facilities. The 2019 Consultation states that Ofgem considers it the responsibility of electricity storage operators to support the accurate and efficient operation of the energy system, including the calculation of relevant charges and levies. Ofgem expects compliance with new licence condition E1 to include consideration as to how stored electricity will be correctly metered.

Wider reforms

Nevertheless, the modification of the generation licence will not, by itself, result in storage operators being exempt from two of the final consumption levies in respect of the Contracts for Difference and Capacity Market charges, due to the way gross demand for the calculation of these levies is currently reported. The 2018 progress update to the SSFP noted that the Government, Ofgem, Elexon, the Low Carbon Contracts Company and the Electricity Settlements Company are working together to amend the Balancing and Settlement Code systems and processes in order to resolve this. To this end, in October 2018, Elexon published its consultation “Aligning BSC Reporting with EMR Regulations”.

The proposed generation licence modifications come at a time of wider market reform in relation to storage, as summarised here. In particular, in addition to the Targeted Charging Review, the following code modifications will likely affect the network charging regime licensed storage providers are subject to:

• CUSC modification proposal CMP280 - Creation of a new generator TNUoS demand tariff which removes liability for TNUoS demand residual charges from generation and storage users;

• CUSC modification proposal CMP281 - Removal of BSUoS charges from energy taken from the national grid system by storage facilities;

• DCUSA change proposals DCP341 and DCP342 – Removal of residual charging for storage facilities in the CDCM/EDCM;

• BSC modification P383 - Enhanced reporting of demand data to the NETSO to facilitate CUSC Modifications CMP280 and CMP281.

Next steps

To date, there has been nothing to prevent storage operators securing the unamended form of generation licence and a number of developers have done so. Therefore, this reform simply regularises the approach many are taking already. Assuming the modifications to the generation licence are implemented (which will take place 56 days after Ofgem publishes its decision on the 2019 Consultation) the new licence conditions will apply automatically to electricity storage operators who already hold a generation licence, and such operators will need to comply from implementation onwards. Electricity storage operators who do not yet hold a generation licence should consider whether the advantages of holding one (especially with regard to final consumption levies) outweigh the obligations that being licensed brings.

The consultation closes on 25 July 2019, and, subject to appeal, the licence changes are expected to take effect in Autumn of this year.

Globe Law & Business has recently published a Special Report authored by Louise Dalton titled “Energy Storage: Legal and Regulatory Challenges and Opportunities”, which is available here.