Smart Systems and Flexibility Plan 2021 – key takeaways

On 20 July 2021, the Department for Business, Energy & Industrial Strategy (“BEIS”) and Ofgem published the long-awaited updated Smart Systems and Flexibility Plan 2021 (the “Plan”), following release of the initial Smart Systems and Flexibility Plan in July 2017. We reported on BEIS’ original call for evidence on a smart, flexible energy system in 2016 here and the 2018 update to the July 2017 Plan here).

Alongside the Plan, BEIS and Ofgem have also published the UK’s first Energy Digitalisation Strategy, which is the subject of a separate Law-Now article.

Key takeaways from the Plan are:

• Facilitating flexibility from consumers will be key in meeting net-zero targets, with government seeking to take action to regulate and standardise smart energy appliances and products and private electric vehicle (“EV”) chargepoints;
• A more sophisticated and clearer regulatory framework for storage and interconnectors will be required in order to remove barriers on these technologies’ ability to provide flexibility to the grid;
• Reform of flexibility markets is required in order to appropriately reward providers of flexibility for the value they provide to the system and improve price signals; and
• Harnessing the power of data across a digitalised energy system will be essential in ensuring assets across the system will be effectively optimised, and that innovative low carbon solutions and services can be offered to consumers.

Further detail on the key policy areas and actions contained in the Plan are set out below.

Background

The Plan is the government’s roadmap to transforming the UK energy system into a smarter and more flexible one, capable of integrating high volumes of low-carbon energy and utilising technologies such as energy storage and electric vehicles, in order to effectively deliver on the UK’s net-zero by 2050 ambitions.

The 2017 and 2018 versions of the Plan set out a total of 38 actions for government, Ofgem and industry to take in order to deliver a smarter and more flexible energy system. The Plan notes that to date, 29 of the 38 actions have been implemented and the remaining 9 actions are on track to be delivered by the end of 2022 (the Plan also includes updated versions of these actions).

The Plan covers the following four core policy areas:

1. Facilitating flexibility from consumers;
2. Removing barriers to flexibility on the grid: electricity storage and interconnection;
3. Reforming markets to reward flexibility; and
4. Digitalising the system.

Across these policy areas, the Plan sets out what government aims to have achieved by the mid-2020s, what will be needed by 2030 and beyond and how these actions will be delivered.

1. Facilitating flexibility from consumers

The Plan notes that as electricity demand increases due to the electrification of transport, heat and industry, consumer flexibility will:

a) play an important role in helping to reduce the amount of generation and network capacity required to address such demand; and

b) be one of the most cost-effective ways of reducing carbon emissions, as consumer flexibility will be cheaper than building additional generation.

By the mid-2020s, the Plan aims for consumers of all sizes to be able to provide flexibility to the energy system, supported by the necessary infrastructure and regulatory framework. It is envisaged that by this time, the market for flexibility from large consumers will have matured and consumers will have a greater choice of innovative products (such as smart tariffs) and interoperable smart appliances to help drive flexible consumer behaviour.

Looking ahead to 2030 and beyond, the Plan intends for consumers to be providing significant flexibility to the system (potentially around 13GW in combination with intraday storage), with consumer flexibility and “energy smart” products being normalised and the benefits of consumer flexibility “well established in the public consciousness”. The Plan also aims for deeper integration between EVs and the electricity system by this time via vehicle-to-grid technologies. On 20 July 2021, BEIS launched a call for evidence seeking views on the role of vehicle-to-x technologies in a net zero energy system and the barriers preventing their widespread use.

How will this be delivered

In order to facilitate flexibility from consumers, BEIS and Ofgem have made a number of key commitments to:

• Take action to regulate smart energy appliances, implementing requirements that are underpinned by the principles of interoperability, data privacy, grid stability and cyber security;
• Mandate minimum device-level requirements for private EV chargepoints, including smart functionality (legislation will be laid in 2021 to this effect, as confirmed by the government’s response to the Smart Charging consultation, published 14 July 2021);
• Deliver a regulatory strategy by the end of 2021 that supports EV rollout;
• Incorporate flexibility and smart technologies into energy efficiency and heat policies, including regulations, assessment methodologies, subsidy schemes and market mechanisms;
• Encourage greater availability of smart tariffs for smaller consumers utilising half-hourly settlement (with Ofgem recently setting out its expectation for industry to implement market-wide half-hourly settlement by October 2025);
• Collaborate with industry to develop guidance to tools to advise consumers on smart tariffs and approaches to deliver home energy management services that cyber secure and interoperable across devices;
• Commission further work to set a robust approach to monitoring and mitigating cyber security risks across a smart and flexible energy system; and
• Consult in 2022 on an appropriate regulatory approach for flexibility service providers and other organisations controlling load.

2. Removing barriers to flexibility on the grid: electricity storage and interconnection

The Plan notes that currently the majority of flexibility comes from fossil fuel generation, and in order to meet decarbonisation targets, over the next decade greater flexibility will need to come from electricity storage and interconnectors.

To date, BEIS and Ofgem have taken a number of steps to open up the market for storage and interconnectors. For example, the government passed legislation to make it easier for larger storage projects to acquire planning permission and the EU-UK Trade and Cooperation Agreement sets out the need for UK and EU Transmission System Operators to cooperate to develop technical procedures for new, efficient cross-border trading arrangements to maximise capacity delivered from interconnectors.

By the mid-2020s, the UK government aims to have created a “best-in-class” regulatory framework for electricity storage in order to facilitate greater investor and developer confidence and increase deployment of storage technologies. In addition, the Plan reiterates the government’s ambition to realise at least 18GW of interconnector capacity by 2030, noting that this will deliver efficient and flexible access to cross-border markets across all timescales.

Looking ahead to 2030 and beyond, the Plan intends for storage to be providing significant flexibility to the system, replacing flexibility from traditional fossil fuel generation. The 18GW of interconnection target should be met by this time and the frameworks for interconnector operability will utilise the full potential of flexibility that interconnectors can provide to the energy system.

How this will be delivered

The Plan sets out the following key actions in relation to removing barriers for greater participation of storage and interconnectors on the system:

• When parliamentary time allows, define electricity storage as a distinct subset of generation in primary legislation and update and publish a new version of the Planning Practice Guidance;
• Ofgem will consider how network charges should be applied where storage creates benefits for the system as well as options for removing final consumption levies on electricity imported by domestic storage and vehicle-to-grid technologies for the purpose of re-exporting back to the grid;
• Launching of the £68m Longer Duration Energy Storage Demonstration (LODES) competition to accelerate the commercialisation of first-of-a-kind longer duration energy storage, with the intention of building at least 6 demonstrator projects by March 2025;
• BEIS and Ofgem will take action to de-risk investment for large scale and long duration storage. For example, alongside the Plan, BEIS also published a call for evidence on facilitating the deployment of large scale and long duration electricity storage;
• Ofgem is currently undertaking an Interconnector Policy Review to establish whether there is a need for further GB interconnection capacity beyond the projects which currently have regulatory approval;
• The ESO will identify and remove barriers to entry for interconnectors in balancing services by the end of 2023;
• The government and Ofgem will work with industry to remove regulatory barriers to the co-location of storage with other forms of generation; and
• BEIS will work with the Low Carbon Contracts Company to produce guidance to clarify co-location requirements under the Contracts for Difference (CfD) scheme in order to facilitate the addition of storage to CfD projects. If necessary, BEIS will consult on changes to CfD contract requirements.

The Plan also notes that BEIS and Ofgem are generally exploring the need and case for more fundamental market intervention to support deployment of the storage and interconnection and address existing financing challenges.

3. Reforming markets to reward flexibility

The Plan notes that ensuring the UK system has an effective suite of market signals is crucial to bringing new flexible technologies onto the system. Such signals are also important in supporting the business cases of such technologies and incentivising flexible operation. Recent years have seen significant growth in the value and importance of other supplementary markets and signals such as the balancing mechanism, ancillary services and local markets for flexibility that complement the national wholesale market for electricity.

The Plan envisages that by the mid-2020s, flexible technologies of all types and sizes will have improved access to flexibility markets and will be able to stack revenues across multiple sources of value where this enables whole system optimisation. This will be supported by implementation of a) new network access and charging arrangements and b) reforms to existing markets by the ESO that will incentivise more efficient and flexible network use. In addition, the Plan intends that by this time there will be stronger investment signals for flexibility, which could include changes to the CfD scheme to balance system needs with large-scale deployment of low-carbon generation. In the government’s call for evidence on enabling a high renewable, net zero electricity system, a common theme put forward by respondents in relation to potential changes to the CfD included a focus on the system integration of renewable energy, such as through developing or providing support to flexibility.

By 2030, the government aims for all flexible supply and demand energy resources to contribute their full potential to the energy system, with dynamic close-to-real-time markets playing an important role in ensuring the most efficient assets are dispatched. In addition, stronger long-term investment signals will indicate when and where flexibility will be needed and will compliment operational signals and procurement mechanisms.

How this will be delivered

The Plan sets out the following key actions which will drive forward flexibility markets and improve price signals:

• The ESO will deliver on its ambition for net zero operability by 2025, which will include a new suite of ancillary services and implementation of a single day ahead market for response and reserve by 2023. The ESO will also deliver and build on its pathfinder projects and present a clear and credible plan to deliver reforms beyond 2023 to achieve its objectives of zero carbon operability and market solutions across all services by 2025;
• DNOs will need to deliver and adopt a standardised approach for procuring flexibility services and managing connections across the GB distribution networks;
• Greater collaboration between DNOs and the ESO will be required in aligning distribution and transmission flexibility and servicing conflicts;
• The government and Ofgem will ensure that institutional arrangements governing the energy system are fit for purpose to deliver coordinated and effective flexibility markets (with Ofgem and government recently publishing joint consultations on system operation and energy code governance);
• BEIS will continue to engage with industry on how best to balance investment signals for low-carbon generation with wider system needs in the CfD scheme in the run up to the next allocation round (AR5);
• BEIS’ imminent call for evidence on the Capacity Market will gather stakeholder views on the longer-term future of the Capacity Market in the context of net-zero;
• Network and system operators will develop consistent methodologies for carbon reporting and monitoring of their actions and markets, with carbon monitoring and reporting expected to be in place by 2023;
• Further to the Energy White Paper, legislation will be introduced to enable competitive tendering in the construction, ownership and operation of the onshore electricity network; and
• The government will work with the UK ETS Authority to review the 20MW UK ETS exemption in 2022, which can distort market signals and block investment in low carbon flexible technologies (e.g. inrecent auctions a high percentage of Capacity Market agreements were awarded to carbon emitting gas generators smaller than 20MW).

A key message in chapter 3 of the Plan is the expectation for network operators to work together proactively (e.g through the ENA and other relevant governance arrangements) to deliver a step change in coordination across flexibility markets, demonstrating a clear, long-term view of how flexibility services will complement each other at both the distribution and transmission level.

4. Digitalising the system

The Plan recognises that harnessing the power of data across a digitalised energy system will be essential in ensuring assets across the system will be effectively optimised, and that innovative low carbon solutions and services can be offered to consumers.

By the mid-2020s it is intended that the UK will have standards and regulatory frameworks in place that ensure energy data collection and applications meet best practice and that data assets will be treated as open and accessible while privacy and security are protected. At this stage, the next steps for digitalising the energy system will be identified, including what new data governance, market frameworks and institutional designs are required to ensure data privacy and cyber security are maintained while increasing market access.

By 2030 and beyond, it is expected that system operators will have visibility of all energy assets on the system. The availability of greater data access across the market will support new business models and new entrants participating in the sector.

The Plan does not set out a list of actions in this area and refers to the Energy Digitalisation Strategy, which sets out the barriers to digitalisation of the energy sector, outlines a strategic approach to addressing these barriers and identifies a series of actions for the government, Ofgem and industry to take to deliver a digital net zero energy system.

BEIS and Ofgem’s approach to monitoring

Alongside the Plan, BEIS and Ofgem also published Appendix II to the Plan, which sets out its initial approach to monitoring the outcomes of the Plan. Generally, BEIS and Ofgem have proposed a “market monitoring” approach, with a list of key indicators set out in Appendix II which it will refer to as part of its monitoring framework.

The government will work with stakeholders to develop the monitoring framework by identifying new indicators and data sources. BEIS and Ofgem will gather stakeholder feedback and share an updated version of the monitoring indicators and decide the longer-term process for the monitoring framework, including which organisation should have responsibility for the strategy and how it should be shared with stakeholders.

Comment and next steps

Despite the various barriers that remain, flexible technologies and systems are being increasingly developed and deployed in the UK as the energy transition advances. The publication of the Plan will be widely welcomed by industry as offering further clarity and insight into how certain remaining barriers are envisaged to be removed, and where the future lies with regards to a flexible electricity system. That said, many of the issues brought forth in the Plan are not new. For example, BEIS proposes to define storage in primary legislation when parliamentary time allows. However, this intention to legally define storage was identified back in 2017 in the first Smart Systems and Flexibility Plan, and we are yet to see Parliamentary time allowed.

To deliver flexibility at the pace and scale required for achieving net zero ambitions, the actions and directions set out by the government in the Plan must advance with a greater sense of urgency and momentum. With an overarching direction now in place for the years to come, we can expect to see further consultations emanating from the Plan to enable its implementation.