Storage is increasingly seen as the answer to making the energy system more efficient and cost-effective. But legal and regulatory barriers are making it hard to make use of developing storage technologies at least cost. Louise Dalton, senior associate in the energy team at international law firm CMS, details the hurdles that have to be overcome before storage can step up
Storage is the hot topic in the UK electricity industry at present. The benefits that the broad range of technologies can offer a variety of industry participants, from system and network operators to individual consumers, have been widely discussed and recognised by the Department of Energy and Climate Change (Decc), Ofgem and the National Infrastructure Commission (NIC). However, challenges remain for new-build storage projects.
Uncertain revenue streams There is no specific revenue support available for energy storage in the UK, although limited research and development funding is available from a number of authorities. As a result, developing a viable business case is more complex than has been the case for renewable generation technologies.
This can require the “stacking” of multiple revenue streams, such as ancillary services revenues, capacity market payments, Triad benefits and other embedded benefits. However, some of the available revenue streams prevent the provision of multiple services simultaneously, thereby making the raising of the initial capital expenditure more challenging. Further, a number of benefits that energy storage projects can offer, such as the deferral of network reinforcement, are not yet formally monetised.
The contract terms available for many of the available revenue streams are short in duration; at four years, the proposed term of the Enhanced Frequency Response (EFR) contract is the longest. In consequence, projects have to manage greater revenue uncertainty over the lifetime of the project.
Energy storage is well suited to provide a range of ancillary services, such as fast reserve and frequency response. National Grid is currently in the process of running the first tender for EFR services. While this tender is technology-agnostic, the service requirements (provision of frequency response in 1 second or less) make the tender of particular interest to new battery storage projects.
The tender has been very popular, so it is not clear what level of availability fees the successful projects will achieve, but the certainty of a four-year EFR contract is likely to be a key driver in increasing deployment of energy storage in the UK.
Additional operational costs Energy storage projects can face additional operational costs. Where an energy storage device imports electricity from the transmission or distribution system, it is charged as if the storage device were an ‘end-user’ for the purposes of the Renewables Obligation (RO), Contracts for Difference, and feed-in tariff (FIT) charges. This is the case even though the same electricity will be exported on the system at a later point for use by a true energy consumer.
The position is similar in relation to the Climate Change Levy (CCL). However, HM Revenue & Customs has waived CCL charges on individual projects, for example UK Power Networks’ (UKPN’s) Leighton Buzzard project.
In addition, where a large-scale energy storage project is importing and exporting electricity,
balancing charges and connection charges are levied twice. These additional charges disadvantage storage operators when compared with generators.
A clarification of ‘end-user consumption’ would enable storage projects to be more competitive.
However, this clarification is not without its challenges, as the efficiency of charging and
discharging of an energy storage solution can result in less electricity being exported than was generated or imported.
This element of electricity usage by the storage project would have to be recognised.
Generation licensing The current regulatory regime was designed when the only energy storage technology available was pumped hydro. Pumped hydro was designated as generation, as it has some similar characteristics to large-scale conventional generation.
Other energy storage assets now also fall within this classification, even though they can have drastically different characteristics. Consequently, energy storage projects fall within the Electricity Act’s generation licensing regime, even though the generation licence was not formulated with such energy storage projects in mind.
This requires storage developers to hold a generation licence if the project capacity is over 100MW, or obtain a specific exemption from the requirement to hold a generation licence if the project capacity is over 50MW. Projects of 50MW and below benefit from the generation licence class exemption.
Holding a generation licence places a number of obligations on the licensee, such as compliance with the Grid Code.
Restrictions on DNOs Distribution network operators (DNOs) such as UKPN and Western Power Distribution (WPD) have been pioneers in energy storage. However, under the Electricity Act, it is prohibited for a distribution licence holder to hold a generation licence as well. This restricts DNOs’ participation in larger-scale energy storage projects and acts as a further barrier to the deployment of such projects.
The distribution licence itself also places further restrictions on DNOs. Firstly, pursuant to standard licence condition 4.1, a DNO is required to “manage and operate the distribution business in a way that is calculated to ensure that it does not restrict, prevent, or distort competition” in the electricity or gas market. The operation of energy storage assets could have the ability to impact on the competitiveness of the electricity market. As a result, to date, DNOs have contracted with third parties to handle the energy flows in order to demonstrate licence
compliance, adding further cost and structural complexity to such projects.
Secondly, under standard licence condition 29, there are “de minimis” restrictions on DNOs conducting non-distribution related business. This “de minimis” is set at 2.5% of the DNO business revenue or the DNO’s share capital. As a result, there is a cap on the extent to which DNOs can be directly involved in energy storage.
Legal definition of energy storage Fundamentally, energy storage does not fit within the current regulatory framework. As a result, many in the sector have been arguing that there should be a legislative definition of energy storage. Please see the box opposite for thoughts on how such a definition could be formulated.
The introduction of such a definition could clarify the application of the regulatory framework to energy storage. This would ensure such projects are not treated as generation or consumption and recognise the unique characteristics of such projects.
A definition could also better delineate the role of various industry participants, particularly network operators, within the sector. If it is considered that network operators’ participation needs to be further regulated, a definition could allow for licensing of such energy storage projects, including any appropriate requirements and restrictions.
The signs that these barriers may be overcome are promising. The recent NIC report recommended that Ofgem and Decc review the legal and regulatory status of storage in order to create an appropriate framework in which energy storage can operate
The government has stated that it will issue a consultation this year to consider the options for the removal of the regulatory barriers to energy storage. This is expected imminently. Regulator Ofgem has also committed to working with Decc to clarify the legal and commercial status of energy storage and explore whether changes to the regulatory regime are required.
Despite the challenges, there are many developers and investors that are willing and able to overcome them, by developing innovative business models and contracting strategies. Removing even some of these legal and regulatory obstacles would be hugely beneficial, in maximising the benefits that energy storage can offer and facilitating the full-scale commercial development of the sector.
A legal definition for energy storage
Given the range of energy storage technologies, industry participants seem to agree that any legislative definition of energy storage in the UK must be technology-agnostic.
The definition needs to be flexible, given the variety of available technologies and the potential range of applications of those technologies. Future-proofing will be important to ensure that it does not impede the market entry of new storage technologies or distort competition between different technologies. The
definition must also be sufficiently specific to allow all industry participants to be clear on what does not fall within the definition.
There are a number of other considerations, including:
• How to define the act of storage itself: “absorbing, supplying, and redelivering energy”, “intake and stocking”, or simply “store” have been used or suggested.
• Whether the definition should focus just on electrical energy storage (as has been done in the USA) or whether the definition should cover heat storage or gas storage facilities as well (as has been suggested by the German Association of Energy and Water Industries, BDEW), with a sub-category of electrical energy storage.
• How the definition should work with any EU or other EU member states’ definitions, particularly in relation to the Third Energy Package and the internal energy market.
• Whether any technologies should be specifically referenced. Some definitions used outside the UK provide a specific non-exhaustive list of examples of technologies that fall within the relevant definition.
• Whether any relevant authority should have the ability to determine the application of the definition to new technologies. The US Storage 2013 Act allows for the relevant departments to determine whether other technologies comply with the relevant definition.
• How the definition should apply to established technologies, such as pumped hydro, where the current classification as generation does not present significant obstacles to existing projects.
First published in the May 2016 issue of New Power.