Thought leadership from our experts

Energy Storage – There’s a Storm Coming

The idea of energy storage is not new – pumped hydro-electric solutions have been used in the UK for decades, but advancement in battery technologies and a sharp decline in the cost of a leading technology – lithium-ion batteries – means that energy storage is finally becoming an economically viable answer to variable energy demand problems.

Energy storage solutions allow renewable energy generators to store electricity at times of high generation (such as midday) and supply it at times when demand – and therefore price – is highest. Storage technology holds benefits for balancing electricity supply and demand both on very short timescales (such as frequency response) and for longer periods (such as participation in the capacity market to ensure availability of power at times of highest demand). In the UK, balancing of supply is likely to be a primary driver for the storage market.

Estimated figures around storage potential in the UK are striking:

  • UK capacity predicted to grow from 24MW in 2016 to 1.6GW by 2020
  • £2.4 billion per year could be saved by 2030 on a business-as-usual basis
  • If regulatory barriers are removed, £7 billion per year could be saved
  • £50m pledged by the Government to "energy storage, demand-side response and other smart technologies" by 2021
  • Innovation in storage could create £12bn of new business revenue.

Barriers to growth

Despite these exceptional numbers, it is widely acknowledged that there are legal barriers stopping the market from expanding as quickly as it would like. Much of the legislation on electricity is almost 20 years old and ill-suited to regulate a technology it could not have predicted. The Electricity Act 1989 regards energy storage as a generator of electricity and in some instances also a consumer, when it fits neatly into neither category. Both European and UK regulators are working towards appropriate solutions to balance the competing needs of consumers, renewables providers and traditional utilities, though no immediate change is on the horizon.

The National Infrastructure Commission has said that the UK could become a world leader in electricity storage systems provided it reviewed the regulatory and legal status of storage (by Spring 2017) and incentivised network owners to improve capacity and resilience using storage. The House of Commons Energy and Climate Change Committee, back in 2015, told the Government to "get a move on and encourage the energy market to embrace smart technological solutions like energy storage and demand side response" and in 2016 called upon the Government to urgently address "archaic regulation" and "unfair double-charging".

Difficulties under the current regulatory framework

Storage devices connected to the grid are regarded as both a generator and a consumer of energy, with all the costs and regulatory hurdles associated with those two roles. Transmission Network Use of System (TNUoS) charges are payable to the National Grid upon generating. Unless exempt on account of its size, as a generator the storage operator must also be licensed and comply with the Grid Code. Whilst storage continues to be viewed as both a generator and end-user of electricity, it will also be subject to the Climate Change Levy – twice. This type of cost is eventually passed on to the consumer and it is therefore in the Government's interest to clarify the position of storage in the energy value chain.

Small storage plant may benefit from a generation licence exemption where it generates power below the specified thresholds. There is a class exemption for output below 50MW and individual exemptions are available up to 100MW on application. This may not entirely circumvent the unbundling requirements however: the standard terms of the distribution licence require the holder to ensure it is not restricting, preventing or distorting competition in the market in managing and operating its distribution business. Taking a flexible approach, the Government has said that distribution network operators can utilise energy storage provided this business is kept separate from its network operations. The engagement of third parties to operate storage services would more easily demonstrate the requisite level of independence.

Utilities are well placed to benefit from energy storage as a balancing tool but on the other hand must be cautious of breaching the EU-based rules on unbundling, which prohibit a network operator from generating or supplying energy. A strict interpretation of the rule would prohibit storage (as a generator) from being used by utilities, but not all member states agree. The EU acknowledges the need for a clear statement of the application of the unbundling rules to storage.

UK Government direction

BEIS launched a consultation on "A Smart, Flexible Energy System" in late 2016 and is currently analysing responses. The consultation document discusses a number of policy options for removing regulatory barriers. Regarding licensing, for example, options include:

  • Continuing to treat storage as a generator for licensing purposes
  • Defining storage as a sub-set of generation in a modified generation licence, with or without a change to the primary legislation
  • Establishing a new activity for storage via a change in primary legislation.

Uncertainty over the UK Government's long-term policy for decarbonisation and the promotion of renewables is a risk factor for investors in energy storage. There are currently no incentives or subsidies available for the installation of energy storage.

Previously, the Government has said that regulating energy storage is not going to be easy – legislation is not "oven-ready" and not expected in the current Parliament.

The European perspective

The European Parliament has also voiced its support for energy storage, calling for a strong framework with a clear definition of storage and recognition of its unique role in both generation and demand, and outlining the need for harmonisation of certain aspects of the energy market to ensure free access for energy storage. It recommends that network operators be allowed to own and control energy storage for the purposes of grid balancing, recognising that one storage facility may service a number of different parties. Whilst no European rules are in place, Member States are free to determine their own policies.

Outlook

There is evidence that energy storage providers are succeeding in navigating the tricky regulatory landscape. Last year, National Grid awarded 201 MW of enhanced frequency response worth £65.95m to energy storage providers, with the first projects expected to come online shortly; only three out of 67 successful bids in the technology-neutral tender were from non-storage providers. However to reach its potential, the nascent market is looking to the Government (which has other big things on its collective mind) to lay down a clear and supportive framework which allows it to compete with existing energy services and complement them without penalty or undue restriction.

This article was written by partner and head of environment and climate change, Steve McNab and environment consultant, Sarah-Jane Denton at international law firm, Simmons & Simmons.