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Ofgem to licence battery storage as a 'subset of generation'

Proposed changes to the electricity generation licence conditions would provide "regulatory clarity" over the treatment of battery storage, Ofgem has said.05 Oct 2017

The energy regulator has proposed modifying the existing generation licence to accommodate storage as a distinct subset of electricity generation. The government intends to make the same change to the underlying primary legislation, the 1989 Electricity Act, when parliamentary time allows.

This is part of our series analysing the challenges and opportunities ahead for companies embracing smart energy technologies. For more, sign up to receive an exclusive Pinsent Masons research paper on smart energy technology, supply, storage and investment.

One of the effects of the change would be to stop distribution network operators (DNOs) from operating storage, as they are not permitted to own generation for competition reasons. However, Ofgem intends to permit DNOs to operate storage in specific circumstances where this would not be anti-competitive, such as for time-limited emergency restoration and maintenance.

The consultation closes on 27 November 2017, and Ofgem anticipates that the changes would take effect by summer 2018.

Separately, the UK government has announced the seven universities that will be founding partners of the £65 million Faraday Battery Institute, to be funded with part of the £246m that the government has set aside for battery technology investment over the next four years through its Industrial Strategy. The partner universities will work together with industry partners and other academic institutions to research and develop market-ready battery technologies.

The founding partners are Imperial College London, Newcastle University, University College London, University of Cambridge, University of Oxford, University of Southampton and University of Warwick.

Currently, electricity storage is not defined in primary legislation, making its regulatory status within the electricity system and planning regimes unclear. When parliamentary time allows, the government intends to amend the 1989 Electricity Act and other legislation to explicitly define electricity storage as a distinct subset of generation. Health and safety standards will also be updated.

In the meantime, Ofgem's proposed changes would allow for this to be done through the electricity generation licensing system, as indicated in the Smart Systems and Flexibility Plan it published in the summer. It intends to base its definition of storage on that proposed in the government's call for evidence on storage: "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 a controllable manner". The condition will require the licensee to ensure that 'self-consumption' is not the primary function of the storage facility.

The way the changes work would also address the issues faced by storage facilities regarding final consumption levies (FCLs), which under the current structure could effectively be charged twice at the time that storage providers both import from and export to the grid. 'Double counting' adds to the operational cost of storage projects and may be passed on to the end consumer, potentially making storage less competitive than other forms of generation.

Smart energy expert Nick Shenken of Pinsent Masons, the law firm behind, explained that the potential for FCL double-charging arises because storage assets technically 'consume' electricity in order to store it and then the same electricity is similarly consumed by the end user when it is released from storage. FCLs are, in effect, a contribution towards the cost of market support mechanisms, such as the Renewables Obligation, feed-in tariffs, contracts for difference and the capacity market.

"Technically, in this scenario, there are at least two 'consumers' – the storage asset and the final consumer," Shenken said. "It was felt that the financial impact of this would likely fall on those final consumers, thus making storage uncompetitive in the market."

"The current proposals therefore set out a plan under which storage would become a subset of generation and potentially be able to receive a generation licence which only requires compliance with those of the general licence conditions which are relevant to storage, and not those conditions which are only relevant to conventional generation. In addition, storage assets with this kind of licence would be under an obligation to ensure that their primary function was in fact storage for injecting electricity back to the grid, and not for consumption at a later date on site," he said.

"Compliance with this condition ensures the storage asset is not in fact the end consumer, thus avoiding the FCLs. If the primary function is simply to store energy which is then used by the generator later, then the thinking is that they are in fact the end user and should pay FCLs. It will be interesting to watch whether the definition of 'primary function' becomes more detailed, or whether it will simply be left wider to encapsulate as much as possible," he said.