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Future

The need for energy storage will be even greater in the future.

Energy storage is a potentially revolutionary technology for tackling climate change. It is a critical component for a net zero energy system. It can provide flexibility to balance our electricity system nationally and to manage local constraints. It can also provide services to maintain the frequency and stability of the grid. The need for storage will be even greater in the future as increasing amounts of intermittent renewable generation comes online and peak demands of electricity increase though electrification of heat and transport. It will be critical to maintaining energy security if we are to avoid building more fossil fuel generation.

Regulatory barriers

In July 2021, BEIS and Ofgem published its Smart System and Flexibility Plan (the “Plan”) setting out its vision for delivering a flexible, smart energy system to deliver net zero. This included a chapter looking at how to address policy and regulatory barriers affecting storage technologies and how to facilitate its widespread deployment, particularly at a larger scale and using longer duration batteries – i.e. those which can discharge electricity over sustained periods of time. Regulatory barriers to the deployment of storage were previously identified in the previous version of the Plan which was published in 2017 and, since then, the Government and Ofgem have taken several steps to address these, including:

  • publishing a modified generation licence for storage facilities to provide greater clarity about how it is treated under the current regulatory framework
  • passing legislation to make it simpler for larger scale storage facilities to obtain planning permission without going through the NSIP process; and
  • ending the so-called “double charging” of certain grid costs for storage facilities when they import and export electricity.

However, while over 1 GW of new storage has been put on the grid since 2017 and the costs of lithium-ion batteries (the most prevalent technology for storage) have fallen about 90% since 2010, a number of barriers remain which are hindering the more widespread deployment of storage assets, particularly for: (1) large scale, longer duration storage assets; and (2) small scale storage assets for domestic and business customers. The barriers identified and the proposed actions to overcome them are as follows:

Barrier

 

Description

Proposed Actions

Funding / financing large scale storage projects remains a challenge.

Large scale, long duration storage assets involve high upfront costs, longer build periods and have difficult to forecast IRRs, due to the merchant nature of revenue streams available to a storage asset. There is also the risk associated with investing in new technology. This makes funding projects a challenge without more established routes to market.

Launch of major competition worth up to £68m to accelerate commercialisation of longer duration storage assets.

Launching separate call for evidence at the same time as the Plan for the facilitation of large scale storage projects.

Ofgem considering network charges for storage where it acts in a way to benefit the system.

Energy storage is primary focus for UK’s new Infrastructure Bank.

National Grid ESO developing new and improved solutions / services for managing the electricity system which large scale, longer duration assets can play into. Plan due by March 2023.

Improved market / price signals will help to bolster business case for storage assets.

Co-locating storage with CfD assets.

The Contract for Difference (CfD) scheme rules put barrier on deploying storage assets alongside renewable generation assets which are bidding for or have already been awarded a CfD.

Produce guidance to clarify further co-location requirements.

Consult on changes needed to the CfD contract requirements to facilitate addition of storage to CfD assets.

Payment of network charges by storage assets.

Storage assets have to pay grid / network charges on the same basis as other generation assets, even though the storage assets may actually be benefitting the system by alleviating generation constraints or avoiding the need for network reinforcements.

Ofgem is reviewing network charges including considering how demand and generation charges should be applied where storage is benefitting the system.

Business rates for storage assets.

Treatment of storage assets for business rates purposes is a barrier to the deployment of small scale assets for business customers.

Government committed to fundamental review of business rates in Spring Budget of 2020. The review will be concluded in Autumn 2021.

Payment of final consumption levies by domestic customers.

The payment of final consumption levies (a form of tax) on electricity which is imported by domestic storage for the purposes of re-exporting to the grid. This creates an uneven playing field for smaller storage assets.

Ofgem considering options to remove final consumption levies on electricity imported by domestic storage for the purposes of re-exporting to the grid. This will also be considered for Vehicle to Grid technologies.

Routes to market

The market for energy storage is dynamic and constantly evolving. The introduction of new balancing services such as National Grid’s Dynamic Containment service and the ability to participate in the Balancing Mechanism are opening new routes to market for storage operators by facilitating the effective “stacking” of revenues. Innovations in offtake arrangements for storage assets (such as the use of “capacity usage and dispatch” agreements which can provide for floor payments) and advancements using AI and algorithms in storage optimisation strategies have further improved the business case for battery storage projects. The potential to create win-win scenarios by co-locating battery storage with new build renewable generation assets is also very clear where the right technical solution can be found. Potential changes to network charges payable by storage assets and improved market / price signals in the future could be game changing for this market.

Regardless of the characteristics of any individual project, the proposed project structure needs to be “bankable” to attract funding. This requires lawyers who understand the industry and putting in place robust legal agreements which appropriately allocate risk and provide as much certainty as possible for these merchant projects. Please get in touch with us if you would like to get your battery storage project off the ground.  

Potential changes to network charges payable by storage assets and improved market / price signals in the future could be game changing for this market.

For further guidance on energy storage solutions or regulations, contact our energy solicitors.

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