Batter up: Storage ready to play hardball

It doesn’t take too much hard work to understand just how much room for maneuver current U.K. policy has left for smart energy solutions: close to none. The U.K.’s Electricity Market Reform (EMR), which the government legislated in 2014, laid bare its vision of a future energy system.
Simply put, this amounts to a centralized energy system, where large power plants provide the base load and new renewable power investments comprise mainly offshore wind power plants. The EMR’s two policy mechanisms – the capacity market and Contracts for Difference (CfDs) – serve this vision. The capacity market provides a regular retainer payment to non-renewable forms of capacity in return for such capacity to be available when the energy system is tight. CfDs provide long-term revenue stabilization for new low carbon generation investments, but the mechanism’s design and budget allocation prioritizes offshore wind, leaving solar PV technology at a disadvantage.
Furthermore, remuneration schemes such as the Renewables Obligation (RO) and feed-in tariffs (FITs) that previously drove the U.K.’s stellar solar PV growth and are outside the remit of the EMR, have been drastically abandoned or reduced, particularly in recent months. Smart energy policies, such as energy storage and demand side response (DSR), were not taken into account when the EMR was being drawn up.

Market design anti-storage

The latter is not a surprise. Wherever storage and DSR solutions are put forward, power market design follows the logic that market mechanisms (e.g. scarcity rents and DSR) will provide the funds for capacity costs and lead investors will decide the technology, timing and location of their investments. Reliability of the energy system is determined solely via the marketplace.
The U.K. power market, post the EMR, works in reverse. The market design provides for an additional power generator’s income through the so-called “capacity payments.” This is an approach followed when generators do not earn enough money from the energy and ancillary services to cover their costs and invest in new assets.

Why things changed

A reason the U.K. market design took this approach is that the government’s Department of Energy and ClimateChange (DECC) somehow managed to get its storage technology timing totally wrong. Ray Noble, the U.K.’s Renewable Energy Association (REA) Senior Advisor on solar, storage and electric vehicles, says DECC believed that the storage technology on the market today would not arrive for at least a decade, and calculated its policy thus. However, the technology is already here, and DECC is not sure how to deal with it. The department has, however, recently set up an energy storage unit, which despite consisting only of a handful staff, is a sign that the ministry is seeking to understand what is happening.
Apart from such rapid technological advancement, the second factor driving smart policies is the failure of the EMR. The first two capacity market auctions have failed so massively that market stakeholders are openly speaking about reforming the reform. Specifically, the inaugural capacity market auction in December 2014 procured 49.26 GW of mostly fossil fuel-based capacity, of which only 0.35% and 5.48% were DSR and storage systems respectively.
The second capacity market in December 2015 led to the procurement of 46.35 GW of capacity, of which 1.03% was DSR and 5.65% was storage. The REA commented that the capacity market results show that the U.K. is supporting high carbon power at the expense of renewables and energy storage, which could have provided better value and lower carbon options. Furthermore, “the lack of new build energy storage shows that the design of the mechanism needs to be adjusted to better incentivize greater investment in energy storage and DSR capacity,” the REA added.

U-turn in policy response

Another change that will most probably drive change is the U-turn in policy recommendations made by the PV andxAdvertisementenergy storage sectors. This change of direction was starkly highlighted at the event Energy Storage: The New Market Dynamic organized in January by the REA in London.
The renewable energy market is changing rapidly, departing from the subsidy model that stimulated it in the past, Noble remarked at the event. Thus, it looks rather impossible to expect a subsidy for storage apart from perhaps some tax concessions, he added, wondering, however: “Do we really need one? An energy storage market is developing anyway and, in fact, storage is on a similar path that PV technology in the U.K. took a few years ago.” Obviously, there remain a great many uncertainties, Noble explained, the form – or type – of storage being one of them. Will the U.K. storage market be behind-the-meter (e.g. located on-site together with solar PV systems at residential and commercial installations), take the form of grid support and reinforcement (storage systems located in substations), or be developed for frequency control purposes? “The answer is we don’t know yet,” Noble answers. Nevertheless, the market and storage technology type and route chosen will most likely be driven by the value proposition, while the fact that one million U.K. customers already have solar rooftop systems installed certainly creates a strong market potential, Noble said. The sector needs to develop business models for domestic and commercial installations and ground-mounted systems, he suggested.
Joe Warren, Managing Director of Powervault, a London-based company that manufactures a fully-integrated home energy storage system, stated the case even more clearly: “We ask for the value that is in the market to be redistributed in a fairer way. This is what we ask [the government] – not subsidies. And if we frame it that way we have more chance [to put our message across to politicians].”

Current market routes

Speaking at the Energy Storage Update Europe 2015 conference organized in London in December, Jonathan Cohen, Principal Associate at Eversheds, an international law firm, agreed that the “U.K. electricity market is not designed with widespread deployment of a diverse range of storage technologies in mind.” Cohen asked: Does storage generation or supply require its own category and licensable activity? The U.K. needs a strategic policy road map that takes a holistic approach in addressing such questions and providing for different market applications, he argued.
Current storage policy incentives that serve as a route to the market are: the capacity market; contracts with the National Grid Electricity Transmission (NGET) for frequency response services; and other contracts with NGET (e.g. short-term operating reserve, fast reserve, etc). NGET contracts, however, are short-term and do not provide the long-term financial certainty that investors require, Cohen argued.
The National Grid, the company that owns and operates the U.K. transmission grids, is looking to procure 200 MW of enhanced frequency response through a tendering exercise. All storage technology types that can meet the required parameters are welcome in the tender, with the projects aimed to be operational by the third quarter of 2017.

Policy activity

The most recent storage document from DECC is a paper titled “Towards a Smart Energy System,” published on December 17 last year. The paper aimed to kick-start a discussion regarding the utilization of smart energy policies, including storage and DSR, in order to minimize electricity bills.
“There have been some good initial steps towards a smart energy system, including network innovation through the Ofgem-run Low Carbon Network Fund [Ofgem is the UK energy regulator], and wider work under the DECC/Ofgem-chaired Smart Grid Forum,” stated thedocument. “However, further action is needed,” continued DECC. “Therefore, the National Infrastructure Commission will be looking at these issues further and has recently published a call for evidence.” The Commission will provide recommendations to the government on next steps by April 2016, while in spring the ministry also aims to launch a consultation on storage systems.
Phil Graham, the National Infrastructure Commission’s Chair, who also took part in the REA event in January, told a panel discussion that the Commission was only established in October and he was appointed in December. His team’s goal, Graham said, is to develop policy recommendations through strategic cross-sector infrastructure cooperation and by undertaking case studies looking at interconnection, DSR and storage aspects. The Commission does not look solely at storage; its focus is on system flexibility in general and takes a long-term view. Finally, Graham suggested to the stakeholders attending the event that DECC’s staff have a lot of work to do in very little time, so in order for the issue of storage to be pushed further up the agenda, the general public needs to engage more widely with the technology. Regulators will then follow suit, thus accelerating storage’s adoption, Graham concluded.
Speaking at the REA event, Marianne Boust, a principal analyst in the power technologies team at research consultancy IHS, said that according to their forecasts, the U.K. will add 1 GW of storage facilities by 2020. Current U.K. storage installations are a mere 24 MW. The main drivers for this growth will be high renewable energy systems penetration, rising retail electricity prices, the government spending significant sums on storage R&D, a well-established network of solar installers, and the launch of a frequency regulation tender.
On the other hand, Boust added, the U.K.’s policy uncertainty, the dominant role of thermal generators, the capital cost requirements, and the lack of funding mechanisms remain great hurdles that inhibit the U.K. storage market’s growth. This is indeed the essence of the story: The U.K. storage sector does not ask for subsidies, knowing it stands zero chance of getting any. Instead, it asks for regulatory clarity that paves the way for various kinds of storage applications. Given that the country’s electricity market design favors the big thermal producers, what are the chances that policymakers will now open a window to further system disruption through storage technologies?