Energy storage – the missing piece in the electricity grid policy jigsaw

Energy storage – the missing piece in the electricity grid policy jigsaw

Understanding the legislative background

To combat climate change, the world needs to reduce carbon dioxide emissions by at least 50% by 2050 – an enormous task requiring systemic changes to every sector of energy generation and use.

In the UK, under the Climate Change Act 2008 (“the Act”) there is a legally-binding target to reduce greenhouse gas emissions by 80% (below 1990 levels) by 2050. The Act established a system of five-yearly carbon budgets to serve as a path forward and the first five carbon budgets, leading to 2032, are set in law.

The 1st carbon budget has been met and the UK is currently on track to outperform on both the 2nd and 3rd carbon budgets (up to 2022). However, the real challenge is how to meet the 4th carbon budget, which covers the period 2023-27 and which the Government is currently not on target to meet.

Taking a look a little further ahead, the Committee on Climate Change (CCC) published (November 2015) its advice to Government on the 5th carbon budget covering the period 2028-2032 (as required under Section 34 of the Act); and in light of the Paris Agreement reached at COP21 (December 2015), the CCC has since indicated to the Government the need for new plans and policies to meet existing carbon budgets and to prepare for the ambition agreed in Paris.

To the surprise of some, given other political distractions, the Government duly accepted that advice on 30 June 2016, the same day the CCC published its 2016 Progress Report to Parliament, which assesses UK-wide progress on reducing emissions and meeting carbon budgets. This latest commitment came only one week after the Brexit vote and, despite the move to disband the Department of Energy and Climate Change (DECC) and merge its activities under the new Department for Business, Energy and Industrial Strategy (BEIS), The Carbon Budget Order 2016 came into effect on 21 July 2016. It is a clear signal from the Government that the UK remains committed to its climate targets and the plans on how the Government will meet the 4th and 5th carbon budgets are to be set out by the end of this year.

Getting to grips with Government strategy and regulations

Against this legislative background, the Government’s energy and climate change strategy is broadly underpinned by three key objectives – “energy security“, “decarbonisation” and “affordability“. Meeting future carbon budgets under the existing legislative framework will require the reduction of domestic emissions by at least 3% per year and it is clear the electricity industry must play a key part in reaching these goals.

To assist in achieving these goals the Government has announced the closure of all coal-fired powered stations by 2020 and introduced Electricity Market Reform (“EMR”). Set out across four stages, EMR seeks to provide the process and mechanisms to enable the transition to, and the long-term support for, more distributed, variable, low carbon electricity generation in the UK.

Implementation of EMR is provided for under the Energy Act 2013 via the introduction of two new market mechanisms into the existing electricity wholesale market, namely “Contracts for Difference” (CfD) and “Capacity Agreements” (within a ‘Capacity Market’). Both are administered by the System Operator (SO; National Grid).

The details on the rules and regulations of these two market mechanisms are beyond the scope of this article; the important point is that neither regime covers the critical role of “energy storage”.

Yet as the UK electricity sector undergoes its biggest transformation for over half a century –  transitioning to a deeply decarbonised power system, accommodating high levels of intermittent renewable energy supply amid an ever growing demand for energy (accentuated by heating and transportation systems also becoming electrified) – it is clear the role for viable energy storage technologies is absolutely mission critical. The importance to be placed on energy storage is backed up by the central findings in the National Infrastructure Commission’s (NIC) ‘Smart Power’ report, published in March 2016.

Identifying the key issue – the lack of legal and commercial clarification for energy storage

The UK Government, as part of its previous industrial strategy had identified energy storage as one of the “great eight technologies” in which the UK can be world leaders. It remains to be seen how “energy storage” will feature in the industrial strategy to emerge from the new BEIS team, but already within the UK there are at least 23 operational “energy storage” projects and investments across a number of the technologies, all at various stages of market maturity.

Whether it be mechanical storage (e.g. pumped hydro or compressed air) or electrochemical storage (e.g. Tesla’s lithium-ion or redT’s vanadium redox flow batteries), it is clear energy storage technologies have a vital role to play as a new provider of flexibility in the electricity system. Energy storage technologies bring numerous benefits which they can offer in various forms and to various stakeholders − but herein lies the problem, under the existing regulatory framework, there is no home for “energy storage” as it has not been defined in any legislation.

In order to open up a viable market for energy storage to be effectively deployed in the UK at commercial and utility-scale, there are various outdated barriers that need to be overcome. In the near term, the principal issue is that the legal definition and commercial status of “energy storage” remains unclear. This was also recognised by the NIC.

Energy storage can be broadly understood to operate at three different levels when deployed on the grid: (i) at the transmission level, (ii) at the distribution level, or (iii) behind the meter; and can be deployed at different scales on a distributed and/or centralised basis. At various times, depending on the function it is performing, energy storage could be “generation”, “transmission”, “distribution”, “load balancing”, “supply” and/or “consumption” and while this flexibility in the technology has multiple advantages, it also creates acute regulatory challenges and very real commercial contracting complications.

The danger is that without the legal and commercial clarification that is required, as the majority of energy storage technologies move out of demonstration mode, it remains unclear which stakeholders take on which commercial risks and ultimately who will build, own and operate these energy storage technologies.

Nonetheless, perhaps what is clear is that until the appropriate rules and regulations are in place for the energy storage industry, the sector represents an interesting challenge for experienced and innovative lawyers who need to be able to navigate the existing legislation, contribute to the bespoke business models and help negotiate the commercial terms their stakeholder clients need to operate energy storage successfully.

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