Tag Archives: government

Upgrading Our Energy System: Smart Systems and Flexibility Plan from BEIS – my thoughts

Early in 2017, the UK Government called for evidence and views on how to move the UK to a smarter and more flexible energy system. They received over 200 responses and I am informed that the vast majority related to energy storage.

The UK Government took the views into account and have produced a plan of 29 actions that BEIS, Ofgem, and industry will take for the future of the UK energy system called: Upgrading Our Energy System: Smart Systems and Flexibility Plan. I’ve sketched out some of my main thoughts on the document below.

Introduction of an energy storage licence to UK grid code

Tantalisingly, the UK Government plans to recognise the overwhelming noise from industry and amend the Electricity Act 1989 to include a definition of storage, but frustratingly only as a subset of the generation asset class. It will be based on the Electricity Storage Network definition and Ofgem will begin consulting on this in the summer of 2017.

The licence changes will allow storage to be exempt from final consumption levies and will de-risk investments that co-locate alongside renewables. Ofgem will improve the connections process and will use financial incentives to make the DNOs do more to help their customers.

In some ways, it is great news that the Government is finally making this move. However, by merely adding it as a sub-set of generation instead of making it a separate asset class, I interpret this solution as a bit of a bodge-job.

Creating a separate asset class would have opened up a much deeper discussion about which organisations can own the asset (i.e. can DNOs? Can National Grid?). By not creating a separate class, it seems that this vital conversation is off the cards entirely. Indeed this is consistent with Ofgem’s view (plainly reiterated in the document) that “network companies should not own or operate storage”, as they think it will “impede the development of a competitive market for storage and flexibility services”.

In my mind, this is the wrong conclusion. For me, DNOs are the perfect customer for energy storage assets. They already own the wires on the network that do the spatial arbitrage of taking energy from places of low price (supply) to places of high price (demand). Surely it follows that DNOs should be trusted to do the same with the temporal arbitrage that storage provides?

If DNOs will be continuing to make decisions about investing in the capital equipment of wires, transformers, and the rest, then surely they should be allowed to own storage at the same time, as it is being lined up as a potential rival for these traditional assets ( one of the major touted benefits of storage being “Transmission and Distribution Upgrade Cost Deferral”)?

Removal of other barriers to energy storage and Demand Side Response (DSR)

Apparently, Ofgem has already consulted on a proposed Targeted Charging Review (TCR). The consultation stated Ofgem’s views that storage should only pay one set of balancing system charges (not two as currently) and that storage should not pay the “demand residual” element of network charges at transmission and distribution level. This is obviously a sensible move as it removes a major source of unfairness and will make the business case for storage projects a lot healthier.

Ofgem are looking at giving aggregators access to the Balancing Mechanism (BM) and clarifying the rules for DSR and energy storage to participate non-exclusively in the Capacity Market (CM). This is really great news for the UK energy market. Firstly, clarification of the CM rules will finally allow the much-talked-about revenue stacking that underpins almost all energy storage projects.

Secondly, allowing aggregators access to the BM will boost DSR and energy storage as it will allow them to compete with traditional generation in the provision of this vital service to the System Operator, National Grid. Professor Goran Strbac of my almer mater Imperial College has frequently spoken about the potentially huge benefits that energy storage assets could provide to the BM, so this development would pave the way for his predictions to become reality.

Removing barriers to smart meters and “time of use” tariffs

The document refers to the UK Government’s commitment to ensuring that every household and small business is offered a smart energy meter by the end of 2020.

To make the most of these hard assets, domestic half hourly settlement of electricity payment has been possible on an elective basis since June 2017 and Ofgem will consult on whether it will be made mandatory. If so, it would be dovetailed to coincide with the smart meter roll-out.

Intriguingly, these two developments would allow me to introduce my PowerCube product idea if I decided to move forward with it, as the smart meter and half hourly metering requirements were the two major limiting factors holding back the product’s successful launch.

The document talks about the need for consumer protection, standards, and cybersecurity protection as part of the smart energy revolution. In an increasingly interconnected and rapidly-changing world, these factors will be extremely important if the benefits are to be safely secured.

Recognition of smart energy entrepreneurship

On a final note, it was great to see the inset case studies of various innovative smart energy startups such as VCharge and Open Utility included in the paper.

It was particularly great to see Upside Energy mentioned, which is a company that formed as part of the Nesta Dynamic Demand Challenge competition that I supported as a mentor back in 2014. Graham and the team were one of the winners, so it’s encouraging to see them still going from strength to strength.

Sale of Green Investment Bank

In my opinion, one of the great Liberal Democrat achievements of the Lib Dem/Conservative Coalition UK Government of 2010-2015 was the establishment of the Green Investment Bank (GIB).

The GIB was set up with UK public money to “back green projects on commercial terms and mobilise other private sector capital into the UK’s green economy”. It invests in a variety of green UK projects such as energy efficiency, waste/bioenergy, and offshore wind. By June 2017 it had invested into 99 projects, committing £3.4bn into the UK’s green economy (much of that from private co-investors).

As a Brit who is dedicated to greening the global economy, I was proud to see this excellent development and excited to think about the huge potential impact that it would have.

I envisaged a British version of KfW, the German Government-owned bank with over €489.1bn of total assets and annual revenues of over €74.1bn (in 2014). KfW has had a transformation impact on the German green economy and wider economy. It is 90% financed by the capital markets, issuing bonds that are guaranteed by the Federal Government (and therefore have an interest rate that is extremely low).

I was therefore shocked to hear that the Conservative government (2015-2017) had agreed on the £2.3bn sale of the GIB to Macquarie, an Australian infrastructure investment bank. Many have criticised the sale, saying it has been sold off on the cheap and that the bank will not stick to the green investment mantra after the obligatory 3 year period.

Apparently, the GIB chair was in favour of the sale as they believed it was important to get new investment to grow the bank’s impact and secure its long-term future. How true that is (or how much it is someone protecting their job/position) I can’t tell, but I can somewhat see the logic.

What I find odd is the fact that the GIB would surely be a key channel that the Government could use to deploy capital to support their flagship Industrial Strategy policy. This Strategy was formulated to stimulate technology and green businesses so that the UK economy is well positioned to grow and be globally competitive for years to come. Selling the GIB removes a crucial funding dispersal mechanism that could have addressed barriers to green economic development and buttressed the Government’s efforts.

Additionally, I would have thought that leaving the GIB in public hands would be ideal for the UK Government’s commitments under the Paris Agreement and the commitment to spend 0.7% of GDP on international aid. Having a bank focused on clean energy projects would have been an ideal channel to deploy capital into projects aligned with these commitments.

This year, there were rumours that the sale could be abandoned in favour of an IPO. That appeared to be the preferred option of the second favourite bidder, Sustainable Development Capital. Whether the recent election miscalculation of Theresa May has interfered with it remains to be seen.