DSOs, energy storage and preventing market distortions

Ofgem's Andy Burgess explain's the regulator's latest thinking on the conundrum pf network-owned energy storage

During the summer Ofgem and Government published the Smart Systems and Flexibility Plan which is a roadmap for developing a more flexible energy system in Britain.

The benefits for consumers of a more flexible system are major – estimated to be between £17-40bn up to 2050, according to research by Imperial College and the Carbon Trust. We need to move quickly to adapt regulations and market arrangements so that they don’t hold up progress on capturing these benefits.

The plan announced several changes which will benefit developers of electricity storage. We also said that we want to see competitive markets developing for different forms of flexibility, including electricity storage services; and that the roles and responsibilities of the system and network operators were changing. Network operators will increasingly be buyers of flexibility services. This means that they should not be looking to develop any new storage facilities of their own. Collectively they currently own around 13 MW of storage.

As distribution network operators continue to embed distribution system operator (DSO) roles, they will play an important part in managing supply and demand. The Distribution System Operator (DSO) will have to pick the most competitive option for addressing a constraint or bottleneck at any one point, choosing from a range of sources which include flexible generation and demand side response as well as storage.

It is critical that DSOs remain impartial in the way they undertake their functions. If networks own and operate large amounts of storage, or for example if they use their own demand side aggregation services, how can people be confident that there is a level playing field and that the network company will choose a more efficient alternative over an option they have an interest in?  

This week we have set out our initial plans for addressing this alongside the detail of a modified generation licence for storage providers. Our view is that DSOs will not have to sell off their existing storage, but they must be impartial when they operate it.

The DSOs must operate storage in a way that does not distort, or have the potential to distort, the market. We plan to introduce a new licence condition to ensure that the side of a DNO’s business which operates storage of any size is legally separate from the part which runs the network. This will back up existing requirements on ownership separation in European energy legislation and is in line with European Union proposals for a Clean Energy Package.

The DNOs will only be able to operate their own storage in very limited circumstances. For example, in a power outage DNOs could use batteries to keep vital sub-stations, or priority customers on supply temporarily until faults are fixed. This is in place of the mobile generators they would use at the moment.

When the market is working normally they will have to get special consent from us that any decision to use their own storage is the most economic and efficient solution at the time. They would have to show us that there was no alternative storage available in the market and that other forms of flexibility would not have resolved a supply and demand management issue. 

Our aim is to make sure that there is a competitive market in storage services. DSOs must carry out their role without conflicts of interest and if any further issues do arise we will take action to remove them. The principles that we are setting out on storage ownership and the dividing line between regulated monopolies and markets will continue to guide our regulatory approach more widely.

We want to move quickly on resolving the ownership issue and finalising the generation licence for storage. This is important so that going forward there is no uncertainty particularly for new storage developers. More than 550MW of storage has already contracted to come online by 2020, but this figure is set to grow rapidly. This makes it all the more important to have a framework in place that encourages competition in flexibility, including storage services, so that consumers can get the best value for money from the energy system.