Energy storage needs proper regulatory framework

Energy storage can help stabilise rapidly evolving power markets, but only if regulators provide a proper framework, says Jeffrey Casey.

The UK may be missing a historic opportunity to integrate energy storage technologies as it moves to decarbonise the energy sector. Recent evidence of this misstep can be seen within the provisional results of the capacity market auction, announced last week, being dominated by fossil fuels with storage getting a paltry 1.7 per cent of the payments – a cut of 80 per cent.

Storage technologies – primarily batteries – are proving to be game-changers throughout the world. However, in the UK structural challenges are slowing progress and development of energy storage has yet to achieve the outcomes and scale that it should have. The recent move to de-rate for shorter-duration systems will have a dramatic impact on project profitability for the technology.

What we need to do is correct structural market challenges.

Shying away

Under Ofgem’s regulatory framework, there are not enough incentives for developers to take the risks to deploy storage. Who wants to put their career, company, money, etc. on the line by taking a 10 year risk on an 8 year asset with a measly 2-3 year guaranteed cash flow? Pricing signals are telling them to put their investment elsewhere in the market or in the world. Large infrastructure investment banks are shying away from the UK storage market.

In parts of the world where storage is thriving and growing, revenue stacking compensates its gamut of services and allows appropriate opportunities to recover a reasonable return on investment.  In the UK there is not a strong enough payback for any private investors to enter the market. When the country’s largest investment banks shy away from investing in energy storage, you can be sure the market isn’t functioning as well as it should be.

This raises the question – is regulation in the UK misaligned and simply focused on the wrong things?

Revised regulation

In my view it is, but here’s a four-point plan that could put the UK on the right track.

The first step is revised regulation looking at a whole system approach and procuring the services the customers and the networks need. Furthermore, they must remove things that are distorting the market and/or crippling investment.

The second step would be to reevaluate all incentives throughout the value chain, reexamining all the potential markets and lowering barriers to entry. Providing certainty in the market will drive investment and result in the outcomes we desire – a reliable and resilient network fed from renewable sources.

The third step would be to stack value across the chain, so market participants are appropriately rewarded for the services they provide. There are many variables, but all ensure reliable, long-term cashflow over a term needed to provide a reasonable expected return on investment. The UK market must allow stacking of financial resources to create a payback that makes sense.

Openness and transparency

A fourth critical step involves changes that promote openness and transparency. This will be key to resolving issues and reinforcing the traditional network and optimising investment. For example, one simple method would be to allow smart meters to be installed that share operational data instead of simply serving as billing outlets. Smart meters providing system performance data would allow operators to identify constraints and weaknesses that can be addressed at a micro level with batteries and other technologies far in advance of investment and infrastructure constraint and burden.

A further question is how the network, system and market will treat storage for consuming and exporting power? The answer will largely depend on how Ofgem reacts and the guidance the government provides through BEIS. We can surely see evidence of the need for change from the industry. Take for example National Grid shifting 75 per cent of their global investment to markets that support their business and financial aspirations. With that goes industry expertise and innovation.

Storage, however, is not a silver bullet. It is an important tool but only one of many that will be necessary for an integrated whole system solution that will propel the UK toward a low, or no-carbon, future. This is what the clean growth strategy alludes to, but who in government will stand up and lead the transformation from the front?

The industry has the engineers to solve any technical challenges and the investment community stands ready to jump in; but they are only two legs of a three-legged stool. Ofgem and BEIS act as the third leg, and so the whole system is unstable if they are unable to devise sensible policy and regulations.

We are therefore at a critical junction where important policy decisions need to be made and, in some cases, revisited and corrected. At the moment it seems certain that Ofgem will continue its focus on removing cost from the industry to keep profit levels “reasonable” and protect consumers. The market has a knack for speaking with its investment.