Ofgem rules out DNO-owned storage

Network ownership would “impede” competitive markets for storage and flexibility, says regulator

Ofgem will not allow distribution network operators to own and operate storage, as it fears this could “impede the development of a competitive market for storage and flexibility services”.

In the smart systems and flexibility plan, published jointly with the government today (24 July), Ofgem said it sees storage as “one form of flexibility that can be used by network operators in a number of different ways to help manage and deal with some of the issues they face”.

However, the report said, “if a network company owns or operates storage it could impede the development of a competitive market for storage and flexibility services”.

In addition to blocking future direct ownership of storage facilities by DNOs Ofgem will, therefore, also introduce new reporting requirements for networks who already run storage assets.

“We send a clear message that we don’t want [network companies] to own or operate storage because we don’t think they can be impartial if they own one of the solutions,” Ofgem associate partner for energy systems, Andy Burgess, told Utility Week.

“As the distribution networks understand the need to look at flexibility and the need to look at more market-based solutions, we think we’ll increasingly get a number of cases where there is a need to decide where the dividing line is between the monopoly and the market,” he added. “We very much welcome the monopolies procuring services from the market, but we don’t want them to be competitive in those markets.”

Responding to the ownership veto, a spokesperson for the Energy Networks Association (ENA) challenged Ofgem’s thinking, saying that the commercial market may be unable to provide the services networks need from storage.

They told Utility Week: “The key question is one of accessibility. Our members support flexibility, including storage, being procured from the competitive market place as a commercial service.

“However it should be recognised that there are likely to be circumstances where the commercial market place does not provide storage services in the right places that networks need it or at the lowest cost to customers. In that case it may be best for the network to own and operate storage.”

The debate about whether networks should own and operate storage has been a hot topic in the industry for some time.

Ofgem previously rejected calls from the National Infrastructure Commission and the storage industry for networks to be able to own and operate storage. At meeting of the now-defunct Energy and Climate Change Committee in April last year, Burgess told MPs “if you want competitive markets to develop, you need to keep regulated monopolies out of them”.

Former Npower chief executive Paul Massara, now chief executive of storage and solar PV company North Star, agrees. In April, he insisted that networks should not be allowed to own storage assets, as doing so would lead to market distortions and inefficiencies.

Many DNO representatives disagree however, arguing that owning and operating storage facilities would help them address growing challenges in system balancing, arising from increasing volumes of decentralised energy resources and changing demand patterns.

In its submission to the smart systems call for evidence published in January, the ENA warned that the option for distribution network operators to own and operate storage “must be retained” until it is proven that a commercial market can meet the needs of network operators.

The smart and flexible energy systems plan released today by Ofgem and the department for business, energy and industrial strategy also addresses a number of other issues relating to the development of energy storage in the UK.

It proposes a number of actions to resolve the “specific regulatory and policy barriers” faced by providers bringing their technologies to market. This includes consulting on changes to a possible new generation licence for storage which would allow storage facilities to identify themselves as exempt from so-called final consumption levies, which operators have complained undermine their business models.

It also proposes to make it easier for energy storage to co-locate with renewable generation sites and to find ways to improve the connections process for storage.

More broadly, the report sets out a plan for the way in which government and Ofgem will support the transition to a smarter and more flexible energy system by fostering “effective markets and competition”. This includes addressing a lack of standards for the growing range of smart appliances active in the energy system, and ensuring that the potential for increased vulnerability to cyber attacks is mitigated.