The United Kingdom may be missing a historic opportunity to integrate energy storage technologies as it moves to decarbonize the power grid. Storage technologies — primarily batteries — are proving to be game-changers worldwide. However, in the UK, structural challenges are slowing progress.
In other parts of the world, significant deployments of utility-scale storage are helping solve grid emergencies and even proving to be cost-competitive alternatives to conventional solutions such as gas-fired generation or deferring new traditional T&D investment.
The utility industry has long relied on storage solutions to meet service expectations. Storage can even include the coal pile outside a generating plant, to excess capacity in the natural gas pipeline system, to pumped hydro solutions. Today, there are more than 40 energy storage technologies, though many are not realistic options because of their high upfront capital costs or other characteristics that can only be applied to few applications. Lithium ion batteries have jumped to the head of the pack of storage solutions — partly due to mainstream marketing by the likes of Tesla, but also because of reductions in cost, speed to market, availability of proven technology, ability to improve reliability of renewable energy resources and ability to resolve a host of other system needs.
There is no question that the energy system is changing dramatically in the UK. We are at the precipice of this movement, but which way will it go? We are certain that it is a revolutionary and interactive system with far more in play at the distribution network level than ever before. Storage may be the catalyst but that is difficult to predict. If adoption occurs on the customer side, both large and small customers will be driven by price, social change and even the motivation to keep up with the Joneses. We just don’t know because development of energy storage has yet to achieve the outcomes and scale that it should have.
The path forward must revolve around correcting structural market challenges. Energy storage is still an immature and emerging market that will not develop in the UK until misaligned stakeholder interests are recognized and brought into alignment. That means that the Department for Business, Energy and Industrial Strategy (BEIS) and the Office of Gas and Electricity Markets (Ofgem) must take action to re-evaluate and correct current regulatory policies. In other words, either regulate storage properly, or get out of the way and truly let the market naturally drive the transformation.
Under the current 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 eight-year asset with a measly two- to three-year guaranteed cash flow? Pricing signals are telling them to put their investment elsewhere. Further, current regulation prevents Distribution Network Operators (DNOs) from owning or operating storage, due to the assumption that their monopolistic structures would corner the market and kill off innovation and creativity. This approach might in fact be killing off the industry but not because of anti-competitive behavior of regulated monopolies. It is because no private investors can make the numbers work with limited (quality and quantity) revenue stacking models.
For proof, look at the results of the recent T-1 Capacity Market Auction in which storage accounted for just 1.7 percent of the UK capacity. The result was not a surprise since BEIS had previously announced it would cut de-rating of battery projects by 80 percent.
The transition to Distribution System Operators (DSOs) is fundamental to the energy storage movement. Significant storage capacity can and should exist at the distribution level but DNOs are not rewarded for designing their systems like system operators. This is a very subtle shift, but network planning engineers do not currently understand the contracts and operating regimes needed for the storage equipment that developers want to install on their networks. This lack of understanding and lack of DSO-minded policies can add unnecessary barriers to entry and ultimately stop investment. With the interplay between customers, energy retailers, DNOs and Transmission Network Operators (TNOs), services like storage must be procured from a whole system approach. Regulation must keep in step with this transition and align incentives and market participants from this new vantage point.
The truth is, DNOs seem to be suited to own and operate these assets because they can gain system value and benefits (outside of direct income) at a scale or level of adoption that can solve the UK’s toughest flexibility challenges.
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. This raises the question: Is regulation in the UK focused on the wrong things? Is the siloed method of regulating antiquated or even appropriate?
In the UK, we have smart and creative engineers who have the ability to devise the technical solutions and bankers who can create the financial structures we need. But current markets do not allow the appropriate investment structures. There is not a strong enough payback for any private investors to enter the market. Follow the money. 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.
What is needed?
The first step would be revised regulations 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 crippling investment.
The second step would be to re-evaluate all incentives throughout the value chain, re-examining all the potential markets and lowering barriers to entry. Providing certainty in the market will drive investment and result in the outcome we desire — a reliable and resilient network.
The third step would be to stack value across the chain so all players have incentives to play. In the U.S., for example, storage owners can sell into the capacity market or into the frequency regulation market. 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.
A fourth critical step would be changes that promote openness and transparency. This will be key to resolving issues and reinforcing the traditional network and optimizing investment. For example, one simple step 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 with batteries and other technologies before power outages or voltage fluctuations can occur.
One issue that may be at the heart of the regulatory problem is that battery-based energy storage does not fit into any of the traditional boxes that have defined the power industry. Rather, it blurs, moves or even removes these lines. Is it a generation resource or does it fit better on the other side of the fence, supporting demand (i.e. power consumption)? Or is it mainly a technology resource, regulating frequency, ensuring continued system reliability and shifting peak demand to defer unneeded investments?
It can actually fit all of the above, and it should be rewarded according to the value and benefits it supplies. Storage can be used in multiple ways and applied to multiple markets. But how will the network, system and market treat storage for consuming and exporting power? The answer will largely depend on how Ofgem reacts and the guidance BEIS provides. If the consultation feedback doesn’t provide sufficient evidence of the need for change, we can surely see it empirically from the outflow of investment. Take, for example, National Grid shifting 75 percent of its global investment to markets that support its financial aspirations. With that goes industry expertise and innovation.
Storage is not a silver bullet, either. 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 where energy is affordable, reliable and nearly impervious to weather-related events or other disasters. This is what the Clean Growth Strategy alludes to, but who in government will stand up and lead the transformation from the front?
How do we support this transformation over time? It will happen and will take time. Storage thrives when its breadth of services is adequately compensated, and that means the regulators have to get it right.
What can we do today to change the game and support the DNOs? A good start would be to stop focusing on the wrong things and focus on appropriate business models for positioning the industry, namely revised regulation that allows developers to achieve the scale they need for investment.
Needless to say, we are at a critical junction where important policy decisions need to be made and in some cases revisited and corrected. 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.
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 are the third leg, and the whole system is unstable if they are unable to devise sensible policy and regulations. Ofgem clearly holds the key to whether storage begins to realize its potential in the UK.
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