Energy revolution? Government publishes Smart Systems and Flexibility Plan

​The UK Government signals its intent to support smart technologies and energy storage in its Smart Systems and Flexibility Plan published in July 2017.

Upgrading our energy system: Smart Systems and Flexibility Plan

In November 2016 the UK Government issued a Call for Evidence consultation document in relation to “moving to a smarter and more flexible electricity system” which “captures the benefits for consumers and businesses”. The Smart Systems and Flexibility Plan (the Plan) responds to that and is an important part of the Government’s Industrial Strategy.

The Plan notes that the proportion of the United Kingdom’s electricity generation coming from renewables has reached a record 26.6% in 2017. This is mostly due to an increase generation capacity in wind and solar. The grid is subsequently under increasing pressure to manage this intermittent power supply and to integrate energy storage into the national electricity grid. Technological developments in energy storage are available, but policy and regulatory hurdles have largely prevented such expansions being viable.

In acknowledgement of such challenges, the Plan sets out how the Government will enable the development of a smart, flexible energy system that will reduce the costs for consumers and industry, and support the growth of innovative new business. Core to the Plan is upgrading the regulatory and market framework, opening up new opportunities for consumers and market participants, and providing conditions in which innovation can flourish.

Guiding principles for a smart, flexible system

The Plan promotes an effective market with thriving competition to promote flexibility and efficiency. This is to be achieved by enabling providers of solutions access to a full range of markets, opening up new markets and being able to stack value across them wherever appropriate. It is hoped that energy consumers will be able to utilise smart technologies such as smart meters to gain control of how much energy they are using and have access to cheaper, more suitable, sources of energy. It is acknowledged that to do so, there has to be an incentive to encourage innovation and input from the full range of stakeholders.

Removing barriers to smart technologies

The Plan proposes the following actions to address undue regulatory and policy barriers to storage:

  • Charging: Ofgem has already hinted at reform in their Targeted Charging Review (TCR) when considering the current network residual charges.
  • Storage definition: The Government intends to amend the definition of “Electricity Storage Network” in the Electricity Act 1989 so that it is a distinct subset of the generation asset class.
  • Planning: The Government will also review the planning regime to consider the national planning threshold for storage facilities and planning guidance associated with storage.
  • Storage licence: Ofgem will consult on a modified generation licence for storage to enable storage facilities to be exempt from final consumption levies (given that they are not end consumers). The Government has also made clear that imported electricity to storage facilities may be exempt from the Climate Change levy in certain circumstances.
  • Co-location: Importantly, it will be made clearer when storage can co-locate alongside renewable generation without jeopardising agreements under Contracts for Difference, the Renewables Obligation or subsidy incentives under the Feed-in-Tarrifs Scheme. This is likely to benefit owners of solar assets who could deploy battery storage en masse once the economics of such technology is viable. We are working on several co-location project opportunities combining storage with renewable generation, and the business case already stacks up in a number of scenarios and cost models.
  • Storage ownership: Network companies should not own or operate storage facilities as this could impede the development of a competitive market for storage and flexibility services.
  • Funding Innovation Schemes: In acknowledgement that financial incentives will promote smart innovation and subsequent flexibility, the Government has announced several public funding innovation schemes. The smart innovation budget will be increased to £70m and a £246m fund will be introduced for the Industrial Strategy Challenge Fund to kick-start the development of disruptive technologies (particularly better batteries for electric vehicles). Further, there are four innovation competitions: a £9m challenge fund on cost reduction for storage, a £20m vehicle-to-grid competition, a £7.5m competition for innovative non-domestic Demand Side Response (DSR) and £600,000 funding towards feasibility studies into large-scale storage.
  • Metering: DSR is financially incentivizing energy use away from peak-use times; consequently reducing demand to reduce costs. Currently, there is little DSR from households or small businesses but there is both a technical potential and consumer appetite for increased participation. The Government is committed to offering every household and small business a smart meter by 2020 to unlock this market.
  • Consumption: To complement the consumer engagement, Ofgem is working on implementation of mandatory half-hour settlement to encourage suppliers to help consumers to move consumption away from peak times.
  • Pre-payment meters: Ofgem will seek to protect vulnerable domestic consumers in the retail market by extending the current safeguard tariff in place for consumers in pre-payment meters.
  • Domestic storage: The Government has also shown a commitment to support domestic electricity storage for self-consumption and small scale low-carbon generation exportation to the grid by ensuring incentives are sufficient.

VAT backtrack for Solar - a rare “win”

A further boost for storage which the Solar Trade Association (the STA) confirmed on 03 August is that the VAT rate for battery storage for householders installing a storage system alongside new solar PV Systems will be 5% rather than the standard rate of 20%. STA’s Vice Chair Seb Berry stated that

“This is a helpful and welcome decision by the Treasury following a major lobbying effort from the Solar Trade Association. Reduced VAT on new systems will encourage homeowners to embrace storage technologies alongside solar. Solar remains a good investment and storage means householders can now take greater control of their energy bills. All STA members will be delighted by this win. The policy wins are needed as solar deployment has fallen to a seven year low. The industry is struggling with a policy framework that now provides tax breaks for fossil fuels that are not applied to solar.”

Conclusion

The proposed actions of Ofgem and the Government seek to remove inhibiting regulatory and policy hurdles and support growth and innovation to reduce costs for consumers and industry. It is hoped this will benefit the energy industry and consumers and put the UK in a leading position to export smart energy technologies and services to the rest of the world.

There will of course be a number of practical hurdles to overcome as well. We note that the Plan states that Ofgem will consult on a modified generation licence for storage with the aim of it being introduced by summer 2018 and that this can proceed independently of the parliamentary timetable which changes to primary legislation will be limited by.

From a planning perspective this could complicate consenting in the interim period between licence changes and primary legislation changes as there is no statutory definition of capacity of a generating station in planning legislation relating to the Nationally Significant Infrastructure Project (NSIP) regime. Although many developers and local authorities have regarded battery storage as a generating station and therefore relevant to calculating the capacity thresholds over which they would together with an existing generating station become an NSIP, the change to the licencing regime could bring that into sharper focus. Developers will have to be more cautious than they have been in terms of ensuring that they do not unintentionally fall into the NSIP regime as the development of an NSIP without a Development Consent Order would be a criminal offence.

Whilst the cancellation of the essential support regimes has precipitated this slowdown, the stalwart developers and investors are working on a big pipeline of post subsidy solar. We are working on several. Some private wire / pure generation models and colocation models stack up today given the wholesale vs retail price differentials. Others are expected to become viable if we see predicted drop in module and equipment costs come to pass, and continued improvements in operational efficiency.

We also saw last week further statistics on the massive public support for fossils compared to renewables on a global basis. Aid agency Cafod published research showing the UK spent twice as much overseas support on fossil fuels projects as on renewable ones so far this decade with 99.4% of UK export finance support directed towards “dirty” energy investments.

For further information on Energy Storage issues, please see the Simmons & Simmons booklet on the topic here or please get in touch with your regular Simmons & Simmons contact.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.