The National Infrastructure Commission has recommended building a smarter grid without delay. Treasury has backed the plans. Those with battery assets could stand to gain, writes Brendan Coyne
The government has backed recommendations to speed the development of a much smarter power system. The plan is to bring down market barriers for battery storage and demand side response, which could provide significant revenue gains for operators of mission critical infrastructure.
George Osborne’s March Budget gave the green light to the recommendations published a few days earlier by the National Infrastructure Commission. It stated: “The government will implement the Commission’s recommendations, and will work with Ofgem to remove regulatory and policy barriers, positioning the UK to become a world leader in flexibility and smart technologies, including electricity storage”.
While all political statements should be viewed with a degree of scepticism, it is clear from National Grid’s market signals that UK energy infrastructure is already headed in that direction. With more intermittent renewable generation and less thermal plant on the system, capacity margins are thin. The disruption of intermittent wind and solar has effected wholesale market power prices and the economics of thermal plant and developers are not rushing to build new ones. Grid therefore needs more companies to respond to signals and switch to back-up plant or adjust consumption in order to meet peak demand.
Over the coming years, it will need many more companies to sign up to balancing services in order to keep a more weather-dependent and leaner power system stable.
Battery assets and UPS systems, which provide the fastest response times, will therefore become increasingly valuable. Recent market economics are starting to alter the economics of that type of storage.
In the last few months, energy suppliers have launched schemes that will effectively pay or subsidise the cost of electricity to those that use power when the wind is blowing. That is because changes to industry rules for energy suppliers make it much more punitive for them to be out of balance. So-called cash-out changes mean it is now more expensive for them to generate or consumer more power then they contracted for.
That means companies can charge storage assets at a subsidised rate. They can also get paid to discharge their assets to perform grid balancing services when there is not enough power to meet demand.
Contracting assets into both of those types of schemes may prove challenging. But, if possible, would fundamentally change the economics of battery storage, from getting paid one, to getting paid twice.
There are also arbitrage opportunities for operators able to charge batteries when power prices are cheaper and discharge them when it is more expensive. It is worth noting that analysts predict power prices will become spikier within-day over the next few years (see December print issue of MCP).
In its report, the National Infrastructure Commission outlined key priorities for UK energy infrastructure. It said smart grid development – harnessing battery storage and demand-side response – and better interconnection with the continent would play a crucial role in keeping the grid stable and the lights on. It recommended that regulator Ofgem and policy department Decc lose no time in making the necessary new market rules.
Big shift, big bucks
The Commission noted that the need for grid balancing services “could increase up to ten-fold” as intermittent power replaces baseload plant.
It stated that investors were “queuing up” to invest in storage, and that storage would not require subsidy. That is largely because payments for the fastest forms of demand response are likely sufficient incentive for operators to build, own and operate those assets.
Those who do not have to build assets, and already have grid connections, will therefore have an advantage in the tenders currently being run by National Grid and potentially in future, also by distribution network operators. Given that National Grid’s tender for 200MW of sub-second enhanced frequency response was six times oversubscribed, that advantage could prove crucial.
Breaking down barriers
The Commission recommended a regulatory overhaul of the market to bring more electricity storage capacity to market. Currently, storage is treated is treated as both generation and consumption. That means storage operators are charged twice for using the electricity network. The Commission thinks they should be classified as a distinct asset to remove double charging.
“This approach ignores the other benefits that storage can play in the electricity system and creates barriers to investment in storage assets,” the report states. “For example, it increases costs for storage asset owners by requiring storage to be charged twice for using the electricity network – once as a generator when exporting electricity and again as a consumer when electricity is being taken from the network to be stored. Whilst storage technologies are clearly making use of the network both as a consumer and producer, charging in this way takes no account of the fact that storage assets are likely to be exporting power at times of peak load, and drawing power at times of peak generation, reducing the stresses faced by the network rather than increasing them.”
Storage assets also take a double hit on government levies such as the Contract for Difference scheme under which low carbon and renewable generators are given a guaranteed price for their power. The price of that support is smeared across all electricity bills.
The Commission said those operating storage assets should not pay that levy when charging, and then have the levy added again when their power is exported.
A better approach “would be to charge these levies on the basis of the electricity actually used, reflecting that no storage technology is 100% efficient, rather than on both inflows and outflows. Not only would this be a fairer treatment, creating a level playing field with other technologies, but it would also incentivise more efficient storage technologies”, the report stated.
Prepare for higher bills and spikier prices
The Department of Energy and Climate Change also said in March that it would bring the capacity market forward a year and proposed rule changes to bring in more demand-side response providers to the market.
That’s good news for those with flexible on-site generation and consumption, as they can bid for contracts that will pay them to make their asset flexibility available to cover shortfalls in winter capacity.
However, it will add cost to every energy bill as the money paid to those providers appears on bills as a levy, and Decc also published proposals that could have serious implications for use of diesel back-up generators.
Meanwhile, the National Infrastructure Commission report contained one ominous line for those that do not, or cannot, consider more flexible power use. “We see a case for sharper allocation of the costs of the capacity market to incentivise consumers to reduce demand at peak times,” it stated.
Making the market
The Department of Energy and Climate Change (Decc) will consult on the energy storage market this Spring with the aim of creating a level playing field. Government will respond to the consultation in Autumn, which could make next year an interesting one for companies considering how they can make money from battery storage assets. Participating in balancing services, for example, could fund investment in new UPS infrastructure, or more UPS infrastructure, increasing redundancy as well as income.
A version of this article first appeared in the April print issue of Mission Critical Power.
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