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Energy Regulators Pave The Way For More Flexible Energy Systems

Ahead of Europe's smart energy community gathering at European Utility Week (EUW) 2016 in Barcelona this November, OFGEM's Andy Burgess was asked for his reaction to an EUW Advisory Board Member survey. Here he shares his thoughts on the finding that over 77 percent of respondents thought that energy storage would be the breakthrough technology for enabling the new energy future. He also shares how energy regulators are paving the way for new technology to deliver more flexible energy systems.

The potential for storage is seen by many as very exciting, and there are certainly lots of possible advantages that will come from an increasing use of storage. The challenge for regulators is to ensure the right conditions are in place to promote not only storage, but also other flexible solutions that may be coming down the line.

Storage benefits

There is no doubt that storage is going to have a huge impact on the way we manage and consume our energy. For a start, because of its ability to smooth out the intermittency of renewable generation, widespread uptake will mean less wastage of renewable energy generated at times when it's not needed by the system or by consumers. That will mean more energy being available, which is ultimately better value for consumers. 

Storage will also help local electricity networks ensure they can cope with unexpected peaks in demand. By providing valuable back-up power, storage could make networks more robust.


So with such clear benefits, why hasn't storage really taken off yet? There are several different factors. First of all there's the question of whether the economics currently stack up, or will the cost of storage need to drop a bit more before it's adopted in a meaningful way?

Secondly, there's the issue of ensuring the regulatory framework can incorporate storage on a large scale. To do this we need to make sure the existing market rules, regulatory arrangements, incentives and the legal framework don't unduly inhibit the uptake of storage. The existing regulations were designed for a more traditional energy world. But that world is rapidly changing. As regulators, we are very conscious of the need to review those rules, in light of new business models and new technologies, such as storage.

Ongoing work

We've been working on this issue with the UK Government over the past year and we'll soon be publishing a call for evidence, which will ask industry stakeholders for help and input to develop a "Smart, Flexible Energy System". The call for evidence examines the potential barriers to storage and other forms of flexibility. Interestingly, one of these barriers is the lack of a definition for storage. It's an issue, but not an intractable one. Sometimes storage behaves more like generation, sometimes it's more like demand. The important thing is to ensure that we treat storage appropriately in the various regulations. For example, we need to make sure that the arrangements that govern how a particular activity is charged for using the network, fits the purpose that it's serving at that particular point in time. Storage could help when addressing such issues, and it is something which we will consult on in our call for evidence.

As a regulator, the use of storage by networks is part of our focus to increase flexibility in the energy system. In the UK, network companies are generally monopolies. But as the body that regulates these monopolies, we've been very aware of the need for these organisations to innovate. Historically, where they have been slow to do that we've put specific incentives on network operators, through our framework for network regulation, which we call the RIIO (Revenue = Incentives + Innovation + Outputs). This provides incentives for network companies to innovate, and generally they will earn a rate of return based on the investment they make in infrastructure if it is cost effective.  As part of the RIIO price control we also introduced the Network Innovation Competition and its predecessor the Low Carbon Network Fund, which allows network companies to compete for funding for the development of innovative ways to manager their networks.

The traditional incentive model for regulating networks did not always work for the type of innovation we're now seeing in the market. This is principally because a lot of the solutions to today's problems tend to be classed as operating expenditure rather than the capital expenditure that was historically incentivised. Use of storage, as a way of solving problems on the network, would fall under operating expenditure.

So to fix this type of problem, we developed a mechanism within the RIIO price control called totex or "total expenditure", where companies can earn a rate of return regardless of whether it's capital expenditure or operating expenditure. This means they're free to make the most efficient use of whatever technology is around to solve a particular problem, rather than being pushed towards capital investment. The point is that network companies need to have the right incentives, and that they respond to those incentives by being more creative and exploring different options. 


Options are important. When most people talk about flexibility these days, their minds quickly turn to storage and lithium-ion batteries in particular. But there are other flexible technologies available. And so we may increasingly see the energy industry starting to behave more like the telecommunications sector, which is characterised by rapid change and by taking advantage of new technologies, new services and new ways of doing things.

While storage will of course deliver flexibility to the system, it's not the only show in town. There's also demand side response and interconnection between countries. If there's a shortfall, the system operator can make this up from storage. But it could also import electricity from other countries through interconnectors, or use more demand side response, particularly at the industrial and commercial level. 

Level playing field

Looking forward there could be new forms of flexibility that might come into the market over the next few years.  Whatever the choice, the key will be ensuring a level playing field; to allow the TSO or DSO to choose the most efficient option, and the one which delivers best value for consumers.

The challenge for us as regulators is to adapt to these changes. As the outside world becomes smarter, we need to make sure the existing rules that we oversee aren't a barrier to new business models or new technologies. The difficulty is that we don't know what that new technology will look like. We know what's out there at the moment, but we don't know what's coming. So we have to make sure, as far as possible, that our rules are future proof, and where any rules might present an undue barrier to someone entering the sector, be ready to review those rules. 

And it's a global issue "“ most countries around the world are facing the same problems and we're all trying to work out the best way through. So the more that we can share ideas and best practice, the easier it will be to address the challenges that we all have. 

Dialogue between countries and different parts of the sector is key. We also need to hear from those who might be identifying particular barriers to marketing their products. EUW will facilitate that dialogue. It will bring the smart energy community together to look at all of these issues and generate healthy debate. I, for one, am looking forward to it.

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