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UK Summer Regulatory Blitz

  • United Kingdom
  • Energy and infrastructure

15-09-2017

As the Summer ends and Autumn draws in we reflect on the regulatory changes which swept through this Summer.

This Summer has been a hive of regulatory change, predominantly to cater for the surge in battery projects and to adapt the regulatory framework to changes in the technology profile and the market.

Embedded benefits revenue slashed

Embedded benefits for sub 100MW embedded generators are proposed to be changed fundamentally by removing residual TNUoS benefits (equivalent to £45/kw) and replacing them with GSP benefits (equivalent to £1.62/kw). This is to be phased over 3 years from April 2018.

This will impact not only existing generators, but also notably capacity market participants and storage operators.

Storage generation licence

The Department for Business, Energy & Industrial Strategy (“BEIS”) has confirmed that it intends to introduce a licence for storage which will be a distinct subset of the generation asset class. This will result in storage facilities being exempt from so-called final consumption levies, such as, CfD, ROC, FiT, Capacity Market levies.

There is still a lot of detail required as regards the mechanics, in particular how this applies to licence exempt storage facilities.

Welcome removal of double grid charges for storage

Storage operators who import and export electricity are currently paying grid related charges on both such imports and exports on the basis of being regarded as a generator.

It has now been proposed that any imports by storage operators will not be subject to residual TNUoS and BSUoS charges.

This is due to be consulted upon and implemented in due course in April 2018.

This is good news for storage operators, however, it is unclear whether and how these proposals will apply to licence exempt storage operators.

Review of transmission and distribution charges – behind the meter

Ofgem are concerned that the current charging framework for transmission and distribution charges is no longer fit for purpose since many customers and generators are avoiding such charges by various means, including demand side reduction and onsite generation. Accordingly, Ofgem are implementing a review of the charging framework and propose to make a decision in Q3 2018.

This does raise uncertainty for the industry, especially in the context of behind the meter initiatives.

Capacity Market storage adjustments

BEIS released a consultation on 24 July 2017 proposing a number of changes to the Capacity Market Rules to apply for the next auction in 2018.

Amendment of technology classes and the de-rating methodology for storage Capacity Market Units are two of several proposals BEIS has invited stakeholders to comment on. In addition, it has been proposed that meter assessments are allowed to be re-taken and the requirements of Satisfactory Performance Days (including consequences of a failure to meet such requirements) are to be made more stringent.

BEIS acknowledged that the following factors could impact the de-rating of storage: (i) limited discharge period; (ii) declining performance over time; and (iii) potential for battery not being fully charged at the start of a system stress event, however, in terms of the next auction round, BEIS is proposing to only take into account the discharge period when setting the storage de-rating factor.

National Grid strategy and ancillary services simplification

National Grid released its new System Needs and Product Strategy consultation this summer. The consultation sets out National Grid’s forecast of its primary needs in the next five years, which highlighted the increasing need for flexibility in the services provided and centred around five key areas: (i) system inertia and rate of change; (ii) frequency response; (iii) reserve; (iv) reactive power; and (v) black starts.

The consultation also invited industry feedback on its proposed strategies to simplify the ancillary service contracts offered, either through the standardisation of the current products, or by having a reduced number of products with more variables. Furthermore, stakeholders were invited to comment on the possibility of trialling different procurement approaches, such as cleared price auctions and day-ahead markets, as well as the need to increase coordination with DNOs. The consultation closed on 18 July 2017, with the post-consultation recommendation expected by the end of September 2017.

National Grid SO and TO separation

National Grid has confirmed, following consultation with the industry, that it will be implementing a separation of the System Operator (“SO”) role from its Transmission Owner (“TO”) activities. Due to the evolving SO role (particularly in respect of the need to (i) act as a residual balancer, (ii) facilitate competitive markets and a whole-system view, and (iii) support competition in networks) and with it the increasing need to address actual or perceived conflicts of interest within the National Grid roles, there will be a legal separation of the entities within the National Grid group which undertake the SO and TO activities, to be completed by 1 April 2019. Development of the future regulatory and incentives framework to reflect this required evolution is ongoing.

DNOs and DSOs

Following the BEIS/Ofgem Smart, Flexible Energy System: call for evidence, which identifies the need for the DNO-to-DSO transition, a number of DNOs have been consulting on how they propose to implement and effect this transition. The exact role DSOs will play has yet to be identified, however, the core aim is for DSOs to act as a neutral facilitator of an open, competitive and accessible market (within which consumers can be both generators and consumers), as well as managing the coordination of the various distributed energy resources to improve the security, sustainability and affordability of the network.

Achieving this transition will require (A) investment in and the development of technical mechanisms for more complex and detailed Distributed Energy Resource (“DER”) data analysis in order to (i) provide visibility of congestion and/or capacity on the network to manage current DERs and allow investors to identify where there is capacity for the connection of further DERs (ii) allow for strategic, targeted infrastructure development, and (iii) improve forecasting accuracy to increase adaptability to changing network demands; (B) the use and development of flexible connection arrangements to maximise use of the network capacity and improve accessibility to the network; and (C) the development of a local energy market platform.

BEIS have also confirmed that they do not wish to encourage DNOs to own storage assets and will keep this under review.

ENA has published a new standardised application form for storage connections.

VAT changes

It has been reported in the press that when householders install a new solar photovoltaic system and, at the same time, integrate a storage system VAT will be charged at only 5%. The Solar Trade Association had produced evidence to Her Majesty’s Revenue and Customs (HMRC) that such combined installations should bear only 5% VAT because they play a part in reducing transmission and distribution losses on the grid. HMRC has retained the existing 20% VAT rate for batteries sold separately.

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