Ofgem’s Vision for U.K. Energy

By Bloomberg New Energy Finance’s European Power Transition team. This article first appeared in BNEF’s ‘EU Power Weekly’ publication, available to clients on the web and on the Bloomberg Terminal.

The U.K. has laid out a vision for the future of its energy grid. The report envisions distribution companies like UK Power Networks moving increasingly from being network owners towards system operators. It also aims to create more opportunities for behind-the-meter resources to provide system flexibility, benefitting firms like Moixa, Limejump, and Open Energi. While many of the recommendations are already underway, the overall vision will take plenty of work to achieve.

Battery storage has been disadvantaged in the U.K., facing duplicate network charges, difficult planning processes, and a misclassified legal status. Ofgem and BEIS propose reclassifying storage as generation assets, giving them access to the same market opportunities as existing power plants and diesel gensets. This, alongside simplified permitting and reduced grid fees, will make storage more lucrative and put it on a more even playing field with other technologies. However, a complicated market for balancing services must also be addressed.

Cumulative energy storage deployment forecast by application for the U.K.

Source: Bloomberg New Energy Finance

BEIS and Ofgem plan to simplify the way companies are paid for grid services. The current system is complex, with a range of different services, on top of balancing and capacity markets. There is also a lack of clarity around whether and how these can be combined – a critical issue for technologies such as battery storage that can provide multiple services. The proposal is to simplify and update the offerings, leaving a suite of services which are better aligned to current market needs. The end-goal is to make procurement and remuneration of grid services more efficient, and to enable participation from new technologies like demand response and storage.

There are still many open questions on how this is achieved. For instance, the U.K. must decide whether to pursue a framework with multiple ancillary products, each meeting a different system need, or to establish a single product for multiple system needs. The length of contract is also an unknown: new assets like storage prefer long-term contracts that lower the cost of financing, yet such contracts can lead to overpayment. These challenges are yet to be resolved.

Another goal is to enable customers to benefit from demand-side participation. Standard U.K. tariff structures and the current market design mean that customers, both large and small, rarely have a financial incentive to change their consumption patterns to match supply. Ofgem wants to remove the barriers for demand response, behind-the-meter storage and electric vehicles (EVs) by introducing half-hourly retail settlement and allowing flexible EV charging, in addition to rewriting standards such that all the above can participate in balancing services.

The advantages to the grid could be substantial if such products become widespread. For instance, we see a more economic outcome for solar if dynamic charging for electric vehicles is the norm.

There is a long road ahead for the U.K. to implement a dynamic market for flexible resources, but the Ofgem and BEIS proposals acknowledge the challenges and state an intent to resolve them. Many countries are beginning to address the same issues – or will need to soon.

 

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