Last week, Ofgem published Upgrading Our Energy System – Smart Systems and Flexibility Plan. The plan forms part of the Government’s Industrial Strategy and Clean Growth Plan as well as Ofgem’s future work. It is apparent that Ofgem recognises that the UK is moving towards a renewables-dependent and decentralised grid network or smart grid; ‘our energy system is changing. There is more low carbon generation, much of it located close to people’s homes and businesses, and it produces different amounts of electricity depending on factors like the time of day or the weather.’
These changes are in part thanks to the falling cost of technology, coupled with a need to reduce energy consumption in order to tackle rising energy costs and increasingly stringent legislation. Ofgem also recognises that there is a significant cost benefit to a smart energy system, estimating savings of £17bn – £40bn to 2050.
‘By harnessing the potential of energy storage, demand-side response and smarter business models, we have an opportunity to upgrade to one of the most efficient, productive energy systems in the world. This is central to how we deliver secure, affordable and clean energy now and in the future.’
The plan tackles several key areas raised in Ofgem’s Call for Evidence last year.
Smart tariffs for homes and businesses
At present, only large energy consumers with a half hourly meter can use a variable tariff to make savings by reducing energy use during peak times; a technique called demand-side response. This could soon change, as Ofgem decides on mandatory half-hourly settlement (HHS) for all consumers.
Suppliers will be assisted in offering smart tariffs through the provision of smart meters and removal of the four-tariff cap. This could give households and smaller businesses tremendous control over how they choose to manage their energy, as well as helping to balance our overall grid supply.
Last week the Government announced plans to ban the sale of new petrol and diesel cars and vans will from 2040, citing air quality as the major driver for the decision. Many carmakers already estimate that a quarter of their sales will be electric by 2025 and it is estimated that 45 million national chargepoints would be required by 2040 in order to meet the demands. The majority of these would be located in homes.
A huge change is underway and to better manage this change the Government is seeking to set standards for chargepoints in the Automated and Electric Vehicles Bill. This would enable ‘smart’ electric vehicle chargepoints to be used for demand-side response, helping to balance the grid and minimise the amount of new generation and network investment required. The Government will also potentially support a new vehicle-to-grid trial to better manage these benefits and Ofgem will assess any regulatory, network and tariff implications.
Making room for storage
One of the major areas of focus is energy storage. The cost of lithium ion batteries has halved since 2012 and storage looks set to play a crucial role in how we manage the distribution of a more renewables-based and smart grid supply. The plan sets out several actions from Ofgem and the Government to assist in the development of energy storage facilities:
- Consultation on a Targeted Charging Review to assess current network residual charges so that storage facilities only pay one set of balancing system charges
- Amending the Electricity Act 1989 to include a definition of storage as a subset of the generation asset class
- Review planning to assess whether it could be simplified for storage facilities
- Consult on forming a modified generation licence for storage that will enable storage facilities to be exempt from final consumption levies
- Making clear when storage can co-locate alongside renewable generation without putting at risk agreements under Contracts for Difference, Renewables Obligation or Feed-in-Tariff.
Ofgem’s Call for Evidence highlighted concerns that storage and demand flexibility should participate on a level playing field in the Capacity Market. In response, the Government will simplify metering requirements for those offering demand-side response, allow combined revenues from the Capacity Market and ancillary services, and enable asset relocation by demand-side response providers.
Concerns over network charging will also be addressed in a working paper and through a Targeted Charging Review, which covers storage (as mentioned previously) and how residual network charges are allocated.
In order to make ancillary services more open and transparent, the System Operator will simplify the number of services and pilot new procurement methods, such as auctions. Ofgem also envisages changes in local flexibility services that would see current Distribution Network Operators (DNOs) operating as Distribution Service Operators (DSOs) stating ‘If storage, demand-side response, energy efficiency, use of heat networks, or other actions can deliver better value to consumers than traditional reinforcement, the DSO should pursue these solutions.’
Further funding for innovation
The Government announced at least £50 million of funding for smart innovation. The latest plan from Ofgem increases this amount up to £70 million, in addition to the £246 million from the Industrial Strategy Challenge Fund. There are four innovation competitions: £9 million for cost reductions for storage, £20 million for vehicle-to-grid and £7.5 million for innovative non-domestic demand-side response. The report also highlights funding that is available for feasibility studies into large-scale storage to be completed by the end of the year.