Utility Week

18 | 23RD FEBRUARY - 1ST MARCH 2018 | UTILITY WEEK Finance & Investment Market view T he UK may be missing a historic opportunity to integrate energy stor- age technologies as it moves to decar- bonise the energy sector. Recent evidence of this misstep can be seen within the pro- visional results of the capacity market auc- tion, announced last week, being dominated by fossil fuels, with storage getting a paltry 1.7 per cent of the payments – a cut of 80 per cent. Storage technologies – primarily batteries – are proving to be game-changers through- out the world. However, in the UK structural challenges are slowing progress, and devel- opment of energy storage has yet to achieve the outcomes and scale it should have. The recent move to de-rate for shorter duration systems will have a dramatic impact on pro- ject profitability for the technology. What we need to do is correct structural market challenges. Under Ofgem's regulatory framework, there are not enough incentives for develop- ers to take the risks to deploy storage. Who wants to put their career, company and money on the line by taking a ten-year risk on an eight-year asset with a measly two- three year guaranteed cashflow? Pricing sig- nals are telling them to put their investment elsewhere in the market or in the world. Large infrastructure investment banks are shying away from the UK storage market. In parts of the world where storage is thriving and growing, revenue stacking com- pensates its gamut of services and allows appropriate opportunities to recover a rea- sonable return on investment. In the UK, there is not a strong enough payback for pri- vate investors to enter the market. When the country's largest investment banks shy away from investing in energy storage, you can be sure the market is not functioning as well as it should be. This raises the question, is regulation in the UK misaligned and simply focused on the wrong things? In my view it is, but here's a four-point plan that could put the UK on the right track. The first step is revised regulation looking at a whole-system approach and procuring the services the customers and the networks need. Furthermore, they must remove things that are distorting the market and crippling investment. The second step would be to reevaluate all incentives throughout the value chain, re- examining all the potential markets and low- ering barriers to entry. Providing certainty in the market would drive investment and result in the outcomes desired: a reliable and resilient network fed from renewable sources. The third step would be to stack value across the chain, so market par- ticipants are appropriately rewarded for the services they provide. There are many variables, but all ensure reliable, long-term cashflow over a term needed to provide a reasonable expected return on investment. The UK market must allow stacking of financial resources to create a payback that makes sense. A fourth critical step involves changes that promote openness and transparency. This will be key to resolving issues and rein- forcing the traditional network and optimis- ing investment. For example, one simple method would be to allow smart meters to be installed that share operational data instead of simply serving as billing outlets. Smart meters providing system performance data would allow operators to identify constraints and weaknesses that can be addressed at a micro level, with batteries and other technol- ogies far in advance of investment and infra- structure constraint and burden. A further question is how the network, system and market will treat storage for con- suming and exporting power? The answer will largely depend on how Ofgem reacts and the guidance the government provides through the Department for Business, Energy and Industrial Strategy (BEIS). We can surely see evidence of the need for change from the industry. Take for example National Grid shiing 75 per cent of its global investment to markets that support its business and financial aspirations. With that goes industry expertise and innovation. Storage is not a silver bullet. It is an important tool, but only one of many that will be necessary for an integrated whole- system solution that will propel the UK toward a low, or no-carbon, future. This is what the Clean Growth Strategy alludes to, but who in government will stand up and lead the transformation from the front? The industry has the engineers to solve any technical challenges and the invest- ment community stands ready to jump in; but they are only two legs of a three- legged stool. Ofgem and BEIS act as the third leg, and so the whole system is unstable if they are una- ble to devise sensible policy and regulations. We are at a critical junction where impor- tant policy decisions need to be made and, in some cases, revisited and corrected. At the moment it seems certain that Ofgem will continue its focus on removing cost from the industry to keep profit levels "reasonable" and protect consumers. The market has a knack for speaking with its investment. Jeffrey Casey, business development director, Burns & McDonnell Storage needs a boost Energy storage can help stabilise rapidly evolving power markets, but only if regulators and government provide a proper framework that rewards investment, says Jeffrey Casey. Key points Storage is a key technology in the drive to decarbonise the energy system. The recent capacity auction demonstrates that storage is not being picked up. Regulation needs to take a whole-system approach. All incentives in the value chain need to be reevaluated. Value needs to be stacked across the value chain. Issues of openness and transparency need to be addressed. "Is regulation in the UK mis- aligned and simply focused on the wrong things?"

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