Regulatory and Market Issues Assessment Danae Marshall, DECC

Discussion: DECC’s recent publication on smart Areas of focus ahead of the Call for Evidence Discussion of storage-specific areas 2 2

Our energy system was largely designed and built in the 20 th century to address a different set of problems from the ones we face now… DECC published “Toward a Smart Energy System” on 17 December It sets out:  Some of the key challenges our energy system faces as we seek to power our economy and decarbonise cost effectively;  How a smart energy system, based around new forms of flexibility, could help the UK deliver our objectives. Our Electricity System faces new challenges as we look ahead… 3 Call for Evidence: Specific questions on storage amidst… Wider call for evidence on other areas of smart energy

Smart could cut consumer bills, help us go low carbon cost-effectively, and keep the lights on… 4

As a result, there are a range of market failures preventing efficient deployment… 5 Historically, energy policy and regulation have been designed around a traditional power generation system, and have not always provided an appropriate framework for innovative, flexible solutions. Policy and Regulation Incentives for market players are not always well aligned to ensure that the most efficient, flexible solution is chosen. Misaligned Incentives New forms of flexibility offer benefits to many actors in the energy system, but these benefits are not all monetised or are difficult to capture. Missing Markets A proportion of the benefits of smart will spill over across the energy sector and not be completely captured by the company that invests in it. Technology Risk Consumers / generators are not always exposed to the true whole system costs of energy which may weaken the case for them adopting more flexible solutions. Cost Reflectivity Existing energy market players have significant influence through existing policy and regulatory processes making introducing new business models challenging. Market Power Flexible solution providers may also face information asymmetry when considering where to provide their flexibility so that it provides the most value to the system. Information Asymmetry

We will call for evidence on our work shortly… 6 Clarify role of aggregators in the market, explore the need for policy intervention and regulatory oversight Consider barriers to storage deployment, and how to address these Levelling playing field for smart technologies Consider ways in which we can encourage consumers to offer their flexibility (e.g. half hourly settlement, smart appliances, etc) Delivering clearer price signals Ensuring that DECC innovation funding supports those areas critical to the development of a smart energy system. We will also look at how innovation in this area can be supported best by the public sector more broadly. Catalysing further innovation Considering what system functions may be required in a future smart energy system to maximise benefits while managing the risks; and how roles and responsibilities may need to change in light of these (e.g. from DNO to DSO). Examining case for more fundamental changes Considering the costs and benefits in more detail; how much flexibility might be ‘least regrets’; and identifying evidence gaps more broadly in this area. Developing our analysis and evidence base We are working with Ofgem on a programme of work intended to manage the transition to a smart energy system:

Regulatory Considerations on Storage ahead of the Call for Evidence

Regulatory considerations ahead of the Call for Evidence 8 DECC-led: issues of time, scale and boosting investor confidence Planning DECC-led: issue of exempting distribution-sited storage from policy charges (RO, FiTs, CCL) Final Consumption Levies Jointly led: issue of where and how storage sits in legislation Regulatory Clarity Jointly led: issue of who can or should own storage Ownership Ofgem-led: issues of priority, cost, duration and status of existing generators installing storage Connections Ofgem-led: issue of ‘double-charging’ on import and export Network Charging

Other DECC-led considerations ahead of the Call for Evidence 9 DECC-led: part of the ‘system functions’ work. How could smart technologies, including storage, access the full value of their services, and through which markets? Missing markets and stacking value DECC-led: part of the ‘customer-level flexibility’ work. How could price signals be improved to encourage the use of storage in the home/office? Stronger price signals We will also be looking at the following areas, but whose primary consideration is broader than storage alone.

Next steps 10 Publication of Call for Evidence – shortly Call for Evidence government response – Autumn 2016

Questions for discussion now 11 How does a lack of a definition for storage in legislation affect all the other barriers that storage faces? How far would a definition for storage go in addressing these barriers? How should we and industry approach the task of defining storage? E.g. narrowly - for ease and speed, broadly - for comprehensiveness, openly - to future proof it, etc.