HC 742 Electricity Market Reform

Memorandum submitted by Swanbarton Limited

1. Swanbarton Limited is a specialist energy storage consultancy, based in the United Kingdom. Our main area of professional work is the development of commercial electrical energy storage in projects in the UK and abroad. We have taken a leading role in the proposed development of a number of project proposals, and have first-hand understanding of the technical, regulatory and financial thresholds required for the successful implementation of energy storage projects.

2. Today, storage technologies are based upon electro-mechanical, hydro-electric, thermo-electric and electro-chemical processes. While pumped-storage technology might be considered the only mature technology today (in the context of electricity networks), the technical development of the other technologies is at the point where, if revenue uncertainty can be reduced, they could enjoy useful and environmentally-beneficent operation.

3. Swanbarton Limited has contacts with a large number of storage developers and users throughout the world, and is an active member of the Electricity Storage Association. We are responding to this call for evidence to make particular reference to the need for the future electricity market to include the application of electrical energy storage, at all scales. We would be pleased to submit further explanation of our evidence if required.

Main points

4. There is a body of opinion, nationally and internationally, that storage capacity is vital in the provision of a flexible and low-carbon electricity network. Our business brings us into contact with national and international manufacturers, developers and operators of storage technologies, National Grid Company (NGC) and the regional electricity companies. We strive to solve the economic barriers that these technologies face, today.

5. The benefits of using storage technologies on the power network include:

· The ability to provide power for peak demand from energy secured from low-carbon sources rather than peaking plant (which is often, for economic reasons, the most inefficient generation in the whole fleet)

· The ability to reduce price spikes, by virtue of energy arbitrage functions

· The capability to address, at least in part, the issues surrounding lulls in wind output

· The capability to integrate an increased proportion of renewable generation onto the network.

6. There are three main barriers to the greater adoption of storage in the UK today:

· a lack of demonstration projects, at sufficient scale, which are required to drive down technology costs, provide learning and ready the technologies for widespread use in the coming, decarbonisation years

· an electricity market, with advantages for existing energy resources compared to new entrants

· the regulatory framework, which limits the opportunity for distribution and transmission licence holders to own and operate electricity storage.

7. Taking into account National Grid’s prediction of the requirement for Short Term Operating Reserve to rise from 4 GW today to 8 GW by 2020 [1] , the expected increase in negative prices for electricity, and continued demands on the network to incorporate renewable generation and electric vehicles, we see a significant technical requirement for storage, which could be satisfied if the right commercial and regulatory framework was in place.

8. There are a number of UK and EU-based companies in these fields that are at a significant disadvantage compared to US-based companies, which are deploying many practical projects under the US Department of Energy stimulus funding packages (a list of these projects is available for examination [2] ). The effect has been to support several large-scale projects to demonstrate technology and commercial operation. Allied with these, has been the successful realignment of market rules which started with FERC Order 890 [3] and rule changes for the New York Independent System Operator and the New England Independent System Operator. FERC Order 890 provides for open access for non generation resources to sell ancillary services (this means that storage and demand-side measures must be treated in the same manner as generation), and the ISO rule changes allow electricity storage to be considered either as a business within the regulatory framework, or to provide an enhanced tariff for storage applications [4]  .

9. With particular reference to the questions contained in the call for evidence our responses are as follows:

What should the main objective of the EMR project be?

10. We should secure environmental stability for the future population. The scale of the change required is enormous and it is vital that the electricity market, as a conduit for energy revenue, is fit for this purpose. Market trading, at present, determines which generation plants are run, scheduling not on the basis of emissions, nor of efficiency but of least cost. The risks are that environmental costs are not properly represented and that new technologies, which might be widely used, are not introduced progressively and there is no action until a critical threshold is reached. Evidence from case studies where storage has been used in conjunction with both conventional and renewable generation, shows considerable reductions in primary fuel use. [5]

11. The EMR should consider all energy resources, whether or not they are traded on the market today. Examples of energy resources include smart grids, storage units and demand-side responses, as well as the traditional fleet of generators (thermal plants, pumped hydro-electric storage and wind generators). Since the last decade, many engineers have been thinking in terms of resource approaches. The International Energy Agency’s ENARD work programme is one group [6] , further evidence can be seen in the topics of the energy-related calls of EU Framework Programme Seven [7] .

12. We are concerned that, in the policy-options analysis which Redpoint Energy undertook for DECC on EMR, only existing generation technologies are considered. Given the scale of change and the need for new low-carbon technologies to replace old, we suggest that the analysis approach is not completely representative. Progressive actions may be missed.

Do capacity mechanisms offer a realistic way of achieving energy security, low carbon investment and fair prices?

13. Not all the generation capacity that is required needs to be replaced on a like-for-like basis, it should be replaced with a mix of low-carbon generation and other measures such as storage, smart-grids and demand-side management. The market should be changed to ensure that these technologies can compete on a basis which allows decarbonisation goals to be met. Whilst availability and utilisation payments (as used in the ancillary services market for frequency regulation and reserve power) would be beneficial in reducing the risk for new, low-carbon generation and storage plants, it must be ensured that the levels and applicability of these payments is carefully set, potentially with respect to particular groups of technology.

What effects will EMR have on the development of capacity for electricity storage?

14. The effect depends on the policy option undertaken. We have considered the options outlined in Redpoint’s analysis:

- Capacity Payments for all low-carbon generators

15. In principle we support capacity payments as a more effective means of ensuring that there is sufficient capacity on the system, which is essential in the provision of security of supply. As much of this new capacity would be the provision of reserve, we expect that this could be provided by energy storage, in small or large-scale.

16. Electricity storage investments are long term in nature, as are most other generation assets, because of the high initial capital cost and long operating life. However while traditional forms of generation can be remunerated by a predictable income stream based on the sale of energy, most storage plants will be remunerated by the price differential between peak and off-peak prices, or by tendering for other services, which is much more uncertain. This uncertainty is reflected in higher hurdle rates for the investment, which makes project viability less likely. The provision of certainty in the form of capacity payments would, as Redpoint suggested in their analysis, reduce the risk premia and make these long-term investments more viable.

- Carbon Price Support

17. Carbon prices have the greatest effect on generators of bulk power. Storage units provide the capability to meet peak power requirements and by their mere availability, enable more efficient operation of networks. Due to their relatively low hours of operation (reserve and/or peak power requirements only, rather than bulk generation) the carbon price has little effect in the transition from carbon-intensive to low-carbon peaking plant. Our calculations show that a £20/tCO2 increase in the carbon floor would add only £1500/MW/pa to the operating costs of a carbon-emitting oil-fired generator in the reserve power market.

- Emissions Performance Standards

18. Emissions performance standards would be designed to affect new fossil-fuelled generators, encouraging the use of CCS, for example. These should not affect storage plants, except for possible applicability to CAES generators. By virtue of their low-carbon generation, these plants are not likely to qualify. On the other hand, the use of CCS to enable fossil-fuelled plants to operate in a low-carbon manner would likely result in less renewable and nuclear generation capacity, hence somewhat reducing the need for storage units in the future.

- Fixed Payments for low-carbon generators

19. Provided that storage units are given similar treatment to other generators, a system of fixed payments (in terms of availability and utilisation) could reduce investment uncertainty. To enable investment, long-term contracts should be available. In the case of storage units, the payment system and method of operation of storage units needs to be considered to ensure the most beneficial operation.

- Contracts for Difference for low-carbon generators

20. The complexity of a CfD could be a barrier to entry, when compared to a capacity or fixed-payment system. As in paragraph 18, the payment system needs to be carefully considered so that the best use can be made of demand-side and storage units, which can substitute a reduction in load for an increased need for generation.

Feed-in-tariffs

21. The use of feed-in-tariffs is often seen as an inhibitor to storage, as the renewable producer claims an income from selling into the network, and leaves the problem of management of any surplus electricity to the system operator or central buying agency. If a self-producer of renewable energy feeds directly into their own storage device, the FIT mechanism needs to be based on the amount of energy fed into the store, rather then the output of the store (the difference is due to the inherent inefficiency of the storage device). An alternative is to create a special FIT allied with a storage device, which remunerates on the output, but at a higher rate. By remunerating the output, it provides an incentive for the storage operator to increase efficiency above that expected by the storage FIT.