Government must incentivise energy storage and demand side response

The Government should redesign its Capacity Market—a subsidy scheme designed to minimise the risk of electricity blackouts—to incentivise innovative energy storage and demand side response (DSR) technologies that could make our energy grid cleaner, more flexible and secure, the Energy and Climate Change Committee says.

Chair’s comments
Launching the Committee’s final report, its Chair Angus MacNeil MP, said:

“The Government must get a move on and encourage the energy market to embrace smart technological solutions like energy storage and demand side response. There is an incredible opportunity for the UK to become a world leader in these disruptive technologies. Yet our current energy security subsidies favour dirty diesel generation over smart new clean tech solutions. Getting Demand Side Response right will empower consumers, reduce bills, ease pressure on the grid, and lower carbon dioxide emissions. Energy storage is a vital keystone in building a clean electricity system. It will mean we won’t have to wait for the sun to shine or the wind to blow to get our energy from renewables. We can generate electricity, store it and turn it on when it’s needed. If current regulatory barriers to storage were removed, some £7bn per annum of savings to consumers could be achieved.

The Government needs to tackle the issues making the economics of energy storage and demands side response challenging. We need to learn from California where strong public financial support and clear legislation have helped develop a storage industry and integrate storage infrastructure into the grid.”

Energy storage
The Government must move quickly on addressing regulatory barriers faced by energy storage: there must be a clear definition for storage, an end to double-charging, and a separate asset class for grid-level electricity storage established. The Committee further recommends that the Government sets out a high-level public commitment to making the UK a world-leader in storage and sets a storage procurement target for 2020. The last two capacity market auctions have failed to deliver any energy storage. The Capacity Market should be redesigned to incentivise both energy storage and demand side response. The Government should also consider a possible subsidy framework for energy storage to accelerate deployment.

Demand Side Response
DSR can reduce costs to consumers, cut carbon emissions and improve the efficiency of the entire energy system, but unfair bid bonds and the length of contracts available under the Government’s Capacity Market are currently disadvantaging DSR providers in favour of more polluting new build power stations. The market should be given a clear signal that DSR capacity is a strongly preferred alternative to diesel generation plants. And both Government and Parliament should become beacons of good practice by demonstrating the use of flexible demand solutions across the Government and Parliamentary estates.

Implications of exiting the EU
The short-term impacts of the vote to leave on electricity and gas supply appear to be limited. But the vote to leave has reduced already-weak investor confidence in the energy sector, which Government must address by publishing its Emissions Reduction Plan. EU energy and climate change policies have historically played an important role in underpinning UK policy and providing a ‘double-lock’ to decarbonisation commitments. Nevertheless, the UK’s departure from the EU is not expected to change the general direction of UK energy and climate change policy, since this is driven by the Climate Change Act 2008, and domestic concerns about security of supply and affordability.

In the longer term there are concerns that the UK’s departure from the EU could end its involvement with coordinated actions and processes, such as the EU’s proposed ‘solidarity principle’—a policy designed to ensure that Member States receive immediate assistance in the event of a gas supply crisis. The Committee urged Government to examine how the UK can continue to participate in this and urgently investigate alternative back-up arrangements to ensure security of supply in the event of a crisis. The Committee also heard from stakeholders that remaining within the EU Emissions Trading Scheme (ETS) and other European energy arrangements like the Internal Energy Market could allow us to avoid costs and retain benefits as the UK leaves the European Union.

EU Emissions Trading
The EU ETS is seen as one of the most important policy instruments for the potential reduction of greenhouse gases in Europe. Emissions trading will account for 50% of the UK emissions reduction required by 2020 under the Climate Change Act. UK-based energy intensive industries in construction product manufacturing tend to be part of large European or international companies, so leaving the EU ETS would be highly complex in terms of their carbon trading policies. Improvements in the System, such as clearer price signals and improved governance, are due to be introduced in phase IV (from 2021 onwards).

Decisions about the next phase, applying from 2021 to 2030, would be made in 2017 when the UK as an existing EU member could still play a full part in negotiations and decisions. The Committee warned there would be complex challenges associated with alternative options. These include the potentially costly and complex option to establish a UK ETS linked to the EU System, or the politically difficult creation of a direct carbon tax. Government must consider the impact of any alternative approaches on consumers and the competitiveness of UK industry.

Retaining EU-derived laws
EU-derived legislation retained in UK law will need to be reviewed and amended in the light of the UK’s relationship with the EU once it has formally left. It is essential that Parliament has adequate time to fully scrutinise any proposed legislative changes. There are also questions about how relevant such laws will remain once the UK is no longer in the EU, and how enforceable they will be when the directives from which they are derived no longer apply and there is no longer any recourse to the European Court of Justice.