REA response to DECC Consultation on Ensuring Regulation Encourages Innovation

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1 REA response to DECC Consultation on Ensuring Regulation Encourages Innovation The Renewable Energy Association (REA) is pleased to submit this response to the above consultation. The REA represents a wide variety of organisations, including generators, project developers, fuel and power suppliers, investors, equipment producers and service providers. Members range in size from major multinationals to sole traders. There are over 750 corporate members of the REA, making it the largest renewable energy trade association in the UK. Introduction The REA s members are inherently connected to and impacted by, any changes in the energy market as they operate across the industry, from supplying energy to customers through to generating the power and manufacturing the equipment to generate it. The market has been affected by rapid change in recent years as new technologies and business models emerge, such as community ownership, and it is very likely that the pace and scope of change will accelerate in future years. DECC, and Ofgem with their own package of work, should be given recognition for identifying that changes are likely and taking steps to prepare in advance for these. We would like to point out that many of the changes envisaged that are seen as challenging can already be observed in comparable markets. This includes significant community energy ownership in Denmark and Germany and energy storage playing a significant role in the US power markets. Overarching principles for effective regulation The REA would like to make some observations on the broad themes as opposed to detailed commentary, which others would be better placed to provide. The consultation document refers to welcoming general views on the overall theme, which we aim to provide rather than answer every question. We believe that the best way to prepare for potentially far-reaching changes to the energy market, much of which cannot be foreseen, is to adopt a series of guiding principles, prior to more detailed policy implementation, which will only be possible once the full changes requiring regulation are known. As such, we propose the following high-level principles: - Ensuring as simple and non-technical a framework as possible The current complexity of the energy market (for example the hundreds of pages of the Balancing and Settlement Code) acts as a barrier to entry to new entrants and business models. Any new entrant must either take considerable time and internal cost to understand the complex market 25 Eccleston Place Tel: Victoria, London SW1 9NF

2 operational procedures, or pay a consultant to do this for them. While many sets of rules can also be difficult and complex to change, with existing players more able to make changes. There is clearly a case for simplifying much of the energy market s regulatory and technical framework, although we recognise that much of the framework cannot be changed, for very good reasons. More use could be made of sleeving and Licence Lite type of approaches which allow participants to enter the market while not requiring them to engage with the full regulatory framework. Albeit the present model of Licence Lite has had less uptake than hoped for and effectively relies on an incumbent licensed supplier to offer their services at a reasonable rate. This framework needs to enable competition and synergy at the utility/grid level, commercial level and domestic level. - Appropriate intervention Some business models and policy areas will require more regulation and complexity than others and the level of market intervention should match this. For example energy storage technologies could be incentivised with only a few significant changes to the current system, but should not be subject to overly-onerous regulations that risk stifling the technologies early. - Ensure Flexibility Any regulatory regime aiming to respond to and enable new business models and unexpected changes must by its very nature be flexible and able to respond quickly to changing conditions. - Enhance Competition The new structures must encourage and support the growth of renewables at utility scale, commercial scale and domestic scale. A critical component of this is to enable technologies which match demand with supply and all players in the supply chain at grid level (eg National Grid/DNOs), by commercial users/generators and also domestic consumers/generators. It needs to be equally possibly to introduce demand response/storage capability at all levels in the supply chain. Energy storage in the energy system of the future One of the biggest changes to the system will come from the roll out of costcompetitive energy storage technologies in the UK market. More information should be gathered on this given the potential benefits such technologies can bring. Energy storage can help balance the system, avoid costly grid reinforcement expenditure and enable the deployment of more renewable energy on the system. For example, storage technologies could be deployed at wind and solar farms to help smooth out the export of power on to the grid and avoid balancing system costs. Further benefits of storage include: Storage technologies could decrease the need to invest in new conventional generation capacity, resulting in financial savings. Additionally, they would reduce emissions especially from electricity generation. Increasing energy security by optimising the levels between supply and demand, thus reducing the need to import electricity via interconnectors. 2

3 They can also provide system stability and increase reliability of supplies during electricity outages by supplying energy at these times and reducing the financial costs of power outages. Utilisation of storage also means less reinforcement of networks is required and these can be less expensive when required. Energy can be stored when prices are low and utilised when they are high to save consumers and businesses money on their bills. Large amounts of storage technologies can significantly reduce energy loss during transmission and distribution as the energy can be used closer to the source of generation. Storage technologies can reduce the usage of fossil fuels, enabling a greener energy supply mix. We see energy storage playing a role in the following ways: Domestic storage: consumers and businesses install energy storage systems and store power from microgeneration when they are not using any electricity, then using the power when they need it instead of buying it from the grid. In the near future such systems will interact with electric vehicles (EVs) as well, effectively creating a domestic microgrid whereby renewables, EVs and storage work together (for example unused EV charge uploaded to the home energy storage unit, and the storage unit directly charging the EV.) DNO/Grid Operator led storage: At the large scale, storage systems being installed instead of or in addition to, grid reinforcement (ie infrastructure in the ground) to enable the continued operation of the network when changes such as increased distributed generation are introduced. These installations can also provide technical services/benefits such as frequency response and voltage rise response. In the USA, grid operators have been mandated to install storage capacity in some markets, and receive higher payments for ancillary services, which reflects the value put on energy storage services. Co-located storage at renewable energy installations: In a market increasingly constrained by grid connection capacity and with variable renewable generators facing increased balancing system costs, projects will increasingly be incentivised to install energy storage at their generation projects to avoid punitive charges even as a requirement to be able to construct the project. In the UK, reforms to the Capacity Market to avoid over-penalising storage projects, and DNO regulations, to enable these companies to feed electricity back onto the network, are required, among a range of measures, to enable storage to fulfil its potential. The REA has a dedicated Energy Storage industry group whose members include both storage development companies and renewables developers and we would be very happy to engage further on the possible applications and development of this sector in the UK. 3

4 Other areas to address: With respect to local energy, we also see the emergence of commercial energy provides operating ESCos (in addition to community energy and municipal energy offerings) Heat Networks We support the growth of heat networks. These may be operated by private organisations (commercial or not for profit housing associations) or public organisations (eg local authorities). Overtime, there may need to be some light touch regulation as these start to complement the existing electricity and gas networks. Early work on consumer protection will need to develop as this technology becomes more widespread. The recent funding announcement was welcome however more discussions are needed on how to support heat networks going forward. Local Authority Involvement Local authorities could play a key role in enabling a shift to new energy market business models and should be enabled to do so. At present the community ownership space in particular does not make enough reference to the power of these organisations and the vital role they could play. Prosumers The UK and international energy markets are increasingly moving towards pro-active consumer engagement with energy on an everyday basis. This includes the range of distributed generation, coupled with energy storage, electric vehicles and smart appliances. As new entrants such as technology companies examine this market there could be fundamental changes ahead consumers need to be enabled and encouraged to do the right thing for sustainability and system security reasons, while the most vulnerable in society are protected and not left behind. The impact of Decentralised Energy Decentralised energy will be a game changer for the UK energy landscape and could usher in a brave new world for the industry. There are many areas requiring action. At present there is insufficient centrally held data on the contribution of decentralised energy sources, and we hope this will improve with National Grid s moves to require DNOs to report on Distribution network generation in coming years. Generating power at hundreds of thousands of sites rather than a few centralised points, has huge benefits in terms of reduced energy losses getting the power to where it is used, increasing security of supply by reducing reliance on just a few very large sources of energy, and spreading the economic benefits of energy production more evenly around the country. In essence we are moving to a world where everyone plays a part in the energy system, rather than a handful of players. This will be challenging but offers great potential, there are already 600,000 solar PV installations and countries such as Australia have far higher rates of penetration, with a quarter of households, or around 1.3 million homes, benefitting from solar panels. It is estimated by JP Morgan 4

5 that approximately half of Australian homes could install a domestic energy storage system. There is nothing stopping similar levels of uptake in the UK in theory, especially if solar continues its march towards grid parity when installing solar will become a no brainer for most homes and businesses to install and other technologies such as onshore wind could follow suit in reducing costs. Developments in the storage industry, such as Tesla s entry to the domestic market, will also accelerate the adoption of storage. Prices of domestic storage systems when combined with solar systems have come down by roughly 75% in the past couple of years. Conclusion If the system is designed and regulated in appropriate ways, we can lead the transition to a low-carbon, lower cost and more participatory energy system. We look forward to engaging in this process further and are happy to answer any further questions or discuss further. REA February