Why energy storage is imperative and the legal considerations sponsors need to consider when developing an energy storage project
Tuesday, 25th October 2016
Historically, supply and demand on the national electricity grid largely balanced itself because power plants would not generate if there were no buyers for their electricity. Market forces helped balance supply and demand. However, the government incentive-led boom in renewable energy generation (both in the form of direct generation subsidy and various tax-based incentives) has upset this market-driven balancing model. The generative ability of two key (and widely implemented) renewable energy technologies - solar and wind - is a hostage to the weather and (in the case of solar) the day-night cycle. Neither the weather nor daily rotation of the earth care for the economics of supply or demand: the inevitable consequence is that there are occasions when supply outstrips demand, or demand is high when there is reduced generative ability.
The National Grid system needs to remain balanced and can itself neither store nor generate energy. Therefore in recent times, to balance the grid, the National Grid has relied upon paying energy generators to cease generation or call on other (often non-renewable) generators of energy to increase generation as required.
However, the traditional energy generators that have historically been used to help balance the National Grid in times of under-supply are decreasing in number - more than 8.4GW of generating capacity produced from coal-fired power plants has been removed in 2016 alone. The intermittent nature of renewable energy means that it alone cannot be relied upon to fulfil electricity requirements.
The recent Invitation to Tender issued by National Grid Electricity Transmission (ITT) goes some way towards trying to solve the difficulties created by the changing generation mix in our energy market structure. The ITT seeks suppliers who can provide, pursuant to four year contracts, up to 200MW of power on an enhanced frequency response (EFR) basis, and can provide 100% active power output within a second of registering a frequency deviation. The service will be required for up to 30 minutes at a time. Projects must be between 1MW and 50MW.
Whilst the ITT is technologically agonistic, the National Grid has reported that - of the 1.3GW of capacity offered in the expressions of interest - some 888MW are predicated on battery technology. Little wonder therefore that there are claims that battery storage is about to "come of age" and enter the large-scale, commercial market.
Bidders will need to ensure that they have developed a solution which tackles a number of legal issues, including:
1. Code compliance - correctly identifying the correct codes should be the subject of in-depth legal analysis because the codes will dictate certain technical and legal requirements for a project. Whether the asset will be connected to the distribution or transmission network will determine whether the Distribution Connection and Use of System Agreement or the Connection and Use of System Code applies (respectively).
2. Licencing - as "energy storage" is not recognised as a self-standing concept under existing electricity legislation, some energy storage projects could be classified as "generators" (which will not be without complication). Bidders will need to ensure that they have adequate licencing arrangements in place (or are in a position to delegate the responsibilities), or can benefit from relevant exemptions, such as the small generator exemption.
3. Brexit - as with many sectors which have been regulated to any degree by the European Union, sponsors of energy storage projects will be keen to learn how regulatory framework is affected by Brexit, especially whether the codes being developed by ENTSO-E will be binding on UK operations.
4. Property rights - the bidder will need to ensure that it has the rights it requires in order that it may deliver the project once its tender is accepted by the National Grid. Has the sponsor protected itself by obtaining options for leases and options for easements?
5. Contracts for the delivery of storage solutions - there is debate as to whether the Housing Grants Construction and Regeneration Act 1996 applies to contracts for the installation of energy storage, on the basis that the Act does not apply to some "power generation" construction contracts. If the commercial repercussions can be understood and accounted for, it may well be more straightforward to avoid any existential debate and ensure that the contract is drafted to comply with the Act.
A number of the issues above will be familiar to anyone who has worked in the roll-out of renewable energy projects in the UK, and for these issues (such as points 4 and 5) there are bankable, tried-and-tested solutions. Other issues will not so easily be resolved due to the innovative nature of these projects, and project sponsors would be well-advised to find those legal advisers with a track record of finding innovative, risk-assessed solutions.