REA response to Commons Energy & Climate Change Committee Inquiry into Low Carbon Infrastructure

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1 REA response to Commons Energy & Climate Change Committee Inquiry into Low Carbon Infrastructure 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 and the only such body to cover heat, transport, power and energy storage. Introduction A network infrastructure that is fit for purpose must ensure and enable a pathway to a low-carbon UK energy system, which requires significant innovation and change, but will create significant benefits. The REA believe that network infrastructure needs investment in order to deliver low carbon energy in the UK and meet our climate change obligations, however this should be done in the most appropriate way. The grid network has become one of the principal impediments to the connection of renewable energy generation in the UK. We are rapidly approaching the position whereby the local network owners (Distribution Network Operators, or DNOs ) are unwilling and in some cases unable to connect new projects to the network because the log jam of projects offered connections exceeds the local available network capacity. This results in grid offs being offered that are high cost and/or late delivery and otherwise unacceptable to developers and funders. Ultimately this will pose and the authorised capacity expenditure for new projects, and this risks progress towards our legally binding renewable electricity targets. There is a real problem with how DNOs manage grid capacity at present - many of the connection offers handed to developers will not be taken up as part of natural project attrition rates, high costs to connect, significant time delays or planning uncertainties, and now in particular with the upcoming removal of subsidies for both large-scale solar and onshore wind projects this add a further level of concern. However such projects that are progressing through the connections process are currently considered by the DNOs to be reserved capacity and therefore the capacity is not available for new projects to utilise. We are aware that the DNO s and industry participants are currently reviewing capacity queue management noting that a more pragmatic approach is needed which would allow the DNOs to take a more realistic approach to calculating available spare capacity. This would not involve The DNOs are also reviewing a methodology for reviewing and potentially taking back any grid connection offers that are not going to proceed to build out by reviewing offers, but rather a new way of assessing the offers already handed out. This would not result in added expenditure as it simply involves the reassessment of capacity considered likely to be used. 25 Eccleston Place Tel: Victoria, London SW1 9NF

2 We would suggest that in the unlikely event that all offers made progress to build out, the DNO could make a reopener business case to Ofgem (under the RIIO ED1 business cases) to bring forward their future expenditure. For new projects, a new system of handing out grid offers is required which incorporates project milestones and ties developers to reasonable progression, rather than not developing sites with grid connection offers. There would need to be consideration given to projects with grid connection offers 4-5 years in advance however, and those bidding for a CfD, which may have to wait multiple auction rounds before receiving support. Such offers could have a sliding scale of payments and time periods for example an application for connection in three years time would attract a higher fee, with stages payable every year than an application made for nine months time. This would lessen the upfront cost to renewables developers in a world where support contracts are not guaranteed for particular projects (CfDs are allocated via auction and FiTs proposals are for a quarterly cap on projects). It would also mean developers could reconsider whether to keep the grid application live each year. The REA sees this as a measure which could be introduced at no cost to the taxpayer, which could increase future deployment, particularly solar PV on buildings, using largely existing regulatory instruments. The REA also has a range of policy recommendations for encouraging energy storage, a key enabler of low carbon generation and critical component of the future grid network. These include the ability to apply for 15 year Capacity Market contracts, allowing DNOs to operate storage technologies and the possible provision of tax incentives- please see Annex A for further information. Answers to specific inquiry questions What are the limitations of today's electricity infrastructure and how can these limitations be addressed? Today s system was designed for a centralised generation world, with large amounts of power being generated at a small number of sites and moved to another point of consumption using significant infrastructure. This results in considerable inefficiencies, with a recent study suggesting 54% of the power generated is lost between generation and consumption, equating to over 9 billion of waste. If half of current centralised thermal generation was instead directly connected at the distribution level near demand, the avoided transmission losses would save energy users 135 million annually, the report suggested 1. The limitations can be addressed by moving to a decentralised, distributed generation network, with supply sources located more closely to demand, and more flexible demand side response and energy storage infrastructure. 1 ADE, 2015, Less Waste, More Growth, Boosting Energy Productivity, 2

3 In addition, the self-governing codes used to make changes in parts of the industry is not fit for purpose as they exclude distributed generators from decision making votes, which only include the DNOs and very large (50MW+) generators. This is a situation the REA has been campaigning to improve, to allow trade bodies and smaller generators a vote on changes, Ofgem consulted on the issue but have yet to publish any outcomes, but it is clearly an unsustainable situation whereby DNOs can propose and vote on their own changes without opposition (Ofgem have the final say on any changes but generally nod through the DNOs proposals partly due to the complex technical nature of many changes). This issue was also identified by the CMA in its Provisional Findings on the energy market 2. What will a low carbon network look like, what are the challenges for Government and other bodies in achieving it, and what benefits (environmental, financial or otherwise) will it bring to the UK? A low carbon network will bring about enormous benefits for the UK, economically as well as environmentally. Energy storage should play a major part in the network of the future. Storage technologies can offer a range of benefits including deferred grid reinforcement, voltage optimisation and frequency response, all of which allow the grid to be effectively managed in a low carbon system. How can we ensure that a low carbon network is designed and operated fairly and in a way that helps to minimise consumer bills? A System Architect grid model could assist in this. This is a model used in Denmark and Germany to great effect and results in lower costs for customers connecting to the grid. Our points regarding the need for fair, open access self-regulatory procedures apply here generators should be given a fair say in changes to the DNO system charges and technical standards. How can we ensure that grid connections are readily accessible across the country and that costs are fair? A more coherent, strategic approach to grid reinforcement is required, which would enable investment to be made ahead of time and in advance of need. This approach is taken in other countries and would better ensure access to the grid for all. This would require a review of transmission and distribution strategy to encompass not only centralised generation but also set in place an infrastructure to accommodate distributed generation. What are the key technologies available today and how effectively do Government and Ofgem incentivise innovation and development of the grid and grid technologies? There are several energy storage technologies commercially available today and several more nearing commercial deployment. We advocate for a technology 2 CMA, July 2015, Energy Market Provisional Findings report, https://assets.digital.cabinetoffice.gov.uk/media/559fc933ed915d /emi_provisional_findings_report.pdf 3

4 neutral approach that would create a level playing field for all energy storage technologies to compete on. There are particular steps which could be taken to encourage and support energy storage, including altering the rules of the Capacity Market to offer long term (15 year) contracts for new storage capacity (in line with those offered to new build conventional power plants), which would allow finance to be secured by such projects. The positive news is that few are calling for a Feed-in Tariff for storage in the sector and this should be welcome in the current context. Energy storage technologies (batteries and pumped hydro for example) have been around for decades in the UK but require an appropriate policy framework to deliver. What impact will changes to the electricity system including distributed energy generation/storage, demand response and interconnection have on the role of National Grid and the Distribution Network Operators? (e.g. in terms of ownership structures, responsibility for system balancing and system security) A wholesale change can be expected but this will not be as damaging as some have suggested. We currently generate around 20% of our electricity from renewable sources and this must increase to 30% by 2020 to meet our legally binding targets. Much of this is distributed or embedded on the distribution network and hidden from the transmission network. Much better communication is required between the National Grid and DNO companies on what is being generated on an embedded basis, as this is recognised to be inadequate at present. In fact the problems here have caused problems for many generators who are told they can connect to the grid only to be told at the very last minute that there is no transmission grid network capacity available, requiring major upgrades at a cost which makes their project unviable. This is known as the Statement of Works process and while initiatives are being taken to address the problem, the issue remains. What lessons can be learnt from low carbon electricity grids from other countries? Denmark and Germany have a system architect model which identifies future system needs for low carbon infrastructure and plans accordingly. Such an approach pre-empts investment requirements for the grid and gives clear signals to developers and generators on a locational and strategic basis. We would welcome the opportunity to discuss any of our response in more detail. REA 20 October

5 Annex A Policy Recommendations to encourage energy storage in the UK - Allowing energy storage and DSR projects to access 15 year Capacity Market contracts, in line with those available to new-build conventional power plants - Providing tax breaks, such as Enterprise Investment Scheme (EIS) and Enhanced Capital Allowances (ECA) support - High-profile Government support to provide investor confidence, such as an energy storage capacity target - A shift in mindset from Government and more internal DECC resourcing for energy storage - Market education and information on the different storage options and their potential - An agreed definition for Energy Storage to be used across Government and stakeholders - Amending existing rules to enable energy storage technologies to be operated and owned by DNOs, as at present they cannot put power onto their networks and this therefore prevents them operating storage devices which charge and discharge - The development of technical standards for installing and using energy storage systems, to prevent cowboys entering the market and harming perceptions. The REA have begun leading this work 5

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