The United Kingdom Takes Giant Steps toward Market Transformation

Coauthored by Marc Bartlett

In July 2017, the United Kingdom’s Department for Business, Energy and Industrial Strategy (BEIS) and energy regulator Ofgem published their Smart Systems and Flexibility Plan. This document outlines the United Kingdom’s next phase in its transition to a low carbon future. It is the result of a long consultation period launched in November 2016 with many different stakeholders. The United Kingdom is making significant progress toward a more flexible energy system by removing barriers, encouraging innovation, and placing the customer at the center of the energy market. The plan is bolder than many other countries’ energy policies and sets a foundation for business model innovation. For example, the United Kingdom could well be the first to introduce a residential transactive energy market.

However, publishing a plan is far easier than implementing one. BEIS and Ofgem must work closely with the industry to ensure the UK energy market transition remains on track, they manage the different aspirations of stakeholders, and consumer protection remains at the top of the agenda. The Smart Systems and Flexibility Plan focuses on three areas: removing barriers to smart technologies—with a strong emphasis on storage—enabling smart homes and businesses, and making markets work for flexibility.

Regulations Adapt to Incorporate Storage

Storage is considered an increasingly important technology for the UK energy market. However, the country’s regulatory environment had not adapted quickly enough to address the specific requirements of storage. For example, since the United Kingdom had no clear definition of storage, its regulatory status was unclear. This uncertainty led to the charging of final consumption levies on storage, despite it not being a final consumer. The Smart Systems and Flexibility Plan also incorporates improved planning and licensing processes for storage, encouraging the colocation of storage with renewable generation and providing more streamlined processes to connect storage.

As regulated, unbundled monopolies, UK distribution network operators (DNOs) will not be permitted to directly own storage. BEIS and Ofgem believe that storage services should be tendered in a competitive market and that if a DNO were to own storage, it could hinder innovation and market developments. Yet, there is also an argument for DNOs to become suppliers of last resort. In this case, they would be permitted to provide and own storage where open markets fail to attract investment. BEIS and Ofgem have yet to finalize their plans for storage and will publish further guidance on unbundling storage services from DNO operations.

Smart Households to Play a More Active Role in the Future Energy Market

Demand-side response (DSR) will play a significant role in future UK system flexibility. At present, there is no technology to support residential DSR. However, the nationwide smart meter rollout will provide this foundation. Smart metering will allow half-hourly settlement, enabling the creation of time-of-use and other tariffs that shift peak demand. Household appliances and EV smart charging points will be the primary loads targeted in residential DSR programs. The government has stated its intention to work with industry, appliance manufacturers, and other countries to develop a common standard to ease the incorporation of these loads into DSR programs.

Barriers to New Business Models Will Be Removed

The plan acknowledges the need to evolve existing roles and responsibilities so networks are efficiently managed and barriers to new technologies or business models are removed. It specifies regulated monopolies’ need to plan, engage with new businesses, and explore the use of markets to solve issues. The days of the asset-focused DNO are numbered. These businesses will transform into system orchestrators that create platforms to interact more closely with service providers, system operators, and transmission network operators.