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Energy storage has become an area of focus in many jurisdictions across the globe due to its potential to offer a wide range of benefits to electricity systems. This Expert Guide brings together analysis from our legal experts across 22 jurisdictions. Each summary covers the sector’s development and the legal and regulatory environment to consider in the deployment of energy storage projects.As is evident from our survey, a range of energy storage projects have been installed or are due to be deployed in the majority of jurisdictions; and whilst battery technologies are receiving the bulk of industry attention at present, a range of technologies have been, and are due to be, installed, pumped hydro storage in particular.Obstacles remain in the overall regulatory framework in all jurisdictions, however, some projects have been able to overcome these challenges without the intervention of governments and/or regulators, helping to demonstrate how the storage sector’s development could accelerate in an environment where such legal and regulatory barriers are addressed or mitigated.
Why energy storage?
Energy storage offers a range of opportunities for standalone developers, generators, network operators and consumers (ranging from large energy users through to domestic consumers) and other electricity sector participants. Storage is an increasing focus due to the range of benefits the various technologies can provide. The flexibility of energy storage is demonstrated by projects being able to provide some or all of the following to the electricity system:
Energy storage may be used in a range of project types, including standalone, co-located, and behind-the-meter projects.
Standalone energy storage projects are increasingly utility-scale installations. For example, a battery array can provide a range of services, including ancillary services, to the system operator or network owner. This type of project allows for the deferral of network reinforcement works or islanded networks.
Energy storage may also be co-located with generation. In these projects, the energy storage technology will be developed alongside a generation facility. An example of a co-located project could be a solar park developed alongside a battery; in times of high generation or low energy prices, the battery can store the solar-generated power, to be exported later, at the evening peak.
Behind-the-meter energy storage systems can be used to alter a consumer’s demand profile. These systems enable consumers to draw energy from the grid, and store it for later on-site use or to enable better use of any onsite generation, such as rooftop solar.
Energy storage is not new – the scale of pumped hydro deployment across the globe is significant.
The new technologies, however, are technologies that are frequently quick to build out, often have fast response times and have a range of potential applications. There is a broad range of storage technologies, each of which has different advantages and disadvantages which may make them suitable for different applications.Technologies currently being deployed include:
Pumped hydro is one of the most mature forms of energy storage, and is very much in the mix across the globe. It uses electricity to pump water from a lower to an upper reservoir, which then generates power as it flows back down through turbines. While this is suitable for large-scale energy storage, it is reliant on suitable topography.
Compressed air energy storage (“CAES”) runs electric motors to compress air in under- or above-ground facilities and releases it through turbines to generate power. CAES systems are inexpensive and easily scalable, but suffer large energy losses.
Flywheel energy storage functions through using electricity to spin a wheel; slowing the wheel down converts the stored mechanical energy back into electricity. Flywheels have a long lifecycle with low maintenance requirements, but have variable efficiency levels and remain relatively expensive.
Batteries are a key storage technology; they include lead acid, copper zinc, sodium sulphur, flow and, most commonly, lithium-ion batteries. Batteries are increasingly becoming a more efficient and cost-effective method of storage. The cost of lithium ion batteries in particular is expected to drop by 60% by 2020. Batteries are a significant area of focus due to their flexibility of use, fast response times, and co-location and demand reduction opportunities.
Hydrogen Storage uses water electrolysis technology to produce hydrogen, which can then be stored in small amounts in tanks or in larger amounts underground. The stored hydrogen can be burned as a fuel directly in combined cycle gas power plants or re-electrified in fuel cells. Hydrogen is scalable, stable for long periods of time and has a relatively high energy storage capacity, however its efficiency is only around 50% – 60%.
Supercapacitators may be electrostatic or electrochemical. They offer extremely fast charge and discharge time, high maximum power output, and essentially unlimited recharging cycles. However, supercapacitators need to be significantly larger than batteries to store the same amount of power, have less control over discharge voltage, and face high costs.
While there are an increasing number of innovative projects and new ideas for energy storage, pumped hydro and battery storage are the technologies most “in vogue” at present. Of these technologies, lithium-ion batteries appear to be becoming the technology of choice due to their flexibility (both in size and in the range of services they can provide) and falling costs.Energy storage technologies offer enough variety of capacity and discharge times and therefore can offer a spectrum of services, from managing power quality, through to grid support and bulk capacity management.
Our review demonstrates that no jurisdiction currently provides a comprehensive regulatory framework for energy storage, with the majority of jurisdictions currently allowing storage to be defined as “generation” for the purposes of licensing and other regulatory requirements. However, many countries are increasingly aware of the need to address energy storage within the wider electricity regulatory framework and are exploring this through strategy papers, consultations and proposed draft legislation.
Ideally, the development of an energy storage regulatory regime would be technology agnostic and not restrictive at this early stage of development of the sector, in order to avoid creating future barriers to entry. It should also provide for a clear and non-discriminatory system for connection and use of system charges as many regimes do not adequately deal with energy storage in this context at present. A robust regulatory framework would also reflect storage’s unique ability to act as generation and consumption and remove the need to pay end-user electricity consumption charges.
The vast majority of countries do not have a specific subsidy regime. However, there are some exceptions – Germany, for example, has a newly launched battery storage funding programme for decentralised battery storage systems, which aims to ensure that solar PV installations will be more beneficial to the overall system by smoothing their export. While some energy storage solutions are commercially viable without subsidy support, larger infrastructure-heavy projects, such as larger-scale pumped hydro, are currently struggling to attract investment due to the extent of the merchant revenue risk.
The variety of revenue streams available to storage, as detailed above, may help different storage technologies to develop, for example capacity markets, ancillary services and other grid services. However, many revenue streams cannot be stacked together and other system benefits are often not monetised, e.g. the deferral of network reinforcement costs.
The regulatory regime also influences which industry participants are able to participate in energy storage, i.e. the role that network operators should play. In Italy, for example, the transmission and distribution system operators are investing in storage facilities within their own networks, whereas the UK is allowing storage providers to bid into technology-agnostic auctions to provide services to the system operator, rather than the system operator developing energy storage projects directly.
Other legal considerations
As set out above, there are a wide variety of energy storage technologies and applications available. As a result there are a number of legal issues to consider, although the relative importance of such issues will be informed by the specific energy storage project design.
Grid Connection: consideration will need to be given to the grid connection arrangements with the relevant network operator in terms of:
location of the project on the network;
import and export connection capacity requirements;
use of system charging; and
revenue stream requirements e.g. double circuit connection.
EPC & O&M: the contractual protections offered under EPC & O&M arrangements may differ widely depending on the type of storage technology and project configuration. The usual areas that would be subject to negotiation for any EPC/O&M contract would of course be relevant, including caps on liability, bonds/guarantees, insurance, unforeseeable circumstances, default / termination rights etc. Particular areas of interest will be:
the interface arrangements, for example between:
specific technology suppliers and the EPC contractor and whether an EPC wrap is available (covering operating software in particular);
any existing infrastructure e.g. for co-location or behind-the-meter installations; and
the extent and nature of warranties and performance guarantees provided;
the testing and commissioning regime; and
responsibility for decommissioning/disposal at the end of the project.
Consenting: the required planning consents will depend on the jurisdiction and be influenced by the project technology, structure and capacity. Planning authorities may be unfamiliar with newer storage technologies and therefore ensuring the existing processes are fit for purpose will be important.
Land rights: appropriate land rights will need to be secured for the project, the nature of which will depend on the type of storage project proposed and its expected lifetime (for example some pumped-storage projects have an asset life of over 40 years). For leasehold-type land rights, the rental arrangements may influence the usage of the storage project. Some landlords may also require technology-specific protections to be included in the documentation, for example in relation to contaminated land issues.
Environment: each type of energy storage technology will raise different environmental issues which will also be dependent on the legislation of the relevant jurisdiction. For example, pumped hydro projects may require consideration of water abstraction and discharge issues, whereas other projects may need to address hazardous waste issues.
Financing: energy storage projects will require access to financing in order to fund the capital intensive upfront costs of storage plant. Any financing available from public sector sources is typically limited or not substantial in a number of jurisdictions and the procurement of private sector equity and/or debt financing is a challenge. The bankability of the revenue streams of energy storage projects is a key concern for private sector funders. Revenue streams do not typically match the tenor of the financing required by an energy storage project and the accessible revenue streams do not always match the debt service requirements of a private sector financing. Traditional private sector debt providers are also often not used to funding projects which contain an element of merchant risk associated with the revenue streams. Financing structures may also differ to take account of the different types of funding mechanics applied to deliver the relevant project against the backdrop of the particular regulatory and public sector support available as well as the commercial circumstances of the project and its developers. Pure equity funding structures, traditional on-balance sheet debt financing, limited recourse debt financings as well as asset financing structures may all be appropriate in conjunction with (or more likely reliant on) public sector financing or subsidies.
Electricity supply and offtake arrangements: each storage project will need the appropriate commercial arrangements in place in order to enable the supply of electricity to the storage device within the relevant regulatory regime. The structure of such arrangements will also differ depending on whether the storage project is standalone, co-located or behind-the-meter. The onward sale of the stored electricity exported onto the wider system may also be monetised to provide an additional revenue stream to the project.
Existing benefits: while co-located projects offer a range of potential benefits to generation developments, there are issues to consider in relation to:
the eligibility of the project for the existing renewable or other support regimes, such as capacity markets; and
how storage is dealt with within such support regimes e.g. is the efficiency loss included or excluded for such purposes.
A number of jurisdictions are seeking to address the challenges that energy storage faces, for example, by reviewing instances where double charging is discriminating against storage projects unduly.EU Commission, A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy (http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=COM%3A2015%3A80%3AFIN) As energy storage deployment increases, we expect to see:
specific contracting forms and approaches being developed for construction, O&M and financing of energy storage;
energy storage specific rules, regulations and requirements being incorporated into the legal frameworks of many jurisdictions;
costs of storage technologies continue to reduce;
greater flexibility in electricity systems develop as a result of greater deployment of energy storage;
a certain reduction in unnecessary network investment, the scale of which will depend on the extent of network operators’ involvement;
an impact on the demand profile of large energy consumers through the use of storage to avoid peak demand charges; and
the continued development of innovative business models, such as virtual power plants.
How we can help
CMS has been deeply involved in the development of energy storage – including advising on pumped hydro and battery standalone storage, co-located energy storage and generation developments and behind-the meter projects. Further, given our extensive network, we are ideally placed to support developers and funders to develop projects across a number of jurisdictions. We are also at the forefront of advising on accommodating the specific needs of energy storage projects within the legal and regulatory framework of each jurisdiction.