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ukpowernetworks.co.uk
Smarter Network Storage - business model consultation
2 | Smarter Network Storage - business model consultation
4.InvestmentModelTemplates 65
4.1. TemplateIntroduction 66
4.2. ModelSpecification 66
4.2.1. Structure 66
4.2.2. Inputs 68
4.2.3. Calculations 70
4.2.4. Outputs 71
4.2.5. Assumptions 74
4.2.6. Limitations 75
4.3. BusinessModelInsights 75
4.3.1. DNOContractedModel 75
4.3.2. ContractedServices 75
4.4. ConsultationQuestions 76
Appendix1TheValueofStorage 77
LocalSecurityofSupply(SOS) 78
FirmFrequencyResponse(FFR) 78
ShortTermOperatingReserve(STOR) 78
EnergyArbitrage 79
EmbeddedBenefits 79
OtherDNOServices 79
CapacityPayments 79
AncillaryServiceExclusivity 80
ExecutiveSummary 4
1.Introduction 11
1.1. WhatdoesUKPowerNetworksdo? 12
1.2. TheSmarterNetworkStorageProject 12
1.3. AimsandScopeoftheConsultation 14
1.4. TheValueofDistributionConnected
ElectricalEnergyStorage 17
1.5. ThePotentialBenefitsofaWider
RolloutofDistributionConnectedEES 22
1.6. HowtoRespond 23
2.BusinessModelsforStorage 24
2.1. BusinessModels 26
2.1.1. DNOMerchant 28
2.1.2. DistributionSystemOperator 30
2.1.3. DNOContracted 34
2.1.4. ContractedServices 37
2.1.5. ChargingIncentives 39
2.2. QualitativeAssessmentSummary 41
2.3. RegulatoryTreatment 44
2.4. AccountingTreatment 46
2.5. ConsultationQuestions 46
3.LeadBusinessModels 48
3.1. DNOContracted 49
3.2. ContractedServices 55
3.3. Variants 59
3.4. SecureCapacityWindows
&TollingContractTerms 61
3.5. Comparison&Conclusions 63
3.6. ConsultationQuestions 64
Contents
Smarter Network Storage - business model consultation | 3
Figures
Figure1 BusinessModelKeyFeatures 6
Figure2 LeightonBuzzardReinforcementOptions 13
Figure3 StorageProjectSchematicCostComparison 18
Figure4 ConsultationQuestions 25
Figure5 BusinessModelKeyFeatures 26
Figure6 DNOMerchantModel 28
Figure7 DNOContractedModel 34
Figure8 ContractedServicesModel 37
Figure9 QualitativeAssessmentSummary 43
Figure10 RegulationOptions 44
Figure11 DNOContracted:ContractualStructures 50
Figure12 ContractedServices:ContractualStructures 56
Figure13 DNOandThirdPartyOwnershipVariants 60
Figure14 InvestmentModelTemplateSchematic 67
Figure15 ModelInputCategories 69
Figure16 GenerationCapacity
andSystemInefficiencies 70
Figure17 AssetUtilisationSplitSummary 71
Figure18 TraditionalReinforcement
andStorageOptionCostComparison(£) 72
Figure19 ProjectProfitabilityChecks 72
Figure20 RangeofFeasibleTollingCharges
(Cumulativeoverlife-timeofproject) 73
Tables
Table1 BusinessModelAdvantages
andDisadvantagesSummary 8
Table2 SNSProjectAncillaryBenefits 20
Table3 QualitativeAssessmentCriteria 27
Table4 DNOMerchantModel
QualitativeAssessment 29
Table5 DSOModelQualitativeAssessment 33
Table6 DNOContractedQualitativeAssessment 36
Table7 ContractedServicesModel
QualitativeAssessment 38
Table8 ChargingIncentivesModel
QualitativeAssessment 40
Table9 QualitativeScoringMatrix 42
Table10 ExampleDNOContractTolling
AgreementHeadlineTerms 52
Table11 ExampleContractedServices
TollingAgreementHeadlineTerms 58
Table12 AlternativestoTollingAgreement
HeadlineTerms 62
4 | Smarter Network Storage - business model consultation
Executive Summary
Smarter Network Storage - business model consultation | 5
technology-type toSNS. This Consultationwill complement
existing studies on the macro-economic benefit of storage,
suchasthosefromImperialCollegeLondon1andtheEnergy
Research Partnership2, and will inform how these might be
achievedinpractice.
ThekeyfeaturesofthetechnologiesthatthisConsultationis
applicabletoare:
• Technology:Electricalenergystorageincludingforexample
lead-acid, lithium-ion, flow and sodium sulphur batteries.
Mechanicalstoragecouldalsobeapplicable.
• Size:Generationcapacityofbetween1MWto10MW,with
storage capacity equivalent to between one and several
hoursofgeneration.
• Location:Distribution-networkconnectedatEHV(ExtraHigh
Voltage)orHV(HighVoltage).Wehaveconsideredbusiness
cases for projects that are located at similar voltages in
distributionnetworks.
• Primary need: The primary need is for mitigation of a
distributionnetworkconstraintthatwouldotherwiserequire
reinforcement. This could be related to network security,
statutory voltage limits or fault-levels. We consider cases
wherethisisamajordriverofthebusinesscase.
• Technology and proposition maturity: Future storage
developments,fromthefirstpost-LCNFundprojectstoafuture
worldinwhichEESformspartofBusinessAsUsualforDNOs.
The consultation closes on30th September 2013. Interested
partiesshouldseeSection2.5forasummaryofquestionsand
instructionsonhowtorespond.
InDecember2012,UKPowerNetworkswasawarded£13.2
millionof funding fromOfgem’s LowCarbonNetworks Fund
(LCNFund)fortheSmarterNetworkStorage(SNS)Tier2project.
TheSmarterNetworkStorageprojectwilldevelopandutilise
6MW/10MWh of advanced electrical storage technology to
support the local distribution network while exploring the
potential commercialopportunitiesassociatedwithproviding
balancing energy through the wholesale electricity markets,
andancillaryservicestotheSystemOperator,andtheextentto
whichmultipleservicescanbeprovidedsimultaneously.
1.ConsultationScope
Aspartofthisproject,UKPowerNetworksislaunchingaConsultation
ontheviablebusinessmodelsfordistributionscaleElectricalEnergy
Storage(EES).Weaimtodemonstrateandtestour thinkingon
the possible business models for energy storage, including the
advantagesanddisadvantagesoftheoptionspresented.
The purpose of this Consultation is to gather views from
all interested parties on the possible business models for
distributionconnectedEESasproposedbyUKPowerNetworks.
TheConsultationalsoseeksassurancefromstakeholdersand
subject matter experts that all significant cost and revenue
streamshavebeenaccountedforinthebusinessmodels.We
areseekingviewsonthemicro-economicbusinessmodel:
the business model for a particular installation of energy
storage, from an investor or ‘controlling entity’ perspective.
We are considering the suitability of the business models
for projects of a similar distribution-scale and of similar
1 Strategic Assessment of the Role and Value of Energy Storage Systems in the UK Low Carbon Energy Future, Energy Futures Lab, Imperial College, EDF UK R&D, 20122 The future role of energy storage in the UK, Energy Research Partnership 2011
6 | Smarter Network Storage - business model consultation
2.BusinessModels
We considered five broad categories of business model in
Figure1.
Figure 1 Business Model Key Features
Fullmerchantrisk,exposedtopowerpriceandbalancingservices
DNOexposedtoincentivescheme
DNOexposedtoconstructionandoperationalrisks
LowcommercialriskforDNO
Noguaranteeofassetbeingbuild
• DNObuilds,ownsandoperatestheasset.Fulloperationalcontrol.
• DNOmonetisesadditionalvaluestreamsdirectlyonashorttermbasis(e.g.trading).
• Possiblebarriers:Costsofaccessingthemarket,DNOskillsandcapabilities,regulationandshareholderexpectationsofrisk.
• DNObuilds,ownsandoperatestheasset.DNOhasfulloperationalcontrol.
• DNOhasDSOrole;coordinatingportfoliosofflexibilityforbothdistributionandwidersystembenefitthroughacentralizedcontrolmechanism.
• DNOcommercialriskisdependantondesignofincentivescheme.
• DNObuilds,ownsandoperatestheasset.DNOhasfulloperationalcontrol.
• Priortoconstruction,longtermcontracts(e.g10years)forthecommercialcontroloftheassetoutsideofspecifiedwindowsareagreed.
• Dependantonthefeasibilityoflongtermcontracts.
• DNOoffersalongtermcontract(e.g.10years)forservicesataspecificlocationwithcommercialcontrolincertainperiods.
• Thirdpartyresponsibleforbuilding,owningandoperatingtheassetandmonetisingadditionalrevenuestreams.
• DNOsetsDUoStocreatesignalsforpeakshavingthatreflectthevalueofreinforcement.
• Barriers:nooperationalcontrolforDNO,thereforenoguaranteeonsecurity.
Model Keypoints Comments
DNOMerchant
DSO
DNOContracted
ContractedServices
Charging Incentives
Incr
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omm
erci
alri
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Incr
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arty
Smarter Network Storage - business model consultation | 7
In the DNO Merchant business model, the DNO takes full
ownershipandoperationof theassetand is responsible for
monetising thevalue fromthewholesaleelectricitymarkets
and ancillary services provided to the System Operator. The
DNOdoesthisdirectlyintherelevantmarketsandthereisno
thirdpartywithadirectrelationshiptotheasset.
Under a DSO model the DNO would own, operate and
maintaintheassetaspartofawiderroleofactivelymanaging
itsnetworkunderaregulatoryincentivescheme,akintothe
role that National Grid plays at the transmission level. The
DNOwouldalso lead thedevelopmentand constructionof
the asset, finance its construction and operation and then
holditsfullcommercialcontrol.TheDNOwouldaccrueallthe
projectcostsandbenefitsandtherewouldbenodirectthird
partyinvolvement.
The DNO Contracted model differs from the DNO Merchant
model due to the involvement of a third party to manage
thecapacityoftheassetwhenit isnotrequiredforsecurity
purposes.TheDNOwouldstillfinance,maintainandoperate
the asset, but would dispatch for ancillary services at the
instructionofathirdparty.
UndertheContractedServicesmodel,theDNOrunsatender
forthirdpartiestobuildandoperatestorageataspecificsite.
The DNO makes a fixed annual payment in return for the
distributionnetworkservicesprovidedbythethirdparty.The
thirdpartymanagesthecapacityoftheassetwhenit isnot
requiredforsecuritypurposes.
TheChargingIncentivesmodelisoneunderwhichtheDNO
ensuresthattheDUoSchargingcreatestherightincentivesin
thelocationrequiringreinforcement.Thirdpartiesmayormay
notrespondtotheincentivesbybuildingstorage.
Asummaryofthepotentialadvantagesanddisadvantagesof
eachmodelisshowninTable1.
8 | Smarter Network Storage - business model consultation
Table 1 Business Model Advantages and Disadvantages Summary
Businessmodel
DNOMerchant
DistributionSystem
Operator(DSO)
DNOContracted
ContractedServices
ChargingIncentives
Advantages
• DNOhasfulloperationalcontrol.
• Maybelowercostoffinancingiffinancedasa
regulatedasset(dependingonrisksharingbetween
DNO&Customers).
• DNOhasfulloperationalcontrol.
• SpecificincentivesonDNOtomanagecostsof
balancingthegrid.
• Maybelowercostoffinancingiffinancedasa
regulatedasset(dependingonrisksharingbetween
DNO&consumers).
• Maybelowercostoffinancingiffinancedasa
regulatedasset(dependingonrisksharingbetween
DNO&Customers).
• CommercialriskforDNOsignificantlydecreased.
• Thirdpartymaybebetterplacedtomanage
commercialvaluestreams.
• Thirdpartymaybeabletoaggregateacrossmultiple
assetswhichincreasesscalabilityandoverallsystem
efficiency.
• CommercialriskforDNOsignificantlydecreased.
• Thirdpartymaybebetterplacedtomanage
commercialvaluestreams.
• Thirdpartymaybeabletoaggregateacrossmultiple
assetswhichincreasesscalabilityandoverallsystem
efficiency.
• DNO(andCustomers)takesnocommercialrisk.
• Incentivesbasedapproachmaybeeconomically
efficient.
Disadvantages
• DNOrequiresnewskillsand
capabilitiestotradeinthewholesale
energymarketandparticipate
inprocurementmechanismsfor
ancillaryservices.
• MaynotbeconsistentwithDNO
shareholderexpectationsofrisk.
• Regulatoryregimenotyetinplace
• CommercialriskremainswithDNO
andCustomers.
• Complextollingcontractrequired(i.e.
aservicescontractbetweentheDNO
andathirdparty).
• Thirdpartymayheavilydiscountlong
termvalueofadditionalrevenues.
• DNOdoesnothavedirectoperational
control.
• Complextollingcontractrequired.
• Thirdpartymayheavilydiscountlong
termvalueofadditionalrevenues.
• Noguaranteeofstoragebeingbuilt.
• NoDNOcontrolonassetbeing.
availablefornetworksecuritywhen
required.
• Thirdpartyexposedtoannual
changestoincentives.
Smarter Network Storage - business model consultation | 9
Impactonassetvalue,costsandrisks
Bothmodelsdependonawell-structuredtollingcontractthat
givesasmuchavailabilitytothethirdpartyaspossiblewithout
compromisingsecurity.Bothmodelsplacetheoptimisationof
thevaluestreamswithathirdpartywhichislikelytohavea
moredevelopedsetofskillsandcapabilitiestogeneratevalue
fromthestoragewithoutimposinghighcostsoftrading,and
dependona thirdparty’swillingness to take long term risk
on the additional value streams. However, under the DNO
ContractedmodelthereismoreflexibilityfortheDNOtoshare
someofthisriskiftheDNOcantakesomemerchantexposure.
A relative advantage of the DNO Contracted model may be
a lowercostofcapital.However thismaynotpersistas the
deploymentofstorageincreasesandtheriskprofileoftheutility
changes.TheDNOContractedoptioncreatesthepossibilityof
sharingtherisk(andadditionalbenefit)withCustomers(ifthis
wasconsidereddesirableforCustomers),whereasthis isnot
easilypossiblewiththeContractedServicesmodel.
Impactonwiderbenefits
Under both models, the tolling contract will need to clearly
specifythetermsonwhichcapacityismadeavailable.Thereis
ariskthatthefullbenefitsfortheGBsystemarenotcaptured
duetoalackofflexibilityintheseterms.
TheDNOcontractedmodelallowsforcompetitionbetween
thirdpartiesintheprovisionoftradingandaggregation.The
third party has the ability to transfer their knowledge and
expertise to develop projects in other DNO licence areas.
UndertheContractedServicesmodel,thethirdpartycanalso
transfertheirexperienceofdesigning,buildingandoperating
other storage assets. Additionally, third parties that have a
portfolio of assets in planning, construction or operation
mayhavealreadyestablishedfairervaluearrangementsand
Afterreviewingthesemodels,weselectedDNOContractedand
ContractedServicesasthetwoleadbusinessmodelsforfurther
consideration.TheDNOMerchantmodelwasexcludedmainly
because of the requirement for the DNO to build a trading
capability and take wholesale market risk. The DSO model,
whileattractiveinprinciplewasexcludedatthistimebecause
the underlying regulation that would define this model has
yettobedevelopedandassuchcannotbecriticallyappraised.
However,werecognisethatanumberofotherLCNFprojects
maybenefitfromthiskindofapproach.Assuch,wedonot
ruleoutthepossibilitythatthisbusinessmodelbecomesmore
relevant in the future. The Charging Incentives model was
excludedbecauseitprovidesnoguaranteeofthestoragebeing
builtor,oncebuilt,beingavailabletoprovidenetworksecurity.
3.LeadBusinessModels
Under the DNO Contracted model, the DNO would own the
asset,whereasunderContractedServicesitwouldbeowned
andoperatedbyathirdparty.
Theleadbusinessmodelsshareacommonconceptofalong
termcontractbetweentheDNOandathirdpartytosharethe
risksandrewardsfromcommercialopportunitiesthatcanbe
capturedbeyondtheasset’sprimaryroleofprovidingnetwork
security.Thetermsforthistollingcontractwouldneedtogive
thethirdpartythegreatestfreedompossibletooptimisethe
value of additional value streams whilst ensuring that the
DNO’ssecurityrequirementismet.
Impactonnetworksecurity
TheDNOContractedmodelgivestheDNOdirectcontroloverthe
operationofthestorage.ThesecurityprovidedbytheContracted
Services model is dependent on the contractual obligations
placedonthethirdparty,andhowitfulfilstheseobligations.
Whilst not as direct as operational control, this model could
providesufficientsecurityifthetermsarewellstructured.
10 | Smarter Network Storage - business model consultation
barriers for these models are shared: the complexity of the
tollingcontractandthewillingnessofathirdpartytotakelong
termriskontheadditionalvaluestreams.
4.InvestmentModelTemplates
Wehavealsodevelopeda template investmentmodel for
each of the two lead business models. These templates
demonstrate how the business case for distribution-
connected EES might be assessed. The investment model
template illustrates the possible financing costs, operating
models and revenue streams in each case, and enables
comparisons across the business models for the same
configurationofstorage.
TheConsultationresponseswillallowtheprojecttoupdate
theinvestmentmodeltemplates,andtounderstandthelevel
ofacceptancefrompotentialbuyersofservicesandthelevel
ofappetite frompotentialstorageowners for thedifferent
businessmodels.Theinvestmentmodeltemplatesareakey
tool intheprojectandoneoftheaimsoftheproject isto
populateanddisseminate thesewith real costandbenefit
figuresbasedonexperiencefromtheoperationaltrials.
contractswiththeprovidersofthesedesign,procurementand
buildingservices.
Under both models, the DNO is able to set terms of the
technologyconsidered, toensure thata lowcarbonsolution
isprocured.
Futureproofingofbusinessmodel
Bothmodels allow for aggregationof thedispatchofmultiple
assetsbythethirdparty.TheContractedServicesmodelallowsone
thirdpartytooperatestorageacrossmultipleDNOlicenceareas.
FromaregulatoryperspectivetheDNOContractedmodelcould
face barriers as theDNOapproaches its present deminimis
non-distribution activity limit, which is 2.5 per cent of the
sumofthelicensee’ssharecapital,itssharepremium,andits
consolidatedreserves.
Based on our review of the lead models, both the DNO
Contracted and Contracted Services appear to be feasible
business models for distribution-connected storage. The key
Smarter Network Storage - business model consultation | 11
Introduction1
12 | Smarter Network Storage - business model consultation
1.1.WhatdoesUKPowerNetworksdo?
UKPowerNetworksowns,operatesandmanagesthreeofthe
fourteenregionalelectricitydistributionnetworksintheUK.Our
licenseddistributionnetworksareintheEastofEngland(Eastern
PowerNetworksplc),London(LondonPowerNetworksplc)and
theSouthEast(SouthEasternPowerNetworksplc).UKPower
NetworksisoneofthelargestDistributionNetworkOperators
(DNOs)intheUK,coveringanareaofapproximately30,000km,
extending from the Wash in the east, through London, to
LittlehamptonontheSussexcoast.Approximatelyeightmillion
connectedcustomersdependonusfortheirpower.
1.2.TheSmarterNetworkStorageProject
TheSNSprojectwilldevelopa6MW/10MWhbattery facility
atLeightonBuzzardprimarysubstation.Thissystemwillhave
thecapabilitytogenerate6MWforapproximately1.5hoursfor
eachfullchargeanddischargecycle,andtochangeoutputlevel
withinafewseconds.Thisisintendedtodelay,orpotentially
avoid the requirement for traditional reinforcement to the
distributionnetworkasdescribedbelow.
LeightonBuzzard substation comprises two33/11kV38MVA
transformers fed by two 33kV overhead Lines (OHLs), each
withawinterratingof35.6MVA.Networksecurityofsupply
standard Engineering Recommendation P2/6 sets out the
minimumdemandthatneedstobemetfollowingthelossofa
circuitdependingonthegroupdemand.Thisrequiresalevelof
redundancysuchthatifonelineweretofail,acertainproportion
ofgroupdemandcanstillbemet.AtLeightonBuzzard,thesite
‘firmcapacity’ –definedas themaximumcapacityavailable
during an N-1 event – is currently restricted by the thermal
ratingofthe33kVOHLandistherefore35.6MVA.
Peak demand at LeightonBuzzard has been above this firm
capacitylimitbetween9and37daysineachofthelastfiveyears
(typicallyduringperiodsofverycoldweather).Theadditional
capacityrequiredhasbeenprovidedbytransfercapacityfrom
InDecember2012,UKPowerNetworkswasawarded£13.2
millionof funding fromOfgem’s LowCarbonNetworks Fund
(LCNFund)fortheSmarterNetworkStorage(SNS)Tier2project.
The Smarter Network Storage project will develop and utilise
6MW/10MWh of advanced electrical storage technology to
support the local distribution network while exploring the
potential commercial arrangements that will support overall
systembalancingandstability,thewholesaleelectricitymarkets
and the viability in providingmultiple services simultaneously.
Theprojectisdifferentiatedfromotherstoragedemonstrationsin
thatitsaimistoundertakearangeofcommercialandtechnical
innovationstoexploreandimprovetheeconomicsofelectrical
energy storage when leveraged for full-system benefit, and
howtheseadditionalvaluestreamsmaysupportviablebusiness
modelsforstorageinthefuture.Theobjectiveistosupportthe
developmentofthestorageindustrytobenefitnetworkoperators
andcustomers,allowingstoragetobenefitanupgradedelectricity
systeminamoresustainableandcostefficientway.
As part of this project, UK Power Networks is launching a
consultationontheviablebusinessmodelsfordistributionscale
ElectricalEnergyStorage(EES).Weaimtodemonstrateandtest
ourthinkingonthepossiblebusinessmodelsforenergystorage,
including the advantages/disadvantages of the options. The
Consultationalsoseeksassurancefromstakeholdersandsubject
matter experts that all significant cost and revenue streams
havebeenaccountedforinthebusinessmodels.
Wearealsoseekingfeedbackonatemplateinvestmentmodel
fortwospecificbusinessmodelsthatwebelievearethemost
likelytobesuitablefordistribution-connectedstorage.These
models demonstratehow thebusiness case for distribution-
connectedenergystoragemightbeassessedforeachbusiness
model.Thetemplateinvestmentmodelillustratesthepossible
financingcosts,operatingmodelsandrevenuemodelsforeach
businessmodel.
Smarter Network Storage - business model consultation | 13
to LeightonBuzzardprimary substation,anda third38MVA
transformer at Leighton Buzzard. This reinforcement would
provide an additional 36 MVA of firm capacity at Leighton
Buzzard,which is significantlyabovepredicted requirements
for the medium-long term. The traditional reinforcement
option, and alternative approach using storage as described
below,isshowninFigure2.
neighbouring sections of the network. Peak demand at this
locationisforecasttocontinuetogrow,andtransfercapacityis
limitedat2MVA,meaningthatlimitsmaybebreachedinfuture
years.Thisisatriggerforreinforcementofthenetwork.
The conventional reinforcement option for Leighton Buzzard
hasbeenevaluatedasathird33kVcircuitfromSundonGrid
Figure 2 Leighton Buzzard Reinforcement Options
GridSupply
ToCustomers
OverheadLines
ConventionalIntervention:
3rdLine
EnergyStorage
Primary Substation 33kV to 11kV
GridSubstation132kVto33kV
PowerFlow
14 | Smarter Network Storage - business model consultation
Theprimarypurposeofthestorageassetistoprovidenetwork
security,andadditionalbenefitsmustbecompatiblewiththis
requirement.
DuringthecourseoftheSNSproject,UKPowerNetworkswill
demonstrate:
1.Deployment and multi-purpose application of large-scale
distribution-connectedEES
2.ImplementationofaSmartOptimisation&Controlsystemin
ordertomanageandoptimisethestorageflexibility
3.Innovativecommercialarrangementstosupporttheshared
useofenergystorage inprovidingwidersystembenefits,
includingstandbyreserveandmanagingfrequency
4.Assessmentandvalidationofthefullvaluethatstoragecan
provide to DNOs and the wider system to support future
businessmodelsforstorage
This Consultation will primarily support the third of these
objectives,asdescribedinthefollowingsection.
1.3.AimsandScopeoftheConsultation
The purpose of this Consultation is to gather views from
interested parties on the possible business models for
distributionconnectedEESasproposedbyUKPowerNetworks.
Therearemultipledifferentownershipandoperatingmodels
thatcouldevolvearoundEES.TheSNSprojectaimstocapture
learning,demonstrateanalysisandprovidethought-leadership
thatwillsupportthedevelopmentofviablebusinessmodels
forfutureelectricitystorageprojectsatthedistributionlevel.
Note that we are not consulting on the business model for
the SNS project itself. The business model and commercial
arrangements for the Leighton Buzzard EES facility reflect a
variationofthe‘DNOContracted’businessmodel,inwhichthe
DNOownsandoperatesthestorage,asdescribedlaterinthis
report. This approach has been designed to ensure learning
Analternativetobuildinganewcircuitandtransformer is to
considerinnovativesolutionsthatwillgiveUKPowerNetworks
theabilitytoreduce(net)peakofftakeatLeightonBuzzardto
maintain demand below the firm capacity rating. This could
taketheformofembeddedgeneration,DemandSideResponse
(DSR),orElectricalEnergyStorage(EES),allofwhichcouldreduce
therequiredofftakefromthenetworkatLeightonBuzzard.The
reductionofpeakdemandcoulddelaytheneedfortraditional
reinforcement foranumberofyears. Thismaybecombined
withincrementalupgradestothenetwork(e.g.reconductoring
of theexistingoverhead lines) to furtherdelayorpotentially
avoidtheneedfortraditionalreinforcement.
Distributionconnectedstorageisstillarelativelynewconceptthat
attractsasetof“FirstofaKind”coststhatwouldnotbeaccrued
tootherestablishedtechnologiesandsolutions.Thesecostsare
expectedtoreduceinfuturewithgreaterdeploymentofstorage.
Ontheotherhand,distributedstoragecanaccessarangeof
additionalbenefitsnotaccessibletotraditionalreinforcement.
Thevalueoftheseadditionalbenefitsrelativetotheadditional
cost of storage governs whether storage is cost effective
comparedtothealternativetraditionalreinforcementoptions.
The aim of the SNS project is to explore how EES can fully
maximise these ancillary benefits. These benefits are above
andbeyondtheresolutionofnetworkconstraintsatLeighton
Buzzard and can both improve the project economics and
advance theuseof storageasa cost-effectivealternative to
networkreinforcement.Theseadditionalbenefitscouldinclude:
• Provisionofpowerqualityservicesonthedistributionnetwork
• Provisionof balancingenergy to themarket andancillary
services to the System Operator to reduce the costs of
managing the GB transmission system with increasing
proportionsofintermittentrenewables
• Reductioninrequirementforpeakgenerationcapacity
Smarter Network Storage - business model consultation | 15
thesearedescribedinBox1.UKPowerNetworksanalysis
has indicated thata reasonableestimate for thepotential
nationalcapacityofsitessimilartotheSNSprojectisofthe
orderof2GWby20403.Thereareanumberofkeyfeatures
whichwillbecommontotheseopportunities:
• Technology: Electrical energy storage including for
example lead-acid, lithium-ion, flow and sodium
sulphurbatteries.Mechanical storage, if scalableandat
similar Technology Readiness Levels (TRLs) could also
be applicable, such as some flywheel systems. Storage
requiring specialist geological requirements, such as
undergroundcompressed-air,areoutofscopeduetothe
differingCAPEXandOPEXrequirements.
• Size:Generationcapacityofbetween1MWto10MW,with
storagecapacityequivalenttobetweenoneandseveral
hoursofgeneration.
• Location: Distribution-network connected at EHV or HV.
Wehaveconsideredbusinesscasesforprojectsthatare
locatedatsimilarvoltagesindistributionnetworks.
• Primary need: the primary need is for mitigation of a
distribution network constraint that would otherwise
requirenetwork reinforcement. This couldbe related to
network security, statutory voltage limits or fault-levels.
We consider cases where this is a major driver of the
businesscase.
• Technologyandpropositionmaturity:weareconsulting
on the business models for future storage developments,
from the first post-LCN Fund projects to a future world in
whichEESformspartofbusinessasusualforDNOs.
canbegained inrelationtoawiderangeof futurepossible
businessmodelsthatmayinvolvethestoragebeingentirely
managed,operatedorevenownedbydifferenttypesofthird-
partyorganisation.Furthermore,thisapproachwillensurefull
transparencyof the valuegenerated fromeach service area
andmakesmosteffectiveuseofexistingbusinesscapability
andoperationalexperienceacrossourprojectpartners.Thiswill
notnecessarilybe typicalof futurestorageand thescope is
rathertoconsiderthefuturebusinessmodelsforstoragethat
aretobedevelopedwithoutLCNFundsupport.
Businessmodels
Thescopeofthebusinessmodelsconsultationisdefinedas:
• Micro-economicbusinessmodel:thebusinessmodelfora
particularinstallationofenergystorage,fromaninvestoror
‘controllingentity’perspective.Thiswillincludealllifecycle
andinvestmentcostsindetailandallowinstallationstobe
compared in terms of economic viability, and sensitivity
analysis.Outof scopeare ‘non-bankable’ societalbenefits
accruingto‘UKPlc’,suchascarbonemissionssavings.These
are relevant to the overall benefits case for storage and
mayinfluencethedesignofpolicyorregulationbutdonot
directlycontributetorevenues.
• Suitable for energy storage projects of a similar
distribution-scale and of similar technology-type to
SNS: in order to restrict the scope of discussions we will
evaluate business models for projects similar to the SNS
project in terms of scale and storage type. We note that
thereareawiderangeofpotentialtechnologies,sizesand
usesofstorageonthedistributionnetworks,someofwhich
arebeingexploredunderotherLCNFundprojects.Someof
3 LCNF Full Submission Pro-Forma. Appendix G, Section 2 http://www.ofgem.gov.uk/Networks/ElecDist/lcnf/stlcnp/year3/smarter-network-storage/Documents1/SNS%20RE-Submission%20+%20Appendices%20Redacted.pdf
16 | Smarter Network Storage - business model consultation
Therangeofscalesandusesofstorageondistributionnetworksrangesfromdomesticorstreetlevelbatterytechnologies,upto
megawattscalestoragethatmaybeusedtoabsorbexcessembeddedrenewablegeneration(exportconstraintmanagement)
ormeetpeakdemandinimportconstrainedareas.Storagemayalsobeinstalledforpowerqualitymanagementpurposes.
Box 1 Storage on distribution networks
ProjectName
Demonstratingthebenefitsofshort-termdischargeenergystorageonan11kVdistributionnetwork
ShetlandandtheNINESproject
CHALVEY
DNO
UKPN
SSEPD
SSEPD
Location
Hemsby,Norfolk
LerwickPowerStation,Shetland
Chalvey,Slough,Berkshire
Description
UKPowerNetworkshasinstalledadynamicenergystoragesystem(ESS)atHemsbyinNorfolk,incollaborationwithABB.ThesystemisbasedonABB’sSVCLightproduct,combinedwithaLithium-ionbatterystoragedeviceandislocatedonan11kVdistributionnetworkwithsomepenetrationofwindpower(http://www.ukpowernetworks.co.uk/internet/en/innovation/documents/Hemsby_Progress_report%20_Oct_2012_FINAL.pdf)
ThisProjectinvolvesinstallinga1MWeconnectedbatteryattheLerwickPowerStationonShetland.ThisProjectwillprovidelearningregardingtheoperationofthebatteryanditsintegrationwithlocalDemandSideResponsetoremovestationpeaksprovidingadditionalDemandcapacity(inasimilarwaytomanaginganetworkloadconstraint).(http://www.ofgem.gov.uk/Networks/ElecDist/lcnf/ftp/sse/Pages/index.aspx)
Thisprojectseekstounderstandthepotentialbenefits,practicalitiesandcostsofinstallingelectricalenergystorage(EES)connectedviafourquadrantpowerconversionsystems(PCS)ontheLVnetwork.Themainobjectiveistoinformandde-riskthelargerscaledeploymentofstreetbatteriesasdetailedintheNTVVTier2project.(http://www.ofgem.gov.uk/Networks/ElecDist/lcnf/ftp/sse/Pages/index.aspx)
These threeexamples are shown to illustrate the rangeof possible storageapplications and that thebusinessmodels
presentedinthisconsultationwhilegenericasfarasispossible,maynotbeapplicabletootherstorageprojects.
Smarter Network Storage - business model consultation | 17
We are requesting responses from a broad range of interested
parties with an interest in distribution-scale electricity storage.
This may include, but is not limited to:
• Supply chain (e.g. manufacturers)
• Generation (renewable and conventional generators)
• Transmission (Transmission Owners and the GB System
Operator)
• Distribution (Distribution Network Operators)
• Suppliers and aggregators
• Customers (e.g. Industrial, Community)
• Regulation (Ofgem)
• Government
We will review the responses and publish a summary along with
our findings. The output of the Consultation will be used to inform
the on-going SNS project. In particular we expect this to guide
the further assessment of regulatory and commercial barriers and
the assessment of the business case for distribution connected
storage. Feedback on the template investment model will be
incorporated into a version which will be populated throughout
the project lifecycle as learning relating to the operational costs
and value streams is validated during the trial phases.
1.4. The Value of Distribution Connected Electrical Energy
Storage
An understanding of the business models for storage depends
on an understanding of the value streams available to EES. For
We have reviewed a range of potential business models and
made a qualitative assessment of these in order to select two
models for further consideration. We have considered the
details of how these two models would operate, and what the
advantages, disadvantages and risks are of these models.
Investment model template
We have also developed a template investment model for each
of the two lead business models. These templates demonstrate
how the business case for distribution-connected EES might
be assessed. The template investment model illustrates the
possible financing costs, operating models and revenue models
in each case, and enables comparisons across the business
models for the same configuration of storage.
The investment templates are provided for illustration of the
business models only. Although we have populated them with
representative values as an aid to users to understand the
workings of each model, we do not present these as a business
case assessment for any particular EES project.
Timelines
Responses should be sent to:
by 30th September 2013. The Consultation process is shown
schematically in the below diagram.
Incorporating learning into SNS project
Review responses and publish summary
Stakeholders respond to consultation
Issue consultationDevelop business models and investment model templates
18 | Smarter Network Storage - business model consultation
traditionalreinforcementoptions.Thebusinesscaseisdriven
primarilybythisconstraintwhichcouldberelatedtonetwork
security, or, statutory voltage limits for example, whilst
additional value streams increase the competitiveness of
storagewhenconsideredalongsidetraditionalreinforcement.
This is shown schematically in Figure 3 where the current
storage project cost is adjusted for future technology and
system cost reductions, along with the expected ancillary
revenuestreams.ThisreducedcostisshownastheLongRun
Cost.Thisisthenetcostwhichcanbecomparedtothecost
oftraditionalreinforcementtoappraisethefutureviabilityof
storageprojects.
this analysis we focus on the monetisation of benefits to a
particularproject, ratherthanthewidereconomicandsocial
benefits provided to theGB systemas awhole (it isworth
notinghoweverintheparticularcaseoftheDSOtheincentive
islikelytohavebeensetbasedon,anddesignedtoachieve
thesewidereconomicandsocialbenefits).
Forthescopeofdistribution-scaleEESunderconsideration,the
“NeedsCase”forstorageisinitiatedbyadistributionnetwork
requirement.Whereflexibilityindemandand/orgeneration
would help to mitigate network constraints and potentially
deferinvestment,thenstorageshouldbeconsideredalongside
Figure 3 Storage Project Schematic Cost Comparison
Conventional Once proven successful
£m
ConventionalReinforcement
SNSProjectCost
1stofakindcosts
TechCostReduction
FutureIncomeStreams
SystemCostSavings
LongRunCost
Smarter Network Storage - business model consultation | 19
InthecaseoftheSNSproject,thestorageisrequiredtocontribute
tonetworksecurity.TheimplicationoftheNeedsCaseisthat
storagemustbeavailableforsecuritypurposeswhenrequired,
takingpriorityoverallotheruses.Thisisbecausethesecurity
providedbythestorageassetcannotbeprovidedbyanother
storageassetorgeneratorelsewhereonthenetwork–itmust
beconnectedtothespecificsubstationthatrequiressupport.
There are alternative applications for distribution-connected
EES other than to meet security obligations, for example
the management of the output of embedded intermittent
generation.Insuchcasestheassetcouldbeoperatedwithout
restrictioninapurelyprofitoptimisingmanner.
Anyadditionalvaluestreamsmustbecompatiblewiththe
security requirement. Given the nature of timing of the
demand,itishighlyprobablethatthestoragewillberequired
toprovidesecurityforonlyasmallwindowwhenparticularly
highpeakdemandmayoccur.Currently this is likely tobe
timedcloseto theGBsystempeakdemand,althoughthis
couldvaryinfutureforareaswithsignificantpenetrationof
embeddedgenerationbehindthesameconstraint.For the
LeightonBuzzardexample,theassetislikelytoberequired
for securityonly inwintermonthsandonlyatpeak times
(e.g. 4-7pm).Wedefine this periodof timeas the Secure
Capacity Window. Outside of this window the storage can
provideotherservices,subjecttobeinginastatetoprovide
security to the system at the start of the Secure Capacity
Window.Itmayalsobepossibleforsomecompatibleservices
tobeprovidedduringtheSecureCapacityWindowitself.This
isanareathattheSNSprojectwillinvestigateastohowthis
mightworkinpractice.
Table2 showsa listof the future incomestreamsshown in
theStorageProjectCostBreakupinFigure3above.Onlysome
of these income streams have been considered in the SNS
projectandinvestmenttemplates,alistofwhichisgivenina
followingsection(furtherdetaileddescriptionsanddiscussions
areincludedinAppendix1).
20 | Smarter Network Storage - business model consultation
Table 2 SNS Project Ancillary Benefits
Valuestream
Local SecurityProvisionofcapacityattimesofpeaklocaldemand
‘Embedded Benefits’ e.g. avoided demand TNUoS, avoided BSUoS, avoided losses
Reactive PowerProvisionofreactivepowertoreducelosses
Voltage SupportProvisiontolocalnetwork
Firm Frequency Response (FFR)ManagingtheGBsystemfrequency
Short Term Operating Reserve (STOR)ReservefortheGBsystem
Energy ArbitrageTradingofwholesalepower
Capacity Payments
Finalcustomer
DNO
Supplier
DNO.Mayalsobeopportunitiesontransmissionnetwork
DNO.Mayalsobeopportunitiesontransmissionnetwork
TSO
TSO
Wholesalemarket/Supplier
GeneratorsorEnergyproviders
Driversofvalue
Avoided/delayedreinforcementcost
DemandTNUoS,BSUoS,transmissionlosses
Reducedlossesandpossibleavoidedreinforcementduetoreactivepowerallowingmoreefficientuseofnetwork
Possiblevalueinspecificlocationse.g.withlocalrenewablegeneration
GrowthinFFRrequirementduetosizeoflargestlossontransmissionsystem
GrowthinSTORrequirementduetointermittency
Powerpriceshape&volatility
Designofcapacitymechanism
Valuerisks
Technicalperformanceofstorage(availability)
Onlyrelevantwhenstorageisexporting
Opportunitiesmaybelimited/specific
Opportunitiesmaybelimited/specific
CompetingsourcesofFFR
CompetingsourcesofSTOR
Lackofmarketliquidity
Penaltiesfornon-delivery
Likelysuitability
Primaryneed
Secondaryvalue
stream
Opportunityspecific
Opportunityspecific
Secondaryvalue
stream
Secondaryvalue
stream
Secondary
valuestream
Potentialfuture
benefit
Smarter Network Storage - business model consultation | 21
Table 2 SNS Project Ancillary Benefits
Valuestream
Managing Intermittent Renewable Generation (Balancing Market Services)Absorbingexcessrenewablegeneration
Fast Reserve
Transmission Constraints
Inertia ServicePossibleTSOservice
Responsive Flexibility ServicePossiblefutureTSOservice
Distribution LossesGenerationatpeakreduceslossesbymorethatincreasewhencharging
Finalcustomer
RenewablegeneratororDNO
TSO
TSO
TSO
TSO
DNO
Driversofvalue
GrowthinIntermittentgeneration
Sizeofmarketforfastreserve
Transmissionconstraintinlocationofstorage
Maybeincreasinglyrequiredasamountofasynchronousgenerationincreases
Possiblefutureproducttospecificallyreflectbenefitsprovidedbyresponsivestorageorothersourcesoflow-carbonflexibility
Dependsonincentivescheme.BenefitmayaccruetoDNObutnottostoragedirectly
Valuerisks
Requirementisunpredictable
Competingsources
Unlikelytobeapplicableunlessaggregated
Competingsources
Productcurrentlyundefined
Likelysuitability
Valuableifsignificant
localembedded
generation
Limitedtocapacity
>50MW
Notconsidered
Potentialfuture
benefit
Potentialfuture
benefit
Anancillarybenefit
ofoperationofthe
asset–unlikelyto
drivedispatch.Not
considered
22 | Smarter Network Storage - business model consultation
networks once EES is proven as an economic alternative
solutiontoreinforcement.Theanalysisconservativelysuggests
around2GWofdistribution-connectedstoragecapacity could
beintegratedintothesystemacrossGBby20404.
UKPowerNetworkshasalsocalculatedthepresentvalueof
net benefits of this additional flexible capacity at anational
leveltobearound£0.7bn,resultingfromsavingsindistribution
and transmission investment, value from supporting system
balancing, displacement of peaking generation capacity and
reducedcostsofcurtailmentoflow-carbongeneration.These
benefits assume that the storage is leveraged across only
a limited number of applications simultaneously for short
periods;althoughinpracticeitisexpectedthatstoragecapacity
couldbemuchmoreflexible5.
AstheintegrationofEESintotheGBsystemincreasessodo
the possible portfolio and scalability benefit to the project
parties.Forexample,athirdparty(orindeedaDNOwithan
establishedenergytradingcapability)couldactivelymanage
anddispatchassetsoveralargespatialarea,tofirstlyincrease
economiesofscaleandreduceoperatingcosts,andsecondly
toincreasetheirownsystemredundanciesandimprovetheir
system efficiency (where increasing system redundancies
refers to theirability tomitigateunavailabilityof individual
assets by picking up lost generation across their asset
portfolio).Similarly,anEESassetcouldbe incorporated into
a portfolio of intermittent generation assets, allowing the
intermittentgeneratorstodischargetheassettoavoidcostly
energyimbalancecharges.
TheSNSprojectwillfocusonthevalueavailablefromasubset
ofthesevaluestreams,whichhavebeenassessedasbeing
themostsignificantinthecurrentmarketandarecompatible
with the characteristics and likely operation of the storage
assetenvisaged.
• Localsecurity
• ShortTermOperatingReserve(STOR)
• FirmFrequencyResponse
• EnergyArbitrage
ForthepurposesofthisConsultationandinvestmenttemplate
we include two additional sets of value streams as being
significantinthecurrentmarkettocomplementthoseoriginally
identifiedascorevaluestreams;
• EmbeddedBenefits
• CapacityPayments.
We use these value streams as examples throughout this
Consultation document and in the investment templates.
However we recognise that other value streams mentioned
abovemaybecomeequallyormoreimportantinfuture,and
sotheinvestmenttemplateincludestheabilitytoincludeother
user-definedbenefits.
1.5.ThePotentialBenefitsofaWiderRolloutofDistribution
ConnectedEES
UK Power Networks has modelled the potential number of
typicalstoragedeploymentsthatcouldbeappliedtodistribution
4,5 LCNF Full Submission Pro-Forma. Appendix G, Section 2 http://www.ofgem.gov.uk/Networks/ElecDist/lcnf/stlcnp/year3/smarter-network-storage/Documents1/SNS%20RE-Submission%20+%20Appendices%20Redacted.pdf
Smarter Network Storage - business model consultation | 23
a.Arethereotherscenariosthatshouldbeincluded?
b.Arethereinherentregulatorycreatedlimitationsthathave
notbeendiscussed?
c.Arethereadditionaladvantagesordisadvantagesforeach
ofthesescenariosthatshouldbeconsidered?
SECTION3LEADBUSINESSMODELS
5.Do you agree with the respective advantages and
disadvantages of the two lead business models as
describedintheSection3?
a.Are there other limitations, barriers or features of these
businessmodels,orEESprojects ingeneral thathavenot
beenconsidered?
b.Doeitheroftheseleadbusinessmodelsdisproportionally
favouronepartyovertheother?
6.Fromyourperspective,whichofthetwoleadbusiness
modelsismostlikelytobefavoured?
SECTION4INVESTMENTMODELTEMPLATE
7.Arethereothertechnologyparameters,costsorrevenue
streams that should have been considered in the
investmentmodeltemplate?
a.Ifsopleasegivedetails
8.Doyouagreewiththeinterrelationsoftheseancillary
servicesandtheirassociatedrevenuestreams?
a.Arethereadditionalcomplexitiesinthedispatchoftheassetto
utilisetheserevenuestreamsthathavenotbeenconsidered?
Are they all mutually exclusive or potentially dispatchable
inunison,arethereadditionalcomplexitiesintheknock-on
effecttobatteryperformancethathavenotbeenconsidered?
9.Doyouagreewiththestatedassumptionsandmodel
limitations?
a.Should any of these stated assumptions or limitations
havebeendealtwithdifferently?
1.6.HowtoRespond
Responsesshouldbesentto
by30thSeptember2013.
Thequestionsthatweinviteinterestedpartiestosubmitwritten
evidenceandanalysisonareasfollows:
SECTION2BUSINESSMODELSFORSTORAGE
1.Do you agree with the range of business models
presentedinSection2.1?
a.Arethesebusinessmodelsandtheirvariantsrepresentative
oftherangeofplausiblebusinessmodels?
b.Doyouagreewiththecharacterisationsofeachofthese
businessmodelsintheirrespectiveSections2.1.1through
toSection2.1.5?
2.Doyouagreewiththechoiceofassessmentcriteriaas
describedinSection2.1?
a.Are these thekeyassessment criteria that thebusiness
modelsshouldbecomparedagainst?
b.Are there any additional advantages, disadvantages or
barrierstoanyoftheindividualbusinessmodelsthathave
notbeenincluded?
3.Doyouagreewith thechoiceof the two leadmodels
andthereasonsforselectingtheseasdescribedinthe
QualitativeAssessmentSummary,Section2.2?
a.Are these options the most likely to be suitable for
distribution-connected storage, or should one or more
oftheotherbusinessmodels(orvariantsofthese)have
beenconsideredovertheDNOContractedandContracted
Servicesmodels?
b.Ifso,whichmodelsshouldhavebeenconsideredandwhy?
4.Doyouagreewiththerangeoffourregulatorytreatment
scenariospresentedinSection2.3?
24 | Smarter Network Storage - business model consultation
Business Models for Storage2
Smarter Network Storage - business model consultation | 25
inherentroleasthepartyresponsibleforthesecurityneedcase.
Therearealsoawiderangeof thirdparties fromthroughout
theelectricityvaluechainwhocouldplayaroleinthebusiness
model. In describing the business models, we consider the
relationshipbetweentheDNOandasinglethirdpartyonly.In
reality, the thirdpartycould take the formofa jointventure
orconsortium,oraspectsofthebusinessmodelcouldbesplit
betweenmultiplethirdparties,aswillbethecaseforthetrials
withintheSNSprojectitself.
Inthissectionwedescribearangeofpossiblebusinessmodelsfor
distributionconnectedEES.Subsequently,wedescribehowwehave
selectedandfurtherdevelopedtwoleadmodelsforconsultation.
Thedefinitionofabusinessmodelforourpurposescoversthe
development, ownership, operation and maintenance, and
marketingofservices.TheConsultationaimstodevelopmodels
inlinewiththekeyquestionsinFigure4.
Thereareabroadrangeofpartiesthatcouldplayaroleina
distribution connected EES business model. The DNO has an
Figure 4 Consultation Questions
Ownership CommercialOperation Market
Whoshouldtakeriskonconstructionandoperation
oflargescalestorage(e.g.availabilityrisk)?
Whoshouldtakethebenefitandmanagetherisk
associatedwithcapturingthevalueofstorage
(i.e.market/operationrisk)?
Whichservicesandmarketscouldtheoperators
participateinandhowdotheycomplement/cannibaliseeachother?
KeyQuestions
Options
DNO
Energytraders/Aggregators
InstitutionalInvestors
IndustrialCustomers
RenewableProjectDevelopers
PrivateEquity
Suppliers
Community
SecurityofSupply
EmbeddedBenefits
FirmFrequencyResponse
STOR
EnergyArbitrage
CapacityPayments
PrimaryServicese.g.
SecondaryServicese.g.
26 | Smarter Network Storage - business model consultation
modelwhereathirdpartybuildstheassetandtheDNOhas
no commercial relationship with the storage other than a
connectionagreement.Betweentheseextremesaremodels
whichinvolveacontractualrelationshipbetweentheDNOand
athirdparty.
2.1.BusinessModels
Wehaveselectedarangeofbusinessmodelstoillustratethe
landscapeofpotentialoptions.Thesearesummarisedatahigh
levelinFigure5.Thefivechosenbusinessmodelsrangefrom
aDNOmerchantcasewheretheDNOtakestotaloperational
controlandnothirdpartyisinvolved,toaChargingIncentives
Figure 5 Business Model Key Features
Fullmerchantrisk,exposedtopowerpriceandbalancingservices
DNOexposedtoincentivescheme
DNOexposedtoconstructionandoperationalrisks
LowcommercialriskforDNO
Noguaranteeofassetbeingbuild
• DNObuilds,ownsandoperatestheasset.Fulloperationalcontrol.
• DNOmonetisesadditionalvaluestreamsdirectlyonashorttermbasis(e.g.trading).
• Possiblebarriers:Costsofaccessingthemarket,DNOskillsandcapabilities,regulationandshareholderexpectationsofrisk.
• DNObuilds,ownsandoperatestheasset.DNOhasfulloperationalcontrol.
• DNOhasDSOrole;coordinatingportfoliosofflexibilityforbothdistributionandwidersystembenefitthroughacentralizedcontrolmechanism.
• DNOcommercialriskisdependantondesignofincentivescheme.
• DNObuilds,ownsandoperatestheasset.DNOhasfulloperationalcontrol.
• Priortoconstruction,longtermcontracts(e.g10years)forthecommercialcontroloftheassetoutsideofspecifiedwindowsareagreed.
• Dependantonthefeasibilityoflongtermcontracts.
• DNOoffersalongtermcontract(e.g.10years)forservicesataspecificlocationwithcommercialcontrolincertainperiods.
• Thirdpartyresponsibleforbuilding,owningandoperatingtheassetandmonetisingadditionalrevenuestreams.
• DNOsetsDUoStocreatesignalsforpeakshavingthatreflectthevalueofreinforcement.
• Barriers:nooperationalcontrolforDNO,thereforenoguaranteeonsecurity.
Model Keypoints Comments
DNOMerchant
DSO
DNOContracted
ContractedServices
Charging Incentives
Incr
easi
ngc
omm
erci
alri
skfo
rDN
O
Incr
easi
ngc
omm
erci
alri
skfo
rThi
rdP
arty
Smarter Network Storage - business model consultation | 27
listofcriteriarepresentsahighlevelviewofthekeybusiness
model considerations. The relative importance of the criteria
maydifferbetweeninterestedparties.Wehavenotattempted
torankthesecriteria.HoweverwenotethattheDNOControl
requirementisconsideredaprimaryfactorbecausetheprovision
ofsecuritytothelocalnetworkisthedriveroftheNeedsCase.
Thecommonsetofqualitativecriteriathataretobeusedto
assess the business models, along with their descriptions is
showninTable3.
Inthefollowingsections,eachbusinessmodelisfirstcharacterised
according to its key exhibited features, namely storage
developmentandconstruction,financing,ownership,operations
andmaintenanceandcommercialcontrol.Second,eachbusiness
modelisassessedagainstacommonsetofqualitativecriteria.
ThecriteriaaimtocoverabroadspectrumoftheaspectsofanEES
projectonwhichthebusinessmodelmayhaveanimpact.
Thecriteriaareclusteredwithinfourbroadthemes–security,
assetvaluecostsandrisks,widerbenefitsandfutureproof.The
Table 3 Qualitative Assessment Criteria
Grouping
Security
AssetValue,
CostandRisks
WiderBenefit
FutureProof
Criteria
DNOControl
OptimisingValue
ofAsset
RiskAllocation
Financing
OptimisingValuefor
System
DynamicEfficiency
CarbonEfficiency
Scalability
Regulatory
Compatibility
Flexibility/
Optionality
CriteriaDescription&Examples
• EnsurethattheassetisavailableforDNOsecurity/constraintmanagementpurposes
whenrequired.
• DNOconfidenceinassetavailability.
• Incentiviseefficientusageoftheasset.
• Optimiseviablevaluestreams.
• Easeofadministrationandavoidanceofprohibitivecostsofdoingbusiness.
• Marketrisksallocatedtopartyabletotradeinthemarkets.
• Constructionriskallocatedtopartieswiththeappetiteandabilitytomanagethis.
• Operationsandmaintenancebypartywithabilitytomanagethis.
• Enableaccesstolowcostfinancing.
• Optimiseoverallmacro-economicandwelfarebenefits.
• Abilityforinnovationtooccurontechnologydevelopmentandtechnologychoice.
• Abilityforbusinessmodeltoevolveovertime.
• Incentivisesandenableslowcarbonpowersystem.
• Ensurethatbusinessmodelisscalableandcanevolveinresponsetochangingvalues
orvaluestreams.
• Compatiblewithcurrentmarketdesignsandcurrentregulation.
• Futureproofagainstexpectationsofchangestomarketdesignsorregulation.
• Consistentwithexpectationsofprojectlife:interactionwithpotentialfuturereinforcement.
• Allowsforthepossibilityofrelocationofthestorageassettoanotherpartofthenetwork.
28 | Smarter Network Storage - business model consultation
TheDNOwouldleadthedevelopmentandconstructionofthe
storage facility, including all planning and consents. The asset
wouldthenbefinancedbytheDNOonbalancesheet,potentially
asaregulatedasset.Thiscouldbeagainstabaselineoftraditional
reinforcementwithDNOandCustomerssharingthebenefitsand
risksofanysavingsorcostoverrunsthroughasharingfactor.
2.1.1. DNOMerchant
In the DNO Merchant business model, the DNO takes full
ownershipandoperationof theassetand is responsible for
monetising theadditionalvalue streams. TheDNOdoes this
directlyintherelevantmarketsandthereisnothirdpartywith
adirectrelationshiptotheasset.Figure6belowillustratesthe
keyaspectsofthebusinessmodel.
Figure 6 DNO Merchant Model
Ownership
Development & Construction
• DNOmanagesdevelopmentasforanyothernetworkasset
Operations & Dispatch
• DNOhasfulloperationalcontrol
Finance
• FinancedbyDNO• Mayformpartof
theDNO’sRegulatedAssetBase
Maintenance
• DNOmaintainsasset
DN
O tr
adin
g op
erat
ion
Security of Supply
Embedded Benefits
Reactive Power & Voltage Support
Frequency Response
STOR
Energy Arbitrage (buy and sell)
Capacity Payments
Operation Services/ValueStreams
EnergySupply(internaltransfer)
DNO
DNO 3rdparty Contract Market
MonthlyFFRtenders
AnnualSTORtenders
EnergyTrading
CapacityAuction
RelationshipwithSupplier
Smarter Network Storage - business model consultation | 29
Asummaryoftheprincipaladvantagesanddisadvantagesofthe
modelaccordingtothecommonsetofqualitativecriteriaisgiven
inTable4(seeTable3fordescriptionsoftheassessmentcriteria).
Table 4 DNO Merchant Model Qualitative Assessment
Grouping
Security
AssetValue,
CostandRisks
WiderBenefit
FutureProof
Criteria
DNOControl
OptimisingValue
ofAsset
RiskAllocation
Financing
OptimisingValuefor
System
DynamicEfficiency
CarbonEfficiency
Scalability
Regulatory
Compatibility
Flexibility/Optionality
Description
• DNOhasfulloperationalcontrol.
• DNOscurrentlylacktheexperience,skillsandcapabilitiestotradeandriskmanagetheasset.
• ThefirstofakindcostofdevelopingthesecapabilitieswillbehighunlesstheDNOhas
alargeportfolioofassetstospreadthecostsacross.
• UntilDNOshavedevelopedtheinternalexpertisethereisariskthattheassetis
utilisedsub-optimally.
• DNOisrequiredtotakeriskthatvalueofresidualrevenuestreamswillnotdrive
asavingwhencomparedagainsttraditionalreinforcement,whichisasignificant
departurefromtheirbusinessasusual.
• RiskallocationwithCustomersmustbealignedwiththeproportionofregulatoryfinancing
• Customerscouldshareinadditionalcapturedvaluenotpreviouslyavailable,depending
ontheproportionofregulatoryfinancing.
• Financingasaregulatedassetcouldreducethecostofcapital.
• Forasingleassetthereisnoaggregationthereforecostsoftradingwillbehighasa
proportionofrevenues.
• MaybemoresuitableifDNOcandevelopmultipleassetstospreadcostsoftradingand
acceleratedevelopmentofinternalexpertise.
• AssetmaybeaggregatedwithassetsofotherDNOsinajointtradingorganisation.
• DNOhasfullcontroloverthestoragetechnologyandcantargetthedevelopmentof
specifictechnologiesifrequired.
• Thebusinessmodelwouldbecomemoreefficientasprojectsarerolledoutandthe
DNObuildsitsinternaltradingandriskmanagementexpertise.
• Incentivisesandenableslowcarbonpowersystem.
• Canbescaledbutwouldbelimitedbydevelopmentofinternaltradingandrisk
managementexpertise.
• TheremayberegulatorybarrierstotradingofpowerbyDNOandthefinancingofthe
projectasaregulatedasset.
• DNOhasfullcontroltorelocatetheassettonewconstrainedlocationifrequired.
30 | Smarter Network Storage - business model consultation
potentially aggregate the asset with other DNOs in a joint
tradingorganization.
Anadditionalcomplicationwouldbehowtheassetisfinanced
and operated within the DNO business. If the asset was a
regulated asset to be fully financed by the Customers, but
operated by the DNO there could be a misplaced incentive
on the DNO to operate the asset’s ancillary services in a
profit optimising manner as they would not accrue any of
this additional financial benefit. (The effect of the different
financingoptionsonpricecontrols,alongwiththecost,riskand
benefitsharingbetweentheDNO,thirdpartyandCustomersis
discussedindetailinSection2.3).
2.1.2.DistributionSystemOperator
Our definition of a Distribution System Operator (DSO) is
discussedinBox2.TheDSOmodelforstorageassumesafuture
world inwhichthenecessary regulatorychangeshavebeen
made.UnderaDSOmodeltheDNOmightown,operateand
maintainelectricalenergystorageaspartofawider roleof
activelymanagingitsnetwork,akintotherolethatNationalGrid
playsatthetransmissionlevel.UnderthismodeltheDSOmight
leadthedevelopmentandconstructionof theasset,finance
itsconstructionandoperationandthentake fullcommercial
control.TheDNOwouldaccruealltheprojectcostsandbenefits
andtherewouldbenodirectthirdpartyinvolvement.
AlternativelytheDSOmightsimplycontractforservicesfrom
electricalenergystorageonanexclusiveorprioritybasis.Thisis
subtlydifferentfromtheGBTSOmodelwheretheGBTSOdoes
notownanygenerationorstorage.
TheDSOmodelcanbeconsideredasavariantoftheDNOMerchant
model,butwiththeadditionofanewregulatoryincentiveregime
tomanagetherisksassociatedwiththevalueoftheasset.
Under the DNO Merchant model the DNO would have full
operational control of the asset and therefore the ability to
meet any security or constraint management obligations.
TheassetwouldbefinancedontheDNO’sbalancesheetasa
regulatedasset.Thereareanumberofvariationsontheextent
whichCustomerswouldfundtheassetandtakesomeofthe
riskaroundthereturns,discussedinSection2.3.ADNOislikely
tohavealowerWeightedAverageCostofCapital(WACC)than
themajorityofpotentialthirdparties.Thismaymeanthatthe
asset can be financed at lower cost (albeit with Customers
taking some or all of the risk). However, the risk profile of
thestorageishigherthantherestoftheDNO’sbusinessand
creates exposure to new risks, and a significant portfolio of
storagemayincreasetheDNO’scostoffunding.Thereforethe
DNO may assess the development using a marginal cost of
capitalimplyingahigherrateofreturn.Thismaydependon
howmuchriskissharedwithCustomers.
TheDNOMerchantmodelcarriesthegreatestcommercialrisk
fortheDNO.TheDNOwouldneedtotradeinthewholesale
energy market and participate in procurement mechanisms
for ancillary services (see Appendix 1 for a description of
the possible ancillary revenue streams). The value that can
bedrawn from theseancillary serviceswouldbe limitedby
theDNO’sde-minimisthreshold,whichis2.5percentofthe
sumofthelicensee’ssharecapital,itssharepremium,andits
consolidatedreserves.
A DNO trading and risk management operation would also
be required. This would be a significant deviation from the
core business of the DNO and would require additional set
upandoperationalcostsforthefirstofakindproject.These
costswouldbeexpected todecreasewith increasing rollout
ofsimilarprojectsandtheestablishmentoftheDNOsinternal
trading and risk management expertise. DNOs could also
Smarter Network Storage - business model consultation | 31
ADistributionSystemOperator(DSO)hasaccesstoaportfolioofresponsivedemand,storageandcontrollablegeneration
assetsthatcanbeusedtoactivelycontributetobothdistributionnetworkandwidersystemoperation.ADSObuildsand
operatesaflexiblenetworkwiththeabilitytocontrolloadflows.Thecombinationofahighlyflexiblenetworkandaccess
todemandandgenerationresponseallowstheDSOtocontributetotheincreasingchallengeofencouragingdemandto
followgeneration.Thiswillbecomeincreasinglyimportantashighervolumesoflowcarbon,zeromarginalcostintermittent
generation(suchaswindandsolar)becomeavailabletosupplyGBdemand.However,changeddemandprofilesmightalso
giverisetohigherpeakdemandsoccurringwhenavailabilityoflowcarbongenerationishigh.Moreover,inordertoprovide
fastlow-costconnectionstorenewabledistributedgenerators,theuseofinterruptibleconnectionarrangements,suchasis
beingtrialledthroughUKPowerNetworks’FlexiblePlug&PlayNetworksproject,mightbecomemorecommon,particularly
foronshorewindgenerationinrespectofwhichatypicalloadfactormightbearound25%.
Itfollowsthataswellashelpingtosupportthemarket,aDSOwillalsohavetoconsiderdistributionnetworkconstraintsand
theopportunitiesforusingcommercialinnovationssuchasdemandsideresponse(DSR)inordertoreducetherequirement
fornetworkreinforcement.TheDSOrolecouldalsoentailcloserinteractionswiththeNationalElectricityTransmissionSystem
Operator(NETSO),suchasaresponsibilitytoassistwithbalancingatanationallevelandprovidingancillaryservicessuchas
reserve,frequencyresponse,andvoltageandreactivepowermanagement.
ItfollowsthattheDSOroleisconceptuallysimilartotheNETSOroleunderwhichNationalGridmanagesbalancing,reserveand
constraintsontheGBinterconnectedtransmissionsystemovertimeperiodsrangingfromoutagemanagementplanningtimescales
tosecondbysecondsystemfrequencycontrol.TheNETSObalancesthesystemusingarangeofmechanisms.Theseinclude:
• Ancillaryandcommercialservicessuchasreactivepower,frequencyresponseandreserveserviceswhichtheNETSOwill
contractfordirectlywiththeserviceproviders;
• Contractnotifications–wherebytheNETSOcanbuyandsellelectricityaheadofGateClosuredependingonwhetherthere
isexpectedtobeasurplusorshortfallofgeneration;and
• TheBalancingMechanismwherebytheSOinstructsBalancingMechanismUnitstoincreasegeneration/reducedemand
(acceptanceofanOffer)orincreasedemand/reducegeneration(acceptanceofaBid).Bid/Offeracceptancesaremade
onlyfollowingGateClosure6.
NationalGridisalsoresponsibleforensuringthattheGBinterconnectedsystemremainswithinsafeoperatinglimitsandthatthe
patternofgenerationanddemandisconsistentwithanysystemtransmissionrelatedconstraints(forexampleduetoaplannedoutage
ofacircuit).WhilstNationalGridwillendeavourtocoordinatenetworkoutagescoincidentwithrelevantgenerationoutagesinorderto
minimiseconstraintcosts,itmaybenecessarytotakeactions(byenteringintoaTransmissionConstraintAgreement,tradingortaking
actionsintheBalancingMechanismwithgenerators,suppliersandlargecustomers)toresolveconstraintsonthetransmissionsystem.
Box 2 Definition of a DSO
6 Note: whilst a Bid/Offer acceptance might move a generator or Supplier from their contracted position such that they are technically imbalanced, this does not affect their settlements (cash-out) position.
32 | Smarter Network Storage - business model consultation
NationalGridisincentivisedontheprocurementandutilisationofservicestomaintaintheenergyandsystembalanceand
othercostsassociatedwithoperatingthesystem.Userspayforthecostoftheseservicesandanyincentivisedpayment/
receiptsthroughtheBalancingServicesUseofSystem(BSUoS)charge.TheSOforecaststhecostsatthestartofapricecontrol
period,andOfgemplacesincentivesontheSOtokeepcostswithintheseforecasts.Thesechargesarereconciledagainst
actualcostssothattheSOisnotexposedtoexcessiveoverorunderspend.Forexample,iftheSOoverorunderspends
againstitsforecastitisexposedtosomeoftheextracostorsavingrespectively,subjecttoadead-band.TheamounttheSO
isexposedto-the‘sharingfactors’-were25%foreitheroverspendorunderspendfortheperiod2011-20137.
ADSOmighttakeanactiveroleinmanagingthedistributionnetworkthroughdispatchingorcurtailingelectricalenergyat
differentlocations,forexamplethrough:
• curtailingorconstraining-ongeneration(dependingonwhetherthenetworkisconstrainedforgeneratorexportorrequires
generatorsupportduetolossofsecurecapacity);
• dispatchofelectricalenergystorage;or
• curtailmentofdemandthroughDSRcontracts,curtailmentofgenerationoruseofstorage)tominimisethecostofresolving
constraintsandensuringnetworksecurity.
TheDNOregulatoryframeworkdoesnotexplicitlyprovideforsuchmarket-based/relativelyhighrisksolutions.Itisdesigned
forcapitalandoperatingexpenditurethatcanbeaccuratelyforecastandthensetasabaselineex-anteallowancebyOfgem
aheadofanapplicablepricecontrolperiod.Moreover,therearecurrentlylimitationsembeddedintheDNOlicencethatlimits
theamountofgenerationorstorage8whichtheymayown.TheDNOdoeshoweverhaveincentivestomakeefficiency
savingsthroughacost-sharingmechanismwherebysavedcostsaresharedwithconsumersbutanyoverspendisonlypart
fundedbyconsumers.Someflexibilityisprovidedthroughtheuseofuncertaintymechanisms9,whichallowtheDNOtoalter
itsallowedexpenditureduringthepricecontrolperiod.
TheDSOmodelmaybemostrelevantinfutureasDNOstakeamoreactiveroleinmanagingthedistributionnetwork,e.g.
curtailmentofembeddedgenerationanddispatchofDSR.HoweveritcouldalsoofferDNOsamechanismthroughwhichto
manageadditionalvaluestreamsofstorageoutsideofthepricecontrolstructure.ItcouldalsogiveOfgemanumberoflevers
toplaceincentivesontheDNOtomaximisethevaluestreamstoprovidethemostbenefitforCustomers.
Box 2 Definition of a DSO
7 Ofgem, 2011. National Grid Electricity Transmission System Operator Incentives from 1 April 20118 Existing storage is operated under Generation Licences, There is some current debate as to whether storage should be treated as generation for the purposes of the regulatory
limitation on DNOs.9 Uncertainty mechanisms can include indexing, volume drivers, triggers, logging-up provisions and re-openers.
Smarter Network Storage - business model consultation | 33
therefore forward compatibilitywithDSO-typearrangements
shouldbeaconsideration.
TheSNSprojectisintendingtoexplorefurthertheseregulatory
barriersfollowingthefirst-of-a-kindtrialsofthestoragefacility
forarangeofvaluestreams,whichwillbesharedwithDNOs
and industry. A summary of the principal advantages and
disadvantagesofthemodelaccordingtothecommonsetof
qualitativecriteriaisgiveninTable5.
It should be noted that while the DSO model is contingent
on significant regulatory development, these developments
arenotnecessarilyrequiredfordistribution-scaleEESprojects.
UndertheSmartGridsForumWorkstream610,DECC,Ofgemand
theindustryareexploringthepotentialscopeoftheDistribution
SystemOperator(DSO)roleforDNOs.Theinitialviewfromthe
SmartGridsForumisthataDSOmodelisnotrequiredforRIIO-
ED1.Howeverdistribution-connectedEESbuiltunderRIIO-ED1
may find itself operating under a DSO framework in future;
Table 5 DSO Model Qualitative Assessment
Grouping
Security
Assetvalue,
costandrisks
Widerbenefit
Futureproof
Criteria
DNOControl
OptimisingValue
ofAsset
RiskAllocation
Financing
OptimisingValuefor
System
DynamicEfficiency
CarbonEfficiency
Scalability
Regulatory
Compatibility
Flexibility/Optionality
Description
• DNOhasfulloperationalcontrol.
• InaDSOworldtheDNOwouldactivelymanagethebalancingofthenetworkandwould
thereforebebetterplacedtooptimisethevalueoftheassetthanapresent-dayDNO
• Anexperiencedthirdpartyaggregatormightstillbebetterplacedtooptimisetheoperation
oftheasset.
• Ifaregulatedasset,DNOcansharerisksandbenefitswithCustomersdependingon
thesplitofregulatoryfunding–agreaterproportionofsystemvaluecapturedfor
customers.
• DSOrolestillatconceptualstage(WS6ofSGF).
• Financingasregulatedassetcouldreducethecostofcapital.
• Customerscouldshareinadditionalcapturedvaluenotpreviouslyavailable,depending
ontheproportionofregulatoryfinancing.
• ForDSO,maybeadditionalincentivesonpowerquality,lossesetc.whichcangenerate
additionalvalue.
• DNOhasfullcontroloverthestoragetechnologyandcantargetthedevelopmentof
specifictechnologiesifrequired.
• Incentivisesandenableslowcarbonpowersystem.
• RelevantinfutureasactivenetworkmanagementbyDNOdevelops,activeassets
increase,andregulationsaredeveloped.
• Maybemoreappropriatewhenmultipleactivelymanagedassetsareinplace.
• Themodelisreliantonfutureregulatorydevelopments.
• DNOcontroltorelocateassettonewconstrainedlocationifrequired.
10 http://www.ofgem.gov.uk/Networks/SGF/Pages/SGF.aspx
34 | Smarter Network Storage - business model consultation
asset’soperationand theassociatedcommercial riskwere to
becontractedtoathirdparty(whowouldbeexpectedtobe
abletobettermanagethisrisk).Also,whilethebalancingof
thenetworkwouldbeacorepartoftheDNO’sbusinessundera
DSOscenario,aspecialistthirdpartymaystillbebetterplacedto
operateandrisk-managetheassettoensuregeneratedpower
andancillaryservicesachievethemaximumpossiblereturns.
2.1.3. DNOContracted
TheDNOContractedmodeldiffersfromtheDNOMerchantmodel
duetotheinvolvementofathirdpartytomanagethecapacityof
theassetwhenitisnotrequiredforsecuritypurposes.TheDNO
wouldstillfinance,maintainandoperatetheasset,butwould
dispatchitforancillaryservicesattheinstructionofathirdparty.
Under a futureDSO incentive scheme theDNOwould still be
incentivised to actively manage the distribution network to
reducecosts.Assuch,theoperationoftheassetwouldalready
beacorefunctionoftheDNO’sbusiness,decreasingoperational
costs in setting up a trading and risk management business
andincreasingrevenueefficienciesthroughalreadyestablished
expertise.Storagecouldbeoneofmanytechnologiesforenabling
this, forming one part of a portfolio of active management
technologiesandsystemswithagreaterwidersystemvalue.
However,theobviousdrawbackofthismodelisthatitisstill
verymuchahypotheticalcase.Also,whiletheextenttowhich
theDNOwouldneedtocarrythecommercialriskoftheasset’s
operation is unknown, it would still be greater than if the
Figure 7 DNO Contracted Model
Ownership
Development & Construction
• DNOmanagesdevelopmentasforanyothernetworkasset
Operations & Dispatch
• DNOhasfulloperationalcontrol
• DispatchedforancillaryservicesatinstructionofThirdparty
Finance
• FinancedbyDNO• Mayformpartof
theDNO’sRegulatedAssetBase
Maintenance
• DNOmaintainsasset
Security of Supply
Embedded Benefits
Reactive Power & Voltage Support
Frequency Response
STOR
Energy Arbitrage (buy and sell)
Capacity Payments
Operation Services/Valuestreams
AnnualSTORtenders
Energytrading
Capacityauction
RelationshipwithSupplier
DNO
DNO 3rdparty Contract Market
Trad
ing/
aggr
egat
ion
MonthlyFFRtenders
EnergysupplyTollingcharge
Smarter Network Storage - business model consultation | 35
asset,andisresponsibleformeetingthethirdparty’sdispatch
instructionsintheperiodswhenthethirdpartyhascommercial
controloftheasset,improvingtheoverallDNOconfidencein
theavailabilityofthecapacitywhenrequired.
The disadvantage with the DNO Contracted model is that
thetermsofthethirdparty’saccesstothecapacitycouldbe
complexandneedtobeclearlydefinedpriortodevelopment
of the asset. The ability to define the times at which the
third party will have access to the asset is dependent on
forecastingof the specificnetwork constraint requirement,
which ismainlydependenton the localnetworkareaand
local demandgrowthwhich is largely uncertain (offset by
any growth in embedded generation or DSR). Also, these
contracted security requirement windows would aim to
allow as much flexibility as possible for the monetization
of additional value streams. As such, they would aim to
usethesmallestwindowthatguaranteestheDNOsecurity
requirementsaremet.However,therewouldbeaninherent
and largely unavoidable conservatism in these contracted
security requirementwindows,whichwould likelybe long
termcoarseagreementswithpoorgranularityforrealtime
deviationsofrequirement.Thiswouldcreateapotentialvalue
losstotherevenuestreamsoftheassetancillaryservices.
Underthismodel,thethirdpartywouldenterintoalongterm
capacitycontract(ideallytotheendoftheoperationallifeof
theasset)whereadditionalvaluewouldaccrueto theDNO
throughfixedannualavailabilitypaymentstotheDNO,orsome
form of percentage pass-through of value. The DNO would
thereforebeinapositiontomakeitsinvestmentdecisionby
comparingthenetpresentvalueoftheavailabilitypayments
underthelongtermcapacitycontractsagainsttheincremental
costofstorageoverandabovetraditionalreinforcement.
Asummaryoftheprincipaladvantagesanddisadvantagesof
themodelaccordingtothecommonsetofqualitativecriteria
isgiveninTable6.
TheprincipaladvantageoftheDNOcontractedmodelisthat
some, or all, of the risk around monetising the additional
valuestreams is transferredaway fromtheDNO. Inviewof
theinherentuncertaintyastothelongtermvalueofadditional
revenuestreams,thethirdpartywouldbeexpectedtobidat
adiscounttothe longtermexpectedvaluefor thiscapacity.
Theextentoftheriskswillobviouslydeterminetheextentof
thediscountthatitapplies,whichwillinturnaffectthelikely
viabilityoftheinvestmentfromtheDNO’sperspective.Afurther
advantageisthattheDNOretainsfulloperationalcontrolofthe
36 | Smarter Network Storage - business model consultation
Grouping
Security
AssetValue,
CostandRisks
WiderBenefit
FutureProof
Criteria
DNOControl
OptimisingValue
ofAsset
RiskAllocation
Financing
OptimisingValue
forSystem
DynamicEfficiency
CarbonEfficiency
Scalability
Regulatory
Compatibility
Flexibility/
Optionality
Description
• DNOhasfulloperationalcontrol,andcommercialcontrolindefinedsecurityperiodsonly.
• Possibilityofcomplexcontractualtermstoensurethemostvaluableservicesare
availabletothirdpartywhilstensuringsystemsecurity.
• LikelytobeconservativeSecureCapacityWindowswithsignificantvaluelosses(i.e.lost
ancillaryservicebenefits).
• AssumesthatSecureCapacityWindowscanbedefinedwithenoughcertainty.
• Thirdpartymayheavilydiscountlongtermvalueofadditionalrevenues,dependingon
theriskinessoftheserevenues.
• Thirdpartyexpertisehoweverwould,intheory,ensuretheassetisoptimallyutilised.
• TheDNOwouldnotberequiredtoestablishanenergytradingandriskmanagement
functionwithintheirbusiness.
• TheDNOwouldpasssomeofthecommercialrisktothethirdparty,theextentof
whichwoulddependontheSecureCapacityWindowsandtollingagreementbetween
thetwoparties.
• Financingasaregulatedassetcouldreducethecostofcapital.
• Customersshareinadditionalcapturedvaluenotpreviouslyavailable,dependingon
theproportionofregulatoryfinancing.
• Thetermsofthetollingagreementcouldallowfortheassettobeaggregatedintoa
largerthirdpartyportfolio.
• DNOhasfullcontroloverthestoragetechnologyandcantargetthedevelopmentof
specifictechnologiesifrequired.
• Thebusinessmodelwouldbecomemoreefficientasprojectsarerolledoutandsubject
totheDNOestablishinganinternaltradingandriskmanagementexpertise,the
organicgrowthofthesecapabilities.
• Incentivisesandenableslowcarbonpowersystem.
• Thirdpartymaybeabletoaggregateacrossmultipleassetswhichincreasesscalability.
• Theremayberegulatorybarrierstothefinancingoftheprojectasaregulatedasset.
• IftheDNOwastocarrysomeofthemerchantexposure(amodelvariation),theremay
beregulatorybarrierstotradingofpowerbytheDNO.
• Optionalitytore-locateassetmayberestrictedifnotexplicitlycoveredbytermsof
agreementwiththirdparty.
Table 6 DNO Contracted Qualitative Assessment
Smarter Network Storage - business model consultation | 37
Figure 8 Contracted Services Model
Ownership
Development & Construction
• Thirdpartymanagesdevelopment.LikelytorequireDNOinputatthisstagetodefinerequirements
Operations & Dispatch
• Thirdpartyhasfulloperationalcontrol,subjecttoobligationstoDNO
Finance
• Financedbythirdparty
Maintenance
• Thirdpartymaintainsasset
Trad
ing/
aggr
egat
ion
Security of Supply
Embedded Benefits
Reactive Power & Voltage Support
Frequency Response
STOR
Energy Arbitrage (buy and sell)
Capacity Payments
Operation Services/Valuestreams
MonthlyFFRtenders
AnnualSTORtenders
Energytrading
Capacityauction
RelationshipwithSupplier
Thirdparty
DNO 3rdparty Contract Market
DNOservicescontract(TollingCharge)
2.1.4.ContractedServices
Underthismodel,theDNOidentifiesthesecurityrequirement,
orothernetworkconstraintformitigation,selectsthesiteand
thenrunsanopentenderforthirdpartiestobuildandoperate
storage.TheDNOsetstechnicalrequirementsthatmustbe
met, such as, the Secure Capacity Windows, the minimum
exportingcapacityandstoragecapacityoftheasset.TheDNO
offersafixedannualpaymentinreturnforthesecurityservices
providedbythethirdparty.
38 | Smarter Network Storage - business model consultation
Grouping
Security
AssetValue,
CostandRisks
WiderBenefit
FutureProof
Criteria
DNOControl
OptimisingValue
ofAsset
RiskAllocation
Financing
OptimisingValue
forSystem
DynamicEfficiency
CarbonEfficiency
Scalability
Regulatory
Compatibility
Flexibility/Optionality
Description
• Thirdpartyhasfullcontroloftheasset.
• DNOdoesnothaveoperationalcontrol,ortangibleassuranceofsafetyortechnical
aspects.
• Possibilityofcontractualchallengesinensuringsystemsecurityatbestvalue.
• Thirdpartymayheavilydiscountlongtermvalueofadditionalrevenues.
• Littleexistingappetitefromthird-partieswhileunproven.
• Fullcommercialriskwiththethirdparty.
• LimitedinitialinvestmentbyDNOs/Customers.
• Additionalsystemvalueisnotdeliveredtocustomers.
• CostofcapitalmaybehigherthaniffinancedbyDNO.
• AssetcanbeaggregatedintoalargerThirdPartyportfolio.
• Dependingonthetenderrequirements,notnecessarilypromotingthedevelopmentof
energystorageaboveothersolutions.
• DNOcouldstilldefinethestoragetechnology,oropenuptoalltechnologies.
• Incentivisesandenableslowcarbonpowersystem.
• Thirdpartymaybeabletoaggregateacrossmultipleassets,whichincreasesscalability.
• Likelytofacefewregulatorybarriers.
• DNOoptionalityonrelocationofassetisremoved.
fullcommercialcontroloftheassetandwouldreceivetolling
paymentsfromtheDNOcombinedwithuncertainreturnsfrom
additionalvaluestreams.
Asummaryoftheprincipaladvantagesanddisadvantagesof
themodelaccordingtothecommonsetofqualitativecriteriais
giveninTable7below.
UndertheContractedServicesmodelthesuccessfulthirdparty
would leadthedevelopmentandconstructionof thefacility,
including all consents and planning. The third party would
thenfinance,own,operateandcontroltheasset.Theoriginal
tender agreement would guarantee them revenue streams
across the expected life of the asset in return for meeting
theDNO’ssecurityrequirements.Thethirdpartywouldhave
Table 7 Contracted Services Model Qualitative Assessment
Smarter Network Storage - business model consultation | 39
2.1.5.ChargingIncentives
The Charging Incentives model is one under which the
DNO ensures that the DUoS charging (for both generation
and demand) creates the right incentives for decreases
in (net) demand at peak times in the location requiring
reinforcement. Third parties may or may not respond to
the incentives by building storage (or equally by building
embeddedgenerationorwithDSM,which are outside the
scope of this consultation). The DNO has no control over
howmuchcapacityisbuiltorwhatthetechnicalcapabilities
are.TheDNOalsohasnowaytoensurethatthecapacityis
availableforsecuritypurposeswhenrequired.TheDNOmay
thereforehavetoover-incentivisethethirdpartyintermsof
thepaymentstructure.
Thethirdpartywouldleadthedevelopmentandconstruction
of thestorage facilitywitha technologyoptionand location
of their choice. The thirdpartywouldown,finance, operate
andmaintaintheasset,holdingfullcommercialcontrolofits
operation.TheDNOwouldholdnooperationalcontrolofthe
assetandhavenoguaranteeonsecurity,butwouldsetcharging
signals(suchasnegativeDUoSorcreditsforgenerationduring
the‘SuperRed’timeperiod11)forpeakshavingthatreflectthe
valueofreinforcement.Thesesignalswouldpotentiallyneedto
reactdynamicallytosystemconditions,whichisnotcurrently
thecase.
Asummaryoftheprincipaladvantagesanddisadvantagesof
themodelaccordingtothecommonsetofqualitativecriteria
isgiveninTable8.
FromtheperspectiveoftheDNO,theprincipaladvantageofthe
ContractedServicesmodelisthattheconstruction,operational
andcommercialriskisremovedorsignificantlydecreasedfrom
theDNOMerchantandDNOContractedmodels.Theproject’s
construction, operational and commercial risk is instead
passed toa thirdparty,who couldhavealreadyestablished
anexpertisethatwouldallowthemtoeffectivelymanagethis
risk.TheDNOalsoavoidstheupfrontcapitalcostoffinancing
theasset,insteadspreadingthiscostoutoverthelifetimeofthe
assetasanannualtollingcharge.TheDNOalsoavoidshaving
toestablishaninternalenergytradingandriskmanagement
servicewhichinsteadcouldbetakenbyanestablishedfunction
withinthethirdparty’sbusiness.
However,astheDNOpassescontroloftheassettoathirdparty
theyalsolosedirectcontrolofitsoperation.TheDNOinstead
relies on the Third Party to provide the storage for security
whenrequired.Thisinitselfaddsaconsiderableprojectriskto
theDNOwiththechancethatthethirdpartywouldoverutilise
theassettomaximizetheircommercialbenefits,thusfailing
tomeettheirsecurityandconstraintrequirementobligations.
Forthefirstprojects,therisksassociatedmaylimitthenumber
of potential providers and lead to a lack of competition in
the near term. This may be compounded by the lack of
understandingfromthemarketastothenatureoftheservices
required.Thereisariskthattheconsiderableupfrontcostand
commercialriskthatwouldneedtobecarriedbythethirdparty
wouldagainlimitthemarketsizewiththelackofsuitableand
interestedthirdparties.
11 Super Red time band is a seasonal time of day period determined by each DNO to reflect the time of system peak
40 | Smarter Network Storage - business model consultation
Grouping
Security
AssetValue,
CostandRisks
WiderBenefit
FutureProof
Criteria
DNOControl
OptimisingValue
ofAsset
RiskAllocation
Financing
OptimisingValue
forSystem
DynamicEfficiency
CarbonEfficiency
Scalability
Regulatory
Compatibility
Flexibility/
Optionality
Description
• Thirdpartyhasfullcontroloftheassetanditsoperation.
• NooperationalcontrolforDNO–noguaranteeonsecurityorthatassetisbuiltinoptimal
locationorisbuiltatall.
• Chargingincentivesmayneedtobeverylarge.
• ThirdpartymayheavilydiscountlongtermvalueofadditionalrevenuesandofDUoS
incentives.
• Amarketledsolutioncould,intheory,producethemosteconomicalsolution.However
thisdoesnotrecognisethebarriersandrisks.
• Allcommercialriskispassedtothethirdparty.
• NocommercialrisktoDNOorCustomers.
• CostofcapitalmaybehigherthanforDNO.
• Thirdpartiescouldaggregatetheassetwithothersinawiderportfolio.
• Allowsmosteconomictechnologychoice(notnecessarilystorage).
• Doesnotnecessarilydriveinnovationinstorage.
• Thereisnoguaranteethatacarbonefficientsolutionwouldbeproposedbythethirdparty.
• Appearstobeeasilyscalable.
• Likelytofacefewregulatorybarriers.
• DNOoptionalityonlocationofassetisremoved.
• TheThirdPartyhasfullcontrolovertheasset’slocation.
Table 8 Charging Incentives Model Qualitative Assessment
Smarter Network Storage - business model consultation | 41
Under thismodel theDNOallows themarket to define the
mosteconomictechnologychoiceandlocationsolutionforthe
project.TheDNOwouldcarrynoneofthecommercialrisk,with
alltheprojectandcommercialriskpassedtoaspecialistthird
party (who would be expected to have the experience and
capabilitiestomanagethisrisk).
However,withthismarketbasedsolutionthereisariskthat
thirdpartieswouldnotreacttothepricesignalsandtheasset
wouldnotbebuiltatall.Ifthestorageassetweretobebuiltit
wouldbebyathirdpartyandtheDNOwouldhavenocontrol
ofitslocationortechnologychoice,bothofwhichmightnot
besufficienttomeettheDNOssecurityrequirements.Also,the
DNOwouldhavenocontroloftheasset’soperationandassuch
noguaranteethattheassetwouldbeavailabletoprovidethe
securityrequired.Thismaybeacceptableiftherewerealarge
numberofsmalldistributedassetssupportingasingleregion,
butisabarrierifsecurityisbasedonasingleasset.
Anotherconsiderationisthatthechangestochargingrequired
tocreatetheeconomicsignalscouldaddsignificantcomplexity
toDUoStariffs.
2.2.QualitativeAssessmentSummary
We have performed an assessment of the business models
againstthesetofqualitativecriteriapresentedinTable3,and
usedthistoaidtheselectionoftwobusinessmodelsforfurther
development.Thelistofcriteriarepresentsahighlevelviewof
thekeybusinessmodelconsiderations.Wehavenotassigned
weightingstothecriteriaasthesewouldbehighlysubjective
depending on stakeholder viewpoint. We invite interested
partiestopresenttheirownviewsinthisarea.
Wehavescoredeachmodelagainst thecriteriaabove.Each
model is scored from1 to5where5 is thebest score. The
scoringisnecessarilysubjectivebutprovidesacommonbasis
fordiscussion.
42 | Smarter Network Storage - business model consultation
Table 9 Qualitative Scoring Matrix
DNOControl
Optimising
ValueofAsset
RiskAllocation
Financing
OptimisingValue
forSystem
Dynamic
Efficiency
Carbon
Efficiency
Scalability
Regulatory
Compatibility
Flexibility/
Optionality
DNOMerchant
5
3
1
4
3
2
4
2
2
5
DistributionSystemOperator
5
3
2
4
3
2
4
3
1
5
DNOContracted
4
4
4
4
4
3
4
4
4
3
ContractedServices
3
4
3
2
4
5
4
5
5
1
Comments
Highestscoreformodels
whereDNOhasfull
operationalcontrol.
Assumethirdpartybetter
placedtooptimisevalue
thanDNO.
Allocationofmarketrisksis
akeydriver.
AssumeDNOhaslower
costofcapitalforstorage
investments.
Assumethatthirdparty
aggregationcreatesmore
valueforsystem.
Modelswhichenable
competitionandtechnology
neutralityscorehighly.
Allscorehighlyexpectfor
ChargingIncentives,where
thereisnoguaranteethat
storagewillbebuilt.
AssumeDNOdominated
modelsarelessscalable.
AssumethatDNOlicence
conditionsmaylimitDNO
tradingofpower.
UnderDNOownedmodels,
DNOkeepslongterm
optionalitytore-locateasset.
ChargingIncentives
1
2
2
2
2
5
2
2
5
1
Smarter Network Storage - business model consultation | 43
Figure 9 Qualitative Assessment Summary
1
2
3
4
5
DNO Control
Dynamic Efficiency
Optimising Value for System
Carbon Efficiency
ScalabilityFinancing
Regulatory Compatibility Risk
Allocation
Flexibility/Optionality
Optimising Value of Asset
Key
DNO Merchant
DNO Contracted
Charging Incentives
Distribution System Operator
Contracted Services
44 | Smarter Network Storage - business model consultation
While the DNO would have full control over the asset, they
wouldberequiredtobuildanin-houseenergytradingandrisk
management capability tomonetize theseadditionalbenefits.
ThisinitselfisasignificantdeviationfromtheDNOscorebusiness
andisaprohibitiveup-frontcost.Thereisalsoanincreasedrisk
thattheprojectwouldlosethevalueoftheseancillarybenefits
whicharecriticaltothecommercialviabilityoftheproject.
TheDSOmodelscorespoorlybecausetheregulatoryregime
is yet to get beyond the earliest stages of discussion. This
modelwillbeofmoreinterestinthefuturebutforthecurrent
discussion it is relevant toexplore thecompatibilityofother
modelswithafutureDSOworld.
Based on this assessment the lead models selected for
furtherconsiderationaretheDNOContractedandContracted
Servicesmodels.
2.3.RegulatoryTreatment
WithregardstotheDNO’spricecontrol,therearefourdifferent
regulatory treatment options of interest across the five
proposedbusinessmodels.Apartfromthemodelswherethe
asset is financedbya thirdparty, theDNOparent company
has the option to finance the asset as a non-regulated or
The DNO contracted model scores consistently well across
mostmetrics,duetotheallocationofrisksandresponsibilities
betweentheDNOandthirdparty.Itscoresneutrallyondynamic
efficiencybecauseitdoesnotencouragetheopencompetition
in technologiesormodels that thethirdpartymodelsallow.
The flexibility/optionality for the DNO is restricted by the
contractualrelationshipwiththethirdparty.
The Contracted Services model scores well on dynamic
efficiency, scalabilityand regulatory compatibility,asa result
of being third party owned. It scores poorly on flexibility/
optionalityfortheDNObecausethethirdpartyownstheasset
andthereforeredeploymentoftheassetmaynotbepossible.
Theremainingthreemodelsscorepoorlyonspecificareas.The
ChargingIncentivesmodelofferstheDNOnocontroloverthe
assetstechnologychoice,itslocation,oritsoperationtoprovide
securityorancillaryservices.TheChargingIncentivesmodelas
suchdoesnotguaranteetheassetscorefunctionofmeeting
theDNOssecurityobligationwouldbemet,andistherefore
notconsideredfurther.
TheDNOMerchantmodelscorespoorlyonriskallocationasthe
DNOretainstheriskofmonetizingtheadditionalvaluestreams.
Figure 10 Regulation Options
• ContractedServices
• ChargingIncentives
RegulatoryHandling
RelevantModels
Non-regulated Regulated
ProjectCostAccruedto ThirdParty DNOParentCompany
DNOParentCompanyandConsumerSplit
Consumer
• DNOMerchant
• DSO
• DNOContracted
• DNOMerchant
• DSO
• DNOContracted
• DNOMerchant
• DSO
• DNOContracted
Smarter Network Storage - business model consultation | 45
assetfinancedon theDNOparentcompany’sbalancesheet
theDNOparentcompanywouldcarry theprojectcostsand
all the commercial risk. The regulated value of the asset
underthepricecontrolwouldbethecostofoffsettraditional
reinforcement.Customerswouldtakenoriskonthefinancial
benefits from the assets additional services, which would
accruedirectlytotheDNOparentcompany.Inthisregulated
DNOparent companyfinanced scenario the cost of security
ispassedtotheCustomersviaappropriatepricecontrolsina
similarmannertotypicalnetworkreinforcementcosts.
CustomerRegulatedFinancedScenario
The third option is the opposite extreme of the regulated
scenario,where the regulated value of the asset is the full
capital cost of the asset. In this scenario Customers would
seethesecuritybenefitandwouldalsoaccruetheadditional
financial benefit from the ancillary revenue streams. This
scenariocreatesamisalignmentofincentives,withtheDNO
facing no direct incentive to operate the asset in a profit
optimizingmanner. If theassetweretobeoperatedbythe
DNO,asisthecaseintheDNOMerchantmodel,therewould
beamisalignmentoftheproject’scostandrevenuestructures
wherethebenefitofoperatingtheassetwouldnotaccrueto
the party that would carry its operational cost, namely the
DNO.(Thisexcludesthepossibleresetofallowedrevenuesthat
mightoccuratpricecontrolreviewiftherevenuegeneratedby
storageissignificantlyoutoflinewithotherDNOs)
Thiscasealsoposes thequestionofhowtheseadditional
benefitswouldbepassedtotheCustomersunderexisting
pricecontrolarrangements.Thecostoftheassetalongwith
the benefit of the offset traditional reinforcement could
bedealtwithandpassedtoCustomersviatreatmentasa
regulatedasset. Theuncertainancillary revenuesover the
lifetimeoftheassetwouldthenoffsetthepaymentsmade
byCustomers.
regulatedasset.Furthermore,iftheprojectwastobefinanced
asaregulatedassettheproportionthatwouldbefinancedby
theDNOparentcompanyandCustomerscouldalsovary.This
wouldinprincipledependontheappropriatecostandbenefit
splittobecarriedbytheDNOparentcompanyandCustomers.
This prompts two immediate questions, firstly what is the
appropriateriskandcorrespondingcostandbenefitthatshould
bepassedtoConsumersforboththesecuritybenefitandthe
ancillary services. And secondly, how this cost (and annual
revenues in particular) would be transferred to Customers
throughpricecontrolsorotherwise.Wediscusstheprinciplesof
theregulatorytreatment,ratherthanseekingtoconsiderhow
thismayalignwiththeemergingRIIO-ED1arrangements12.
Non-regulated&ThirdPartyFinancedScenario
In the third party financedmodels there are few regulatory
compatibilityconcernsasallcommercialriskispassedtothe
third party. The DNO parent company would see the tolling
chargeasanoperationalcostwhichwouldbetreatedlikeany
otherunderthepricecontrol.
Wenotethatthereisavariantunderwhichthethirdpartyisinfact
thenon-regulatedbusinessarmoftheDNOparentcompany.This
wouldnotprecludetheDNOparentcompanyfrommakinguseof
anaggregatortomanagetheoptimisationoftheadditionalvalue
streams. Under this variant the DNO’s non-regulated business
buildsandoperatestheasset.CustomersandtheDNO’sregulated
businesstakenoriskontheasset,assumingthatafixedtransfer
priceisagreedforthevalueoftheavoidedreinforcement.The
DNO’s non-regulated business takes the risk and value of the
additionalvaluestreams(variantofDNOMerchant),orcontracts
thecapacityouttoathirdparty(VariantofDNOContracted).
DNOParentCompanyRegulatedFinancedScenario
Inthesecondpossiblescenariowheretheassetisaregulated
12 http://www.ofgem.gov.uk/Networks/ElecDist/PriceCntrls/riio-ed1/consultations/Documents1/RIIOED1DecOverview.pdf
46 | Smarter Network Storage - business model consultation
longtermagreementsfortheeconomicoutputofspecificassets
(suchasthetollingcontractbetweenthethirdpartyandthe
DNO)mayincertaincircumstancesbecategorisedasaleasing
agreement.Ifso,theliabilitiesoftheassetmayconsolidateon
thebalancesheetofthepartywhoissuesdispatchinstructions
for the asset and carries the commercial risk, irrespective of
whohasownershiporoperationalcontroloftheasset.Similarly,
there may be an adverse effect on the credit rating of the
projectpartywhotakestheassetandsubsequentcommercial
risk,againirrespectiveofwhocontrolsorfinancestheasset.
The accounting treatment of the project’s liabilities on the
balancesheetsoftherespectiveprojectpartieswoulddepend
onboththemagnitudeof,alongwithtowhomtheproject’s
assetsandliabilitiesaccruedto.Thisassetliabilitysplitwould
beexaminedinthediscountedcashflowofthespecificproject
and would be tested according to the Financial Reporting
Standard (FRS) 5. Careful consideration of the commercial
structure would be required to ensure that the accounting
treatmentalignswiththeintentionsofthebusinessmodel.
2.5.ConsultationQuestions
The questions that we invite interested parties to submit
writtenevidenceandanalysisonareasfollows:
1.Do you agree with the range of business models
presentedinSection2.1?
a.Arethesebusinessmodelsandtheirvariantsrepresentative
oftherangeofplausiblebusinessmodels?
b.Doyouagreewiththecharacterisationsofeachofthese
businessmodelsintheirrespectiveSections2.1.1through
toSection2.1.5?
2.Doyouagreewiththechoiceofassessmentcriteriaas
describedinSection2.1?
a.Are these thekeyassessment criteria that thebusiness
modelsshouldbecomparedagainst?
Regulated & Split Customers DNO Parent Company
FinancedScenario
The fourth financing option is for the asset to again be a
regulatedasset,butitisnowsplitfinancedbetweentheDNO
parentcompanyandCustomers. In thiscase theDNOparent
company,ifithasoperationalcontroloftheasset,isincentivised
tooperate theasset inaprofitoptimizingmanner (theDNO
parentcompanywouldaccruesomeof thefinancialbenefits
fromtheancillaryservices,thusavoidingmisplacedincentives).
Customerswouldagainseethesecuritybenefit,butthefinancial
benefitsoftheancillaryrevenuestreamswouldnowbesplit
betweentheDNOparentcompanyandCustomers.
Acrossalltheregulatedcasesthekeyistoalignthecostsand
risksthatCustomersaretakingwiththebenefits.Itisclearthat
theDNO should take someexposure to theadditional costs
andrevenuesassociatedwiththeproject,buttheremaybean
argumentforCustomerstotakingmoreorlessofthebenefits
andcorrespondingrisk.
We also note that storage assets do not have the typical long
economiclifeofdistributionassets.Moststorageassets,suchas
batteries,wouldhavealifetimeof10-15yearsfortheenergystorage
mediumand30yearsforthebalanceofplant.Incomparison,most
conventionaldistributionequipmenthasalifetimeof30-50years.
Storageassetsalsodifferfromtypicaldistributionassetsasthey
providepositiverevenuesthroughoutthelifeoftheasset.Therefore
treatmentasatypicalregulatedasset(withreturnsmadeovera45
yearassumedassetlife)maynotbewellalignedwiththetrue
costsandrevenuestotheDNOofowningandoperatingstorage.
2.4.AccountingTreatment
Anadditionalprojectdynamicthatvariesbetweenthedifferent
businessmodelsistheaccountingtreatmentoftheassetand
itsliabilitiesonthebalancesheetsoftheprojectparties.Most
notably,underaccountingrulesasoutlinedintheInternational
FinancialStandardsasadoptedintheEuropeanUnion(EU-IFRS),
Smarter Network Storage - business model consultation | 47
b.Are there any additional advantages, disadvantages or
barrierstoanyoftheindividualbusinessmodelsthathave
notbeenincluded?
3.Doyouagreewith thechoiceof the two leadmodels
andthereasonsforselectingtheseasdescribedinthe
QualitativeAssessmentSummary,Section2.2?
a.Are these options the most likely to be suitable for
distribution-connected storage, or should one or more
oftheotherbusinessmodels(orvariantsofthese)have
beenconsideredovertheDNOContractedandContracted
Servicesmodels?
b.Ifso,whichmodelsshouldhavebeenconsideredandwhy?
4.Doyouagreewiththerangeoffourregulatorytreatment
scenariospresentedinSection2.3?
a.Arethereotherscenariosthatshouldbeincluded?
b.Arethereinherentregulatorycreatedlimitationsthathave
notbeendiscussed?
c.Arethereadditionaladvantagesordisadvantagesforeach
ofthesescenariosthatshouldbeconsidered?
48 | Smarter Network Storage - business model consultation
Lead Business Models3
Smarter Network Storage - business model consultation | 49
Projectdevelopment
The trigger for pre-development of the project is the
identificationofaneedforreinforcementinaspecificlocation
tosupportthelocalnetwork.TheDNOwouldinvestigatethe
rangeofoptionsavailabletoit,whichmightincludeinstallation
of new transformers and or lines, uprating of capacity of
current infrastructure through incremental investments, and
of non-transmission options such as EES and/or demand
side response. If the DNO identifies EES as being the most
technicallyandeconomicallyfeasibleoptionthatisdeliverable
inthetimescalesrequired,itwillinitiatepre-developmentof
thestoragefacility.
At an early stage in the development process, the DNO
would initiate discussionswith potential third parties to test
themarketforthestoragetollingagreement.Assumingthat
the discussions indicate sufficient value in potential tolling
payments,theDNOwouldselectathirdpartyandagreeterms.
Thismay involvebilateralnegotiation,or amore formalised
auctionprocess.
Theassetwouldbebuiltasaregulatedassetundertherules
ofthepricecontrolinforceatthatpointintime.Theoptions
for regulatory treatment are discussed in general terms in
section2.3.
Inthissectionweoutlinetwoproposedleadbusinessmodelsto
beassessedwithintheSNSprojectinmoredetail.Weconsider
the project lifecycle, contractual arrangements, and possible
barriers.Finally,weconsidersomepossiblevariantsofthemodels.
TheDNOContracted and Contracted Servicesmodels share a
numberofcommonfeatures.Theybothrequirea thirdparty
to takesomeorallof thecommercial riskon the long term
valueoftheadditionalvaluestreams,andrequireacontractthat
ensuresthattheDNOhasprimaryaccesstotheassetwhenitis
requiredforsecuritypurposes,orotherconstraintmanagement.
Thekeydifferencebetweenthemodelsistheownershipand
operationof theasset,which lieswith theDNOunderDNO
ContractedandthethirdpartyunderContractedServices.
3.1.DNOContracted
TheDNOContractedmodeltreatsthestorageasadistribution
system asset and the development approach may in many
ways be analogous to a traditional DNO investment, albeit
withthefurthercomplexityofadditionalvaluestreamsanda
contractualrelationshipwithathirdparty.
Thismodelisclosesttothatwhichwillbedemonstratedwithin
theSNSprojectfollowingcommissioningofthestoragefacility.
50 | Smarter Network Storage - business model consultation
Contractingstructure
Figure 11 shows a possible ownership and contracting
structurefortheDNOContractedmodel.TheDNOwouldlead
construction of the asset, contracting out for construction as
required.TheassetwouldbeownedbytheDNOasaregulated
distributionasset.Onceoperational,themaintenancestrategy
ofthefacilitywouldfalltotheDNO’sNetworkOperations.The
actual maintenance may be carried out by the DNO’s field
engineersdirectly,orcontractedouttothemanufacturerora
maintenanceprovider.
Figure 11 DNO Contracted: Contractual Structures
Manufacturer ManufacturerO&M Provider/DNO Function
Insurer
Asset
DNO
Ofgem
Third Party
AdditionalInsurance
O&MAgreement
AssetOwnership
LongTermServicesAgreement
EPCorTurnkeyContract
CapacityOfftakeAgreement
DNOLicence AdditionalServices
Smarter Network Storage - business model consultation | 51
thatensurethestorageisatorabovesomepre-agreedcharging
levelatthestartofeachsecuritywindow(i.e.thethirdparty
mustensurethatthestoragedeviceisattheagreedcharging
levelatthestartofeachsecuritywindow).
DependingonwhethertheDNOhassecuredafixedcapacity
tollingcontractfortheentireeconomic lifetimeoftheasset,
orwhetherarevenuesharearrangement isestablished, the
DNOmaynotholdanypriceormarketriskassociatedwiththe
valueoftheadditionalservices.Ineithercase,theremaybe
somesmallexposuretothenetcostofpowerboughtandsold
intheDNO’suse(e.g.ifafaultwastooccurandtheassetwas
requiredtoexport).
TheDNOretainscounterpartyriskonthepossibilityofthethird
partydefaulting.TheDNOmayrequiresomeformofcollateral,
securityorguaranteeasacontingency.Therisk for theDNO
isthatitisleftwithnoroutetomarket,andwithnorevenue
security.Weassumethat thecounterparty risk that thethird
party takes isnotamajorconsiderationdue to the typically
highcreditworthinessofDNOs.
Note that it is assumed that no Connecting Construction
Agreement (section 16 agreement, controlling the terms
underwhichgeneratorordemandconnectstothenetwork)is
required,becausetheconnectionoftheassettothenetwork
isunder the full controlof theDNO,andoperational control
remainswiththeDNOsothereisnotaneedtospecifythisina
connectionagreement.
ThecapacityofftakeagreementbetweentheDNOandthethird
partydefinesthetermsunderwhichthecapacityisreleasedto
thethirdparty.Theagreementgivesthethirdpartycommercial
control(tolling)oftheassetoutsideofaspecifiedsetofSecure
Capacity Windows. Under the simplest arrangement, these
windowswouldbefixed in advance for thedurationof the
contract(e.g.4-7pmonNovember–Marchweekdays).Asthe
requirementsmightchangeacrossthelifeoftheprojectthe
DNOwouldneedtobeconservativeindefiningthesewindows,
whichmayreducethevaluetothethirdpartyandtherefore
thepaymenttotheDNO.Insection3.3weexploretheoptions
tobuildflexibilityintothiscontract.Aconditionofthecontract
wouldbethethirdpartyisobligedtomaketollinginstructions
52 | Smarter Network Storage - business model consultation
TypicalContractTerms
Whileany tolling contractbetween theDNOand thirdparty
would be project specific, Table 10 gives a summary and
examplesoftheexpectedheadlinecontracttermsthatcould
Terms
SecureCapacityWindow
ContractTenure
GenerationCapacity
OperationalConstraints
DispatchNotice
TollingCharge
Non-performancePenalties
Table 10 Example DNO Contract Tolling Agreement Headline Terms
Description
• FixedtimesthattheassetisrequiredfortheDNO’ssecurity/constraintmanagement
purposes(e.g.4-7pmdailyfromOctobertoMarch)
• Contracttenure(years)
• Thestoredenergy(MWh)thatisrequiredatthestartofaSecureCapacityWindow
• The operational constraints outside of Secure Capacity Windows (e.g. depth of
discharge(%ofbeginningoflifecapacity,responsetime(s))
• Thirdparty’sMWhavailability/holdingrequirementforagivenperiodforancillaryservices
• Thirdparty’sMWhdischargeforagivenperiodifDNOisinstructedbythethirdparty
todispatchtheassetforancillaryservices
• An annual fixed payment from the DNO to the third party (in £ or in £/MWh
ofavailability)
• A£/hrpaymentfromtheDNOtothethirdpartyifthethirdparty’sdispatchnotices
foravailabilityand/ordischargearenotmet
• A£/hrpaymentfromthethirdpartytotheDNOifthethirdpartyissuesdispatch
noticeswhichareinconsistentwiththeSecureCapacityWindowrequirements(e.g.
notenoughenergystoredatstartofaSecureCapacityWindow)
define the commercial elements of any tolling contract. A
summaryofhow these termscould changeas thebusiness
models evolve and the technology becomes established is
giveninSection3.4.
Smarter Network Storage - business model consultation | 53
on the operation of generation by DNOs is a potential
barrier as generation and distribution licenses are taken to
beincompatible.
As network companies, DNOs are prevented from owning
generationlicencesundertheEuropeanThirdEnergyPackage.
However, under theGB regime therearegeneration licence
exemptions for small generators in the Electricity Act.
EffectivelytheseallowaDNOtoowngenerationupto10MWin
capacity.Storageprovidingdistributionnetworkreinforcement
cantypicallybesizedbelowthislimit,andthereforethisneed
notbeabarrier,assumingthatthelimitismaintainedatthe
10MWlevel.
Howevertheneedforstoragetobeoperatedwithageneration
licencehasnot beenvalidated. If storagewasexempt from
beingconsideredgenerationandholdingagenerationlicence
thiswouldsimplifyarrangements.
De Minimis Business restrictions
DNOs are restricted from conducting activity outside of
distributionsubjecttoademinimisthreshold14ofboth;
• 2.5percentofthetotalturnoverofdistributionbusiness:and
• 2.5percentof thesumof the licensee’ssharecapital, its
sharepremium,anditsconsolidatedreserves.
IntheDNOContractedmodelweassumethatstoragedoesfall
undertheregulateddistributionbusiness.However,ifthiswere
notthecasethentheamountofancillaryrevenuegenerated
fromstorageownedbytheDNOscouldbesubjecttoacap.This
wouldnotbeanissueuntillargenumbersofstorageprojects
hadbeendeveloped.
Restrictions on DNOs buying and selling electricity
UndertheDNOContractedmodel,theDNOuseofthestorage
Decommissioningandterminalvalue
Throughout the project life, the DNO would regularly assess
whether storage remains capable of fulfilling the security
requirement, taking account of the useable capacity of the
storage(afteranydegradation)andforecastdemandgrowth.
AtthepointatwhichtheDNOforecaststhatthestoragewillno
longerbesufficienttofulfilthesecurityrequirement,theDNO
willconsiderwhethertoreneworaddtothestoragecapacity
or to make alternative interventions including traditional
reinforcement.IftheDNOfollowsthetraditionalreinforcement
option and the storage still has some usable economic life,
itmaybeeconomicfortheDNOtore-deploythestoragein
another location. This could only occur within the contract
durationiftheoptiontorelocate,alongwithanycompensation
forthetemporarylossofavailability,waswrittenintotheterms
ofthetollingcontract.
Outsideofthecontractterm,theDNOcouldrelocateandaimto
extendthecontractwiththethirdparty.
PotentialbarrierstotheDNOContractedmodel
There are potential regulatory barriers to the ownership or
operation of storage by DNOs, which we explore below.
Workstream 6 (WS6) of the Smart Grids Forum (SGF)13 is
consideringtheseandUKPowerNetworkswillconductfurther
workinthisareainthecourseoftheSNSproject.Herewegive
anoverviewofourcurrentunderstanding.
Generation licence
Storage is distinct fromgeneration in that it both consumes
and releases electricity (with the consumed amount being
slightlyhigherduetolossesinthechargingcycle).However,
storagesuchastheexistinglargescaletransmissionconnected
pumpedstorageatDinorwigandFfestinioghasbeentreated
asgenerationforregulatorypurposes.Assuch,theoperators
currently hold generation licenses. Therefore, the restriction
13 DNO ownership and operation of storage facilities.pdf (unpublished)14 Ref to Standard Licence Condition 29
54 | Smarter Network Storage - business model consultation
technologywouldexpect todegradepast its functional limit
in10-12years,butthebalanceofplantcouldoperatefor30
yearsbeforereplacement.Accordingly,theDNOmaywishto
replacethestoragetechnologytofurthertheoperationallifeof
theasset.Alternatively,theyDNOmaylooktoselltheassetto
anotherpartywhowouldsimilarlyusetheintrinsicassetvalue
toextenditsoperationallifetime.
If the asset and balance of plant have no further intrinsic
operational value, thematerials (and in the caseof EES the
storage medium in particular) and land would still have an
intrinsicvaluethattheDNOcouldmonetizethroughthesaleof
theassetandproperty.
Other barriers
As we have already noted, the model may require complex
contractualtermsinordertoensuremostvaluableservicesare
dispatchedwhilstensuringsystemsecurity.Thiscomplexitymay
alsolimitthepotentialforaggregationofthestorageintoathird
party’sportfolioofflexibleassets,whichmaylimitthevalueof
theassettothethirdpartyorincreasethecostofmanagingit.
Thefuturevalueoftheadditionalrevenuestreamsisinherently
uncertain.Underafixedannualpayment,allmarketrisksits
withthethirdparty,whichmayleadathirdpartytoheavily
discountthefuturevalueoftherevenueswhenevaluatinga
potentialopportunity.OthervariantswheretheDNOsharesthe
riskmayleadtolowerdiscounts.
mayconsumeandgeneratesmallamountsofelectricity.Whilst
theremaybesomerestrictiononthedirecttradingofelectricity
byDNO’s,itseemsthatasupplyagreementwiththethirdparty
wouldcircumventthispotentialissue.
Disposal of assets
When the asset (storage technology and balance of
plant) reaches itsendof life theDNOwouldbe required to
decommissionanddisposeoftheassetaccordingtocondition
26 “Disposal of Relevant Assets” of the Distribution License
Conditions. This condition states that, in general, consent
is given for assetswithoutgivingpriornotice if theasset is
obsolete, redundant or the disposal will not constitute the
disposalofalegal(ratherthananequitable)interestuntilthe
assetisobsoleteorredundant.Howeverthisdoesnotapplyif;
• Thevalueexceeds£200kinanyregulatoryyear
• It does not apply in respect of a relevant asset that is
obsolete,unlessanappropriatereplacementoralternative
arrangementhasbeeninstalled
• It does not apply if the disposal of the relevant asset
constitutesasaleandleasebackarrangement
• Itdoesnotapplyiftherelevantassetisintendedtoremainin
operationalusebutnotundertheoperationalcontrolofthe
licenseeanditsvalueexceeds£20,000
Attheendoflifeitisexpectedthattheassetwouldstillhave
some intrinsic operational value. For example, the storage
Smarter Network Storage - business model consultation | 55
Box 3 SSE Orkney project
TheprimarypurposeoftheSSEOrkneyProjectistomanagetheintermittentgenerationofrenewablesonOrkney.Thiswillbe
runaspartoftheOrkneyActiveNetworkManagement,underwhichSSEPDhastheabilitytocurtailrenewablegenerationif
required.Inthiscase,theuseofstorageisanalternativetocurtailmentofrenewablesandthereforenotspecificallyrequired
fornetworksecurity.
SSEhasprocuredstoragethroughatenderprocess,underwhichSSEwillbuystorageservicesfromthirdpartyowner(s)/
operator(s)underpre-agreedterms(analogoustotheContractedServicesmodel).Whilethereisafundamentalconditionto
makestorageavailabletoreceivesurpluspower,afundamentaldifferencetotheUKPowerNetworksSNSprojectisthatthe
Orkneystoragedeviceisnotrequiredfordistributionnetworksecuritypurposes.
15 http://www.ssepd.co.uk/HaveYourSay/Innovation/Portfolio/OrkneyPhase1/
3.2.ContractedServices
TheContractedServicesmodeltreatsthestorageasaservice
providertotheDNO.Itsharessomesimilaritywiththetreatment
foranembeddedgenerator,withtheadditionoftheprovisionof
capacitytotheDNOwithinspecificwindows.Anotherexample
ofaDNO-connectedstoragewithadifferentprimarypurpose
toUKPowerNetworks’SNSprojectisSSEPowerDistribution’s
OrkneyEnergyStorageproject15describedinBox3.
56 | Smarter Network Storage - business model consultation
CapacityOfftakeAgreement
Alternatively,theDNOcouldissueatechnologyneutraltender,
open to DSR or embedded generation, however it may be
difficulttocompareavailabilityonanequalfooting.Thismight
reducethecostof theservicetotheDNO,however itcould
lead to less innovative,highercarbonemitting technologies
beingselected.
Contractingstructure
Figure12showsapossibleownershipandcontractingstructure
fortheContractedServicesmodel.Thestoragewouldbeowned
bythethirdparty,eitherdirectlyorthroughaSpecialPurpose
Vehicle(SPV).
Projectdevelopment
AsfortheDNOContractedmodel,thetriggerforpre-development
oftheprojectistheidentificationofaneedforreinforcementina
specificlocationtosupportthelocalnetwork.IftheDNOidentifies
EES as being the most technically and economically feasible
optionitwillinitiateatenderforthestoragefacility.
Thistenderwilldefinetheparametersoftheservicerequired
bytheDNO,includingtheexportingcapacity(MW)andstorage
capacity(MWh),aswellasthesecuritywindowsinwhichthe
assetisrequiredbytheDNO.Itwouldalsoidentifythesitefor
theassetandthestartandenddateofthesecurityrequirement.
Figure 12 Contracted Services: Contractual Structures
Manufacturer Manufacturer O&M Provider
Insurer
Project SPV:Storage Co DNO
Third Party
Insurance
O&MAgreement
Ownership
LongTermServicesAgreement
EPCorTurnkeyContract
DNOConnectionAgreement
AdditionalServices
Smarter Network Storage - business model consultation | 57
butcounteredbytheincentivesofmorethanonebidderwho
maybeparticipatinginacontractorauction.
TheDNOisexposedtocounterpartyrisk–inthiscase,therisk
that the third party fails to provide the contracted services
(eitherforisolatedinstances,orinthelongterm).Inthiscase
itisunlikelythattheDNOwillbeabletoreplacethesecurity
providedbytheassetatshortnoticeandmightincursignificant
costsindoingso.Thisisnotaseasilymitigatedwithfinancial
guaranteesasfortheDNOContractedmodelwheretheDNO
isonlyexposedtoafinancialloss.Thismaybeabarriertothe
ContractedServicesmodel,asdiscussedlaterinthissection.
Thethirdpartyislessexposedtocounterpartyriskbecauseof
thetypicalDNOcreditworthinessandthelimitedalternatives
availabletotheDNOintermsofsecurity.
TypicalContractTerms
AsintheDNOContractedmodel,anytollingcontractbetween
theDNOandthirdpartyinaContractedServicesmodelwould
beprojectspecific.However,Table11givesasummaryand
examplesof theexpectedheadline contract terms.Again, a
summaryofhow these termscould changeas thebusiness
models evolve and the technology becomes established is
giveninSection3.4.
To ensure that asset is built in a location that both meets
theDNO’s reinforcement requirementsandcanbeoptimally
incorporated into the existing network, the DNO would
identifythesiteonwhichthestorageistobebuilt.However,
whilsttheDNOwouldidentifythesitethethirdpartywould
beresponsible forsecuringthenecessaryplanningconsents.
Weassumethatthethirdpartywouldberequiredtosigna
connection agreement with DNO. This would most likely be
based on a generation connection agreement, albeit with
someadjustments to reflect theparticular technical features
ofstorage.
ThecapacityofftakeagreementbetweentheDNOandthethird
partywouldhaveatermequaltotheanticipatedeconomiclife
oftheasset.Itdefinesthewindowsinwhichthestoragewill
beheldavailableandatsomeminimumchargelevel.Asthe
requirementsmightchangeacrossthelifeoftheprojectthe
DNOwouldneedtobeconservativeindefiningthesewindows,
whichmay increase the cost to theDNO. In section3.3we
exploretheoptionstobuildflexibilityintothiscontract.
In this model the DNO does not take any market risk. This
remainswiththethirdparty.Thethirdpartyalsotakesriskon
the availability and operational performance of the storage.
ThisislikelytobereflectedinlowertermsofferedtotheDNO,
58 | Smarter Network Storage - business model consultation
Table 11 Example Contracted Services Tolling Agreement Headline Terms
Terms
SecureCapacityWindow
ContractTenure
GenerationCapacity
OperationalConstraints
ThirdPartyDispatchNotice
TollingCharge
Non-performancepenalties
Description
• FixedtimesthattheassetisrequiredfortheDNO’ssecurity/constraintmanagement
purposes(e.g.4-7pmdailyfromOctobertoMarch).
• Contracttenure(years).
• Thestoredenergy(MWh)thatisrequiredatthestartofaSecureCapacityWindow.
• The operational constraints during these Secure Capacity Windows (e.g. depth of
discharge(%ofbeginningoflifecapacity,responsetime(s)).
• MWhdischargeforagivenperiodifassetisrequiredtodischargeforSoSobligations.
• Anannualfixedpayment from theDNO to the thirdparty (in£or in£/MWhof
availability).
• A£/hrpaymentfromthethirdpartytotheDNOifthecontractedSecureCapacity
Windowrequirementsarenotmet.
• A£/MWhpaymentfromthethirdpartytotheDNOiftheinstructeddischargecapacity
isnotmet.
Smarter Network Storage - business model consultation | 59
which can all provide the same service. This is not true in
thecaseofdistribution-connectedEESemployeddirectly for
networksecurity.Apotentialoutcomeofaprobabilitybased
approachmightbetoresultintheDNOcontractingforagreater
capacityofstorage than is required,withoutaddressing the
underlyingissue.
Complexity
As we have already noted, the model may require complex
contractual terms inorder toensuremostvaluable servicesare
dispatchedwhilstensuringsystemsecurity.Thelevelofcomplexity
islikelytobesimilartotheDNOContractedmodel.Thiscomplexity
mayalsolimitthepotentialforaggregationofthestorageintoa
thirdparty’sportfolioofflexibleassets,whichmaylimitthevalue
oftheassettothethirdpartyorincreasethecostofmanagingit.
ItmaybemoredifficultfortheDNOtomakeuseofadditional
benefits, such as power quality control and power factor
correctionimprovementsfromthepowerelectronicsofsuch
storagetechnologiesthathavethecapability.
3.3.Variants
Therearemanypotentialvariationsonthetwoleadmodels
described above.Herewe consider variantswhich separate
ownershipfromoperation,variations incontract length,and
variantsontheregulatorytreatmentofuncertainty.
Ownershipvariants
Inthemodelsdescribedaboveweassumethattheownerof
theassetisalsotheoperator.Byseparatingthesetwofunctions
wegeneratetwonewvariants,showninFigure13.
• Third party operator leased from DNO. Under this
model, the DNO builds the storage facility and then
leases ittothethirdpartytooperate.Comparedtothe
DNOContractedmodelthisremovescontroloftheasset
fromtheDNO.ComparedtoaContractedServicesmodel
Decommissioningandterminalvalue
Under the Contracted Services model, the DNO may have
littleornooptionalityonrelocatingtheasset if thesecurity
requirement canno longerbemetby theasset.Given the
capitalcommittedbythethirdparty, it is likely torequirea
longtermcontractwithafixedpriceforthesecurityprovided.
Thethirdpartyisunlikelytorelocatetheassetunlessthisis
aspecificterminthecontractwhichcompensatedthethird
partyfortheadditionalcostsandrisksincurredinthisprocess
aswellasthelossofrevenue.
PotentialbarrierstotheContractedServicesmodel
ApossiblebarriertotheContractServicesmodelisthelackof
directoperationalcontrolofthestoragebytheDNO.Thisisa
specificissueforEESrequiredfornetworksecuritypurposes,
andmaynotbeanissueforotherusesofEESoutsideofthe
scopeofthisConsultation.
Oneoptionistoputfinancialpenaltiesonthethirdpartyifthe
storageisnotmadeavailableintherequiredwindowswith
thestoragecharged toapre-specified level. The issuewith
thisisthattheimpactontheDNOofnotmeetingasecurity
requirementisnoteasilyquantifiable,andanycompensation
value couldbe sohigh that itmaterially reduced thevalue
thatathirdpartyassignstothecontract.Anotheroptionmay
be for theDNOtohavedirectoverridecontrolof theasset;
howeverthisimpliesalevelofoversightandinterventionthat
is unusual in tolling contracts. Individual DNOs will need to
evaluatetheirownattitudetothisrisk.
TheprobabilitythatDNOsshouldassigntotheavailabilityof
embeddedgenerationiscurrentlydefinedinERP2/6.Areview
ofthesestandardshasbeencitedasawayofaddressingthe
issue for storage, and SNS is expecting to deliver learning
specificallyrelatingtothecontributionofstoragetosecurity
ofsupply.Aprobabilitybasedapproachtotheavailabilityof
capacityissuitablewheretherearemultiplesmallresources
60 | Smarter Network Storage - business model consultation
ContractedServices
itmaintains theDNO’spotential costof capitalbenefit.
However disposal of an operational asset by a DNO to
another operator requires regulatory approval (Section
3.1).
Third PartyLeased from
DNO
DNO Leasedfrom Third
Party
DNOContracted
Third Party Owner
Third Party OperatorThird Party Owner
Third Party Operator
Figure 13 DNO and Third Party Ownership Variants
• DNOoperatorleasedfromthirdparty.Underthismodel,
thethirdpartybuildsthestoragefacilityandthenleases
it to theDNO tooperate. Thismodelmight beofmerit
inacasewheretheDNOrequiredoperationalcontrolof
theassetforsecuritypurposes,butisrestrictedfromasset
ownershipe.g.byregulatoryrestrictions.
Smarter Network Storage - business model consultation | 61
agreeinadvancethetermsofthecontractedSecureCapacity
Windowsandtollingcontractterms.Asummaryoftheexpected
headlinecontracttermsforthetwoleadbusinessmodelswas
giveninSections3.1&3.2.
TheSecureCapacityWindowswoulddefinethecapacityandtime
thatwouldberequiredbytheDNO,withthebalanceofcapacityand
timebeingavailabletothethirdpartytousetheasset.Anincrease
intimeavailabletothethirdpartyislikelytoincreasethevalueof
additionalvaluestreams,althoughthisincreasemaybesmall if
overridingrestrictionsremain.Toensureminimalvaluelossestothe
ancillaryservicesthecontractedSecureCapacityWindowsshould
be carefully considered, balancing security of supply obligations
whilemaximisingtheasset’sutilisation.Forexample,onemodel
isthattheDNOhasarightofoverrideatanypoint,toensurethat
securityofsupplyrequirementsaremet.However,thisavailability
uncertaintyforthethirdpartyisanadditionalriskthatcouldresult
inincreasedcommercialriskpremiums.
Similarly,ifthethirdpartyhadoperationalcontroloftheasset
theDNOcouldincludeinthecontractsetdiurnalSecureCapacity
Windowsthataretobeavailableforthedurationofthecontract.
Thisoptionwould,however,likelyresultinsignificantancillary
servicevaluelossesastheseSecureCapacityWindowswould
beunavoidablyconservative,aswasshownfortheexample
termsoftheleadbusinessmodelsinSections3.1&3.2.
Anoptimal scenario that couldevolveasallpartiesbecome
morefamiliarwiththeassetsoperationwouldbeadynamic
reporting of the asset’s Secure Capacity Windows at a day
and month ahead frequency coupled with aggregation of
thestorageassetsintoawiderportfolio.Thiswouldlimitthe
conservatism in the Secure Capacity Windows and ensure
minimal ancillary revenue stream value losses. A summary
ofthealternativestothetollingcontracttermsaspenetration
of EES assets increase, technology learning increaseand the
businessmodelsevolveisgiveninTable12.
Lengthofcontract
Fortheleadmodelswehaveassumedthatthetollingcontractis
fortheexpectedeconomiclifeofthestoragefacility.FortheDNO
Contractedmodel,theimpactofshorteningthecontractistogive
theDNOmoreflexibilitye.g.ifdemandgrowthisdifferentfrom
forecast.However,thisleavestheDNOwiththeneedtorenegotiate
thecontractatafuturepointintimewhentheexpectedvalueof
the additional revenue streams may be significantly higher or
lower.Ashortercontractmayalsoberequiredifthirdpartiesare
unwillingtotakeonalongtermposition.
UndertheContractedServicesmodel,ashortercontractwould
beharder toenactbecause thiswould leave the thirdparty
withtheriskofastrandedassetinfuture.Alsooncetheasset
isinplacetheDNOistheonlyCustomers,thereforethethird
partywillwishtolockinthefullvalueofthesecuritypayments
upfrontbeforetakingafinalinvestmentdecisionontheasset.
Shortercontractperiodsmayentailhigherpaymentsfromthe
DNOacrosstheshortercontract.
SharingofbenefitsandriskswithCustomers
Ifstorageistreatedasanyotherdistributionasset,thesharing
oftherisksandrewardsoftheassetwouldbesharedaccording
to the price control. However if the risks of storage were
consideredtobemateriallydifferentfromthosefortraditional
distributionassets(e.g.duetotechnologyrisk,ormarketrisk
if theDNO isunable to securea long termcontract) thena
separateuncertaintymechanismcouldbeproposed.Underthis
approach,theDNOandOfgemwouldagreeaspecificstorage
uncertaintymechanism in theDNO’spricecontrol.Thiscould
bespecificallyfocusedonthedriversofstoragevaluethatare
beyondtheDNO’scontrol.
3.4.SecureCapacityWindows&TollingContractTerms
If theasset is tobecommerciallycontrolledbyathirdparty
(withorwithoutoperationalcontrol),asisthecaseinthetwo
leadbusinessmodels, theDNOand thirdpartywillneed to
62 | Smarter Network Storage - business model consultation
Table 12 Alternatives to Tolling Agreement Headline Terms
Terms
SecureCapacityWindow
ContractTenure
GenerationCapacity
OperationalConstraints
ThirdPartyDispatchNotice
TollingCharges
Non-performancePenalties
TollingContractTermAlternatives
TheSecureCapacityWindowsareexpectedtobeconservativetobeginwith,butwithincreased
projectlearningwouldexpecttoberationalisedovertime,forexample;
• Aminimumavailabilitycouldbecontractedinadvanceasabaseline.Thiscouldbereviewedat
setperiodsovertheprojectcontractandrationalisedwherepossibleasallpartiesbecomemore
familiarwiththeasset’soperation.
• Forecasting and contracting of security requirements could increase in frequency to month,
or week ahead reporting, allowing more active real-time control of the asset and avoiding
unnecessaryvaluelosses.
• TheSecureCapacityWindowcouldbeaggregatedforanumberofassetsacrossawiderstorage
portfolio.
• Contracttenuresarepresentlylimitedbytechnologylife-times,butasEEStechnologiesimprove
sowouldthecontracttenuresexpecttoincrease.
• Shorttermrollingcontractsmaybefavourabletosomethirdparties.
• Longtermcontractsacrossportfolioswithassetreplacementsattheendoftheirtechnological
life-timewouldalsobepossibleandmayalsobefavourabletootherthirdparties.
• AswiththeSecureCapacityWindows,thereportingofthegenerationcapacitycouldbecome
more dynamic and reported closer to real time as project party’s familiarity of the asset’s
operationimproves.
• Portfolioeffectswouldincreasetheassetsredundancywhendischargingforancillaryservices
(i.e.risksofnotmeetingtheirobligationwouldbemitigatedbycapacityfromotheravailableassets).
• Theavailablegenerationcapacitywouldincrease,reducingancillaryrevenuestreamvaluelosses.
• Astechnologyperformanceimproves,sowouldoperationalconstraintsbeexpectedtobelessonerous.
• Againincreasingtheavailablegenerationcapacityandreducingancillaryrevenuestreamvaluelosses.
• Withincreasedprojectlearningandeconomiesofscale(asotherassetsarebuilt)dispatchwould
beagreedclosertorealtimetoavoidancillaryservicevaluelosses.
• Withportfoliosdispatchnoticescouldbecomeareaspecific,allowingmultiplestorageassetsto
dischargeinpart(orinfull)inunison.
Alternativetollingchargearrangementscouldbeused,suchas;
• Apaymentindexedtotheasset’sancillaryrevenues.
• Discountsontherevenuesofrespectiveancillaryrevenuestreams(withorwithoutafloorprice).
• Thesenon-performancepenaltieswouldnotbeexpectedtochangeovertheprojectcontract.
• However, security of supply forecasting and technology performance would be expected to
improve,alongwiththethirdparty’sabilitytoeffectivelymanagetheancillaryservices,thus
decreasingthelikelihoodofthethirdpartyaccruingthesepunitivecharges.
Smarter Network Storage - business model consultation | 63
ArelativeadvantageoftheDNOContractedmodelmaybealower
costofcapital.Howeverthismaynotpersistasthedeploymentof
storageincreases.TheDNOContractedoptioncreatesthepossibility
ofsharingtheriskandadditionalbenefitswithCustomers(ifthis
wasconsidereddesirableforCustomers),whereasthisisnoteasily
possiblewiththeContractedServicesmodel.
Widerbenefits
Underbothmodels,thetollingcontractwillclearlyspecifythe
termsonwhichcapacityismadeavailable.Thereisariskthat
thefullbenefitsfortheGBsystemarenotcapturedduetoa
lackofflexibilityintheseterms.
TheDNO contractedmodel allows for competitionbetween
thirdpartiesintheprovisionoftradingandaggregation.The
third party has the ability to transfer the knowledge and
expertise to develop projects in other DNO licence areas.
UndertheContractedServicesmodel,thethirdpartycanalso
transfer experience of building and operating storage, and
thereisthepotentialforfurthercompetitionintheprovision
oftheseservices.
Under both models, the DNO is able to set terms of the
technologyconsidered,toensurethatalowcarbonsolutionis
procured.ItislikelythataContractedServicesmodelwouldbe
lessprescriptiveintermsoftechnologychoice.
Futureproof
Both models allow for aggregation across multiple assets
bythethirdparty;howeverthisislimitedbytherestrictions
imposed by the Secure Capacity Windows. A large number
ofstorageassetswithsimilarSecureCapacityWindowscould
beeasilyaggregated,butifthesearealldistinctthismaybe
less effective. The Contracted Services model may be more
scalable,withonethirdpartyabletooperateandaggregate
storageacrossmultipleDNOlicenceareas.
3.5.Comparison&Conclusions
Our review of the two lead business models presented for
consultation suggests that both the DNO Contracted and
ContractedServicesmodelsareviablemodelsfordistribution-
connectedstorage. Inthehighlevelqualitativescoring,both
modelsperformrelativelywellagainstmostcriteria.
Thetwoleadmodelsarecomparedbelowunderthegroupings
fromthequalitativeassessmentcriteria.
Security
TheDNOContractedmodelgivestheDNOrobustconfidence
inavailabilitythroughdirectcontrolovertheoperationofthe
storage,andcanensurethatthethirdpartyinstructionsdo
notcompromisetheuseofthestoragetomanagenetwork
constraints when required (assuming that the contractual
obligationsdonotpreventthis).Thesecurityprovidedbythe
ContractedServicesmodel isdependentonthecontractual
obligationsplacedonthethirdparty,andhowitmeetsthose
obligations.Whilstnotasdirectasoperationalcontrol, this
modelcouldprovidesufficientsecurityifthetermsarewell
structured.
Assetvalue,costandrisks
Both models place the optimisation of the value streams
withathirdpartywhichislikelytohaveamoredeveloped
set of skills and capabilities to generate value from the
storagewithoutimposinghighcostsoftrading.Bothmodels
alsodependonawell-structuredtollingcontractthatgives
asmuch availability to the third party as possiblewithout
compromisingsecurity.
Bothmodelsdependonathirdparty’swillingnesstotakelong
termriskontheadditionalvaluestreams.However,underthe
DNOContractedmodelthereismoreflexibilityfortheDNOto
share someof this risk if required,and if theDNOcan take
somemerchantexposure.
64 | Smarter Network Storage - business model consultation
FromaregulatoryperspectivetheDNOContractedmodelcould
face barriers as theDNOapproaches its present deminimis
thresholdfornon-distributionactivity.
The DNO Contracted model may allow the DNO flexibility
in the long term location of the storage, with the ability
to redeploy the asset to a new location (e.g. after full
reinforcementatacurrentlocation).However,theDNOmay
requireregulatoryapprovaltodisposeoftheassettoathird
party,whichitmightwishtodoifthestoragenolongerhad
significantvalueintermsofnetworksupportandcouldnot
be economically redeployed. Under a Contracted Services
modeltherewouldbenosuchrestrictionsbutrelocationof
theassettosupportthenetworkinadifferentlocationwould
bemorechallenging.
Conclusions
Based on our review of the lead models, both the DNO
Contracted and Contracted Services appear to be feasible
business models for distribution-connected storage. The key
barriers for these models are shared: the complexity of the
tollingcontract,andthewillingnessofathirdpartytotakelong
termriskontheadditionalvaluestreams.
3.6.ConsultationQuestions
The questions that we invite interested parties to submit
writtenevidenceandanalysisonareasfollows:
5. Do you agree with the respective advantages and
disadvantages of the two lead business models as
described in Section 3?
a.Are thereother limitations,barriersor featuresof these
businessmodels,orEESprojectsingeneralthathavenot
beenconsidered?
b.Doeitheroftheseleadbusinessmodelsdisproportionally
favoronepartyovertheother?
6. From your experience, which of the two lead business
models is most likely to be favoured?
Smarter Network Storage - business model consultation | 65
Investment Model Templates4
66 | Smarter Network Storage - business model consultation
price projections and storage performance scenarios can be
easilypopulatedtoshowthesensitivityofthekeyperformance
indicators (for each project party) to these respective
parameters.Itshouldbenotedthatthemodelhasbeenissued
with default input parameters, but these are notional and
should be updated with project specific values before users
appraiseandcomparetheirownbusinesscases.
Finally,themodelcalculatesthefeasiblerangeofcumulative
tollingchargesbetweentheDNOandThirdPartythatwould
give eachof theproject parties positive net present values
(NPVs),effectivelydefiningamaxandmintollingchargethat
would stillmake theprojectprofitable forbothparties. The
actualuserdefined tolling charge is thencomparedagainst
thisfeasiblerangetoassessiftheprofit/costsplitisweighted
towardsonepartyoranother(Thetollingchargeisthetotal
charge made over the life time of the project by the third
partytotheDNOinthecaseoftheDNOContractedmodel,and
fromtheDNOtothethirdpartyinthecaseoftheContracted
Services mode (See Section 3.4 for a definition of tolling
chargeterms)).
4.2.ModelSpecification
A summary of the model structure, the inputs parameters,
calculationsandoutputsisgivenbelow.Themainassumptions
that were made when preparing the model along with its
inherentlimitationsarealsostated.
4.2.1.Structure
Theinvestmentmodeltemplateissplitintofourmainsections
with supplementary user aids where applicable. A high-
level summary of these four main sections along with their
interrelationsisgiveninthemodelschematicgiveninFigure14.
ToaidtheConsultationprocessaninvestmentmodeltemplate
describing possible business models for distribution-connected
energy storage applications was developed. This investment
modeltemplateisavailablefromUKPowerNetworksandisbeing
issuedinconjunctionwiththisConsultationdocumenttoallow
furtherdiscussionandconstructivefeedbackontheConsultation.
4.1.TemplateIntroduction
Theinvestmentmodeltemplateexaminestheinvestmentcases
forthetwoleadbusinessmodels,namelytheDNOContracted
and Contracted Services models. A third “Project Model” has
beendevelopedinthetemplateasapartyagnostic,hypothetical
referencecasemodelagainstwhichtheinvestmentmodelsfor
thetwoleadbusinesscasescanbebenchmarked.
The investmentmodel templateshouldbeusedby interested
parties to further investigate the two lead business models
described and characterised above. The investment model
templatefirstlyallowsuserstoinvestigateindetailthemagnitude
andinterrelationsofcost,profitandrisksastheyaccruetothe
differentprojectpartiesinthedifferentbusinessmodels.
Secondly, interested parties can input their own project
parameterstoexploretheseinterrelationsfortheirownproject
specific EES cases (the investment models are generic as
faras ispossiblebutaredesigned forprojects fallingwithin
the scope of this Consultation as defined in Section 1.3).As
directcomparisonscanbemadebetweenthethreebusiness
models users can then test the sensitivity of the indicative
financial performance of their project. The project’s financial
performancecanbeassessedfurtherfortherespectiveproject
partiesfordifferentinputparametersacrossthethreebusiness
models.Forexample,differentlife-timeassetutilisationsplits,
Smarter Network Storage - business model consultation | 67
Investment Model Particulars
Usersinputthetechnicalparameters,theproject’sprimaryandancillaryrevenuestreamvolumesandrevenuesandtheproject’sfinancials
Figure 14 Investment Model Template Schematic
Project and Investment Model Introduction
Cover Sheet
Business Model Definition
Adefinitionoftheproject,theinvestmentmodeltemplateandthebusinesscasesconsidered
Discounted Cash Flows
Project Cash Flow Model
DNO Contracted Cash Flow Model
Contracted ServicesCash Flow Model
Traditional reinforcement Cash Flow Model
DCFsarepopulatedfromtheinputstothe“InvestmentModelParticulars”
Investment Model Summary
Asset Utilisation Summary
Business Model Comprision
Asummaryoftheassetutilisationsplit,thecostandrevenuestructuresandtheprojectprofitabilityfromaproject,DNOandthirdpartyperspective
User Aids
Assumptions
Glossary of Terms
Checklist
Technical Parameters
Revenue Streams
Financials
68 | Smarter Network Storage - business model consultation
for the three business models is given in the “Business
ModelComparison”sheet.Thissheetalsosummarisesthe
total costsand revenuesas theyaccrue to the respective
parties,alongwiththeprofitabilityofthedifferentbusiness
models,onceagainsplitforthedifferentprojectparties.The
BusinessModelComparisonsheetalsocalculatestherange
of cumulative tolling charges for which all parties would
haveapositiveNPV(i.e.themaximumandminimumtotal
tollingchargethatcanflowbetweentheDNOandthethird
partyoverthelifetimeoftheprojectfortheprojecttostill
beprofitableforbothparties).
4.2.2. Inputs
Alegendofthetemplate’scelltypesincludingthecellswhich
usersarerequiredtoinputvaluesforisgiveninthetemplate
coversheet.Forindicativepurposesonlythesecellshavebeen
populated with notional values throughout the model as it
is issued.Thesedefaultvaluesarenot representativeofany
empiricallybasedrealcasescenarioandassuchusersshould
inputtheirownprojectspecificvalues(SeeSection4.2.5).
Achecklistoftheparametersthatusersareaskedto input
values for, alongwith the level of detail (or granularity) to
whichtheusersareaskedtoinputforeachoftheseparameters
isgiveninthe“Checklist”worksheet.Thedefinitionsofthese
parameters are included in the Glossary of Terms sheet for
reference.Usersareaskedtocompletethischecklisttosatisfy
themselvesthattheyhaveinputtedtheirownparametersfor
eachoftheseinputsbeforeusingthemodeltoappraiseand
comparebusinesscases.Ahighlevelsummaryofthemodel’s
inputcategoriesaregiveninFigure15.
The “Cover Sheet” and “Business Model Definition” sheets
introduce the Consultation process and the characterisations
of the threemodelsexplored in the template. Similarly, the
“Assumptions”, “Glossary of Terms” and “Checklist” sheets
define themainassumptions, thenomenclatureusedanda
qualityassurance(QA)checkoftheusers’inputstothemodel.
Usersarefirstlyaskedtoinputthemodelparametersinthe
mainbodyofthetemplate.Themodelparameterscomprise
thetechnicalparticularsandthecapitalandoperationalcosts
inthe“TechParameters”worksheet,therevenuestreamsin
the“RevenueStreams”worksheet,andthefinancingoptions,
gearinganddebttermsinthe“Financing”worksheet.
Theseinputsarethenallocatedasrevenuesandcostsasthey
accrue to the respective project parties in three discounted
cashflow(DCF)sheets.Todisaggregatethecostandrevenue
splitsfortheprojectpartiestheDNOcontractedandContracted
ServicesDCFsarefurthersplitintotwoseparateDCFsforthe
DNOandthirdpartyrespectively,giving5DCFsintotal(1for
the Project Model and 2 each for the DNO Contracted and
ContractedServicesmodels).Thereisalsoaseparatesimple
DCFmodelforthetraditionalreinforcementoption,whichis
usedasacounterfactualcomparison.
The results of the model are then summarised in two
output sheets. The technical performance of the asset
and its utilisation split for the users’ input parameters
are summarised in the “Asset Utilisation Smry” sheet.
Then, a comparisonof thefinancial performanceand the
netpresentvalues(NPVs)forthedifferentprojectparties
Smarter Network Storage - business model consultation | 69
Figure 15 Model Input Categories
Technical Parameters
Project Particulars
Technology Particulars
Revenue Streams
Capital Expenditure
Operational Expenditure
Cost Particulars
Offset Reinforcement Cost
Security of Supply Volumes
Ancillary Services Volumes and Prices
Electricity Arbitrage
Short Term Operating Reserve Volume and Prices
Service Operator Charges
Frequency Response Volumes
and Prices
Embedded Benefits
Financing
Cash-Flow Particulars
Terms of Loans
Financing
Taxation
70 | Smarter Network Storage - business model consultation
effort required or, in the case of the Contracted Services
modeloramaximumagreed level in thecontractbefore
penalties are activated. Balance of plant losses refer to
the energy lost in the charge and discharge cycles and
which ismeasuredat thefinalpointofconnectiontothe
DNOnetwork, including losses in step-up and step-down
transformers for example. Notwithstanding the fact that
losses may be reduced elsewhere on the network as a
result, the losses are included here in order to reduce
the“nameplate”capacityofthedevicetoa levelthat is
consistentwiththerevenuestreams.
4.2.3. Calculations
Firstly, the inputs are used to calculate the net available
capacityofthebatterywithrespecttoitschargingvolumeand
durationofdischarge. The technology’sdischargecoefficient,
operational depths of discharge, system inefficiencies, and
storage degradation are then used to calculate the overall
systemefficiencyand the correspondingdischargingvolume
andduration.Asummaryoftheinefficienciesandtheireffect
on the overall system efficiency is graphically shown in the
TechParametersworksheet,anexampleofwhichisgivenin
Figure16.Technicalunavailabilityisduetomaintenanceoutages
andunscheduledfaultrepairs.Thismayrepresentanestimateof
Figure 16 Generation Capacity and System Inefficiencies
10.40
10.20
10.00
9.80
9.60
9.40
9.20
9.00
8.80
8.60
2013 2015 2017 2019 2021 2023
Max
Ava
ilabl
eSy
stem
Dis
char
ge(
MW
h/Cy
cle)
%D
isch
arge
Effi
cien
cy(
%)
Key
Storage Capacity (MWh/cycle)
Gross Storage Energy (MWh/cycle)
Battery Discharge Efficiency (%)
Effective Capacity Drawn from Grid (MWh/cycle)
100.00%
99.00%
98.00%
97.00%
96.00%
95.00%
94.00%
93.00%
92.00%
91.00%
90.00%
Smarter Network Storage - business model consultation | 71
as a counterfactual DCF. The adjusted NPV is calculated by
subtractingthiscounterfactualNPV. It is theseadjustedNPVs
thatarepresentedintheoutputsummary.
Theinvestmenttemplatedoesnotattempttocalculatetheimpact
on the DNO’s Regulatory Asset Value (RAV). We assume any
incentivetofavourstorageovertraditionalreinforcementorvice
versawouldbeneutralisedunderawell-designedpricecontrol.
4.2.4.Outputs
Atechnicalsummaryofthesystem’sutilisationsplitispresented
intheAssetUtilisationSummaryworksheet.Theasset’sutilisation
is split according to the system’s availability, unavailability and
chargingtimeperyear,alongwiththetimethatthesystemisboth
availablebutcontractedandwhenit isexporting(discharging)
foreachoftherevenuestreams.Theassetutilisationsplit isa
function of the technical performance of the asset and the
numberofhoursofutilisationthattheuserhasinputtedforeach
oftheprimaryandancillaryservices.Anexampleofthegraphical
outputofthemodelisshowninFigure17.
The charge and discharge capacities and durations are
then coupled with the utilization (and availability where
applicable)pricesanddurationsfortheprimaryandancillary
revenuestreamstocalculatethesystem’scostofchargingand
correspondingrevenuefromdischarging.
Theserevenuestreamsandtheirassociatedcostsfeedintothe
DCFsalongwiththeproject’sCAPEXandOPEX,debtrepayment
costs and tax payments. The DCFs allow users to front load
paymentsandindexpriceinflationifnecessary.Asmentioned
previously,DCFsarepopulatedforthedifferentprojectparties
inthetwoleadbusinessmodelstoallowcomparisonsofthe
cost,profitandriskprofilesacrosstheprojectpartiesforthe
differentbusinessmodeloptions.
FromtheDCFtheNPVsfortheprojectpartiesarecalculated.
Firstly, the unadjusted NPV values are calculated, these
unadjusted metrics do not consider the additional cost
saving from offsetting the traditional reinforcement costs.
Theoffset traditional reinforcement cost is rather considered
Figure 17 Asset Utilisation Split Summary
2013 2015 2017 2019 2021 2023
120.00%
100.00%
80.00%
60.00%
40.00%
20.00%
0.00%
Key
Generating (Discharging)
Charging
Available (Unused)
Available (Contracted)
Unavailable
Gross Discharging Revenue (£/annum)
Charging Cost @ Full Utilisation to DOD (£/annum)
Ass
etU
tilis
atio
nSp
lit(
/yea
r)
Year
72 | Smarter Network Storage - business model consultation
forthecommercialviabilityfromtheperspectiveofthediffering
projectpartiesinthecaseoftheDNOContractedandContracted
Services models. For the DNO, the discounted cumulative cash
flowsareplottedagainsttheoffsetreinforcementcosttocheckif
thecumulativecashflowatprojectend(theNPV)islessthanthe
offsetreinforcementcost(similartothefirstoutputabove).Forthe
thirdparty,thecumulativediscountedcashflowsareplottedover
thelifetimeoftheprojecttoassessifthecumulativecashflowat
theprojectend(theNPV)ispositiveasshowninFigure19.
The second output sheet, which is the “Business Model
Comparison”sheet,firstlyconsidersiftheSNSoptionismorecost
effectivethantraditionalreinforcement.Themodelcompares
theunadjustednetpresentvalueof thestorageoption (the
costofstorage)againstthetraditionalreinforcementcost.An
exampleoutputisshowninFigure18below;
The cumulative cash flows are then assessed for the projects’
overallcommercialviabilityinthecaseoftheProjectmodel,and
Figure 18 Traditional Reinforcement and Storage Option Cost Comparison (£)
Figure 19 Project Profitability Checks
4,040,016
3,907,208.49
Key
Storage Cost (For the DNO)
Offset Traditional Reinforcement Cost
1 2 3 4 5 6 7 8 9 10 11
Year-50,000
50,000
100,000
150,000
200,000
250,000
300,000
-
Cum
ulat
ive
Dis
coun
ted
Cash
flow
(£) Key
Project Profitable
Discounted Cumulative Cashflow
1 2 3 4 5 6 7 8 9 10 11
-4,100,000
-3,900,000
-3,800,000
-3,700,000
-3,600,000
-3,400,000
-3,300,000
-4,000,000
Off
setR
einf
Cos
t&C
umul
ativ
eCa
shflo
w(
£)
-3,500,000
Key
Offset Reinforcement
Cost (The Cost of Reinforcement)
Project Profitable
Discounted Cumulative Cashflow (The Cost of Storage)
Year
Smarter Network Storage - business model consultation | 73
TheBusinessModelComparisonsheetalsoallowsusers to
runamacrothatcalculatestherangeoftollingchargethat
would give positive NPVs to all of the respective project
parties(i.e.goalseekingtheyearlytollingchargetofindan
NPVofzero).Thetollingchargeisthetotalchargemadeover
thelifetimeoftheprojectbythethirdpartytotheDNOinthe
caseoftheDNOContractedmodel,andfromtheDNOtothe
Figure 20 Range of Feasible Tolling Charges (Cumulative over life-time of project)
thirdpartyinthecaseofthecontractedservicesmodel.The
actualtollingchargeisthenplottedonthisrangeoffeasible
tolling charge to assess if the profit/cost split isweighted
towardsonepartyoranother,oriftheactualtollingcharge
isoutside the feasible range (i.e.oneof thepartieshasa
negativeNPV).AsamplecasefortheDNOcontractedmodel
isgiveninFigure20below;
10,000,000
9,000,000
8,000,000
7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
-
Tota
lPro
ject
Tol
ling
Char
ge(
£)
6,000,000
8,925,088
4,145,893
MaximumTollingChargethattheThirdPartycanaffordtopaytheDNO*
(Increase => Better for DNO)
MinimumTollingChargethattheDNOcanaffordtoreceivetheThirdParty*
(Decrease => Better for Third Party)
AnnualTollingCharge(£ Real)
892,509
600,000
414,589
TotalCharge(Cumulative)
(£ Real)
8,925,088
6,000,000
4,145,893
Max
Actual
Min
RangeoffeasibleTollingCharges
Key
Range of Tolling Charge for which Project has a +ve NPV for all parties
Actual Tolling Charge Payment
*�To�give�that�party�a�positive�NPV��If�line�outside�range�then�-ve�NPV�for�a�party�If�no�range�shown�the�project�cannot�be�profitable�for�both�parties
74 | Smarter Network Storage - business model consultation
4. It is assumed that the DNO can transfer the incremental tax
loss benefits internally, as such these are considered as a post
EBITDA benefit in the DCF. This option can be switched off, in
which case these benefits are accrued within the project.
5. The NPV of traditional reinforcement cost is separately
calculated and then used as a counterfactual . Users are asked
to input the CAPEX of the traditional reinforcement, and the
terminal value at the end of the economic assessment period.
6. As the STOR service is typically contracted in two split
diurnal periods it is possible that the asset is called during
both of these periods. If this were the case the asset would
need to charge during the day between these two cycles.
Accordingly the electricity price for charging for use as STOR
is the average day time price, as opposed to the off-peak
night time low price for the rest of the ancillary services.
7. This model has been constructed for GB specific cases.
8. The reporting currency is assumed to be GBP Pound Sterling (£).
9. UK Corporate tax rates can be defined by the user, but have
been assumed in the model to be as per the HMRC published
figures (http://www.hmrc.gov.uk/rates/corp.htm).
10. The model assumes all senior debt drawn down at once
in development start year.
11. The depreciation rate is as per; http://www.hmrc.gov.uk/
capital_allowances/investmentschemes.htm General rates
of capital allowances section (can be changed by user).
12. The model assumes a single charge/discharge rate for all
services per day, therefore the model cannot differentiate
for different charge/discharge rates for different services.
13. The model cannot be used retrospectively on projects
commencing before 2013.
14. The max project lifetime allowed for in the model
mechanics is 20yrs (input as 12yrs as a default).
15. Gearing ratios outside a 20-50% range give a user warning.
16. Years refer to financial years.
17. Self-discharge loss calculation assumes half of battery
capacity stored per cycle.
4.2.5.Assumptions
All technical, utilisationandpriceassumptions thatareused
inthemodel’scalculationsareinputtedasmodelparameters
byusers.However,thefollowingadditionalassumptionshave
beenmadeintheinvestmentmodeltemplate;
1. In the DNO Contracted Model (in addition to the model
characterisation given in Sections 2 & 3);
a.CAPEXisaccruedtotheDNO
b.OPEXisaccruedtotheDNO(withtheexceptionofthe
“Control systems, trading & risk management” OPEX
whichaccruestothethirdparty)
c.Embedded benefits (i.e. avoided TNUos and BSUoS
charges, and savings in transmission and distribution
losses)areaccruedtothethirdparty
d.Capacitypaymentsareaccruedtothethirdparty
e.Thetollingchargeispaidannuallybythethirdpartyto
theDNOand is a fixed sum that canbe indexed and
front-loadedifnecessary
f. The DNO sees the benefit of the offset traditional
reinforcementcostasacounterfactual
g.TheimpactontheDNO’sRegulatoryAssetValue(RAV)is
notcalculated.
2. In the Contracted Services Model (in addition to the model
characterisation given in Sections 2 & 3);
a.CAPEXaccruestothethirdparty
b.OPEXaccruestothethirdparty
c.Embedded benefits (i.e. avoided TNUos and BSUoS
charges, and savings in transmission and distribution
losses)areaccruedtothethirdparty
d.Capacitypaymentsareaccruedtothethirdparty
e.The tollingcharge ispaidannuallyby theDNOto the
thirdpartyisafixedsumthatcanbeindexedandfront-
loaded if necessary The DNO sees the benefit of the
offsettraditionalreinforcementcostasacounterfactual.
3. All values are real unless otherwise stated to be nominal
(i.e. CAPEX, Tax and Debt in DCFs are nominal).
Smarter Network Storage - business model consultation | 75
18. A single asset is considered in the model. Models may exhibit
different characteristics if a portfolio were to be considered.
19. Constant and symmetrical charging and discharging
across all services is assumed. This means simultaneous
services cannot be modelled.
4.2.6.Limitations
The following limitations apply to the investment model
templateandshouldbeconsideredbyusersbeforeusingit:
1. The investment model template is a learning aid issued for
illustration and comparison purposes only. The template
should not be used under any circumstances as the primary
investment model for any EES project or otherwise.
2. While the investment model template has been prepared for a
specific application type it is still inherently a generic investment
model, and as such cannot account for every eventuality and
permutation that may arise in specific EES projects.
3. For illustrative purposes the model as it is issued has
been populated with default values for the model’s input
parameters. These default values are not based on empirical
real case values and as such cannot be used to appraise project
specific cases (The model has an in-built functionality to clear
all these user defined inputs and to then check that the user
has inputted values for all the required input parameters).
4. The default input financing terms (debt terms, discount
rates, gearing and WACC) are indicative only and would
need to be inputted by users.
5. The model uses a peak/offpeak spread for the value of
energy arbitrage, and does not capture the full volatility
of wholesale prices.
4.3.BusinessModelInsights
4.3.1.DNOContractedModel
IntheDNOContractedmodeltheDNOfinancestheconstructionof
theassetanditsannualoperation,accruingtheprojectCAPEXand
OPEX.ThemodelallowstheflexibilityfortheDNOtofinancethis
throughamixtureofdebtandequity.Thethirdpartyontheother
handwouldonlyaccruetheannualcostsrequiredtooperatethe
asset’sancillaryservices.Thesearedescribedas“Controlsystems,
trading&riskmanagement”costsinthemodel.Thethirdparty
wouldtheninstructtheDNOontheoperationoftheassettoand
whentocontract(ordispatch)theassetforancillaryservices.The
thirdpartywouldaccrueanyrevenuefromtheutilisationofthe
assetfortheseancillaryservices.Thethirdpartywouldthenreturn
anannualtollingpaymenttotheDNOasapaymentforutilising
the DNO’s asset. The DNO also considers the offset traditional
reinforcementcostwhencalculatingtheiradjustedNPV.
Populating the investment model template with a range of
notionalvaluesandscenariosallowsuserssomeusefulinsights
into thediffering interrelationsofcostand revenuesas they
accruetotheprojectpartiesintheDNOContractedmodel.Most
notably,asthetollingchargeintheDNOContractedmodeldoes
notcontributeaslargeaproportionoftheprojectcashflowas
intheContractedServicesmodel,theNPVoftheprojectisnot
assensitivetothetermsofthetollingchargeagreement(i.e.
thereisagreatercalculatedrangeofpossibletollingcharges).
Also,theDNOContractedmodeltendstogivethethirdparty
ashortpaybackbutalowerNPVcomparedtotheContracted
Servicesmodel(i.e. theydonotaccruetheCAPEXandOPEX
costsandhaveminimalcommercialrisk).
Inbothmodels,thereisaninherentandunavoidableconstraint
on revenue generation during the periods where the DNO
requirestheassettobeavailableforsecurityofsupplyservices,
theSecureCapacityWindows.
4.3.2.ContractedServices
IntheContractedServicesmodelthethirdpartynowfinances
theconstructionoftheassetanditsannualoperation,accruing
76 | Smarter Network Storage - business model consultation
The Contracted Services Model gives a longer payback for
the thirdParty thantheDNOContractedModel,buta larger
NPV(i.e.theyneedtopaybackthelargeprojectCAPEXand
wouldexpectlargerfinancialbenefitsforcarryingtheproject’s
commercialrisk).
As in theDNO Contractedmodel there is again an inherent
andunavoidableconstraintonrevenuegenerationduringthe
periodswheretheDNOrequirestheassettobeavailablefor
securityofsupplyservices.
4.4.ConsultationQuestions
The questions that we invite interested parties to submit
writtenevidenceandanalysisonareasfollows:
7. Are there other technology parameters, costs or revenue
streams that should have been considered in the
investment model template?
a.Ifsopleasegivedetails
8. Do you agree with the interrelations of these ancillary
services and their associated revenue streams?
b.Arethereadditionalcomplexities inthedispatchofthe
assettoutilisetheserevenuestreamsthathaven’tbeen
considered?Aretheyallmutuallyexclusiveorpotentially
dispatchableinunison,arethereadditionalcomplexities
intheknock-oneffecttobatteryperformancethathave
notbeenconsidered?
9. Do you agree with the stated assumptions and model
limitations?
a.Should any of these stated assumptions or limitations
havebeendealtwithdifferently?
theprojectCAPEXandOPEX.Thethirdpartywouldbeexpected
torequiresomedebtfinancingandwouldaccruethesedebt
and interestrepayments.TheDNOwouldaccruenoneofthe
project’sCAPEXorOPEXbutinsteadwouldpassanannualtolling
paymenttothethirdparty,nowintheoppositedirectiontothe
DNOContractedmodel.Thethirdparty,inadditiontoreceiving
thistollingchargepaymentfromtheDNOwouldalsoaccruethe
revenuesfromtheancillarybenefitswhichitwoulddispatchthe
assetfor.Thethirdpartyalsoaccruesanyembeddedbenefits
and capacity payments as they have full ownership and
operationalcontroloftheasset.TheDNO’scashflowissimpler
thanintheDNOcontractedmodelwiththetollingchargebeing
theironlycost,andtheoffsettraditionalreinforcementcosttheir
onlybenefit.
Again, populating the template with notional values and
scenariosallowsuserssomeusefulinsights.Astheeconomic
benefitsoftheoffsettraditionalreinforcementcostdoesnot
accruetothepartywhoismakingtheinvestment,thethird
party,thereisaneedforacorrespondingtollingpaymentto
thethirdparty.This,inthecaseoftheDNOContractedModel
wouldbeapaymentfromtheDNOtothethirdparty.While
thisdoesnotdifferinprincipletotheofftakeagreementand
paymentintheDNOContractedmodel,itisthevalueofthis
additionalrevenuestreamtotheoverall investmentcaseof
theDNOandthirdpartythatismateriallydifferent(effectively,
thetollingchargeneedstocovertheCAPEXwhenitaccruesto
thethirdparty).
ThecorollarytothisisthattheDNOavoidstheupfrontexpense
offinancingtheasset,andspreadsitoverthelifetimeofthe
projectastollingchargepaymentstothethirdparty.
Smarter Network Storage - business model consultation | 77
The Value of StorageAppendix 1
78 | Smarter Network Storage - business model consultation
frequency,whichisachieved10secondsfromthetimeof
theFrequencychangeandissustainedthereafter.
TherequirementforFrequencyResponseiscreatedbydemand
forecastinguncertainty,thelossofgenerationfromthesystem
andincreasingwindgenerationforecastuncertainty.
ThetypeofFrequencyResponsewhichwouldbeprovidedby
thestorageisFirmFrequencyResponse.Mandatoryfrequency
responseisanalternativemarketthatisrequiredtobeprovided
under the Grid Code by all sufficiently large generators. An
energy storage device is also eligible to provide Frequency
ControlbyDemandManagement(FCDM),whichisalignedto
providersoffrequencyresponsefromdemandCustomers,but
isalsosuitableforstorage,andthebilateralcontractscanbe
appliedtobothpositiveandnegativeresponse.
Short Term Operating Reserve (STOR)
STOR is one source of reserve for the GB System Operator,
NationalGrid Electricity Transmission.Reserve is required for
thefollowingreasons:
• Demand forecast errors: Most end users of electricity do
notneedtoprovideanystatementoftheirintendedusage
andsoelectricitydemandisuncertainandactualdemandis
oftenquitedifferenttoforecastevenquiteclosetorealtime.
• Unexpected loss of thermal generation:Thelargestinfeed
loss is currently the nuclear unit at Sizewell B. The larger
capacityofthenewnuclearstationsoncetheycomeonline
willleadtoanincreaseinSTORcapacity.
• Variable wind generation: Output from wind capacity is
inherently variable and unpredictable even close to real
time. Therefore reserve is required todealwith situations
wherewindgenerationislowerthanexpected.
STORiscapacitythatNationalGridretainsonstand-bythatcan
becalledontoexportwithin fourhoursof instruction(witha
Local Security of Supply (SOS)
WhenthestorageassetisrequiredtomeetlocalSoSobligations
thestoragemustbeavailablewithasetchargewhencalled.
Itshouldbenotedthatthestoragedoesnotneedtoexport
in order to fulfill the security requirement, but the capacity
mustbeavailableandthestoragemusthaveenoughstored
energytocoverthepeakperiodifrequired.Thestorageasset
willprovidesecurityifitisactivelyexporting.Thiscouldoccur
iftherewasadditionalvaluetoexportingpower(e.g.energy
arbitrage).Inthisinstanceitwillbeimportanttoensurethat
the security requirement was met throughout the security
requirementperiod.Similarly,dependingonthestorageasset
typeanditsoperationtheconstraintcouldalsoberelievedif
theassetwheretostopchargingifitwerebeingchargedatthe
timeoftheconstraint.
Ifafaultdoesoccuronthelocalnetworkatthetimewhenpeak
demandexceedsfirmcapacity,thestoragewillberequiredto
dischargeuntilthedemanddropstoasecurelevel,thenormal
capacity is restored, or the storage is fully discharged. This
wouldtakeprecedenceoverallotheruses.
Firm Frequency Response (FFR)
Frequency Response is the automatic provision of increased
generation or demand reduction in response to a drop in
system frequency. This can be further subdivided into three
typesofresponse:
• Primary response is defined as an initial increase of
generation, with sustained output from 10 seconds to 30
secondsfollowingalossof0.8Hz.
• Secondary responseisdefinedasanincreaseingeneration,
inresponsetosystemfrequencystillbeinglowerthantarget
frequency, with sustained output from 30 seconds to 30
minutesforalossof0.5Hz.
• High response is defined as a decrease in generation, in
response to system frequency being higher than target
Smarter Network Storage - business model consultation | 79
storageissufficienttocoverexpectedandunforeseenchanges
indemandoverthepeakperiod.
Embedded Benefits
“Embedded generation” is electricity generation that is
connectedtothelocaldistributionnetworkratherthandirectly
tothetransmissionnetwork.Beingembeddedinthedistribution
networkmayallowparties to avoid various costs,whichare
termed“embeddedbenefits”.Themajorcategoriesofavoided
costsassociatedwithembeddedgenerationareasfollows:
• transmissionlosses
• distributionlosses
• TransmissionNetworkUseofSystem(TNUoS)charges,and
• BalancingServicesUseofSystem(BSUoS)charges.
These embedded benefits may apply to some extent
to distribution-connected storage. As the avoided costs
associatedwithembeddedgenerationoftenaccruedirectly
tothesupplierratherthanthegenerator,embeddedstorage
would need to negotiate with suppliers in order to realise
actualembeddedbenefits.
Other DNO Services
ThepowercontrolsystemassociatedwithsomeEEStechnologies
canprovideusefulsecondarybenefitsofimprovedpowerfactor
andvoltagesupport,reducedsystemlosses,andpowerquality
enhancementbymeansoftheassociatedharmonicfilters.
Capacity Payments
UndertheElectricityMarketReform(EMR)programme,theUK
Governmentis introducinglegislationtoprovideforafuture
capacitymechanism.Tomitigatetheriskstosecurityofsupply,
theBillprovidesfornewpowersfortheSecretaryofStateto
introduceaCMtoensurethereisenoughcapacityavailableto
meetexpecteddemand.
focus on <20min). The STOR service retains spare generation
capacityonstand-byduringcertainhoursof theday(typically
periods when demand is changing rapidly). There are two
categoriesofSTOR:
• Committedprovidersmustbeavailableinalloftherequired
availabilitywindowsineachseasontheyarecontracted.
• Flexible providers are not obliged to offer services in all
availability windows and National Grid is not obliged to
accepttheservicewhenoffered.
STOR is open to both Balancing Mechanism (BM) participants
(generally transmission connected generation from large power
stationsites)andnon-BMparticipants(generallysmalltransmission
or distribution connected generation and demand). However BM
participants must be ‘committed’ providers of STOR generation.
Distributionscalestoragewouldbemostlikelytobeanon-BMflexible
provider(althoughitmaybepossibletocommitforcertainSTOR).
Energy Arbitrage
Energyarbitrageisthetradingofwholesaleelectricitytobenefit
fromthespreadsbetweenpricesatdifferenttimes.Thistypically
involvesbuyingpowercheaplyovernightandsellingitatpeak
whenpricesarehigher.Asthevolumeofintermittentgeneration
increasesinfuture,thevolatilityinpricesislikelytoincreaseand
timingofhighestandlowestpricesmaybemorevariable.
Energyarbitragerequiresthespreadinpricestobegreatenough
tooffsetthecostoflostpowerduetotheefficiencyofthecycle
(charginganddischargingtheasset).Anotherconsiderationisthat
multiplechargingcycleshaveanimpactonthelifetimeofthe
battery,whichshouldbeaccountedforinthedispatchdecision.
Intheorydistribution-connectedEEScoulddischargeoverthe
peakperiodandstillprovidesecurity,but thiswouldrequire
careful control to ensure that the remaining energy in the
80 | Smarter Network Storage - business model consultation
TheCapacityMechanismwouldpayprovidersofcapacitysuch
asgenerators,storageandDemandSideManagementbased
ontheresultsofacapacityauction.Thefirstauctionisplanned
for2014withdeliveryofcapacityintheyears2018/19.Itis
proposed to hold early trial auctions in 2014 for delivery in
2016whicharetargetedatDSMandstorage.
Ancillary Service Exclusivity
Inmostcasestheasset’sancillaryservicesandsecurityofsupply
obligationswouldbemutuallyexclusive(i.e.Ancillaryservices
couldnotbeusedinsidetheSecureCapacityWindows).For
example,STORandenergyarbitrageifusedinsidethecapacity
windowswouldadverselyaffecttheassetscapacitytomeet
itsSoSobligationasbothoftheseancillaryservicesnecessitate
thedischargeoftheasset’sstoredcapacity.Asdiscussedin
theSecurityofSupplySection,theassetwouldberequiredto
dischargeifafaultweretooccuronthelocalnetworkatthe
timewhenpeakdemandexceedsfirmcapacity.
However, while the terms of the capacity windows would
definehowtheassetwouldbeutiliseditcouldbethecase
thatforsomeoftheancillaryserviceswhenspecificstorage
technology types are used that the asset would not be
requiredexclusivelyforprovisionofSoS.Forexample,inthe
caseoffirmfrequencyresponsetheassetcouldprovideadual
service,providingfirm frequency responseavailabilitywhile
not adversely affecting its capacity to meet its security of
supplyobligation.Thisispossibleastheassetwhenusedfor
firmfrequencyresponseisunlikelytoberequiredtodischarge
significantly,duetotherelativelyshortdurationofoperation.