The Draft Law on Energy Storages Passed the First Reading

On 16 November 2021, the Ukrainian Parliament supported in the first reading the energy storage Draft Law No. 5436-d (the Energy Storage Draft Law). The Energy Storage Draft Law conveys general regulatory rules concerning construction and operations of energy storage facilities in the free market environment. The Draft Law does not deal with the incentives for investment in the energy storage facilities or restrains on the competition in the existing market design. The Draft Law is a compromise among the number of legislative efforts in 2020.

At the end of 2020, Ukrenergo planned at least 240 MW \\[1] of new storage capacities needed for optimal renewables balancing and integration of the Ukrainian integrated power system (IPS) in the European Network of Transmission System Operators for Electricity (ENTSO-E) scheduled to operate in the first quarter of 2023, while tests will be run over 2022.

In September 2021, DTEK, Ukrainian largest private utility, commissioned the first energy storage facility, Li-ion battery of general capacity 2.5 MW. On 16 September 2021 NEURC - Ukrainian energy regulator, amended the Transmission System Code with provisions regulating the construction, grid connection and commissioning of energy storage facilities.

The commissioning of the energy storage facility by DTEK proves that energy storage facilities could be developed and commissioned even in the absence of the special statute, i.e., existing legislation sufficiently enables development of the energy storage facilities, but the economic incentives for investors in energy storage infrastructure might be lacking for a breakthrough in the ES development However, the Energy Storage Draft Law omits any incentives.

Below we review who could operate energy storage facilities and what sources of revenue would be available if the Energy Storage Draft Law becomes the Law.

What is energy storage?

Under the Electricity Market Law, an energy storage facility consists of equipment for storing energy, engineering systems and equipment for transformation of energy, and any related auxiliary equipment, which is connected to the public or private power grids; the equipment, or rather its aggregation, can be used for withdrawal, accumulation, transformation and storing of energy and for further release of energy to the respective grid.

The Energy Storage Draft Law, thus, is neutral to technology being used, for such definition extends notion of energy storage to any available or imaginable technology: mechanical  (pumped hydro storage, compressed air storage, lifting inertial solids etc.), electrochemical (sodium sulphur, lead-acid, lithium-ion, metal-air and other types of batteries), electrical (superconducting magnetic energy storage), chemical (the power to gas (hydrogen, methane), power to fuel etc.), thermal (sensible thermal energy storage, molten salt reactors etc.). On the other hand, much of the existing generation may receive two characterizations, - e.g. hydro power and gas-fueled plants may easily upgrade to become ES.

According to the Report on the Study on energy storage – Contribution to the security of the electricity supply in Europe published by the European Commission in March 2020, the pumped hydro storage facilities and lithium batteries are currently the most common storage facilities throughout the European Union (EU) countries, with the overall installed capacity of 8.83 GW and 8.81 GW respectively \\[2].

Who can own or operate an energy storage facility?

The Energy Storage Draft Law utilizes concepts and the terminology of the EU Clean Energy Package and generally strive to harmonize legal development with the EU acquis, the Draft Law package. However, the Draft Law attempts to take more tailored approach for “unbundling” with respect to the TSO and DSO; therefore, the market might be a bit more competitive for the private installation than under the EU design.

The Energy Storage Draft Law introduces a new market participant - an entity that stores power for subsequent sale or for provision of ancillary or balancing services. The Draft Law suggests that energy storage facility operator must obtain special license to perform an energy storage activity if capacity of their ES facility exceeds the threshold. As with other market participants, the Draft Law does not set thresholds and license terms. but delegates this function to NEURC.

Producers, including RES plants operating under the “feed-in-tariff” could use an energy storage facility connected to their energy-producing facility without obtaining additional license for operating the ES facility, if the ES facility is used to balance the load. If, however, the load increases (that is, any ES facility load adds up to the nominal capacity of pre-existing generation), such producer would need to apply for the additional license ex-ante such an overload of the external grid.

The Draft Law encourages prosumerism: any end-consumer can install and use energy storage facility without obtaining the license for an energy storage facility operator's activity if the relevant consumer does not supply energy to the IPS or the grids of other consumers. I.e., consumers are motivated to balance their own needs behind the meter.

In support of the recent ruling by NEURC, the Draft Law intends to recognize electric vehicle charging stations as energy consumption as long as such stations do not sell power back to the grid. The EV operators, however, can sell such power as a part of their prosumer activity.

What are the revenue sources for ES facilities?

The Energy Storage Draft Law does not suggest any direct subsidies for investors in energy storage facilities. Hence investors may only rely on general revenue sources available for energy market participants, for example, moreover, bids to supply balancing and ancillary services to Ukrenergo, a Ukrainian power transmission system operator.

Several ancillary services procured by TSO are currently undersupplied, and that includes FCR (frequency containment reserves for normal situation and disturbance) and FRR (Frequency Restoration Reserve – automatic and manual).

Ukrenergo publishes capped prices for the services prior to the auctions that are regularly held. For example, NEURC-approved cap for 2021 FCR price is UAH 1,078.54 (approximately EUR 35) per 1 MWt of the capacity.

The Draft Law also enables ES facility operators to sell power under bilateral contracts, in the ‘day-ahead market’, ‘intraday market’ at the prices formed in the respective markets, thus, competing with traditional (non-storing) generation.

NOTE Dec. 28, 2021: FFR (fast frequency reserve) is currently provided free of charge; with the increase of RES power share, its deficit accumulates; thus, FFR costs are expected to be eventually reimbursed under a separate price discovery mechanisms.

Can receive revenue supplying balancing and ancillary services. Producers can also use energy storage facilities for matching their imbalances avoiding accrual of imbalances fees.

Corporates and households can become suppliers in the ancillary services segment or form a group to offer aggregated capacity for any frequency reserve or balancing energy. They cannot, however, sell energy on any organized or bilateral segment, except charging electric vehicles to the end-consumers.

Energy storage facilities and the feed-in tariff

The Energy Storage Draft Law mentions that ES facilities of the RES producers that were awarded the feed-in-tariff, must apply empirically-proven metering methods for determining the net energy that can be released from ES and still paid “green tariff”. Not only the energy inflows and outflows must be metered separately from those of the RES facility (i.e., “behind-the-meter” energy storage may lead to the loss of subsidy), but that such methodics must be approved by the NEURC.

Under the effective legislation, renewable energy producers benefiting from the feed-in tariff shall sell the complete volume of produced power to the Guaranteed Buyer (state-owned off-taker of the green electricity produced under the feed-in tariff). Hence, renewable energy producers benefiting from the feed-in tariff and installing energy storage facilities would be restricted from selling 'green' power stowed in their storage under bilateral contracts, in the DA, ID and balancing market. We also understand that installation of the separate meter shall allow renewable energy producers to purchase power that is not green and sell it in the market when the demand is high.

Therefore, renewable energy producers benefiting from the feed-in tariff are stimulated to keep the energy storage facilities at the “arm’s length”, and use them to:

1. match own imbalances, which would be helpful in the circumstances of full responsibility for imbalances applicable to renewable energy producers after 1 January 2022 (increase from 50% liability in 2021);
2. supply balancing services and ancillary services to Ukrenergo on the market auctions;
3. shifting loads following the out-of-market curtailment (unload) instructions from Ukrenergo. Since the power curtailments are reimbursable at the “green tariff”, the Energy Storage Draft Law provides that the amount of power thus stored must be deducted from the power sold to the Guaranteed Buyer; thus, RES producers can sell such power on the market.

Currently, there is may be a mismatch between technologies available on Ukrainian market – pumped hydro storages might be unattractive financially, while Li-ion batteries installed by DTEK and Kness can be filled up with just over 2 hours. The power to hydrogen units (announced by, once again, DTEK and KNESS) are under construction. At the same time, curtailment commands in the recent history lasted up to 7 hours and amounted at times, several GW. Accordingly, some models argue that there is already an attractive business case for the ES even without a subsidy – at least, until the fast reserve market is saturated.

\\[1] https://ua.energy/general-news/240-mw-energy-storage-will-provide-the-optimal-amount-of-reserves-for-res-balancing-and-integration-of-the-ips-of-ukraine-in-entso-e/

\\[2] Database of the European energy storage technologies and facilities - Data Europa EU