Ratings agency Moody’s said DNOs will be able to avoid much of the expense of installing new cables and transformers to cope with irregular demand surges, allowing them to outperform their regulated cost allowances.
When Ofgem sets the revenues it assumes DNOs will deploy more expensive conventional technologies to address network constraints. DNOs are allowed to keep between 53 per cent and 70 per cent of such savings until 2023.
These storage assets are expected to be owned by third-parties who will then sell energy storage services to the DNO sector.
This will allow DNOs to avoid running costly and complex capex programs to develop their own battery capacity, although relying on third party providers will expose DNOs to greater counterparty risk.
Moody’s said this can be mitigated by robust procurement and quality control processes.
Some have argued that full system optimisation will not be possible unless DNOs are allowed to own the storage asset, but this was ruled out in Ofgem’s call for evidence on how to transition to a smarter system issued earlier last month.
The cost of energy storage fell by 60 per cent in 2010-2105, with further declines in lithium-ion batteries expected due to technological improvements, economies of scale and growing manufacture expertise.
Promising new technologies are also emerging, including lithium sulphur, vanadium redox flow and metal air, while the sector is also being boosted by climate change policies encouraging renewable technologies.