Government confirms cap and floor scheme for long duration energy storage

On 10 October 2024, the government published its responses to its consultation on a policy framework to enable investment in long duration energy storage (LDES).

The responses confirm that government will proceed with a cap and floor scheme that will provide LDES developers with a guarantee minimum income (the floor) in return for a limit on maximum revenue (the cap).

Ofgem will be both regulator for LDES and delivery body for the cap and floor scheme. The government’s current preference is that the scheme will be funded through network charges (TNUoS) as per Ofgem’s cap and floor scheme for interconnectors.

How will the scheme work?

The consultation response reconfirms the government’s position that the scheme will have two application routes:

• Stream 1 – established technologies with Technology Readiness Level (TRL) of 9, a minimum duration of 6 hours and a minimum capacity of 100MW. These will be technologies which have been proved through successful operations, namely pumped storage hydro.  
• Stream 2 – more novel technologies with a TRL of 8, a minimum duration of 6 hours and a minimum capacity of 50MW. These will include technologies which have been successfully deployed in a demonstration phase, so potentially compressed air energy storage, liquid air energy storage and flow batteries. 

Further details on how TRLs will be assessed will be made available ahead of the scheme launch.

The government also noted that a slight majority of respondents disagreed with the proposed minimum duration of 6 hours for both streams. The government’s preference is to keep to 6 hours but it will undertake further modelling to determine the most appropriate figure, working with NESO and Ofgem. The final position will be set out in an upcoming technical decision document (see heading ‘What are the next steps?’ below).

Lithium-ion – to be or not be?

Many respondents to the consultation disagreed with the government’s original proposal that lithium-ion technologies should be excluded from the scheme.

The government’s response is that while projects should not be excluded ‘solely on the basis of their technology type’, projects should also ‘not be eligible to receive support from an LDES cap and floor if they can already readily deploy via existing market revenue opportunities.’

Support will be available to projects that are technically feasible but are not otherwise commercially feasible without a guaranteed minimum revenue. The government has stated this could include novel iterations of lithium-ion batteries, provided they also meet the remaining eligibility requirements.

Eligibility criteria

• As mentioned above, the government’s current preference is to keep the minimum duration for both established and novel technologies at 6 hours.
• Minimum capacity for stream 1 will remain at 100MW as set out in the consultation. The government acknowledges that the minimum capacity for stream 2 (50MW) raised more concerns so it will consider this further and provide an update in its upcoming technical decision document.
• The government is minded not to include a minimum efficiency rating as part of the eligibility criteria for projects, noting that a blunt minimum may exclude projects that are worthwhile on other merits.
• The majority of respondents agreed with the government’s proposals that wider system benefits (such as  local economy benefits, constraint management, energy security etc.) should be considered when assessing a project. The government will confirm the final criteria for these wider considerations in due course.

Capacity targets, length of support and other subsidy schemes

• The government does not believe it is necessary to set an overall capacity target for LDES at this stage but will provide indicative ranges to Ofgem (as the scheme’s delivery body) for each allocation round.
• The government is proposing that the length of the cap and floor contract should be based on either project length up until the first refurbishment or up to 25 years (in line with the arrangement for interconnectors).
• LDES projects receiving cap and floor support will also be able to participate in the Capacity Market but government will consider whether further parameters around LDES participation in the Capacity Market will be required.

Cap and floor mechanism 

On the detail of the cap and floor mechanism, the consultation proposed that:

• The cap should be set at a level that incentivises the asset to continue operating to maximise the available storage in the future energy system and to gain a fair return on its equity investment, whilst protecting consumers from excessive cost.
• The floor level should be set such that a project can recover its debt-related costs to provide certainty to investors that debts will be serviced.

In the consultation response, the government’s preference is to keep the floor calculation at the level of debt but will continue to explore further whether other financing approaches could be included within the calculation. The final position will be set out in the upcoming technical decision document. The government also acknowledges that while its minded-to-position on calculation methodology will remain the same (such as using gross margin and soft caps), exact details will be set out ahead of the first application window after reviewing with Ofgem.

The government’s minded-to-position is also to require projects to outline how they intend to operationalise the asset to exceed the floor as part of the assessment process.  

What are the next steps? 

Government will publish a technical decision document in winter 2024 to address remaining questions and provide the market with a clear explanation of how the scheme will work. Then, prior to the first application window, Ofgem will clarify the exact assessment methodology.

Additionally, to address concerns around potential gaming risks associated with a cap and floor approach, the government has commissioned Cambridge Economic Policy Associates to conduct an in-depth study. Possible mitigations will then be considered with Ofgem ahead of the scheme opening for applications.