New incentive scheme for Long Duration Electricity Storage in Great Britain

On 10 October 2024, the UK’s Department for Energy Security and Net Zero (DESNZ) confirmed plans to create a new revenue support mechanism for Long Duration Electricity Storage (LDES) projects, recognising their key role in achieving the government’s Net Zero mission to decarbonise the electricity system by 2030.  Crucially for project developers and their funders, in its consultation response, DESNZ confirmed a new cap and floor scheme intended to provide certainty to investors in LDES technologies and to help “green light” projects in the pipeline. 

Background

LDES technologies take power generated by intermittent sources, such as wind and solar, and store it for extended periods, reconverting the stored energy to electricity and resupplying it to the grid when required. Long duration storage technologies – such as pumped hydro storage (PSH), liquid air energy storage (LAES), compressed air energy storage (CAES), and flow batteries – can discharge continuously over extended time-periods (from 4-24 hours) and so help to balance electricity supply and demand as the volume of intermittent renewable generation increases. 

However, investment in LDES projects has been hampered by significant upfront costs and the absence of predictable revenue streams. Currently, Britain has just 2.8GW of LDES capacity from four PSH plants Scotland and Wales. By contrast, the National Electricity System Operator (NESO) estimated in its Future Energy Scenarios 2024 that the grid requires 7GW - 15GW of LDES by 2050.

How will the support scheme work?

The government has now confirmed that it will introduce a cap and floor scheme to provide LDES project developers with a guaranteed minimum income (the “floor”) in return for a limit on maximum revenue (the “cap”). Ofgem will be the regulator for the scheme and will be responsible for allocating support.

The cap and floor will be set based on a project’s annual gross margin (the difference between the revenues earned from dispatching energy and services, and the cost of energy to charge the asset). The government proposes to set the floor at a level that will allow recovery of debt and incentivises operation above the floor, and the cap at a level to enable a fair return on equity up to the cap. 

The consultation explored several design details, including performance penalties and using soft caps to remove the cliff-edge above which all returns are removed from the operator and returned to the consumer. Respondents also questioned how the annual gross margin would be calculated (for example whether it would take account of Opex, network charges and taxes etc.). These and other specific design details are expected to be developed with input from Ofgem and defined in a technical decision document to be published this winter. 

However, the government has indicated that floor levels are likely to be set low to reduce the likelihood of use, while still providing comfort to investors that operators can meet debt payments if revenues are much lower than forecast. In designing the scheme, the government has drawn from experience of the cap and floor regime for electricity interconnectors, which has been operating since 2014, with no floor payments made since its introduction.  

The government’s minded-to position is that LDES cap and floor support will last until first refurbishment or up until 25 years (in line with the interconnector regime). In terms of how the mechanism will be funded, the government’s preferred option – like the interconnector regime – is through Transmission Network Use of System charges (TNUoS).

Eligibility and allocation

Under the proposed regime, a range of LDES technologies will be eligible for revenue support including PSH, LEA, CAES, and flow batteries. However, technologies will be required to meet the definition of electricity storage introduced by the Energy Act 2023, which requires the conversion from electricity and reconversion into electricity (rather than into heat for example). 

Ofgem will be responsible for the administrative allocation of support. Applicants will be split into two application routes: 

• Stream 1 will focus on mature, established technologies (such as PSH) with a Technology Readiness Level (TRL) of 9 and a minimum capacity of 100MW; 
• Stream 2 will target novel technologies with a TRL of 8 and a minimum capacity of 50MW. 

Despite disagreement by the majority of respondents, the government proposes to apply a 6-hour minimum duration for technologies in both streams, although the government has said this figure may rise pending further modelling with NESO and Ofgem. It will also consider whether a lower minimum capacity requirement may be appropriate for Stream 2. No minimum efficiency rating is proposed.

The principle of additionality will be one of the eligibility criteria, meaning that support will only be provided to those projects which cannot deploy through existing market revenue opportunities and so require a minimum guaranteed revenue to be commercially feasible. We note however that supported projects will also be eligible to participate in the GB Capacity Market.

Next Steps

The government intends to develop the LDES scheme further and to publish a technical decision document this winter, with a view to opening the scheme to applications in 2025. Acknowledging that there are still “a number of questions to resolve in advance of the first application window”, it continues to work with Ofgem, NESO and other industry stakeholders to develop final positions. 

Along with eligibility considerations and design details mentioned above, the technical decision document will set out the government’s final view on a range of issues such as: pre-qualification criteria and how these will be assessed; how the length of cap and floor agreements will be determined; how “gross margin” will be calculated; and how the scheme will mitigate “gaming” of the system and dispatch distortion risks. In addition, it is expected to provide further detail on the government’s approach to setting the cap and floor, including whether notional debt financing could be included in the floor calculation. 

Whilst the announcement is a welcome development, industry have called for “speedy implementation” of the cap and floor scheme to enable projects to take final investment decisions and begin build-out of projects to meet the government’s 2030 clean power mission. In the meantime, the government hopes the confirmation of a revenue support scheme for the sector will boost investor confidence and help unblock a pipeline of LDES projects.