INTRODUCTION

Long duration electricity storage (LDES) is critical to the delivery of the smart and flexible energy system required for the UK to achieve its net zero targets. 

This article looks at the evolution in the Government’s thinking on long duration storage and some of the key issues that developers, licensed suppliers and funders need to consider in relation to the Government’s “Long duration electricity storage consultation Designing a policy framework to enable investment in long duration electricity storage” that was published by the Department for Energy Security and Net Zero on 09 January 2024 (the 2024 LDES Consultation).

The closing date for responding to the consultation is 5^th March 2024.

BACKGROUND

For some time LDES has been considered by many to solve a number of the challenges created by an energy system in which there is increased demand (primarily as a result of the general electrification of heat and transport) and a high penetration of intermittent generation. 

This was recognised by the Government in July 2021 and August 2022 when it published its call for evidence in relation to “Facilitating the deployment of large-scale and long-duration electricity storage” and the subsequent Government response.

It was also acknowledged in the Government’s British Energy Security Plan (published in March 2023) in which the Government committed to having an appropriate policy in place to enable private investment in long-duration electricity storage projects by the end of 2024.

In each document the Government acknowledged that LDES (previously referred to in the call for evidence and subsequent response as large-scale and long-duration electricity storage or LLES) probably had an important role to play in achieving net zero, helping to integrate renewables, maximising their use, contributing to security of supply, and helping manage constraints in certain areas, but also that LDES faced significant barriers to deployment under the current market framework due to LDES assets’  high upfront costs and a lack of long-term forecastable revenue streams.  

Particular LDES points and barriers highlighted in response to the initial call for evidence (and separately in various independent policy papers) included:

• the wide range of strong opinions on what large scale long duration energy storage is; 
• whilst the UK has around 2.8GW of pumped hydro storage (commissioned between 1963 and 1984) and a limited number of demonstration scale Compressed Air Energy Storage and Liquid Air Energy Storage sites in development, it will need at least 20GW to 40GW of LDES to achieve net zero; 
• that there are significant barriers to the deployment of LDES under the current market framework. Particular issues include: 
  • LDES having high upfront capital costs, long build times and a lack of a track record for certain technologies; 
  • that a Capacity Market contract only has up to a fifteen-year term (which is much shorter than the anticipated technical and project lifespan of certain LDES assets), with the T-4 auction process and subsequent date by which LDES assets need to be operational to comply with their Capacity Market obligations not reflecting the long build times for many LDES assets; 
  • the network charging regime, including high transmission use of system charges, (particularly in Scotland even though this is the location of many potential LDES assets); 
  • the general uncertainty about the future of the GB electricity system, including policies and markets, acting as a barrier to deployment, with current electricity policies and markets also sending distorted price signals to LDES assets; and  
• the need to accelerate the deployment of LDES and for further intervention to de-risk investment for LDES, with a preference for a modified cap and floor regime to bring forward LDES.

THE KEY POINTS IN THE 2024 LDES CONSULTATION

The 2024 LDES Consultation builds on the historic call for evidence and subsequent Government response and sets out the Government’s ‘minded to’ position on a number of key points. These are:

1. deploying long duration electricity storage is estimated to generate significant system benefits from reduced alternative generation, interconnector, and network costs, with the case for deploying long duration electricity storage increasing if there is a reduced deployment of hydrogen to power and/or CCUS. In addition, to maximise system benefit, the modelling suggests that assets with longer duration of storage capacity, the highest charging efficiency and assets located outside of typically constrained locations should be pursued as a priority; 
2. that there is a need for Government intervention to enable investment in LDES projects, with the preferred regime to unlock private sources of funding for LDES assets being an appropriately designed cap and floor scheme;
3. the modelling suggests 3GW of LDES by 2035 is the low regret option that results in the highest level of marginal system benefit (although the consultation also refers to the modelling indicating that up to 20GW of LDES by 2050 could result in savings of up to £25 billion and acknowledges that there are approximately 3GW of pumped hydro storage projects listed on the Renewable Energy Planning Database; Glyn Rhonwy (99.9MW), Coire Glas (1500MW), Glenmuckloch (400MW), Red John Pumped Storage (450MW), Cruachan 2 (600MW). The Government is however minded not to set a specific ambition for the deployment of LDES; 
4. the Government is minded to exclude from any LDES support scheme electricity storage technologies that can already be funded under existing market arrangements, such as lithium-ion battery energy storage systems (BESS);       
5. the Government will look to support through a cap and floor scheme established LDES technologies, but also more novel first-of-a-kind (FOAK) technologies that have not been proven at scale and as such intends to split any cap and floor scheme into two streams. Steam 1 will support established technologies (with a technology readiness level of 9) such as new and refurbished pumped hydro storage and liquid air electricity storage, whilst Stream 2 will support novel technologies (with a technology readiness level of 8) such as compressed air electricity storage, liquid air electric storage and flow batteries (with the technology categories not being fixed and with technologies likely to move into Stream 1 as they mature); and
6. to be eligible for support under the LDES cap and floor scheme:
   • established technology LDES assets (Stream 1) should have a minimum duration of six hours and a minimum power capacity of 100MW (so 600MWh); 
   • more novel LDES technologies (Stream 2) should have a minimum duration of six hours and a minimum power capacity of 50MW (so 300MWh); and
   • an LDES asset will need to meet certain specified pre-qualification criteria.

The 2024 LDES Consultation also sets out a number of detailed design parameters that the Government is minded to adopt with regards any LDES cap and floor scheme. We explore these below.   

CAP AND FLOOR REGIME PARAMETERS

As mentioned above, after considering the different interventions suggested to support investment in LDES, the Government has determined that a cap and floor scheme, similar to the cap and floor scheme for interconnectors, is its preferred policy option. 

This is on the basis that a regime which provides a minimum revenue certainty for investors (floor) to provide debt security and a regulated limit (cap) on revenues to avoid excessive returns gives investors reassurance that they will receive a return on their stake, will likely reduce the weighted average cost of capital for LDES assets upfront (which should have a material impact on overall project costs), offers some protection to consumers and can result in limited / no top up payments being payable if LDES projects meet or exceed the floor level (which has been the case with the interconnector model to date and therefore differs from alternative LDES policy options such as changes to the Capacity Market).

As LDES assets are different to interconnector projects for a number of reasons however, the Government has recognised that whilst the interconnector cap and floor model provides a guide, adjustments will be needed to create a bespoke support mechanism for long duration electricity storage. LDES scheme adjustments that the Government is welcoming feedback on include:

Gross Margin - using gross margin to set the cap and floor levels for LDES assets, with gross margin being the difference between revenues earned from dispatching energy and services of the asset and the costs of buying the energy to charge the asset. This is on the basis that a revenue approach would be difficult to set ex-ante given market volatility and unpredictability and such an approach also being simpler and more transparent than the alternative of total revenues.

Operational Risks and Dispatch Distortions – setting the gross margin floor at the cost of debt, with any return on equity only being achieved once the asset is generating returns above the floor level, assessing the gross margin a number of times over a longer period to smooth out year on year positions, having a soft cap on gross margin where returns to consumers are gradually increased, rather than a cliff edge and including availability and performance requirements to enable the withholding of floor payments / deductions if an LDES asset’s performance does not (subject to certain exceptional event adjustments – please see below) meet the agreed requirements (to continually incentivise an LDES asset owner to take the course of action that benefits the Total System, rather than just it) and including anti-gaming principles such as transparency requirements, a potential prohibition on intragroup vertical trading contracts and possibly a deemed revenue index to assess market behaviour of an LDES asset and set the cap and floor levels for such an asset by reference to the index.   

Administrative Allocation - an administrative allocation of the cap and floor scheme (like the interconnector model), rather than a competitive approach (like the contract for difference allocation regime) notwithstanding the Government’s general desire to move away from administratively awarded bespoke mechanisms. If there was a high volume of bids received however, the Government anticipates that there would be a rigorous assessment process to weigh bids against each other, enabling a degree of competition and prioritisation.

Contract Length – basing the term of any LDES scheme for a particular LDES asset on its project lifetime as opposed to its technical lifespan (i.e. an asset's lifespan prior to refurbishment), but with potentially another regulated regime being required for those LDES assets that operate over a longer period than the project lifetime.

Pre-Qualification Criteria – developers needing to demonstrate an LDES asset meets certain pre-qualification criteria before they can formally apply for support in respect of that asset. These include a developer of an LDES asset needing to:

• connect the asset to the GB Electricity grid once built; 
• have a valid grid connection agreement or being able to provide such an agreement by the time six months prior to the commencement date;
• have obtained the relevant planning consents for the asset; 
• have obtained the relevant environmental permits for the asset; 
• demonstrate that it has all the required real estate rights for the asset; and  
• potentially having a generation licence (noting that it is not that clear why a generation licence might be required at pre-qualification stage). 

Delivery Route – Ofgem (rather than the Low Carbon Contracts Company / Government) being the delivery body for the cap and floor scheme that industry would be most comfortable with, including as a result of Ofgem already having the majority of the powers it needs to implement a LDES cap and floor scheme meaning that the policy can potentially be implemented by the end of 2024 (meeting one of the Government’s Energy Security Plan commitments).  

Funding Mechanism – whether the LDES cap and floor scheme and payments to consumers should be implemented through transmission network use of system charges and rebates (similar to the interconnector cap and floor scheme) or a supplier obligation levy (similar to the contract for difference levy).

Force Majeure and Exceptional Events – that the LDES cap and floor scheme should take into account and be adjusted for force majeure and exceptional events during the pre-operational and operational phase of an LDES asset. Examples include Ofgem permitting a delay to the cap and floor regime start date if a force majeure prevents an asset from becoming operational by the agreed operational start date (rather than the delay reducing the overall length of support available in respect of the asset if it misses that agreed operational start date by more than, for instance, twelve months) and a developer not automatically losing eligibility for floor payments in respect of its LDES asset in a year if the availability of that asset in that year falls below a prescribed level as a result of a force majeure. 

ANALYSIS 

The 2024 LDES consultation has generally been welcomed by the electricity and funding sectors, particularly the confirmation that a cap and floor regime is the Government’s preferred investment framework for LDES, which is something that certain developers have been requesting for many years.

We expect that developers and funders will though want to provide feedback on a number of the detailed cap and floor design parameters being considered by the Government, with the policy considerations in relation to Operational Risks and Dispatch Distortions (particularly some of the potential anti-gaming options being considered by the Government), Force Majeure and Exceptional Events and Gross Margin likely to be key areas.

It is also worth noting that a number of battery energy storage developers and more novel LDES technology developers have constructively criticised certain aspects of the consultation.

From a battery perspective, these criticisms have tended to focus on the proposed policy position of excluding lithium-ion battery energy storage systems (and certain other technologies) from any LDES cap and floor scheme, with one of the common arguments being that the proposed six-hour duration for both scheme streams is within the range of lithium ion and potential future lower cost technologies, but the proposed scheme design prevents a cost discovery exercise between, for instance, pumped storage assets and such assets and involves the Government trying to pick to some extent “winners”. The novel LDES technology criticisms have alternatively tended to focus on the perceived support gap (notwithstanding the Government’s Longer Duration Energy Storage Demonstration (LODES) competition) for those more novel LDES technologies that will struggle to meet the proposed Stream 2 requirements (minimum duration of six hours, minimum power capacity of 50MW and a technology readiness level of 8). Many commentators have also raised the point about the complex interaction between any LDES support scheme and the current and ongoing review of GB electricity market arrangements which has far wider implications for the electricity sector. 

More widely, the electricity sector will be looking for the Government to deliver on its commitment to having an appropriate policy in place to enable private investment in LDES projects by the end of 2024. This means that the Government will need to be proactive and incisive in delivering its LDES policy, something made harder than usual by (probably) an election this year and the significant regulatory changes to the GB electricity sector that the Government is already considering. 

If you would like to know more about long duration electricity storage policy developments in Great Britain and/or how we can and are assisting numerous developers and funders with the development, financing and operational aspects of long duration electricity storage projects of all technology types, please go to our website or contact Alec Whiter, Ross Fairley, James Phillips or Nick Churchward.