The government originally announced its intentions in October 2024 to implement a cap and floor scheme for long duration electricity storage (LDES) to incentivise investment which was reconfirmed in the government's Clean Power 2030 Action Plan. Ofgem has now published a consultation on its proposals with more detail of how the cap and floor scheme might work. We have set out some of the key updates below.

LDES Programme: how will it work?

The cap and floor scheme will open in "windows". Projects for Window 1 may submit their applications for a delivery date by the end of 2030 or by the end of 2033. Unsuccessful applicants or projects with completion dates beyond the end of 2033 will need to apply in later windows. Ofgem has published a timeline with Window 1 opening and guidance will be published in Q2 2025.

Criteria

Eligibility criteria will be applied to determine suitability. Applicants will need to demonstrate:

  • Deliverability of completing the projects against the milestones set out above
  • That the project has a grid connection agreement in place, or one will be in place by the delivery dates
  • Planning consent is in place by the time projects are assessed (for Window 1, Q3 2025) or that planning consent applications have been submitted and are likely to be accepted
  • That the project will meet the capacity and duration limits. Extending these limits from six to longer is still being debated and a decision will be made in the Technical Decision Document (due to be published by Q1 2025).
  • That the project can meet the technology readiness level requirements. These were set out in the LDES consultation response but will be Stream 1 for mature technologies and Stream 2 for less mature technologies.

Project assessment and costs

Ofgem has indicated that it may prioritise projects which can be ready by 2030 rather than by 2033 and that projects will need to satisfy the Cost Benefit Analysis (CBA). Ofgem "expects" its CBA approach will be similar to the cap and floor scheme for interconnectors so it would assess categories such as socio-economic welfare, system operability, balancing market, decarbonisation and security of supply.

Similarly, Ofgem is considering including assessing the suitability of the project in isolation but also whether it would work as the last project to apply in that window. The CBA would focus on three areas in a similar way to with interconnectors: Consumer Benefits, Producer Benefits and LDES Developer Benefits.

Finally, Ofgem is considering a range of options for projects to keep costs down and encourage efficiency such as performance-based incentives (for projects that meet or exceed project timelines) or penalties (for "significant delays and cost overruns").

Gaming risk and mitigation

The consultation highlighted the risks of gaming gross margin and market manipulation under the scheme but Ofgem has sought stakeholder views on some proposed requirements such as detailed reporting and inspection requirements, mandating participation in the Capacity Market (and bidding full LDES capacity in those auctions), prohibiting transactions between cap and floor LDESs and other assets and also requiring detailed cost allocation information.

Next steps

Stakeholders must submit their responses by 8 January 2025. If you have questions around the cap and storage scheme for LDESs our team of Energy experts can help. Please contact James Stanier and Russell Evans for more information.