Cap and floor: LDES watershed or critical battery barrier?

In this week’s Power Playbook: Britain’s storage landscape is set to see some changes, with the LDES cap and floor scheme receiving its first window for project applications. But BESS developers don’t seem happy.

On 8 April, Britain’s energy regulator Ofgem announced the first window for the long duration energy storage (LDES) cap and floor scheme.

While many have welcomed the mechanism since its initial announcement in October, some in the battery energy storage system (BESS) segment don’t seem happy.

Let’s break it down.

LDES cap and floor

The scheme provides minimum revenue certainty for investors: the ‘floor’, to provide debt security and a regulated limit; the ‘cap’ placed on revenues to avoid excessive returns.

In other words, the scheme aims to provide a minimum revenue on applicable projects, sheltering them from risk and providing investor certainty to give the green light to projects with big CAPEX.

Based on their experience with the interconnector cap and floor, implemented in August 2014 to stimulate investment in interconnectors, the UK government appointed Ofgem as regulator.

And according to Ofgem, the benefits are going to be massive.

Think billions of pounds, they say, unlocked to build major LDES projects for the first time in 40 years.

The energy industry in the UK has mostly welcomed the scheme. Back in October, industry associations demonstrated quite a hype.

Kate Gilmartin, CEO of the British Hydropower Association, called it “a pivotal moment for the UK’s clean energy future.”

At the same time, the Association for Renewable Energy and Clean Technology (REA) called it a win. Said the REA’s deputy director of policy, Mark Sommerfield:

“The initiative will create high-quality jobs, enhance UK skills, and highlight the country’s world-leading expertise in this field. The inclusion of a revenue cap also ensures that the scheme will deliver value for money for us all.”

Senior policy analyst Yonna Vitanova of RenewableUK, commenting in March on the release of the mechanism’s technical document, said it’s “a critical means of catalysing investment in an underdeveloped area…”

But not everyone has been quite so excited…

More from the Power Playbook:
Three ways AI has been moulding the global energy market
Trump’s u-turning tariffs: What’s next for a tense energy sector?

BESS barriers

Earlier this week, a group of BESS operators in the UK, led by specialist alternative asset manager Gresham House, called on Ofgem, the Department for Energy Security and Net Zero and NESO to deliver a level playing field for energy storage.

In an open letter, the businesses, which represent 36% of the UK’s operational BESS capacity, highlight flaws in the LDES scheme, citing ‘arbitrary’ barriers for BESS.

According to the businesses, the plans restrict smaller project sizes and prevent existing sites from being expanded to meet its requirements.

The companies cite analysis from consultancy firm LCP Delta, which finds that BESS is the most competitive LDES technology and could save consumers £2.22 billion ($2.96 billion) compared to other technologies.

The analysis also suggests that the LDES plans will artificially favour pumped storage hydro technology, which they say is less efficient, slower to build, more damaging to the environment and more costly compared to BESS.

Said Ben Guest, portfolio manager at Gresham House Energy Storage Fund:

“Government has, unfortunately, had an ongoing anti-battery bias, and initially intended to explicitly exclude batteries from participation in the LDES cap and floor scheme. This is despite batteries having very low and falling costs and being technically proven.”

Indeed, the potential for battery storage systems in the UK should not be scoffed at.

Whether research finding an investment opportunity of €78 billion ($83.3 billion) to 2050, the number of ‘ready to connect’ projects already available, or their ability to open up ancillary and balancing services, I have covered extensively the opportunity the tech provides in the UK.

Guest: ,“Government should focus on setting broad market structures and letting businesses get on with delivering the solutions.

“Getting this right is a not only a key test for the UK’s clean energy ambitions, but also an essential metric for private sector investibility in this sector and the wider economy, at an absolutely critical time to demonstrate the UK is lowering the barriers for inbound investment.”

Guest has not been the only one to issue such critical marks. Back in October, according to UK law firm Burges Salmon, a number of BESS developers and more novel LDES technology developers criticised certain aspects of the consultation, including the exclusion of lithium-ion battery energy storage systems.

Although this has been subsequently included, the open letter points to additional barriers from the scheme, including market distortion for shorter duration BESS, which have no revenue support while LDES projects will, and outdated cost assumptions dating back to 2020.

When it comes to net zero, we have to consider all potential outlets. And while the cap and floor is very much needed for LDES, I have to agree with the open letter that we can’t let any particular type of technology get sidelined.

To go back to Ofgem, when announcing the cap and floor, the energy regulator cited government analysis finding that 20GW of LDES, the current target set for 2050, could save the electricity system £24 billion ($31.9 billion) between 2030 and 2050.

What do you think? Do you agree with the open letter and its call for a level playing field? And if so, how do we achieve that? Reach out and let me know.

Cheers,
Yusuf Latief
Content Producer
Smart Energy International

Follow me on Linkedin