‘Cap and floor’ scheme proposed for long duration storage investment in UK

A ‘cap and floor’ scheme is proposed to overcome current investment barriers for large scale deployment of long duration energy storage in UK.

The ‘cap and floor’ proposal is conceptually similar to that developed by Ofgem and currently in operation to enable investment in electricity interconnectors.

In this case, the regime provides a minimum revenue certainty for investors, i.e. the floor, to provide debt security and a regulated limit, i.e. the cap, on revenues to avoid excessive returns.

When revenues fall below the floor level, they are topped up by consumers through the financing mechanism. Conversely, when revenues breach the cap, excessive returns are passed on to the consumer.

“A cap and floor scheme would unlock investment from private sources by providing a revenue guarantee, giving investors reassurance that they will receive a return on their stake, as has been demonstrated in the interconnector scheme,” states a consultation document from the Department for Energy Security and Net Zero (DESNZ).

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“Unlike the capacity market approach, this is potentially a low-cost option if the floor is met and no top-up is provided (the case with the interconnector model to date). It is also expected to reduce the weighted average cost of capital for projects by reducing the overall investment risk, which is particularly important in addressing the high upfront costs associated with developing long duration energy storage and overall system costs.”

The consultation, which runs to March 5, is aimed to seek input on design options for the cap and floor scheme, including considerations on how it is delivered and on how the associated risks are mitigated.

Among these is a proposal to split the scheme into two ‘streams’ – one for established technologies, i.e. pumped hydro storage, liquid air electricity storage, etc., and a second for novel technologies, e.g. compressed air electricity storage, flow batteries, etc. – to allow tailoring to overcome specific barriers and best support the respective technologies.

Long duration energy storage scenario

Alongside the consultation, the DESNZ has also published a deployment analysis of long duration energy storage (LDES) – defined as a capacity of at least 6 hours – which was commissioned from energy transition consultants LCP Delta and Regen.

A key finding is that modelling shows that adding LDES to the system can have a positive impact on both emissions and system costs, with the duration of the deployed storage being the biggest factor in the size of that impact.

For example, adding just 3GW of LDES in 2035 is modelled to reduce power system emissions intensity by 3-8%, while 12GW of LDES could reduce the emissions intensity by 10-28%.

Another top level finding is that the capital costs of LDES technologies are critical in determining their net benefits and at medium capex levels, most technologies tested bring net benefits to the system.

With the ‘optimal’ deployment level depending on the type of LDES technology, with the benefits of different technologies peaking at different points, both the technology type and duration are important in determining the scale of system cost reduction.

Another finding is that LDES can act as a risk mitigation for reduced delivery of other technologies. With lower levels of gas carbon capture and storage and hydrogen deployment, there are greater emissions and system cost benefits when LDES is added to the system.

However, the location of the LDES was found to not be a significant driver of the benefits to the system, with such benefits significantly smaller than the overall benefits of adding LDES to the system.

Overall, LDES technologies could have a significant impact on providing the flexibility the future GB power system will need, the report concludes.

With the capital costs for LDES technologies an important driver of the extent of system benefits, the reduction of these costs should be a key focus and will help bring these technologies to market.

Originally published on powerengineeringint.com