Ofgem calls for input on the long duration electricity storage Cap and Floor scheme

In October 2024, the government published a response to an industry consultation around the introduction of a new cap and floor revenue guarantee mechanism for Long Duration Electricity Storage (LDES) projects. As part of this, Ofgem were appointed to be the formal regulator of this scheme, tasked with designing, overseeing and implementing it as a new market mechanism across 2025.

The newly established LDES team within Ofgem’s major projects directorate yesterday published an open letter and call for input on the implementation of the cap and floor mechanism. While not stated to be a formal consultation, this letter poses 14 questions to stakeholders, calling for input for Ofgem (working with DESNZ and NESO) to shape the much anticipated Technical Decision Document (TDD). This document, which is due in early 2025, will provide more detail about the scheme’s design, timelines, eligibility criteria, definitions for the cap and the floor, and other clarifications about the scheme that many in the sector have been calling for. The intention is to then open the first window for applications in Q2 2025.

Figure 1: Proposed timeline for first application window and approval for the LDES cap and floor scheme.
Source and credit: “Call for input – LDES Cap and Floor Regime: Our Role, Plan, and response to the DESNZ publication”, Ofgem, 18^th December 2024

The open letter poses a range of questions for the implementation of the cap and floor scheme, as well as summarising some of the proposed changes to the scheme, including:

• A proposed twin-track approach to the first allocation window, enabling applications to demonstrate if they can build-out by 2030 (to contribute Clean Power 2030) or just after, by 2033
• The proposed deliverability criteria that projects will be assessed against under this scheme, including:
  • Engineering design
  • Economic viability (including evidence of plans to raise finance)
  • Project development, construction and commissioning timelines
  • Stakeholder engagement plans.
• The confirmation that a firm grid connection agreement will need to be in place by the delivery date of the application, within their respective track (e.g. by 2030 or 2033)
• The need for planning consent to be in place, or that a planning decision on a submitted application will be approved, before the eligibility assessment starts for the first allocation window (e.g. by Q3 2025)
• Capacity and duration thresholds (discussed more below)
• Confirming that stream 1 technologies (Technology Readiness Level, TRL, 9) will not need to demonstrate detailed evidence of their TRL, but that stream 2 (TRL 8) will need to demonstrated this
• An increase to the proposed minimum duration of stream 1 technologies from 6 hours to 8-10 hours, (based on evidence from a report completed by LCP Delta and Regen)
• A potential consideration to reduce the 50 MW minimum capacity threshold for stream 2 technologies “if there is compelling evidence” to do so, confirmed through the TDD
• Definitions around refurbishment and expansion of existing LDES assets
• The proposed approach to develop the cost-benefit analysis for awarding cap and floor contracts, by incentivising cost reductions and assessing consumer, producer and LDES developer benefits – proposing to set the floor to be 80% of a project’s costs
• The potential to use competitive mechanisms to setting the cap and floor rates
• Methods to mitigate gaming risks and market manipulation

Responses to this call for input are due by 8 January 2025, which could potentially be a challenge for many given the Christmas break. Regen and the Electricity Storage Network will be reviewing these questions in more detail and aiming to submit a response in early January. We would welcome any specific views on these questions, to help shape the details in the TDD and the more formal consultation that will likely follow.

Stepping out of the details of the mechanism, perhaps an overarching point coming through from this open letter, is around how much LDES we will actually need.

The recently published Clean Power 2030 plan by the UK government, included 4-6 GW of LDES capacity required by 2030 and a proposed minimum duration of 6 hours. This was noted to be a little different to NESO’s original recommendations to the government, as taking their numbers of 5-8 GW of power capacity and 81-99 GWh of energy storage capacity, the range of duration required was closer to 12-16 hours. Ofgem have, in this open letter, proposed different requirements across the two streams of the cap and floor mechanism, currently aiming to assess applications based on:

• Stream 1 – 100 MW / 8-10 hours
• Stream 2 – 50MW (or potentially lower TBC) / 6 hours

This potentially reinforces the need for further clarity on the system needs for LDES, the durations of balancing/system events in a future clean power system that LDES projects of various durations can look to support.

The topic of permitting lithium-ion battery storage to bid into the scheme has not been explicitly addressed in Ofgem’s letter. Whilst it is clear that stream 1 applicants must by TRL 9, the previous government response document referred to enabling ‘novel iterations’ of lithium-ion battery storage projects to apply. Ofgem will need to provide more clarity on technology agnosticism as an aspect of the entry criteria through the TDD.

Through the ESN’s Innovation and Technology Working Group, we will continue to engage with Ofgem, DESNZ and NESO around the implementation of this cap and floor scheme, as well as the wider policy and innovation support being investigated by the government to enable the deployment of LDES.

To talk to us more about our wider work and engagement around LDES, please contact Ray Arrell.

Ray Arrell, Associate Director, Regen | Email – rarrell@regen.co.uk