Clean Power 2030: First GB long duration electricity storage cap and floor scheme application round set to launch

On 11 March 2025, the UK Government and Ofgem published a joint technical decision document (TDD) confirming key final details of the cap and floor regime to be introduced for long duration electricity storage (LDES), and introduced the Planning and Infrastructure Bill in Parliament, which requires Ofgem to implement an LDES cap and floor scheme. These latest LDES developments come after Ofgem published a call for input in December 2024 (Call for Input) following the Government's response to its consultation on LDES in October 2024 (Consultation Response). 

 

LDES has been identified by the UK Government as a valuable mechanism for instilling flexibility in Great Britain's (GB) energy network. The Clean Power 2030 Action Plan (CP30 Plan), which sets out GB's pathway to clean power by 2030, specifies that 4-6 GW of LDES will be required to support energy system security by 2030 and 5-10 GW will be required by 2035 (up from the 2.9GW of currently installed capacity) as intermittent electricity generation from renewable sources increases.

In its Consultation Response, the Government confirmed that an LDES cap and floor scheme should be introduced to facilitate rapid and efficient LDES investment to address the investment barriers of high upfront costs and market uncertainty for LDES projects. Ofgem has agreed to deliver the scheme as LDES regulator.

The cap and floor model provides revenue certainty to developers by guaranteeing the floor payment where revenues are below the floor, in exchange for a cap on maximum revenue over a period of, ordinarily, 25 years. The LDES cap and floor scheme has been developed based on GB's interconnector cap and floor scheme, with modifications for the different asset type, so will have some aspects which are familiar to investors.

The floor payments will be recovered through network charges.  This is consistent with the recovery method for cap and floor costs for interconnectors but is in contrast to other generation support schemes where the costs are generally recovered through energy supply charges.

 

Application Process

The first application window for LDES cap and floor support is expected to have a capacity range between 2.7 and 7.7 GW for projects to be delivered by the end of 2035 (Window 1).

Window 1 will have two distinct application tracks (which may be progressed in parallel or using a 'twin track approach'): "Track 1" for projects expected to be commissioned by the end of 2030; and "Track 2" for projects expected to be commissioned by the end of 2033.

There will be two assessment stages: an initial eligibility stage, followed by a Cost Benefit Analysis (CBA) stage in which project costs are assessed and a multi-criteria assessment of project impact is carried out, resulting in Ofgem giving project approval and setting preliminary cap and floor levels for successful projects.

The expected timeline for Window 1 projects is:

• April 2025 – Window 1 opens and eligibility assessments start.  Ofgem is expected to provide detailed information about the eligibility assessment framework by this date. 
• Q2 2025 – consultations on CBA framework, cap and floor financial model and regime financial parameters.
• June 2025 – Window 1 closes.
• Q3 2025 – eligibility decisions made; final CBA framework decision made by Ofgem.
• Q4 2025 – CBA and project assessment starts for projects which pass eligibility assessment.
• Q1 2026 – consultation on initial decision of projects to be granted support.
• Q2 2026 – limited update to projects' cost information for setting the cap and floor levels; Ofgem to determine the cap and floor levels (other than any competitively-determined floor) and all relevant input parameters for Window 1 projects; LDES support awarded.
• C.Q1 2029 – Post Construction Review (PCR) to set final cap and floor levels.

The TDD confirms an intention to open subsequent windows for LDES applications, with a second window opening as soon as practicable after completion of window 1, if it is determined that more LDES capacity is required.

 

Eligibility

The scheme will offer support to both:

• Stream 1 technologies with a technology readiness level (TRL) of 9 (being a final form marketable product which has been proven through successful operations). It is currently expected that only pumped hydro storage and lithium-ion batteries will have a TRL of 9 at the start of Window 1. Lithium-ion batteries are now included in the scheme and will be eligible provided they meet all of the eligibility criteria (including, in particular, that they cannot readily deploy via existing market revenue opportunities).
• Stream 2 technologies with a TRL of 8 (being technologies which have been successfully deployed in a demonstration phase). This would include, for example, compressed air electricity storage, liquid air electricity storage and flow batteries.

Support under the LDES cap and floor scheme will be technology-neutral provided that the relevant project:

• meets the existing definition of "stored energy" (as updated in the Energy Act 2023);
• has a minimum duration of 8 hours continuous output at full power maintained over the full cap and floor regime duration, (this is up from the 6 hours previously consulted on);
• has a minimum capacity of 100MW if it is a Stream 1 technology or 50MW if it is a Stream 2 technology; and
• cannot be deployed through the existing market arrangements or mechanisms without further support.  Note however that Ofgem will treat all LDES applications in the first window as satisfying this requirement provided they have not taken FID. This could change for specific technologies in future windows if they are proven as being capable of being deployed on a merchant basis in GB or internationally.

For the eligibility assessment stage, developers are expected to submit at the time of application (i) cost estimates that are broadly equivalent to an "Outline Business Case", (ii) evidence of upfront engineering design/ optioneering appropriate to the project's development stage, (iii) evidence that a grid connection application has been submitted; and (iv) evidence that planning consent is or will be in place, for Track 1 projects, in the required delivery timescales, and for Track 2 projects, by the start of the project assessment phase (end of Q3 2025 for Window 1).   Note that only an application for a grid connection is required for window 1, as Ofgem acknowledges that the current TM04+ grid reform introduces too much complexity for projects to demonstrate that they have grid connection rights secured when applying for LDES support. Projects will also be required to evidence holding all relevant environmental permits, a generation licence (where applicable) and secured land rights.

No minimum efficiency criterion has been proposed but the Government has noted that efficiency should be considered alongside other metrics (e.g. consumer benefits, local economy benefits and energy security) as part of the CBA assessment of the proposed project.

 

Refurbishments

The LDES cap and floor scheme will be available for significant refurbishments or expansions, as well as new builds provided that:

• the added capacity meets the eligibility criteria set out above; and
• the refurbishments or expansions cannot secure sufficient funding through existing schemes alone such as the capacity market.

Only the cost of the new capacity from the refurbishment or expansion will be eligible for support under the LDES cap and floor scheme, but all revenues from the refurbished or upgraded asset will be considered in the cap and floor calculations.

Ofgem acknowledges that further work on the application of LDES cap and floor to refurbishments and expansions is required, including to clarify what an "extensive" refurbishment is and how the requirement to demonstrate that the project would not be financeable without cap and floor support is to be assessed.

 

Parameters for the cap and floor scheme

Term

LDES assets will be subject to the cap and floor regime for 25 years. Ofgem may consider requests for different regime lengths, but the term must be at least 20 years.

Cap and floor thresholds

The floor will allow for the recovery of all economic and efficient capital and operational costs (including both debt and equity) and a return similar to the cost of debt over the term provided that the project meets a minimum availability threshold (similar to interconnectors).

Developers can elect for Ofgem to administratively set the floor or undertake a competitive project finance process, overseen by Ofgem, where the floor is set to meet debt obligations. If this approach is taken, the floor would be determined once financial close has been achieved on the relevant project, similar to the project finance process for the Greenlink and NeuConnect interconnectors.

The floor will provide some protection for LDES projects against the impact of any zonal pricing changes implemented as a result of REMA, as it will guarantee a minimum revenue stream (see our article on REMA here).

The cap will be set to provide a "fair" return on investment if the assets perform well in the market. Ofgem is yet to decide whether the investment rate of return at the cap will be set administratively or through competition based on the target cost of equity submitted by developers in their bids. Unlike interconnectors' hard cap, a soft cap will apply to LDES, with any revenue above the cap to be shared between the LDES licensee and the consumer to ensure LDES operators are incentivised to continue to make their assets available to meet system needs even where their revenue has exceeded the cap. The details of how the excess is to be shared will be further consulted on (by Q3 2025).

Ofgem expects to conduct a further public consultation from Q2 to Q3 2025 to determine the administrative cap and floor rates of return, the relevant inflation index, the competitive cap rate, its incentivisation process, and whether to use an administrative or competitive cap.

All sources of revenue will be assessed in the cap and floor calculations. The costs assessed will be similar to the building blocks in the interconnector regime (i.e. CAPEX, OPEX, decommissioning costs and pass-through costs).

At the PCR stage, Ofgem will adjust the preliminary cap and floor levels for costs that are considered eligible and efficient and will set the final cap and floor values for each project. The final cap and floor levels will remain fixed for the duration of the cap and floor regime subject to a limited number of cost reopeners e.g. for decommissioning costs and opex which are expected to be available. Ofgem is continuing to work with stakeholders to develop a cost reopener process that works for LDES.

Revenue stacking

LDES operators will have flexibility in how to trade, with third party optimisers and in-house trading permitted, subject to a clear set of rules to prevent gaming and enhanced reporting requirements.

A key reason why the cap and floor model was selected, rather than a Contract for Difference (CfD) or Regulated Asset Base (RAB) model, was to incentivise LDES projects to operate efficiently and earn market revenue. In line with this approach, LDES cap and floor recipients will be able to participate in the Capacity Market (Ofgem is considering whether LDES projects should be required to participate in the Capacity Market).

Delays and incentives

To ensure timely delivery of projects, Ofgem will use backstop dates, delivery incentives and penalties. Both Track 1 and Track 2 projects will be permitted to request an extension of two years to their original deadline if they encounter delays due to force majeure events during the pre-operational period. If this request is approved, there will be no penalties imposed on investors for late delivery during the two-year period.

 

Revenue assessment

Revenue assessment will be over the full length of the cap and floor regime on a net present value neutral basis. Revenue assessments against cap and floor levels will be undertaken every year or five years as preferred by licensees and review the total revenue for the year or five-year period up to that point.

Excess revenues over the cap in any year must be paid back to consumers the following year. Any initial payment will count towards the five-year adjustments and the final adjustment is to be made at the end of the regime.

Ofgem intends to review arrangements after the cap and floor scheme ends to ensure that some revenues generated by the LDES project after the cap and floor regime period are used to offset any floor payments received during the scheme period.

 

Grid Connection Reform and LDES

The TDD clarifies that for the purposes of the upcoming grid connections reforms (see our article here for further detail on connections reform), lithium-ion electricity storage projects will be treated as batteries. They will, therefore, be subject to the zonal battery capacity ranges for the purposes of connections reform, not to the GB-wide LDES capacity ranges, and it is possible that eligible lithium-ion LDES projects may lose their place in the connections queue as a result of the upcoming queue re-ordering in Q2 2025.

Ofgem and the National Energy System Operator are exploring whether successful LDES bidders which lose their place in the connections queue will be able to re-enter as batteries (if lithium-ion) or LDES (in all other cases).

Once projects hold a "live" LDES cap and floor agreement, they are expected to receive protection in grid connection application windows in the same way that projects holding interconnector cap and floor agreements are protected (i.e. a place in the queue is protected but the project's existing connection date and location may change).

 

Next Steps

The TDD is intended to mark the end of the LDES scheme policy development phase and the start of the delivery phase but there are still a number of key areas which Ofgem intends to consult on and finalise, including:

• developing incentives and penalties to manage cost underspends or overruns;
• determining whether to use an administrative or competitive cap; and
• developing a methodology for revenue assessments and creating guidelines for submitting, reporting, and monitoring revenues ahead of the 2030 delivery date.

With the first application window expected to open in April 2025 for a two-month period, potential bidders will need to act quickly to analyse the details set out in the TDD (including the impact that uncertainty surrounding the not-yet-finalised elements of the scheme may have on their bid and risk profile) and to put together their bids.

If you would like to understand more about the LDES cap and floor scheme, please do not hesitate to get in touch.