Long duration energy storage - Government Response

The Government has now published its much anticipated response (the “Response”) to its long duration electricity storage consultation (the “Consultation”), which was published on 9 January 2024. The policy framework envisaged by the Consultation and the Response aims to address the challenges and opportunities associated with investment into long duration electricity storage (“LDES”). Our previous LawNow article on the Consultation can be found here.

As well as confirming that the Government will proceed with the proposed cap and floor scheme, the Response confirms that:

• the scheme will likely be delivered using TNUoS charges;
• the minimum duration for both ‘streams’ will be 6 hours;
• the scheme will be technology neutral, though will not be available to projects that would be viable under existing market arrangements (which raises questions around whether lithium-ion technologies will indeed be able to participate); and
• Ofgem will act both as independent regulator for LDES and take on the role of the investment framework’s delivery body.

Respondents may be pleased to see that the exclusion of lithium-ion batteries suggested in the Consultation has been softened, with the Response setting out that the scheme does not look to exclude on the basis of technology type but instead aims to provide support only to projects that could otherwise not move forward to investment decisions and not to projects that can already readily make use of existing market opportunities. However, there are still concerns, with respondents highlighting that 6-hour BESS projects are not currently commercially viable in GB and longer duration BESS even less so. 

Eligibility

Minimum capacity

The Government Response confirmed that the scheme will offer two application routes based on Technology Readiness Level (“TRL”):

• Stream 1: established technologies with a TRL of 9, which have been proven through successful operations (namely pumped storage hydro), and a minimum capacity of 100MW.
• Stream 2: novel technologies with a TRL of 8, which will include technologies that have been deployed in a demonstration phase, and a minimum capacity of 50MW.

An overall capacity target for LDES will not be set, but the Government intends to provide indicative ranges to Ofgem for each allocation round.

Minimum duration

Despite the majority of respondents disagreeing, the minimum duration for both application streams will be 6 hours. However, the Government has stated that it will undertake further modelling, alongside the National Energy System Operator (“NESO”) and Ofgem, to understand the impact of increasing this requirement above 6 hours. The final position is to be published as part of the Government’s technical decision document this winter.

Minimum efficiency

The Response states that the Government is minded not to propose a minimum efficiency rating as part of the eligibility criteria for projects, acknowledging that doing so may exclude projects which are worthwhile on other merits. Indeed, respondents noted that projects should be considered holistically alongside other metrics, including the lifetime of a project, and cost of cycling.

Wider system benefits

While most respondents agreed that wider system benefits should be taken into consideration in project assessments, respondents requested clear guidelines on the information projects will need to provide as part of these assessments, citing that assessing metrics such as benefits to the local economy, may prove challenging. The Government confirmed its intention to include system benefits as part of the application process but did not provide any further guidance at this stage, noting that the exact criteria thresholds will be confirmed before the applications open.

Suggestions provided by responses in respect of additional benefits that could be considered included:

• hidden value benefits (such as reduced network upgrades, or reduced wind power);
• geographical factors;
• local and national economic impact and benefits;
• reducing system costs;
• the lifetime of the project; and
• flexibility.

Respondents also suggested a variety of other benefits that could be included, such as ecological sustainability, use of grid connection, energy security as well as carbon focused eligibility factors.

Cap and Floor

Much of the detail desired by the sector is to be set out in the upcoming technical decision document. However, the Response did confirm that the Government’s preference is:

• to keep the floor calculation at the level of debt, rather than incorporating a partial return on equity;
• to require projects to outline how they intend to operationalise the asset to exceed the floor as part of the assessment process to avoid speculative applications to the cap and floor scheme;
• for the methodology for calculating the cap and floor thresholds is to use ‘annual gross margins’ (with detail of what this is to include to be set out in detail ahead of the first application window), as respondents agreed that it provides the simplest way, compared to total revenues, to account of the underlying cost of electricity;
• for the scheme to use ‘soft caps’ to provide an incentive for assets to continue operation once the cap has been reached, minimising the risk of dispatch distortions whereby operators deliberately reduce operations as they approach the cap;
• the length of the cap and floor contract either be based on the project length up until first refurbishment or up to 25 years.

In relation to other electricity markets, it has been decided that LDES participating in the cap and floor scheme will be able to also participate in the Capacity Market.

Next Steps

Many of the key details of the scheme remain to be determined, meaning industry will be hotly anticipating the technical decision document which is to be published in winter this year.

In relation to technologies, some comfort has been provided by the Government’s confirmation that the scheme will not exclude on the basis of technology type, although it remains to be seen the extent to which long-duration BESS technologies will be able to become commercially viable in GB without government intervention. We note that the Government has explicitly stated that novel iterations of lithium-ion batteries specifically developed for longer-duration electricity storage may be eligible, provided that they also meet the other eligibility criteria.

Finally, the Response sets out that it is the Government’s intention for Ofgem to open the scheme to applications in 2025. Given the amount of outstanding detail still to be published in the technical document, it is clear that there is still a vast amount for the Government and industry to achieve over the coming months to meet this ambitious deadline.