Long Duration Energy Storage - the cap and floor regime starts to take shape

Following October 2024's long-anticipated response (the “Response” – on which our commentary is available here) to its consultation on long duration energy storage in Great Britain (“LDES”), the Government continues development of the framework for providing LDES projects with a cap and floor support mechanism. On Wednesday 11 March 2025, DESNZ and Ofgem jointly published their Technical Decision Document (the “TDD”), which provides developers, investors and funders with much-needed additional detail on the cap and floor scheme (the “Cap and Floor Scheme”) for supporting LDES projects which was announced in January.

We have set out below the key takeaways from the TDD (along with elements that remain unchanged from the Response), along with key dates and next steps to note for prospective LDES operators and other interested parties.

Eligibility

Minimum duration increased to 8 hours

While the consultation set out a minded-to position of requiring a minimum 6-hour duration (while considering the requirement for a longer duration), the TDD has increased this to 8 hours of continuous output. Whilst some respondents favoured longer durations (including a majority in favour of a 10-hour duration), and it is clear that technical analysis and the additional modelling committed to in the Response has convinced Government and Ofgem that a slightly longer duration is more appropriate and in the best interest of consumers.

Minimum capacity remains at 100MW pre 2030 and 50MW 2030-2035

The minimum capacity for projects participating in the Cap and Floor Scheme remains at 100MW for projects prior to 2030, and at 50 MW for projects between 2030 and 2035. The TDD concludes that prioritising 100MW+ projects better serves the Government's ambition of “Clean Power by 2030”.

What will applicants need to have in place on application?

The TDD fleshes out the ask for developers looking to submit an application for support under the Cap and Floor Scheme, which is expected to open in Q2 of 2025 (ahead of the Q3 2025 estimate provided in the Response). These are:

1. Evidence of deliverability, i.e. being able to provide cost estimates in line with the level of detail envisaged by the Infrastructure and Projects Authority’s “outline business case” (cost estimates with smaller ranges to support assessment and selection on the basis of a cost-benefit analysis); being able to demonstrate evidence of FEED work having taken place that is appropriate to the project’s stage of development; economic viability studies; and project/business plans.
2. Evidence of submission of an application for grid connection. The interface with DESNZ and NESO’s ongoing grid connection reforms is worth noting here, and the complication that this introduces is given by DESNZ and Ofgem as the driver for only requiring submission of an application for connection at the point of application for the Cap and Floor Scheme (rather than having secured a grid connection, as the Response envisaged).
3. A planning consent in place by the start of the project assessment phase (which is described in more detail below, and which will be Q3 2025 for those projects in the first pre-2030 track of projects).
4. Confirmation of compliance with both the minimum duration and minimum capacity requirements (as set out above).
5. The relevant technology readiness level, which remains unchanged from the Response, i.e. TRL9 (established technologies proven through successful operation, including lithium-ion and pumped storage hydro) for the pre-2030 track and TRL8 (more novel technologies) for the 2030-2035 track.

Length of support

The length of support available remains unchanged, in that projects will apply for a maximum of 25 years of support. Developers will be able to apply for a shorter or longer duration (with a minimum of 20 years) if they are able to demonstrate a benefit to consumers of this amended duration.

Allocation round process

The TDD sets out the clearest steer yet in terms of timing for the first round of allocation for the Cap and Floor Scheme, as set out in the diagram below:

Assessment of projects in the Cap and Floor Scheme

As shown in the diagram above, the TDD sets out the assessments Ofgem will make to determine whether they are awarded a cap and floor under the Cap and Floor Scheme:

Eligibility assessment

Ofgem will assess the evidence provided by projects to determine whether they meet the eligibility criteria (as set out above) for the Cap and Floor Scheme.

Project assessment – cost-benefit analysis

Projects which are eligible will be subject to a cost-benefit analysis to determine which will be awarded a cap and floor. The TDD sets out a non-exclusive list of the criteria that will be considered, including:

1. Socio-economic welfare, including consumer welfare (i.e. the benefit consumers will derive from an LDES project), producer welfare (i.e. the benefit other, non-LDES electricity generators will derive from an LDES project).
2. Wider system impacts, including the costs of network reinforcements required to connect LDES projects to the grid and impacts on system operability (including benefits that LDES projects might provide through ancillary services, flexibility services and security of supply).
3. Other, harder to monetise impact, including environmental, landscape, and resource (e.g. land, water) impacts.

The TDD notes that the intention is to take a similar approach to LDES as was taken for interconnectors, and Ofgem, DESNZ and NESO will be publishing a full framework for the cost-benefit analyses it will undertake as part of the Cap and Floor Scheme. This framework will be consulted on in Q2 2025, before a final decision in Q3 2025 and the start of the cost benefit analyses in Q4 2025.

Projects will need to submit detailed cost assessments for the cost benefit analysis stage. The TDD states that Ofgem is developing a detailed template which projects will be required to follow when making their submissions, which may include different scenario mapping (i.e. a reasonably optimistic case, the most likely case, and a reasonably pessimistic case), as well as a risk register and detailed assumption register for those risks, and details of the project’s plans to mitigate such risks.

Details of the analytical methods used (i.e. the “First Additional Method” and “Marginal Addition Method”) remain unchanged, as do details of the cost assessment (i.e. including performance-based incentives for surpassing cost and time targets, and penalties for delays and cost overruns). 

Post construction review

No additional colour has been added in respect of the post construction review phase, in which, following construction, Ofgem will revisit aspects of the costs assessment that relied on costs that were not yet fixed, and re-assess in light of the actual costs fixed or incurred during the construction phase. This includes the final capex and opex figures. This will feed into an adjustment of the preliminary cap and floor figures awarded to projects (due to take place in Q2 2026, as set out in the diagram above), which will then be finalised (subject to specific limited reopeners, which the TDD envisages will mirror those for the interconnector regime).

Setting the level of the cap and floor

Cap

The TDD provides for a “soft” cap, which allows for the recovery of invested capital (i.e. both equity and debt) with a “fair return on investment”. The “soft” elements means that where a project’s revenues exceed the cap, they are shared between the project and the consumer. No details of precisely how this sharing will work are set out in the TDD, which will be determined following further consultation.

Floor

The floor allows recovery of invested capital with a return similar to the cost of debt for both debt and equity investors (i.e. equity investors will not recover at the cost of equity in the event that the floor is engaged). Previous Government publications indicated that the floor would allow recovery of 80% of the cost of debt (as per interconnector projects), but this appears to have been dropped in favour allowing for recovery of 100% of the cost of the debt.

Setting the cap and floor

Where projects intend to seek project financing (i.e. financing on a non or limited recourse basis from third party funders), projects will be able to choose between allowing Ofgem to set the cap and the floor, or having the cap and floor set through a competitive debt-raising process overseen by Ofgem.

In the competitive scenario:

• The floor will only cover the debt obligations under the relevant financing (rather than being based on a notional cost of debt).
• If the financing-derived floor is higher than Ofgem’s notional floor (which allows full recovery of invested capital), then where that higher floor is engaged the project must then repay consumers for amounts received from Ofgem before it can make any shareholder distributions. If the financing derived floor is lower than the notional floor, projects may also receive a bonus in the form of a better sharing ratio above the cap or an uplift to the cap.
• In relation to the cap, projects will propose a target cap rate of return when submitting their eligibility applications. Ofgem will assess the target proposed caps together, and when determining cap and floor participation will award the most competitive target cap rate of return to all projects receiving an award (with the project submitting that most competitive target cap rate of return receiving a bonus).  

Costs included in the cap and floor

The TDD sets out what it describes as the “building blocks” of the cap and floor regime. This includes:

1. Capex, including devex, construction costs, replacement expenditure incurred in replacing or upgrading assets, the cost of spares and interest incurred during construction.
2. Controllable opex, which includes corporation tax paid on the income generated.
3. Decommissioning costs.
4. Uncontrollable opex, which will mirror the interconnector regime in allowing necessary expenses for running the project (including license fees).

These costs will be subject to a limited set of reopeners, allowing for adjustment of the opex and decommissioning costs accounted for the cap and floor during the operation of the Scheme. The TDD states that further information on this is forthcoming in Q2 to Q3 2025. 

CMS comment and next steps

The TDD provides significantly more detail on the future shape of the Cap and Floor Scheme than was provided for in the Response. We expect that developers and funders will take some comfort from Ofgem and DESNZ’s clear desire to follow the path of the interconnector regime as soon as possible, especially given the very ambitious timelines envisaged for application, assessment and construction of the first track of projects to be operational by 2030.

The key challenge at this stage remains the timing. Given the pace at which the Cap and Floor Scheme is developing, and the additional detail still to be finalised, developers, procurement and transactional teams (on the debt and equity sides) will need to establish the way forward for their projects while significant policy development is still ongoing. 

There are several further opportunities for consultation and feedback envisaged in the TDD, and projects should continue to be mindful of the potential for further movement prior to the opening of the first application window for the pre-2030 track.