Cap & Floor considered as model for funding storage

The Cap & Floor regime, which was developed by Ofgem to encourage investment in interconnectors, could be extended to long-duration storage projects.

In a new call for evidence on facilitating the deployment of large-scale and long-term electricity storage (LLES) storage technologies, such as pumped hydro and hydrogen, the Department for Business, Energy and Industrial Strategy (BEIS) says these projects are not being built at the scale needed to support the transition to a lower carbon energy system.

Its call for evidence says the challenges LLES faces in attracting investment could mean it is not an option for tackling the reduction in gas generation and significant increase in variable renewables needed by the mid-2030s.

The consultation paper defines LLES as being able to store and discharge energy for more than four hours and deliver at least 100MW of power.

LLES often has high upfront capital costs and long lead times, while novel technologies, some of which have yet to be demonstrated at scale, lack a proven track-record, the call for evidence says.

The paper states that a Cap & Floor-type mechanism, similar to that in place for electricity interconnectors, may prove effective for LLES projects.

The Cap & Floor regime helps developers of interconnectors to secure finance by offering a minimum revenue allowance.

When operational revenues from auctioning cable capacity to traders fall below a specified floor level, they are topped up by consumers. Conversely, when revenues breach a cap, excess returns are passed on to consumers.

This mechanism incentivises developers to optimise their storage assets to generate the most value, as they are exposed to returns between the cap and the floor.

It also enables energy system users to share in the upside of projects and means they will not necessarily have to pay out a subsidy, depending on the economics of individual projects.

However, the paper questions whether Cap & Floor would be appropriate for storing hydrogen.

While there may be “some merit” in a Cap & Floor mechanism for hydrogen storage in the long term, once the market for the gas is operating, this will depend on how other parts of the hydrogen value chain develop, the document suggests.

The report identifies a reformed Capacity Market as another option for promoting investment in LLES.

A Capacity Market could provide a steady, guaranteed revenue stream, while allowing providers to maximise other revenues, like in wholesale markets or ancillary services.

BEIS also considered the Regulated Asset Base (RAB) and Contracts for Difference (CfDs) models as options for attracting the necessary investment in LLES.

It says it wants storage to be incentivised to respond to varying price signals and provide flexibility when it is needed. It believes the RAB and CfD mechanisms would be less likely to encourage this mode of operation.

It adds that the CfD mechanism as it currently stands is not suitable for storage as it incentivises generators to maximise output. While the proposed dispatchable power agreement (DPA) which BEIS is consulting on for CfD’s possible role in carbon capture, utilisation and storage shows how the framework could be adapted, the department does not believe there is evidence of the need for an availability payment for LLES or a variability payment that would change its position in the merit order.

The deadline for responses is 28 September.