Government backs cap & floor support for long duration storage

The government has backed the introduction of an interconnector-style cap & floor support mechanism to kickstart the development of a new generation of pumped hydro plants and other long duration electricity storage (LDES) projects.

A consultation paper, issued on Tuesday (9 January) by the Department for Energy Security and Net Zero (DESNZ), estimated the deployment of up to 20GW of LDES could result in electricity system savings of up to £24 billion by enabling excess renewable generation to be saved for times of high demand.

According to this modelling, which was carried out by consultancy LCP Delta for DESNZ, these savings add up to 3.3% of total electricity system costs.

While there is currently 35GW of lithium-ion battery storage currently in the planning pipeline, such projects are only able to store electricity for a few hours, meaning other options will be required for those long periods when intermittent renewable sources are not generating.

However the GB power system currently only has 2.8GW of long duration capacity across four separate pumped hydro storage plants, the newest of which was commissioned 40 years ago.

In order to remedy this “historic lack of investment” in LDES assets, the report recommends cap & floor as the mechanism for supporting such projects.

Under the cap & floor mechanism, which has underpinned the UK’s growing fleet of interconnector projects, investors are guaranteed a minimum level of revenue to reflect construction and debt costs. Profits are also capped.

The report says this approach would provide a guaranteed revenue for investors should returns from operating assets drop below an agreed floor.

It would also protect consumers by providing a cap on the revenues operators can earn, some or all of which will be returned over the agreed cap, it adds.

Unlike the capacity market, which was also considered by DESNZ, cap & floor is potentially a low-cost option, based on experience of the interconnector scheme.

The use of the cap & floor mechanism will also reduce the overall risk of investing in storage, cutting the costs of capital, says the consultation paper.

This is “particularly important” given the high upfront costs associated with developing LDES, like pumped hydro plants.

The report suggests that the scheme funding mechanisms for the cap & floor approach could either be payments via existing Transmission Network Use of System (TNUoS) charges or a supplier obligation levy through a Contract for Difference.

In addition, the paper proposes separate streams for established technologies, like pumped storage, and more novel ones, such as compressed air electricity storage and flow batteries.

It says this twin track route offers a fair balance between enabling investment in proven technologies, which can be deployed ahead of the government’s 2035 deadline for decarbonising the power sector, whilst helping to bring less mature options into the energy system.

Support for LDES will only be open to storage technologies able to supply a minimum of six hours of electricity.

The document also says the government has not yet decided to set a specific ambition for the overall deployment of LDES because there could be drawbacks if this level is too low.

DESNZ estimates that there is about 3GW of LDES capacity in the planning pipeline, including Drax’s plans to double its Cruachan pumped storage facility in the Scottish Highlands through the construction of a new 600MW plant.

Ian Kinnaird, Drax’s Scottish assets director, said: “This is a big step towards making a new generation of pumped storage hydro plants a reality. These new plants would enhance UK national energy security and play a significant role in the fight against climate change.”

George Martin, of LCP Delta, said: “Today’s signal from government will be a welcome one to the industry and investors by outlining their intention to provide a policy framework for LDES through a cap and floor mechanism.

“A cap and floor mechanism can provide revenue certainty for investors which will hopefully enable them to overcome the investment challenges seen for these technologies under the existing market frameworks.

“It is important that off the back of today’s direction from government, further progress is made in developing the policy to make investment in LDES appealing to investors.”