In this contributed blog, Sam Langston, power markets manager at Pulse Clean Energy, explores the LDES cap and floor scheme’s potential impact on BESS investment.
April saw a landmark moment for the UK’s clean energy ambitions. Ofgem officially opened the first application window for its new cap and floor scheme for Long Duration Energy Storage (LDES), a crucial enabler of the government’s Clean Power 2030 Action Plan. LDES technologies have the potential to accelerate the rollout of renewable energy, strengthen energy resilience, and transform our grid.
As we look to create a lower-carbon, lower-cost system, we must ensure that policy support for LDES does not create malinvestment. Any LDES program should not come at the expense of the broader energy market by favouring technologies over economics. Without careful design, we risk tilting the playing field and slowing overall progress.
The vast potential of LDES
LDES technologies store energy for extended periods of time, dispatching power during periods of low renewable energy output or peak demand. In doing so, they can displace fossil fuels at a lower cost: providing reliable, around-the-clock energy in a cheaper, cleaner and more flexible manner.
McKinsey estimates that LDES can reduce the cost of achieving a fully decarbonised power system by US$35 billion (£26.24 billion) per year in the US alone by 2040. The same study suggests that over the same period, LDES deployment could result in the annual avoidance of up to 2.3 gigatons of CO2 globally, or up to 15% of today’s power sector emissions.
Flexible technologies have multiple uses, lower costs, are scalable, and have fast deployment timelines compared to upgrading grids. There is little doubt of the central role they can play in balancing the power system and improving efficiency. So far, commercial markets have not supported LDES projects. Developers have been reluctant to invest in these schemes and use their valuable grid connections unless they can provide adequate returns to asset owners and investors while striving to lower system costs.
That is why Ofgem’s cap and floor scheme is significant. By offering revenue certainty through a proven financial support model, the scheme will provide the incentives needed to increase the deployment of this technology. However, we must be aware of unintended consequences. For this scheme to successfully improve the security, affordability and stability of the energy system, its design must not pick winners and must allow all technologies to compete on a level playing field.
Creating a level playing field
A key consideration is the duration of assets eligible to take part. While we welcome the decision to raise the eligibility threshold from six to eight hours, Ofgem should look at going further. The primary need for LDES is to address periods of prolonged low renewable energy generation, which take place over 24 or more hours. Eight-hour projects simply do not fill this gap. Getting the duration right is critical to preserving a level playing field. Allowing eight-hour projects to apply for the scheme not only risks weakening the potential impact but could affect the economics of existing short-duration assets such as battery energy storage systems (BESS).
As we’ve seen in markets like California and in modelling work, existing lithium-ion batteries with a duration of two hours can be incentivised by the market to regulate their discharge to last for four to six hours. With falling BESS capex, this could potentially be increased to eight hours. If the subsidised projects in the cap and floor scheme are to contribute something that existing projects cannot, a higher duration threshold is imperative.
It is well understood that a diverse portfolio of energy storage technologies with varying durations is essential to meet the country’s decarbonisation goals. BESS projects are critical to energy balancing and the stabilisation of frequency in power grids. They can help manage sudden changes in electricity supply or demand as the systems can quickly respond and balance the unexpected spikes or drops to the electrical grid.
To ensure fair, efficient, and transparent competition (the hallmark of a functional marketplace) it is essential that any scheme or regulatory intervention is technology agnostic. It is crucial not to pick winners.
If a subsidised long-duration asset is allowed to compete against BESS for ancillary services and energy arbitrage, this will depress investor interest in BESS assets, which currently receive no government support. This unbalanced competition for revenue would harm the business case for short-duration BESS and undermine the success of a technology that is vital to the energy system. To drive innovation and impact, we must avoid imposing anticompetitive market imbalances.
If eight-hour projects remain eligible for the cap and floor scheme, policymakers should set strict caps or operational limits, such as restrictions on cycling or ancillary service participation, to ensure that each technology supports the grid where it’s needed most. This would avoid undercutting existing economic solutions and distorting an existing working market model where no subsidy or incentive has been required or requested.
LDES projects will be most beneficial in managing curtailments and longer-term periods where intermittent generation is persistently unavailable. If subsidised, their use should be limited to these activities.
We also need greater clarity around the procurement targets. The current goal of 2.7GW to 7.7GW of LDES capacity by 2035 is too wide, creating uncertainty for investors and developers alike. A narrower, more defined target range would create greater investment confidence, better planning, and improved alignment with long-term energy system needs.
Aligning with wider policy
A final consideration is policy coordination. The energy system is complex and involves the joining up of various policies across departments, regions and regulatory bodies to ensure they work in harmony.
To date, much of the analysis on the system benefits of LDES has been based on the current market design. However, with the ongoing Review of Electricity Market Arrangements (REMA) process underway, a change to zonal pricing alone may alter many of the recommendations.
For example, LDES built in Scotland in a single price power market is not projected to reduce power prices, but under a zonal market, LDES in Scotland would have a significant impact on power prices. This is due to much better price signals incentivising LDES to absorb excess wind energy that would otherwise be curtailed due to grid constraints. This cheap energy can then be discharged during gaps in wind generation.
However, moving to zonal pricing is not without its significant challenges and may take time to implement effectively. To address this, the locational benefit must be factored into the LDES procurement process. We would propose a more top-down approach, favouring strategically located storage at key grid bottlenecks.
More generally, the future of the scheme should also consider broader CP30 reforms, including the
Capacity Market, Nuclear & Hydrogen strategies and the considerations and planning related to the contribution of natural gas.
A smarter rollout for a smarter grid
The introduction of a cap and floor scheme for LDES is a key milestone that could shape the future of the UK’s energy mix. But to be truly successful, it must do more than bring new technologies to the market. It must enhance the entire system.
After this first application window closes, Ofgem will consult NESO to understand LDES capacity ranges for 2035 and 2050. This will shape the next steps of the LDES program based on lessons learnt from the first procurement. This provides a clear opportunity to refine the approach.
Focusing on storage solutions that fill genuine gaps in the energy system, protecting the integrity of the wider market, and aligning with broader energy reforms has the potential to create a more resilient and lower-cost energy system. A well-designed scheme for LDES today will mean a smarter, stronger, cheaper, and more secure energy system for tomorrow.
