The Department for Energy Security and Net Zero (DESNZ) has published an industry consultation proposing a cap-and-floor mechanism for long duration energy storage (LDES) technologies. This is designed to overcome the barriers to LDES deployment which exist today. The main barrier is a lack of available revenue streams for LDES applications that can cover the high investment needed. Whilst novel technologies are included in this consultation, the technology readiness level (TRL) rating is fairly mature, hence why a revenue support model is being proposed. This would provide revenue certainty for investors by guaranteeing revenues above an agreed floor and offering protection to consumers by limiting revenues to an agreed cap.
Before going into the detail of the consultation, and the possible responses to DESNZ, let’s look at what LDES is and its benefits.
What is LDES?
LDES is energy storage with a longer discharge rate (6h+) than conventional storage e.g. lithium ion (which is typically 1-2h). LDES can be deployed to store energy for prolonged periods, similar to conventional storage, by charging when prices are low and renewable generation is high, and discharging when there are low periods of electricity supply and high prices.
What are examples of LDES?
LDES has both conventional and novel technologies. It can store and release energy through mechanical, thermal, electrochemical, and chemical means. Most LDES technologies are still in their infancy in terms of development and deployment, with pumped storage hydropower currently the only mature technology. Other novel technologies such as compressed air storage, liquid air energy storage, vanadium flow batteries and ion batteries are more novel and are undergoing research and development.
Why do we need LDES?
Intermittent renewable generation such as offshore and onshore wind, as well as solar, is growing massively in the UK, alongside demand through electrification. These types of generation can have anything from seasonal to multi-day intermittency. With increased reliance on intermittent generation, we introduce more volatility in being able to meet demand where these technologies are not generating. Therefore, we need new storage technology to balance this over longer durations.
On which technologies is DESNZ’s consultation seeking views?
DESNZ is proposing two streams through which projects can apply for the scheme:
- Stream 1 – established technologies with a TRL of 9 for projects at least 100MW/600MWh;
- Stream 2 – novel technologies with a TRL of 8, with a minimum size of 50MW/300MWh.
What could the cap and floor look like?
This could be in the form of a contract for difference (CfD) auction process including a supplier obligation levy, or payments under the existing Transmission Network Use of System (TNUoS) charges (similar to interconnectors).
Is the cap and floor enough?
Will this provide enough certainty to the market to be able to build out these projects? Is there anything else the market could look to include as a policy objective? We will continue to grapple with issues like grid connection, TNUoS charges not recognising the value of storage, and limited manufacturing capacity. Perhaps developers should consider raising these concerns in their consultation response.
Should TNUoS charging be reformed to allow demand credits for LDES? This could provide more incentive to locate in areas with excess renewable generation (not just excess demand) and reduce constraint payments. The main beneficiaries of this would be Scotland (excess wind) and the South West (excess solar).
In terms of the cap and floor, there are tweaks to the model on which the storage market could seek to express its views. For example:
- A hard floor and soft cap? a soft cap would incentivise additional generation when needed by the grid if the cap is reached, allowing continuous generation.
- Floor and cap pricing – should the cap and floor be technology-agnostic and based on revenue/market signals only? Or should they be set locationally with their local benefit measured? If one technology clearly has a cost advantage per MW, this may be a valid point and, to make sure all technologies get to market, this should be highlighted.
- Contract duration – should the cap and floor reflect the respective lifespans of each technology?
- How should revenues be assessed for the cap and floor?
- Could contracts at this stage be awarded through competitive auctions or should they be case-by-case? Could price in an auction be competitive and is there a decreasing cost curve for the technology?
- What other market reforms are needed to improve market signals?
- Is this the right model for investors at all and will the economics of the cap and floor work for large projects? Other models include the:
- regulated asset base (nuclear model), which could be appropriate given the capital outlay in building out large capacity projects such as pumped storage hydropower together with the current cost of capital. This model could allow the cost to be clawed back through a surcharge on energy bills even while the project is being built; and
- dispatchable power agreement (CCUS model), which is similar to a CfD, but developers are paid a fixed availability payment based on their capacity as well as a variable payment to incentivise dispatch.
DESNZ is seeking views from interested parties on its proposed approach until 5 March 2024. Please do get in touch if you have questions about anything in this article or if you wish to discuss possible consultation response strategies.
