Incentivising Long Duration Electricity Storage – Ofgem’s call for input

Programme and delivery timeline

Ofgem plans to manage the LDES cap and floor regime through application windows. Key points include the following:

1. Regular Application Windows: Developers can submit proposals during these windows. If a project is unsuccessful, it can be resubmitted in future windows with feedback provided to improve future submissions.
2. Initial Focus on 2030 Delivery: ‘Window 1’ will prioritise projects that can be delivered by 2030, aligning with the Government’s Clean Power Plan. However, flexibility will be allowed for projects that may be completed by 2033.
3. Assessment Prioritisation: Projects aiming for 2030 delivery will be assessed first if there is a high volume of eligible projects. Efforts will be made to minimise delays for projects targeting 2033. See further below. 
4. Timeline and Guidance: Application guidance for Window 1 will be published in Q2 2025, covering the process from project assessment to commissioning. Collaboration with stakeholders from now to Q2 2026 will continue to develop the necessary licence (a modified form of the Electricity Generation Licence), regulatory instructions and guidance, and other relevant changes to codes and guidance for the regime.

Selecting eligible LDES projects in Window 1

Ofgem will use a range of criteria to assess the eligibility. The Call for Input indicates that only projects that meet these criteria will progress to the Project Assessment stage which will involve a greater level of scrutiny. 

Ofgem’s initial proposed eligibility criteria for Window 1 is:

1. Deliverability: Ofgem proposes two tracks for Window 1: a 2030 delivery track and a 2033 delivery track. Developers must choose a track and provide all relevant information in their initial application. Projects must have the following in place:
   1. FEED (front end engineering design) Studies: Detailed engineering and risk management plans.
   2. Economic Viability Studies: Financial models showing cost-effectiveness, including capital and operational costs.
   3. Timeline and Milestones: Detailed project development and implementation plans.
   4. Stakeholder Engagement Plans: Progress with local communities and planning boards.
   5. Financing Plans: Evidence of plans to raise necessary financing.
2. Grid Connection: For Window 1, projects must have a firm Grid Connection Agreement or show that one can be secured by 2030 or 2033. 
3. Planning consent: Projects must have planning consents in place by Q3 2025 for Window 1, (or provide evidence that applications have been submitted and are likely to be granted).
4. Capacity and duration limits: DESNZ previously proposed a minimum discharge duration of six hours and a minimum capacity rating of at least 100MW for Stream 1 (explained below) or 50MW for Stream 2 of Window 1. Ofgem is considering extending this to 8 or 10 hours, whilst maintaining the 100MW capacity requirement for Stream 1.
5. Technology readiness level (TRL): The LDES cap and floor regime will have two streams:
   1. Stream 1: For mature technologies (TRL 9) with a rating of at least 100MW. Applicants will not need to prove their TRL, as Ofgem’s assessment of deliverability will be sufficient. However, Ofgem indicates that it reserves the right to reject applications from technologies that have not been deployed at scale anywhere.
   2. Stream 2: For advanced but less mature technologies (TRL 8) with a rating of at least 50MW. Criteria will be slightly relaxed to help near-mature technologies, but detailed TRL evidence will be required. Non-compliant projects may be rejected.
   Window 1 will encompass both streams, each of which will be evaluated according to the same criteria and must demonstrate consumer benefits. Eligibility includes meeting the deliverability criteria.
6. Extension and refurbishment of existing LDES assets:  Significant refurbishments that expand capacity or alter the purpose of existing assets may be eligible under the proposed cap and floor regime. However, ongoing maintenance or minor refurbishments will not be eligible for support. 

Project and cost assessment

The Call for Input sets out that Ofgem will assess developers' cost submissions to set preliminary cap and floor values, ensuring projects are economically efficient. As is the case for the regime supporting electricity interconnectors, this will involve reviewing procurement processes and detailed cost evaluations. To incentivise developers, Ofgem is considering performance-based incentives for cost-efficiency and timely delivery, and penalties for delays and cost overruns. In addition, projects must meet delivery 'backstop' dates in the 2030 and 2033 tracks (two years after the required delivery date) to retain support.

The proposed assessment process includes two stages: Project Assessment (PA) and Post Construction Review (PCR). Preliminary cap and floor levels will be set at PA and finalised at PCR. Developers will be required to submit annual reports during construction and yearly operational reports post-construction. Contingency allowances manage cost uncertainties, and developers must have mitigation plans for consumer-underwritten risks. High Impact Low Probability risks will be reviewed separately.

Overview of the proposed LDES cap and floor regime

Ofgem is considering setting the floor for LDES projects at 80% of allowable project costs, as it does for interconnectors, and is considering two methods for setting such cap and floor: 

1. Administrative (notional) method – Ofgem will establish cap and floor levels based on market evidence, including data from developers, to estimate costs of debt (CoD) and equity capital (CoE) for LDES projects, and the equity internal rate of return (IRR). This method can introduce 'basis risk' if the floor does not cover required debt costs, affecting developers' ability to secure financing. The extent of this risk is contingent upon project financing structures and can be mitigated by setting a more generous floor. However, this mitigation strategy may not always be advantageous for consumers.
2. Market-driven approach - similarly to the interconnector regime, the floor could be established through competitive processes, thereby eliminating 'basis risk' for equity and lenders. This competition would set the floor to fully cover debt, which can finance up to 80% of project costs. Additionally, the cap could be determined competitively with developers submitting bids based on their expected returns for the cost of equity (CoE) and internal rate of return (IRR). The final approach will be determined in a Technical Decision Document (TDD) following consultation.

Comment

The Call for Input provides useful further clarity on the direction of travel in many areas. There are, however, remaining gaps which will need to be filled in as further documents are published, including the TDD. One critical area requiring urgent clarification is the anticipated approach to perceived risks of gaming and market manipulation. 

A range of options are considered in the Call for Input including (i) mandating LDES cap and floor projects to participate in the Capacity Market as price takers and bidding their full capacity into auctions and (ii) the possibility of requiring LDES assets to be operated by third parties rather than in-house teams. If adopted, these would represent significant constraints on the operation of LDES assets. As a result, additional clarification on Ofgem’s proposed approach will be closely monitored by the market.

The 8 January 2025 deadline for responses to the Call for Input has now passed and Ofgem, in collaboration with DESNZ, is expected to provide additional details and ‘next steps’ over the coming months.