LDES gets steady ground beneath its feet in the UK

What happened

On 10 October, the UK government announced it will move ahead with a cap-and-floor program to power up debt finance for long duration energy storage (LDES) projects. Set to open applications next year, the scheme will guarantee LDES developers a minimum annual revenue (the floor) in exchange for a limit on their maximum revenue (the cap). This should help them overcome the main challenges in financing LDES projects: high investment costs and uncertain revenues.

The program covers LDES that can discharge for 6 hours or longer and will have separate streams to support established techs (100MW minimum project size) and emerging techs (50MW minimum). It will be administered by Ofgem, Great Britain’s energy regulator, which has experience implementing a cap-and-floor system — its 2014 program to expand transmission capacity to the rest of Europe was a success. Network charges from the transmission program will likely fund the LDES scheme.

The cap-and-floor system guarantees minimum project revenues. Because projects differ in how much debt financing they receive, the floor is set on a project-by-project basis and is calibrated so that the developer can always repay creditors but that equity investors and the developer will lose money if the project relies on the floor. Each year, project owners will report net revenues and either receive the difference between their revenues and the floor or pay the UK government the difference between their revenues and the cap.

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