Long Duration Electricity Storage: Cap and Floor Application Window Opens

The first application window for Long Duration Electricity Storage (LDES) projects under the cap and floor regulatory scheme (the “Scheme”) opened on 8 April 2025 and will close on 9 June 2025, although Ofgem has requested that prospective applicants notify their intent to apply by 22 April 2025.  This follows publication by Ofgem and DESNZ of a Technical Decision Document (TDD) in March 2025 which confirmed key Scheme details (see Long Duration Electricity Storage: Technical Decision).  Ofgem aims to approve the first LDES projects by Q2 2026.  

The Government’s Clean Power 2030 Action Plan (CP30 Plan) identified a significant role for LDES technologies.  They have estimated that 4-6GW of LDES will be required to support energy system security by 2030 and 5-10GW by 2035, largely driven by the anticipated increase in intermittent renewable energy generation and the need to store generated electricity during surplus periods.  Potential savings from LDES deployment of up to £24 billion by 2050 have been estimated.  However, the Government recognises industry concerns regarding the high upfront costs and long build times of LDES and has launched the Scheme in a bid to encourage rapid LDES investment.  

The Scheme is designed to ensure developers receive a minimum amount of revenue (the “floor”) to meet, for example, debt obligations whilst returning money to consumers where LDES revenues are above a prescribed “cap” over a defined period (25 years subject to certain exceptions).  The Scheme is similar in structure to the interconnector cap and floor regime, however significant modifications have been made to ensure it works effectively for LDES deployment.  Project specific Scheme details will be set out in special conditions within the licence held by LDES operators. There will be no option for the operator to voluntarily exit the Scheme and become a merchant project during the support lifetime.

First Application Window

As noted above, the first application window closes on 9 June 2025 with an indicative capacity target of 2.7GW - 7.7GW up to 2035.  To assist applicants, Ofgem has published guidance which can be viewed at Guidance for the cap and floor scheme application: Long Duration Electricity Storage (window one) (the “Guidance”).  We suggest that all potential applicants carefully review this guidance and the TDD to ensure that all necessary steps are fully understood and completed. 

The first application window will prioritise projects that can be delivered by 2030 but will also permit applications from projects that are currently ready (or nearly ready) to start construction but have build times that stretch to the end of 2033. A twin track allocation approach may be adopted if a significant number of applications are received - this will be confirmed once Ofgem has undertaken the initial eligibility assessment (see below). 

Once the application window has closed, the allocation process will be as follows:

1. Stage 1 - eligibility assessment: 10 June to 9 August 2025.  Ofgem will inform applicants whether they are eligible by Q3 2025 based on a series of pre-defined eligibility criteria (outlined below). Only eligible projects will proceed beyond this stage. 
2. Stage 2:
   1. Cost submissions: Q3 2025. Ofgem will require detailed cost information from applicants to inform the cost-benefit analysis (“CBA”). 
   2. Project assessment (“PA”) and CBA: Q4 2025.  Submitted costs will undergo a CBA by Ofgem with support from NESO – this will determine which projects will, in principle, be granted Scheme support. This will be a multi-criteria assessment including socio-economic welfare, system costs and benefits, and non-system impacts (e.g. landscape, environmental, community etc.).  A more detailed CBA framework will be developed and published for consultation in Q2 2025 with a final framework by Q3 2025. Ofgem has already flagged that not all eligible projects will necessarily pass the CBA assessment. 
   3. Consultation on initial CBA (PA) decision: Q1 2026.  A consultation will be held on Ofgem’s initial CBA (PA) decision.
   4. Final decision: Q2 2026.  Ofgem will issue its final decision including preliminary cap and floor levels.  These preliminary levels are set to help applicants secure financing and reflect a project’s cost submissions.  Applicants can elect to fix the cap and floor at these preliminary levels or accept the potential for change at Stage 3 (PCR)  
   5. Milestone monitoring: Q3 2026.  Ofgem will monitor approved projects against established milestones. 
      1. Stage 3 - post construction review (PCR): from 2029.  Once an LDES project is delivered, Ofgem will conduct a PCR to set the final cap and floor levels with reference to any unfinalised cost components from the PA stage together with an assessment of any overspend or underspend.  If a project’s overspend is deemed economic or efficient, the preliminary cap and floor levels will be adjusted upwards.  Conversely, any underspend is deduced from the preliminary values.   These final cap and floor levels remain fixed for the support term subject to a limited number of reopeners. 

Scheme Eligibility 

Ofgem has identified two separate technology groups (streams) which are eligible to apply for Scheme support.  Stream 1 is anticipated to catch pumped storage hydro and lithium-ion batteries by virtue of requiring a Technology Readiness Level (TRL) of 9, meaning they are market ready and proven in repeated use (i.e. at least two assets of >100MW in working operation in GB or internationally).  Stream 2 is anticipated to catch Liquid Air Electricity Storage (LAES), Compressed Air Electricity Storage (CAES), and flow batteries and requires a TRL of 8, meaning they are in the final stages of development (i.e. having a technology that is proven to work e.g. an installed, working example of at least 1MW in size that is technologically identical or near identical to the proposed development).

The same eligibility criteria apply to both streams being (i) deliverability - developers will need to submit a business plan; project schedule; upfront FEED appropriate to the project’s development stage; cost estimates; description of procurement and supply chain approach; financing plans; and evidence of licencing and permitting (e.g. land rights and environmental permitting); (ii): grid connection application submitted; (iii) evidence to demonstrate ability to secure planning consent in required delivery timescales (for 2033 projects, consent in place by end Q3 2025); (iv) minimum project capacity of 100MW (stream 1) or 50MW (stream 2); (v) duration of 8 hours continuous discharge at full power, to be maintained over scheme term (25 years); and (vi) TRL 9 (stream 1) or TRL 8 (stream 2).  Further detail is included in the Eligibility Criteria Assessment Framework appended to the Guidance - see Eligibility Criteria Assessment Framework for LDES window one.  

Significant refurbishments and/or expansions are permitted to apply for Scheme support subject to providing new capacity of 100MW (stream 1) or 50MW (stream 2) and meeting all applicable eligibility criteria.  Only the cost of the new capacity will be supported.

Setting of Cap and Floor Levels

The underlying principle of the Scheme is to enable LDES developers to recover all economic and efficient capital and operational costs subject to compliance with their licence obligations and not being penalised by any incentive mechanisms (see below). 

The Scheme sets a maximum (cap) and a minimum (floor) revenue based on different permitted rates of return (RoR) for each. If a project earns more than the cap, some revenue is returned to consumers.  If it earns less than the floor, consumers cover the shortfall subject to the project meeting minimum availability thresholds. The range between the cap and the floor is key to incentivising efficient operation of the project particularly with respect to earning market revenue.  To this end, operators can choose how to trade power and Scheme projects will also be eligible to participate in the ancillary service markets and the Capacity Market - indeed, Ofgem is considering whether to make participation a condition to Scheme support. 

The cap will be set to allow full recovery of invested capital (debt and equity) and to provide a “fair” return on investment if the assets are operating well in the market.  The cap will be flexible (a ‘soft’ cap), meaning that excess revenue above the cap is shared between the developer and consumer – the exact details will be determined after further consultation but this approach is intended to incentivise operators to make projects available to meet system needs even after the cap is exceeded.  

Ofgem is still considering whether the cap will be set administratively or via competition. A competitive cap will only be adopted if it appears to offer consumers better value for money by achieving a lower RoR than an administrative cap.  Ofgem will consult in June 2025 on the cap and floor financial model and methodologies.  In the meantime, Ofgem expect Scheme applicants to propose a target cap RoR within their application and justify its appropriateness. These figures will help inform Ofgem whether a competitive cap is suitable – for example, if bids fall below the RoR for a merchant generator (as Ofgem anticipate they should due to LDES projects facing lower market risk), Ofgem may favour the competitive approach. If bids are high, Ofgem will likely adopt an administrative approach to avoid market distortion. If a competitive approach is adopted, eligible window 1 applicants will be able to revise their bids (likely Q3 2025) after the final methodology is published. 

The floor will be set to allow recovery of invested capital (debt and equity) and will provide a return similar to the cost of debt for both debt and equity investors.  Scheme applicants will be given a choice between (i) allowing Ofgem to set the floor administratively; or (ii) a competitive debt-raising / ‘project finance’ process. Under the administrative approach, the floor is set to enable full recovery of eligible debt and equity costs.  Under the competitive approach, the floor is set through competition by commercial lenders to provide debt finance for the project and will therefore be set at a level to cover debt obligations only. A further administrative backstop floor will also be established – if the competitive floor is higher than this backstop, consumers will top up revenues to the higher floor.  However, if the operator makes returns above the competitive floor over time, it must repay consumers the difference between the lower backstop floor and the competitive floor before any equity distribution can be made. This approach is already in place for the interconnector scheme and is well understood in the market. The floor payments will be recovered via network charges.

Incentives

To drive cost efficiency and timely delivery, Ofgem is considering incorporating several financial incentives in the Scheme which reward cost savings and meeting / exceeding delivery milestones.  Further “disincentives” are also being considered for projects failing to meet minimum availability thresholds and/or poor cost management.

Interplay with Connections Reform

Large-scale reform to the transmission system connections process is currently underway following publication of the CP30 Plan (supported by NESO’s Clean Power 2030 report).   This reform has resulted in GB-wide total capacity ranges being identified for in-scope technologies which effectively cap (although potentially subject to change) the connection capacity which NESO will offer per technology up to 2030 / 2035.  Two separate capacity ranges have been identified for LDES and battery storage projects.   The latter are being defined as those which do not meet the definition of LDES pursuant to the TDD (i.e. capable of discharge at full power (50MW / 100MW as applicable) for at least 8 hours)   For certain technologies including batteries (but not LDES), more granular zonal capacity ranges have also been identified.  

Ofgem has acknowledged that when the CP2030 capacity ranges were calculated, lithium-ion batteries were not included as LDES. Mindful of this, the TDD confirms that lithium-ion electricity storage projects will be treated as batteries (and not LDES) for the purposes of connection reform and will be subject to the zonal battery capacity ranges and not to the GB-wide LDES capacity ranges. This reclassification will not affect a lithium-ion project’s eligibility for the Scheme should they otherwise be eligible.  Given that the aggregate capacity of battery projects (including lithium-ion) in the existing connections queue is significantly above the allocated capacity ranges, there is a risk that some eligible lithium-ion LDES Scheme projects do not fall within the applicable zonal cap and lose their place in the connection queue which, in turn, would risk their eligibility for Scheme support.  To address this, Ofgem and NESO are exploring the possibility of successful Scheme bidders who lose their queue place being permitted to re-enter as batteries (if lithium-ion) or LDES (in all other cases). Once a project holds a “live” Scheme agreement, they are expected to receive protection in grid application windows.  

Next Window

Ofgem recognises that investors need clear signals to keep investing and are aiming to inform stakeholders in Q1 2026 about the expected timing for opening application window two.  This decision will be based on advice from NESO as alignment with the Strategic Spatial Energy Plan will be prioritised.   They are also considering a contingency plan to open window two independently if the capacity targets for window one are not met.

A Final Thought

As outlined above, several aspects of the Scheme are still to be finalised – crucially, this includes the cap and floor methodology which is integral to any interested party’s ability to assess their project’s bid and risk profile.  Notwithstanding this, prospective applicants now need to act quickly to submit their notice of intent to Ofgem by 22 April 2025 and, thereafter, to analyse the details of the TDD, Guidance, Eligibility Criteria Framework and application form to enable them to assess the attractiveness of the Scheme and their project’s eligibility to apply.  The level of capacity seeking Scheme support will be a clear measure of whether the Government has made the right decision in adopting a cap and floor regime rather than falling back on previous methods of support such as the Contract for Difference or a Regulated Asset Base (RAB) model (being adopted to help fund future nuclear energy projects).  

It will be interesting to see which LDES technologies apply and are successful under the Scheme, particularly within the context of topography requirements, the wide range in anticipated capital expenditure to develop the different LDES technologies and the different lifespans of the technologies. Many have tended to think that pumped storage hydro will be the most successful technology under the Scheme, but given the potentially much higher capital expenditure to develop such projects and the longer development timelines, it could be that other technologies will be more successful under the Scheme than anticipated. It remains to be seen whether refinements to the Scheme will be necessary to better suit the risk profile of some of the pumped storage hydro projects that are proposed to be developed. 

In any event, the Scheme remains one to watch in 2025. 

Should you have any questions regarding the Scheme or application process, please do not hesitate to contact a member of the Energy team at Burges Salmon.

This article was written by Rosie Lord, PDL, James Phillips, Partner and Alec Whiter, Partner in April 2025.

It will be interesting to see which LDES technologies apply and are successful under the Scheme, particularly within the context of topography requirements, the wide range in anticipated capital expenditure to develop the different LDES technologies and the different lifespans of the technologies.