Following the Department for Net Zero and Energy Security (DESNZ) confirmation in October that the scheme would go ahead, Ofgem was tasked with designing the cap and floor mechanism. Just before Christmas, it launched a call for input, which will close this coming Wednesday, 8 January 2025. We look at the latest proposals and what’s changed in the last three months, and hear from RheEnergise and Drax.
In an open letter calling for industry input, Ofgem outlined the latest thinking around the support scheme and confirmed several potential changes from the government’s initial proposal, which were hinted at in DESNZ’s October announcement, as well as new details on requirements.
Ofgem will publish a Technical Decision Document (TDD) by Q1 2025 with the aim of approving projects for the first round of procurement (Window 1) by Q2 2026, for delivery by either end of 2030 or end of 2033.
One thing the open letter did not clarify, however, is how open the scheme will be to lithium-ion battery energy storage system (BESS) technology, which dominates the energy storage market today but is not currently being built in the UK, at scale, for durations beyond four hours. DESNZ initially proposed excluding it before softening this stance in its October announcement to allow ‘novel iterations’ of lithium-ion BESS.
Industry sources have also called for increased clarity on how much LDES capacity NESO and Ofgem think the UK energy system needs to decarbonise.
Potential reduction in project size for Stream 2
Among the most noteworthy new details is that Ofgem is considering reducing the minimum project size of Stream 2 projects from the current 50MW, “if there is compelling evidence” to do so.
Stream 2 is for more novel technology projects with a Technology Readiness Level (TRL) of 8 and subsequently has a ‘slightly relaxed criteria’, while Stream 1, with a minimum size of 100MW, is for more established ones with a TRL of 9.
The October announcement alluded to a potential change in Stream 2’s 50MW minimum, but didn’t say whether this would be up or down. Reducing it was recommended by LDES technology firm RheEnergise in October in comments provided to our sister site Energy-Storage.news.
In new comments, CEO Stephen Crosher reiterated this belief but said that alternative options (if there was no appetite to reduce it) could be allowing smaller pilot projects, a third dedicated stream for smaller projects or an alternative support mechanism.
Increasing minimum discharge duration to 8-10 hours for Stream 1
Ofgem also said it is considering increasing the discharge duration minimum for Stream 1 projects to 8 or 10 hours, from 6 currently (for both Streams).
The minimum duration has been hotly debated and responses to DESNZ appeared to be show a roughly even divide in opinion between increasing it and keeping it the same.
The system benefits of a longer discharge duration would be greater, increasing how much of the daily energy market the projects can cover, but it would also reduce the pool of available technologies because of the increased capex.
RheEnergise is one of the companies which has suggested increasing the minimum duration, and in new comments provided to us, CEO Stephen Crosher said that doing so would “avoid a ‘land grab’ of capacity (short-term durations) that is financeable today but fails to meet system needs even at the end of this decade”.
That is alluding to the fact that lithium-ion BESS is increasingly being deployed for 6-10 hour durations in some parts of the world (though not yet the UK).
Crosher also pointed out that the average modelled duration of LDES in NESO’s Clean Power 2030 plan is 13-18 hours.
“An approach that supports storage at the 8 to 16-hour range will maximise system efficiency and minimise costs to consumers overall. To future proof the cap and floor and to ensure capacity is not consumed by short duration solutions, the duration threshold should be raised,” Crosher said.
Grid connection and planning consent in place
Ofgem has also outlined the requirements there will be around grid connection and planning consent for projects bidding for the cap and floor mechanism.
Projects will need firm Grid Connection Agreement (GCA) in place or demonstrate they have one ready for delivery by 2030 or 2033.
For planning, projects will need planning consents in place by Q3 2025, which will allow for cost estimates and cost benefit analysis when Ofgem starts assessing projects. If it doesn’t have planning consent, developers wil need to provide evidence of planning application and likelihood of being granted in time to ‘avoid speculative projects’, Ofgem said.
Law firm Freeths’ clean energy knowledge lead Shraiya Thapa pointed out on LinkedIn that it isn’t clear how this works with the grid queue reshuffling which is set to start in Spring, a topic she discussed for a separate blog published on Current± in December.
Proving Technology Readiness Level (TRL)
Ofgem’s open letter appears to say that there will be more evidence required for Stream 2 projects to prove a TRL of 8 than for those Stream 1 projects proving a TRL of 9. There isn’t a specific list of technologies for either stream, and Oftem will assess the technologies case by case.
For Stream 1, it said: “Applicants do not need to prove their TRL, as our assessment of deliverability will be sufficient. However, we reserve the right to reject applications from technologies that have not been deployed at scale anywhere.”
For Stream 2, it said: “Developers must provide detailed evidence of TRL 8. We won’t publish a definitive list of technologies due to rapid changes in the field, but will use current judgments.”
One obvious Stream 1 technology is pumped hydro energy storage (PHES) technology, which accounts for the majority of grid-scale energy storage online today globally.
Power firm Drax is looking to build a new plant alongside its existing Cruachan PHES plant in Scotland, and its Scottish assets director Ian Kinnaird told Current±: “We look forward to working constructively with the UK Government and other stakeholders on the next steps of this process.”
Other new details
Other notable details from the open letter include a proposal for the ‘floor’ of the cap and floor to cover 80% of a project’s costs as well as new regulations to prevent project owners ‘gaming’ the system.
Those new regulations could include detailed reporting and inspection requirements, mandating that projects participate in the capacity market (CM) as price takers with full capacity bid in, prohibiting LDES structured transactions and requiring detailed cost allocation information.
Concluding his remarks, RheEnergise’s Crosher said: “The cap and floor should focus on how to deliver 2030’s and 2040’s whole system benefits and avoid the shorter-term temptation to rush forward with too many short duration assets, it should also set levels of returns from the cap and floor commensurate to the debt and equity mix an individual project can achieve. A commensurate approach would allow different scales and maturities of solutions.”
See Ofgem’s open letter outlining all the latest proposals, and questions for respondents – the deadline for responses is this Wednesday, 8 January 2025.
