As the grid becomes more renewable and gas generation retires, long-duration energy storage is increasingly required to provide flexibility. Currently, high construction costs and uncertain future revenues mean that this storage is not being built. The government plans to implement a cap and floor scheme to provide revenue certainty to long-duration energy storage projects and encourage investment.
But how would this work, and how will it impact the buildout of longer-duration batteries?
In this article, we consider storage with a duration of six hours and above to be long-duration, in line with the current government consultation.
No new long-duration storage has been built in Britain for 40 years
The amount of renewable generation in Great Britain has increased from less than 3% in 2000 to almost 50% today. By 2050, Modo Energy’s central forecast scenario projects that this will increase to 80%. Nuclear generation makes up most of the remainder.
Currently, gas generation and interconnectors give the grid flexibility. They provide additional electricity when renewable generation is low but demand is high. However, as gas generation retires, long-duration storage will increasingly be required to balance intermittent renewable generation with a predictable demand curve.
Many technologies that may eventually provide this storage - such as liquid-air storage or vanadium flow batteries - are still being developed and commercialized.
Pumped hydro storage and battery energy storage (BESS) are established technologies for long-duration storage, but they are not currently being built. Dinorwig, a 2.8 GW pumped hydro plant in Wales, was the last system to come online - in 1984.
Expensive build costs and uncertain returns limit investment into new long-duration storage
Long-duration storage takes a long time to build and requires a significant upfront investment. Future revenues for these projects are also uncertain because of the range of future scenarios for the electricity market.
For example, there is a risk that the transition away from gas could take longer than expected. Alternatively, consumer demand could become more flexible. Both scenarios would result in lower revenues and investment returns for long-duration storage.
Cap and floor schemes provide revenue certainty to encourage investment
Following an industry consultation in January, the government has recommended a cap and floor scheme to encourage investment in long-duration storage. The regulator Ofgem will design and implement this scheme.
In a cap and floor scheme, Ofgem calculates a revenue floor and provides ‘top-up’ payments in years when merchant revenues fall below this level. This guarantees that the project will earn at least the floor level of revenue each year. In return, the project must repay Ofgem any revenues above a cap level.
Cap and floor schemes provide a level of revenue certainty. They are similar to a tolling agreement, or the contracts for difference (CfDs) used to encourage offshore wind buildout. However, while these contracts guarantee a single revenue, cap and floor schemes allow for a range of revenues. This ensures that operators remain incentivized to trade these merchant assets effectively.
A similar scheme was launched for interconnectors in 2014. It is currently in use for four operational interconnectors, with eight more in development. Because of favorable market conditions, only the cap has been used so far. The Nemo Link interconnector to Belgium has returned £185 million to Ofgem.
Current debt and operating costs can be used to estimate cap and floor levels
If the scheme design stays similar to the interconnector cap and floor, Ofgem will set the revenue floor for projects at a level that covers essential expenses. This is likely to cover operational costs and debt repayment.
Debt service for a typical six-hour BESS project may average £65k/MW/year. This assumes a project is financed with 60% debt, repaid over 15 years at an interest rate 2.5% above the base rate.