On March 11, 2025, the Department of Energy Security and Net Zero and Ofgem published the much anticipated Technical Decision Document (TDD) to confirm details of the cap and floor scheme for LDES.1 The scheme provides an attractive regime for developers seeking to invest in the LDES assets, and to unlock debt and equity funding for these projects.
What is LDES and why is it important?
Renewable energy sources are critical for the energy transition. The intermittent nature of much of the renewable energy sources available is a challenge, particularly in those jurisdictions where renewables are a large proportion of the overall energy mix.
LDES provides a solution to this problem. LDES assets are based on technologies that store excess electricity that can be released when needed, therefore providing a consistent and secure supply of energy to consumers. Examples include pumped hydro storage, liquid air electricity storage, compressed air electricity storage and flow batteries.
What is the cap and floor scheme?
While LDES assets are valuable, the high upfront costs in building these assets and variable technology readiness levels have deterred investment, particularly in the less established technologies. To encourage investment in LDES assets, the government announced a cap and floor scheme in October 2024 to attract investors and provide funding for developers.2 The TDD provides more detail on the scheme. The overall objective is to have:
- A cap on revenues set to allow recovery of invested capital (debt and equity), whereby fair returns on investment are provided to investors if the assets perform well and a return to consumers where the asset operates above the cap
- A floor on revenues set to allow recovery of invested capital (debt and equity) at a rate of return that is comparable to the cost of debt, such that a guaranteed minimum income is provided to investors should their annual margin be less than the floor
The hope is that through this scheme, investors and lenders will be incentivized to invest in, lend to, build and operate LDES assets.3
What is the application process?
The TDD lays out the framework for the scheme. The application process has three main stages:
Eligibility assessment
Applicants have to satisfy various criteria to be eligible for the scheme, including:
- Deliverability – cost estimates, business plans, economic viability studies and evidence of upfront engineering design/optioneering to be provided
- Grid connection status – Evidence that a grid application has been submitted
- Planning consent – This must be in place by the start of the project assessment phase
- Minimum capacity – Minimum of either 100 MWs for stream 1 technologies or 50 MWs for stream 2 technologies
- Duration – Minimum of eight hours of continuous output at full power
- Technology readiness level (TRL) – TRL 9 for stream 1 technologies and TRL 8 for stream 2 technologies
Stream 1 technologies are defined as marketable products that have been proven through successful operations, should be actively in use in their final form and are being sold in the market. Pumped hydro storage is likely to be classified as a stream 1 technology.
Stream 2 technologies are defined as technologies in which development is complete and design and features are set. Liquid air electricity storage, compressed air electricity storage and flow batteries are expected to fall into this category.
Project assessment
Once projects have passed the eligibility stage, they will be selected through a cost benefit analysis assessment. Ofgem will look into the detailed cost information that developers must provide and other factors such as socioeconomic welfare, system impacts and hard to monetize impacts.4 This is also when the preliminary cap and floor levels are set.
Post-construction review
In the last stage, the cap and floor levels are finalized by reviewing and adjusting the preliminary levels that were previously established. These levels remain fixed for the duration of the scheme, which is 25 years in total or a minimum of 20 years in cases where a shorter duration is requested.
When to apply
The window for applications opens in April 2025 for two months. Developers who may be eligible are encouraged to apply to the LDES cap and floor scheme.
Melanie Amaya Mazza (White & Case, Trainee Solicitor, London) contributed to the development of this publication.
1 Department for Energy Security and Net Zero and Ofgem, 'Long Duration Electricity Storage: Technical Decision Document', available here.
2 Department for Energy Security and Net Zero, Ofgem and Michael Shanks MP, 'New scheme to attract investment in renewable energy storage', available here.
3 Department for Energy Security and Net Zero and Ofgem, 'Long Duration Electricity Storage: Technical Decision Document', page 35, available here.
4 For further detail, see Department Energy Security and Net Zero and Ofgem, 'Long Duration Electricity Storage: Technical Decision Document', pages 29 - 30, available here.
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