Can the UK establish LDES market leadership?

Investors say the proposed cap and floor mechanism would “shake up” global energy storage markets.

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February 7, 2024
Energy storage

Photo credit: Department of Energy

The United Kingdom is doubling down on long duration energy storage, via a government proposal aimed at encouraging domestic investment in the technology.

  • The top line: The U.K.’s proposal, which was released last month and is still open for comment, includes a cap-and-floor mechanism that the government hopes will help the market overcome barriers like long build times, high upfront capital costs, and lack of revenue certainty.
  • The market grounding: The British capacity market — in which participants compete in auctions to nab long-term contracts — focuses on ensuring a secure electricity supply during moments of grid stress. While storage asset owners can win contracts that provide some revenue security, that market currently doesn’t recognize the other, major benefits of LDES: ancillary services, reduction of system costs, and even incentivizing the deployment of distributed energy resources, for instance.
  • The current take: Prelude Ventures co-founder Gabriel Kra said the U.K. has the chance to lead global markets “by explicitly recognizing the urgent need for LDES at a national level and designing nation-wide mechanisms to support its commercialization.” And the country is “well-positioned to value the transmission benefits of LDES and [medium duration storage] because of its less fragmented transmission planning processes,” he added.

The LDES consultation from the country’s Department for Energy Security and Net Zero outlines two pathways for storage providers to take advantage of a cap and floor scheme, which the government proposes setting based on gross margin rather than pure revenue. The first targets already-proven technologies with a minimum capacity of 100 megawatts. The second is for newer, demonstrated technologies with a minimum capacity of 50 MW. Both have a minimum storage duration of six hours.

“We expect this approach would provide revenue certainty for investors by providing a guaranteed revenue should returns from operating assets drop below the agreed floor,” the consultation states. “This also offers a protection to consumers by providing a cap on the revenue that operators can earn.”

Building the market early

The scheme, however, doesn’t apply to lithium-ion batteries. That’s a key element of the proposal, said Laurie Menoud, founding partner of At One Ventures. The inclusion of not-yet-commercialized technologies is also important, she added, and will drive deployment of more novel storage systems like chemical, electrochemical, mechanical, and thermal.

Menoud told Latitude Media that the proposal is “huge,” and not just for companies in the U.K

“I anticipate it’ll shake things up in other markets, especially in the U.S. where there’s already a significant flow of venture capital into novel LDES technologies,” she added. “For starters, LDES startups are now looking at clearer, more predictable paths to market.”

The consultation recognizes some of the unique energy market value-adds provided by LDES and mid-duration storage, said Kra, which is a key consideration for investors. That said, there are still important elements to be ironed out.

“From an investor's perspective, it is imperative that the revenue floor be set at a level that provides sufficient certainty around a minimum threshold return on equity,” he said. “Setting too low a floor risks preventing the LDES market from gaining traction, while setting too high a floor could lead to inefficient deployments.”

Kra pointed to two pieces the consultation doesn’t specify: timing and valuation methodology. 

“The consultation is not specific on when procurements could start, though it does suggest projects may be evaluated as soon as this year,” he said. “Further, the method for evaluating each project should be spelled out in more detail to allow more effective technology and project development.”

Conrad Nichols, a technology analyst focused on LDES and battery storage at British market research firm IDTechEx, said the UK’s projected renewables growth makes the country a prime candidate for establishing a market early. The amount of electricity generated on the British grid is expected to increase by over 300% between now and 2035, he said.

While there are other ways for storage assets to make money — price arbitrage, provision of ancillary services, and capacity markets — none of them alone can really make LDES a solid bet for developers or investors, Nichols said. Price arbitrage opportunities aren’t enough to be a strong source of revenue yet, the ancillary services market is dominated by lithium ion batteries, and capacity markets don’t always recognize the benefits of LDES.

But because 2035 is still pretty far out, achieving long-term revenue certainty while incentivizing a domestic LDES market in the meantime is a delicate process, Nichols said.

“One of the key points of the UK proposal is that they’re not trying to stipulate any targets for LDES deployment yet,” he added. “They don’t want to do that in case it’s too low, and disincentivizes players in the market.”

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