LDES could have ‘real market-moving impacts’ on price spreads and other UK flexibility assets

Renewables creates need for LDES on GB system

“What we see is that adding more and more wind, solar, variable renewable generation onto the system creates the needs where there is a greater potential for LDES to play a role, and the particular characteristics of wind generation are a strong driver for LDES in the GB system,” said John Perkins, director at Baringa (formerly of competitor AFRY).

With the first window for applications now closed, most of the process now remains in the hands of regulator OFGEM and the Department for Energy Security and Net Zero (DESNZ). However, there are some things that developers and operators who’ve submitted projects can still do in the interim, Perkins explained.

“We’re strongly of the view that developers must ensure that the unique competitive advantages of their assets are being properly captured in the CBA evaluation, and that’ll be an important part of ensuring a successful outcome in in the assessments of the CBA of the all the assets entering into into it,” he said.

Overall, Baringa believes the floor levels could be attractive to lenders: “For an asset securing a cap and floor, it will significantly reduce the cash flow variability and offer a lot of revenue stabilisation.”

But he added that participants should think of projects on a portfolio basis rather than a single-asset basis. And, the key point will be the exact levels of the the revenue cap and revenue floor, which will be revealed in Q2 2026 when the CBA is complete.

“We think from our stochastic modeling looking at the uncertainty and cash flow variability that that further quantification of the impact of the cap is is necessary for developers to get a full appreciation of what they’re taking on with assets in this regime,” Perkins said.

The firm’s modelling shows that even a moderate level of LDES capacity could have a market-moving impact on energy price volatility, with stronger compression of spreads at higher capacity levels.

Technology mix

The extent to which LDES is needed and, therefore, should be financially supported by consumers is perhaps up for debate. But even if you agree that it is needed, the question of which technologies should be supported remains debatable.

When the LDES scheme was first discussed, lithium-ion battery energy storage systems (BESS) had just come out of a period of increased prices, and was set to be excluded from the LDES scheme. At that time barely anyone considered lithium-ion as suitable for LDES, but fast forward two years and heavy sustained price falls have almost made it a favourite, and the government was convinced to include it.

Osamudiame Evbuomwan, Baringa senior manager, explained that the LDES class of technologies competing in the cap-and-floor Window 1 round can be split into the electrochemical area (lithium-ion, flow batteries, sodium sulfur etc) and the mechanical energy storage technologies (compressed air, liquid air, pumped hydro etc).

“The electrochemical technologies tend to be cheaper and have higher round trip efficiency (RTE), and we believe that that’s going to play into how developers bid and compete for this window. On the mechanical energy storage side of things, they could have higher chances of contracted revenues from stability services, and also have a long lifespan.”

Expanding on Perkins’ CBA point, Evbuomwan said that the benefits of the competitive uniqueness of the different technologies will need to be captured in the CBA. An example of what could be missed is an overbuild of a lithium-ion system (which degrades) to 10-12 hours to ensure it remains at least an 8-hour system over its lifetime, and that extra duration might not be captured in the CBA.

“So we really, really advise that the CBA should be done properly to ensure that the uniqueness of each asset is captured,” Evbuomwan said.

Market-moving impacts on other flexibility assets

The Baringa team also touched on the potential impact on existing flexibility assets, like short-duration BESS, of successful LDES cap-and-floor projects entering the market.

In April, a group of the UK’s major BESS owner-operators signed an open letter opposing the scheme, saying it would disadvantage short-duration BESS and jeopardise its rollout: we interviewed the founder and CEO of signatory Zenobē about why.

There is around 7.6GW/11.4GWh online today and the government wants 23-27GW online by 2035, according to data from Solar Media Market Research’s Battery Storage: UK Pipeline & Completed Assets Database report.

Alluding to the potential impact, Perkins said, “The target levels of procurement are quite wide at the moment, and there’s potential for some real market-moving impacts on other flexibility assets. And so there’s a risk there, and a level of uncertainty that we’re wrestling with at the moment.”

Lithium-ion is eligible to participate but the letter’s signatories claim the scheme’s structure will favour other technologies, like pumped hydro. However, power generation firm Drax announced shortly after that it would not bid its Cruachan II pumped hydro project into the LDES cap and floor scheme, saying that ‘recoverability of capital’ was unclear.

One consequence of lithium-ion BESS becoming cost-competitive for LDES, and potentially winning cap-and-floor contracts in the scheme, is that you would have a situation where subsidised long-duration BESS projects start to compete in short-duration flexibility services with existing, short-duration BESS projects.

These could be the real threat to the business case for existing BESS projects. Note that some of the major BESS owner-operators did not sign the letter, including Gore Street Energy Storage Fund (GSF). Fund manager Gore Street Capital partner Alicja Kowalewska-Montfort told us it was considering augmenting its projects in order to participate, in an interview earlier this year.