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10 April 2025
In a landmark step for the UK’s energy strategy, Ofgem has officially opened the first application window under its new cap and floor regulatory scheme for Long Duration Electricity Storage (“LDES”) projects.
This announcement follows the joint publication by Ofgem and the Government of the Technical Decision Document (the “TDD”) in March 2025 on a cap and floor regime to support the deployment of LDES projects capable of delivering greater system resilience and decarbonisation at scale.
LDES – or Long Duration Electricity Storage – refers to technologies and systems designed to store electrical energy for extended periods, typically ranging from several hours to days. The stored energy can then be dispatched during times of high demand or low renewable output, helping to reduce reliance on fossil fuels while supporting a more secure, affordable, and low-carbon energy system. These storage systems play a critical role in balancing energy supply and demand, integrating renewable energy sources like wind and solar, and ensuring grid stability.
LDES assets will typically be treated as generation assets (requiring a licence) and comprise the following technologies:
LDES plays a key part in the Government’s Clean Power 2030 Action Plan, which envisions a significant role for long duration storage in delivering a low-cost, low-carbon energy system.
The cap and floor scheme is a financial mechanism aimed at encouraging investment in energy storage projects in the UK. This regulatory framework was first introduced by Ofgem in 2014 in respect of electricity interconnectors. Although the regime for LDES includes similar concepts to that for interconnectors, it has been tailored to ensure it is effective for LDES deployment.
The intent of the cap and floor model is to unlock investment in storage technology that may not currently be viable through market revenues alone, while also protecting consumers from excessive payments. The scheme provides revenue certainty to developers of LDES projects by setting a minimum (floor) and maximum (cap) level for revenues, ensuring stability while safeguarding consumer interests.
This works to create a balanced approach to risk and reward sharing. If a project’s revenues fall below the floor, consumers will top up the developer’s income to the agreed floor level. Conversely, if revenues exceed the cap, the surplus will be returned to consumers.
LDES assets will be subject to the scheme for 25 years. While Ofgem may consider requests from developers for shorter terms, such proposals must not be for a period less than 20 years. The rationale relates to the recovery of capital costs for the project: a shorter duration would likely result in higher ‘floor’ levels needing greater consumer support as the costs are stretched over a shorter term.
Funding for the cap and floor scheme will be raised through network charges on electricity system users. Payments to or from LDES licensees will be managed through the National Energy System Operator (NESO) and regulated by Ofgem to ensure compliance and alignment with system needs.
It is not yet clear which specific network charges will be used to fund the scheme for LDES. However, it is expected that such funding may be raised via Transmission Network Use of System Charges (TNUoS) and/or Balancing Services and Use of System Charges (BSUoS).
For example, the regime for electricity interconnectors is funded through TNUoS. If revenues exceed the cap, the surplus is returned to consumers via reduced TNUoS charges; if revenues fall below the floor, consumers top up revenues through increased TNUoS charges.
The Government will legislate for the delivery of the LDES cap and floor scheme, including to confirm the use of network charges in the event a cap or floor is triggered, via the Planning and Infrastructure Bill which was introduced to Parliament on 11 March 2025.
Ofgem is welcoming applications from developers of eligible LDES projects that can be delivered by either 2030 and 2033. Eligibility will be assessed in a first phase of evaluation by Ofgem in accordance with the Eligibility Criteria Assessment Framework. We set out an outline of the assessment stages below.
At a high level, to be eligible LDES projects must – in addition to other eligibility criteria described below (namely in relation to deliverability, grid connection offer, planning consent, and technological readiness) – have a storage duration of at least 8 hours and meet the minimum size thresholds of either 100MW (stream 1) or 50MW (stream 2).
The LDES cap and floor scheme is also available for significant refurbishments or expansions. As such, provided the refurbishment or expansion project adds an amount of capacity that meets the eligibility criteria, developers undertaking such projects may also apply. In this context, only the cost of the new capacity resulting from the refurbishment or expansion can be supported by the cap and floor scheme.
The application process begins with an eligibility assessment to determine whether LDES projects qualify for the cap and floor scheme. Projects that pass this initial stage will proceed to a detailed evaluation phase, which includes a project cost benefit analysis (“CBA”) stage.
This approach largely mirrors that for electricity interconnectors. However, it has been streamlined to enable faster decision-making on cap and floor levels, supporting developers in progressing their financing arrangements more quickly.
In Q2 2026, Ofgem will also offer a limited opportunity for developers to submit updated cost information through a targeted reassessment process to ensure that final cap and floor levels reflect the most accurate and mature estimates available.
The final stage is the post construction review (“PCR”), anticipated to run from 2029, at which point the final cap and floor levels are determined.
The first stage in the assessment process is the eligibility stage where applications will initially be assessed against the 6 criteria contained in the TDD. The deadline for submitting applications is 9 June 2025.
The eligibility criteria are as follows:
Further information on this first stage is set out in the Eligibility Criteria Assessment Framework that accompanies the guidance published by Ofgem. This framework sets out the requirements in respect of each of the eligibility criteria above, including the specific submission material required and detail regarding the pass/fail scoring for each.
‘Bids’
Importantly, applicants are required to provide initial cost estimates at this eligibility stage (and successful developers will then be required to provide further detailed cost information to inform the CBA stage assessment). The required information is further detailed under ‘deliverability’ in the Eligibility Criteria Assessment Framework.
Cost estimates must be sufficiently detailed to provide a reasonably accurate financial forecast for the relevant LDES project, and align with ‘Class IV’ cost estimates guidance provided by the Association for the Advancement of Cost Engineering 4 or equivalent. Further, applicants must also submit financing plans describing the capital structure of the project and how the approach provides value for money. In particular, applicants must propose a financial model for their project, including revenue projections and target rates of return under various market scenarios.
This target rate of return is referred to as a developer’s ‘bid’ and will be specific to the relevant LDES project. We discuss ‘bids’ further below, and in particular their relevance to Ofgem’s determination as to the appropriate approach (administrative or competition) to setting the cap under the scheme.
It is expected that evaluation of this first eligibility stage will be complete by Q3 2025, at which point successful applicants will proceed to the CBA stage.
Those applicants that are successful at the eligibility assessment stage will then move to the CBA stage. The CBA assessment involves the evaluation by Ofgem, with support from NESO, of the LDES projects’ costs and benefits to determine the cap and floor regime award. It is expected that assessment at this stage will commence in Q4 2025.
At this CBA stage, developers will be required to submit detailed cost information in line with Ofgem’s cost submission template (to be published). Ofgem considers this CBA stage estimate may include three scenarios: the reasonably optimistic case; the most likely case; and the reasonably pessimistic case. These will be assessed by Ofgem and used to inform the final decision and cap and floor regime decision in Q2 2026. As noted above, at this point there may be limited scope for successful projects to provide updated costs for setting cap and floor levels.
The CBA stage will include assessment against multiple impact categories, and may include both quantitative and qualitative assessment of socio-economic welfare, system costs and benefits, as well as assessments of non-system impacts (e.g., assessment of social and environmental costs and benefits).
While all LDES projects – whether deliverable by 2030 or 2033 – will be assessed simultaneously at the eligibility stage, those successful projects that are taken to the CBA stage may be assessed by Ofgem under a ‘twin track’ approach (whereby those projects deliverable by 2030 will be prioritised ahead of those deliverable by 2033) or in parallel (whereby all track 1 and track 2 applications are assessed at the same time).
Ofgem is currently developing the framework for CBA assessment and intends to consult in Q2 2025. It is expected that it will make a final decision on the framework, including to provide a cost template and further guidance, by Q3 2025.
The PCR is the final stage of the cap and floor assessment process and is when Ofgem sets the definitive cap and floor levels for LDES.
At this stage, Ofgem will revisit any cost elements not finalised during the earlier assessments, review actual capital and operational costs, and assess their efficiency. Adjustments will be made based on updated and validated information, with the final cap and floor levels then fixed for the duration of the regime (subject only to a limited number of reopeners, similar to those used in the interconnector framework).
It is essential that the cap and floor levels are set to ensure the right balance of encouraging investment and appropriate operation of the assets while avoiding unnecessary risk to consumers.
Once established, both the cap and floor levels will remain fixed for the duration of the cap and floor regime, subject only to defined reopeners set at the point of licence award. This approach reflects the nature of LDES projects as long-term investments, typically financed once at the outset to support project delivery.
Ofgem is still considering whether or not to adopt an ‘administrative’ or ‘competition’ approach to set the cap. In respect of setting the floor, Ofgem has provided developers with a choice between allowing Ofgem to administratively set the floor, or to undertake a competitive debt-raising process under an optional ‘project finance’ variation.
Ofgem intends to consult with stakeholders in Q2/Q3 2025 in order to determine the administrative cap and floor rates of return, the competitive cap rate, its incentivisation process, and whether to use an administrative cap or a competitive cap.
We consider the approaches in more detail below.
Administrative approach – cap and floor
Under the administrative approach, for all successful LDES projects Ofgem will determine a standard investment rate of return to set the cap and the relevant cost of debt index (as currently used in the interconnector model) to set the floor.
These levels will be determined by Ofgem at the time of the regime award in Q2 2026, based on available market evidence including that provided by project developers, the costs of debt and equity capital for LDES projects and equity internal rate of return.
Competition approach – cap
As set out above, at the eligibility stage developers ‘bid’ a target cap rate of return and provide Ofgem justification as to why the target is appropriate. Ofgem will take these ‘bids’ received at the eligibility stage into account in determining whether or not to adopt the competition approach to set the cap. In this context, where the competition approach is considered appropriate, Ofgem would select one cap rate of return from those LDES projects that were successful at the CBA stage and apply this to all projects awarded a cap and floor regime in Q2 2026, with the most competitive developer receiving a bonus.
Ofgem considers that where developers’ ‘bids’ at the eligibility stage fall below the rate of return for a merchant generator (which should have a higher rate of return compared to LDES projects, as it faces higher market risks and therefore demands higher returns), it is likely that a competition approach is appropriate. In this event, the ‘bids’ would be put to public consultation (anonymised) alongside Ofgem’s administratively determined rate of return.
The competition approach will only be adopted where it offers better value for money for consumers by potentially achieving a lower project rate of return than its administratively determined rate of return. A final decision on whether to proceed with the competitive or administrative cap-setting route will be made in Q3 2025. Ofgem intends to publish a final incentives framework for consultation in June 2025 at which point projects that were successful at the eligibility stage will have the opportunity to revise their ‘bids’ based on that framework.
Competition approach – floor
LDES developers can consider either the competition approach or the administrative approach when setting the floor.
Under this competition approach, or project finance variant, commercial lenders compete to provide funding through a debt finance raise process led by the LDES developer, with Ofgem oversight. For those assets delivered under this project finance route, this floor covers debt obligations only. This approach replicates the model for electricity interconnectors.
Further, in this model the administratively set floor acts as a backstop to protect consumers. Where the project finance floor exceeds Ofgem’s administratively set floor, LDES licensees repay the difference prior to making any equity distributions.
This first application window marks a significant milestone in the regulatory landscape for electricity storage in the UK. The LDES cap and floor regulatory scheme will be instrumental in enabling the long duration flexibility required to maintain security, affordability, and system resilience.
In terms of next steps and key dates, interested LDES project developers must submit their eligibility applications to Ofgem by 9 June 2025 in order to be considered in this first round. Potential applicants should also notify Ofgem of their intention to apply by 22 April 2025.
Developers that are successful at the eligibility stage will move to the CBA stage commencing in Q4 2025.
Ofgem has published detailed guidance alongside its decision to open this first application window to assist applicants, including information on the eligibility criteria and general application guidance.
Looking further ahead, Ofgem intends to consult with NESO following this first window to understand LDES capacity ranges for 2035 and 2050, with the aim to then open window two, taking into account the lessons learned from window one.
This article is for general awareness only and does not constitute legal or professional advice. If you would like further advice and assistance in relation to any issue raised in this article, please contact us by telephone or email enquiries@sharpepritchard.co.uk
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