UK government adopts ‘cap and floor’ scheme for pumped storage development

Cruachan Power Station (Credit: Drax)

In an effort to unlock new investment opportunities, the UK government announced it is adopting a new “cap and floor” scheme to promote development of long-duration energy storage (LDES), including new pumped storage facilities.

The government said this move could help start momentum on the first significant LDES facilities in the UK in nearly 40 years. High barriers like upfront costs, despite low operating costs, have held back investment in this area, the government said.

The announcement follows a consultation held earlier this year which proposed a cap and floor scheme to encourage LDES investment. A cap and floor model would provide a guaranteed minimum income for developers (the floor), in return for a limit on revenues (the cap). Floor levels are intentionally set low to minimize the likelihood of their use — they’re intended to act as insurance in the scenario that revenues are lower than forecast. In return for consumers underwriting this risk, a revenue cap is meant to ensure that LDES asset owners must share some or all profits above a certain level.

The Office of Gas and Electricity Markets (Ofgem) has agreed to act as regulator and delivery body, and the scheme’s first round is expected to be open to applicants next year. Ofgem will design the investment support scheme and, under these proposals, it will be split into two application routes, with one focusing on mature technologies, while another will be dedicated to new innovation.

Great Britain has 2.8 GW of LDES across four existing pumped storage hydro schemes in Scotland and Wales. Analysis has found that deploying 20 GW of LDES could save the electricity system £24 billion between 2025 and 2050, the UK government said. Meanwhile, the National Electricity System Operator has estimated that a total of 11.5 GW to 15.3 GW of LDES will be required by 2050 to achieve net zero.

Several projects are under development, with some expected to be operational by 2030, the government said, and the introduction of an investment support scheme could help deliver them.   

Renewable energy company Drax has applauded the move. Drax is progressing an option to expand its existing Cruachan pumped storage facility in Scotland through the construction of a new 600 MW plant. Built adjacent to the existing underground plant, the new power station would effectively more than double the site’s total generation capacity to more than 1 GW.

“Today’s announcement is a critical step forward to removing one of the key hurdles developers face in building a new generation of pumped storage hydro plants. I would like to thank the new Government for moving at speed to do this within their first 100 days in office,” said Ian Kinnaird, Drax’s Scottish Assets Director. “We look forward to working constructively with the UK Government and other stakeholders on the next steps of this process so we can deliver in partnership a clean power system by 2030 which strengthens our energy security and delivers for consumers.”

A similar cap and floor scheme is used for electricity interconnectors that connect Great Britain’s grid with other countries. Introduced in 2014, no floor payments have been made but developers have shared revenues with consumers.   

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