Super-batteries – a look at Ofgem’s new cap and floor regime

On 8 April 2025, Ofgem opened the first application window to long duration energy storage projects for the new cap and floor regime. 

1. What is Long Duration Energy Storage?

Long Duration Energy Storage (LDES) includes different ways to store electricity for a long time (typically over 4, 12, 24 hours). There are a number of ways to do this:

• Pumped hydro – where water is pumped up to a mountain reservoir using cheap renewable electricity and released later to generate electricity when demand is high and other generation sources are more expensive. Pumped hydro is currently the most mature LDES technology.
• Liquid air energy storage – this is a method of storing energy by converting electricity into compressed air, liquifying it and then storing the liquid air at cryogenic temperatures.
• Compressed energy storage – this method stores excess energy by compressing air and storing it and then releasing it to drive a turbine and generate electricity during peak demand.
• Flow batteries – these are a type of re-chargeable battery where the energy is stored in liquid electrolytes, usually in separate tanks, and then pumped through the battery’s cell to generate electricity.

There is 2.8GW of LDES capacity currently deployed on the GB energy system across four separate plants which were originally commissioned between 1963 and 1984. However, there has been a lack of investment in LDES in recent years with no new assets constructed in Great Britain in approximately 40 years.

2. Why is LDES needed?

The integration of LDES is critical for delivering a smart, flexible energy system that accommodates high volumes of low carbon power, heat, and transport. The benefits include:

• Improved Grid Flexibility: Reducing reliance on carbon-heavy gas-fired power stations. Whilst gas with CCUS and hydrogen to power may play a role in providing low carbon flexibility, the scale of the roll-out of these technologies remains uncertain. 
• Efficiency: LDES allow surplus electricity which is domestically produced to be stored for peak demand periods, reducing wastage.
• Security of supply: The use of LDES will provide resilience to the electricity system, enhancing security of supply. 
• Cost Savings: Projected savings of up to £24bn (approximately a 3.3% reduction in total system costs) from deploying up to 20 GW of LDES.

There has been a historic lack of investment in LDES assets, with no new assets constructed in Great Britain in approximately 40 years.

3. What support framework has been proposed for LDES?

Given the importance of LDES to the UK’s energy system, the UK Government has recognised the need to develop a framework to provide revenue certainty to incentivise investment in the high upfront capital costs for these projects.

Last year the UK Government consulted on potential revenue models for LDES, settling on a cap and floor regime.

The cap and floor scheme ensures investors receive a minimum amount of revenue to enable investment in LDES assets. In addition, a cap on revenue provides returns to consumers for their support, where LDES assets operate above the cap. 

The scheme is similar to the electricity interconnector cap and floor regime, but will include modifications to ensure it works effectively for LDES deployment.

Linklaters has been at the heart of several cap and floor projects, advising Sponsors on both the Greenlink and NeuConnect interconnector project, the first two (and so far, only) projects to be privately financed using the cap and floor regime.

4. What is the cap and floor regime?

Key aspects of the cap and floor regime are:

• Term: 25 years (developers may be able to request a shorter term, subject to a 20 year minimum term)
• Cap and floor mechanism:
  • Developers can recover all economic and efficient capital and operational costs subject to compliance with their licence obligations and any incentive mechanisms. 
  • This cap and floor mechanism ensures that developers of LDES projects can recover their investment while protecting consumers from high energy costs in relation to assets they have helped to deliver. 
  • If a project earns more than the cap, a larger portion of the extra revenue is returned to consumers. If it earns less than the floor, consumers cover all the shortfall, provided the project meets its minimum availability threshold. 
  • The cap allows recovery of invested capital (debt and equity) and provides a fair return on investment if the assets are operating well in the market. The cap is flexible (a ‘soft’ cap), meaning that if revenues exceed the cap, the extra revenue is shared between the project and the consumer. 
  • The floor allows recovery of invested capital (debt and equity) and provides a return similar to the cost of debt for both equity and debt investors. 
• Setting the floor: Similar to the regime for interconnectors, the floor will either be set administratively (i.e. Ofgem makes a determination), or it will be set through a competitive debt-raising process under an optional ‘project finance’ variation. The floor set through this approach will be designed to meet debt obligations.
• Minimum Availability: Each LDES licensee must meet a minimum availability threshold to receive floor payments, similar to the interconnectors' cap and floor regime. If the requirement is not met in any year, the floor may be removed for that year.
• Interaction with the Capacity Market: LDES projects receiving cap and floor support will be able to participate in the capacity market, however Government will continue to consider whether further parameters around participation in the capacity market will be required

5. What are the eligibility criteria for the LDES cap and floor?

Projects wishing to participate in the first cap and floor allocation window will need to meet certain eligibility requirements including:

• deliverability requirements; 
• submission of a grid connection application; 
• planning consents to in place by start of Q3 2025;
• minimum capacity 100MW (stream 1 i.e. for established technologies such as pumped hydro) or 50MW (stream 2 i.e. for novel technologies such as compressed air storage);
• duration of 8 hours continuous output at full power, and maintain this capacity over the full cap and floor regime duration (i.e. 25 years);
• a Technology Readiness Level 9 for Stream 1 technologies; and
• a Technology Readiness Level 8 for stream 2 technologies.

The cap and floor scheme will be available for significant refurbishments or expansions, as well as new builds. 

6. What are the next steps?

• The first application window opened on 8 April 2025. Deadline for applications is 9 June 2025.
• The indicative capacity range for the first application window is between 2.7 and 7.7 GW up to 2035.
• Ofgem aim to approve first projects by Q2 2026.
• Ofgem also aims to publish in Q1 2026 the expected timing for opening application window two, based on advice from NESO.