Cap & Floor Scheme for Batteries
If the government’s 2030 target of zero carbon electricity is to be met, the projected increase in power demand by that time must be capable of being met by renewable generation without gas plant back-up.
Estimates of an increase in electricity demand by 2030 are 50%; by 2035 estimated demand rises to 65%. We know there will be a gap, possibly a very big gap between renewables generation and demand.
To add to that gap, much of what we will rely on is intermittent, so there are many days on which that gap is not just a big gap, but a yawning gap.
Closing the Intermittency Gap
Too much needs to be done to close the 2030 demand-supply gap and meet the 2030 clean electricity target. But we could make substantial strides towards closing the intermittency gap by 2030 by means of long duration storage. In doing that, we reduce reliance on gas.
The government recognises this and is in the process (with Ofgem) of devising a ‘cap and floor’ support scheme to encourage long duration storage.
Much of the detail of how the scheme will operate is still uncertain. We estimate that the details will be out after Christmas and that it will be possible to apply for support under the scheme some time from next June onward.
The Basic Model
Although most of the details are still unknown, we do know some things about the scheme. Most importantly, it will be based on the interconnector funding model. That means the following steps, if only in broad form, are expected to be followed.
First: there will be a time-limited Pre-Application phase. Projects will be able to apply in that window. With their application they must, crucially, provide information to demonstrate they are in “GB consumers’ interest”. What we take that to mean is that any project that is to receive public funding support must demonstrate “additionality”.
Second: this is the Initial Project Assessment phase. The details of this phase as applied to interconnectors can’t be applied to storage – but it is worth noting that the assessment for an interconnector application during this phase is about the “social welfare impacts of each project”. So the demonstration provided at the first step will at this point be thoroughly assessed. There will be questions: e.g., how much additionality is there; what is the evidence for the claim; is it de minimis or substantial, and so on. These answers will be modelled in some detail.
Third: there then follows, after financial close of the project (which we assume can be conditional) and after publication by Ofgem of the preliminary cap and floor levels (the basic debt level support and cap on returns), the Final Project Assessment.
This phase seems late in the day. It involves assessment of design, assessment of all the costs from A to Z (which includes basic funding, EPC, O&M, replacement of plant up to decommissioning, offtake arrangements showing how the floor level is intended to be exceeded) and a range of other ‘its and bits’.
The justification of the project is the major part of the first two phases. Technology is the major part of the third phase and is the point, we estimate, when Ofgem (which will be running the scheme) brings in its external technical consultants to undertake an appraisal.
The Framework for the Detail
Looking at some of the detail of what DESNZ and Ofgem now think they intend for long duration storage, we know the following:
Ø The scheme is intended to be agnostic about technology, so a Lithium-ion battery of the right size and duration can compete with all the other long duration technologies.
Ø Applicant schemes must be feasible technically, but cannot be feasible commercially. The case for the difference between the two needs careful analysis and presentation.
Ø There will be two ‘streams’ – one of technologies with a readiness level of 9[1], a minimum capacity of 100MW and a minimum duration of 6 hours. The second stream is for “more novel technologies” with a readiness level of 8[2] and, again, a minimum duration of 6 hours. It will be incumbent on projects to be very clear where they fit within this scheme.
Ø The floor for each scheme will be set at the level of debt (yes, really, debt and probably marginal cost, but the details to come may deviate from this). The intention is to ensure the (allowable) costs of the scheme can be repaid.
Ø Applicants will need to demonstrate how they intend their income to exceed the floor. It is clear that this is a key consideration. Applicants have to be able to show that if debt is covered, they will be able to recoup some of their expected rate of return. So when they apply they will need to have an operational scheme worked out in detail.
Ø The cap will probably be ‘soft’ and allow for recovery (to paraphrase) a reasonable rate of return. This might mean that different technologies are rewarded differentially or it might indicate room for negotiation.
Ø The term of the support varies, but extends to 25 years, “if needed”, whatever that means, or up to the point at which the scheme needs re-engineering.
Ø Throughout the term, there will probably be five-year reviews – which means that the cap-and-floor contract will allow for variation, provided it is in “GB consumers’ interest”.
This will be a tough regime to enter and whoever does so needs to have their eyes focussed on additionality.
It will be exactly the same as putting a project-financed project together – all the models, Gantt charts, contracts, funding arrangements will be needed, plus some serious “additionality” justification.
The government expects there to be 30-50GW of long duration technologies (not only batteries) by 2035, with a large number by 2030.
NESO, meanwhile, has published its Clean Power 2030 Report. It is, basically, an offer to government: you can do it this way or that way and these are the consequences of each.
In each of the two options (one involving a focus on flexibility and one on a greater construction of generation), long duration storage has an important role to play:
Long duration energy storage (LDES) … is particularly important for longer term flexibility and additional operability needs (such as during extended periods of wind drought or to spread demand between weekend and weekdays).
NESO notes that despite the importance of long duration storage, the pipeline for deployable options “is limited”. However, in its analysis, that capacity could by 2030 grow from 28GWh to anywhere between 81GWh and 90GWh.
If NESO is right, there are likely to be many batteries rather than fewer large batteries because:
New and innovative LDES, liquid air, compressed air and longer-duration batteries (10+ hours) projects have successfully operated at a small scale. Work has started on new projects and feedback from stakeholders was that the lower range is within what they can build for 2030.
Long duration storage that is too big to be commercially viable has a short window in which to get itself financed.
12 November 2024
[1] Marketable Product: proven in repeated use - Product being sold in market, scaling up sales volumes. Actual application of technology is in its final form - Technology proven through successful operations.
[2] Pre-commercial deployment
Reproduced with permission of www.veragroup.co.uk
Our purpose is to support the entrepreneurs driving change. Sometimes you need help with the path, other times with the destination or the tools or you simply need to check that your compass works. Each project team comprises only Partners, who deliver their expertise directly and without dilution. Flexible, practical solutions driven by years of real-world experience with extensive network connections across the energy sector : Financing ; Legal & Regulatory; Strategy; Development; Commercial; People
www.veragroup.co.uk/contact-us