Achieving the UK’s objective of a fully decarbonised power system by 2035 will require more than just increasing renewable energy generation capacity and removing fossil fuels. Generation must be accompanied by substantial increases in low-carbon energy storage to manage the intermittency of certain renewables like wind and solar.
Such storage provides flexibility to balance the electricity grid by shifting consumption or generation to balance supply and demand, which reduces energy waste and makes the system most cost effective for operators and consumers. The importance of this flexibility is only set to increase with the concurrent electrification of heat and transport integrated within the low-carbon power system.
A report in September 2023 by the Royal Society that analysed 37 years of weather data found that by 2050 the UK will require up to 100 terawatt hours of energy storage. It calculated this would be equivalent to more than 5,000 pumped hydro-electric dams of the kind at Dinorwig in Wales.
Nor is it as simple as just increasing total storage capacity. There is the separate issue of storage duration – how long the electricity can be stored for and then discharged at a later point – that is central to managing energy variations over longer periods of time.
Long-duration
Examples of short and medium-duration storage include battery technologies like lithium-ion, liquid air energy storage and flow batteries. According to a report by National Grid ESO in December 2022, there was 1.6GW of operational battery storage capacity in the UK, mostly with one-hour discharge duration.
In order to address longer, multi-day and seasonal balancing needs, large-scale and long-duration electricity storage must be deployed – and quickly. The most mature form of LDES is pumped hydro storage, which has been in operation in the UK since the 1960s, but there are also more novel technologies including redox flow batteries, compressed or liquid air energy storage, and gravitational and mechanical storage.
The Department for Energy Security and Net Zero has been consulting with industry on a proposed policy framework to enable investment into LDES, after a call for evidence in 2021 identified a series of barriers impacting deployment, including:
- high upfront capital costs
- long build times
- lack of a track record of the technologies (since many are first-of-a-kind)
- lack of revenue certainty
- lack of market signals
The latest consultation, which closed on 5 March, highlighted how deploying up to 20GW of LDES is estimated to bring up to £24bn in essential system savings. It also noted the greater savings that may arise in a “low CCUS and low hydrogen” scenario, given that hydrogen to power and gas carbon capture use and storage are expected to play similar roles in the electricity system to LDES.
Enabling investment
The central proposal to help alleviate some of the challenges and risks is a cap-and-floor regime that would provide a minimum revenue certainty for investors in the case of fluctuating prices. The proposal is based on an existing cap-and-floor mechanism which provides income certainty for interconnector projects.
Investors will likely welcome the cap-and-floor proposal in principle.However, investors will be interested in whether DESNZ decides to follow the interconnector cap-and-floor regime (which is administered by Ofgem pursuant to licence conditions) or the renewables contracts for differences regime (which is administered by the Low Carbon Contracts Company pursuant to a contract). The mechanism for awarding support will also be important, with DESNZ’s current assessment favouring an administrative rather than fully competitive approach in the short term. The methodology to be used to weigh different projects against each other if a high volume of bids is received is also likely to be scrutinised, including how locational system constraints are factored in.
It is also worth noting DESNZ’s proposed “additionality” requirement, with DESNZ stating that the intention of the LDES scheme is to support investments in projects that are feasible but not otherwise able to be built. This has led DESNZ to propose excluding specific technologies, such as lithium-ion battery energy storage systems, from the LDES scheme but whether this is appropriate will no doubt be a key topic covered in consultation responses (as will the proposed six-hour minimum duration).
Review of electricity market arrangements
The LDES scheme is being developed alongside REMA, which is a wider government review of electricity market arrangements. In the latest consultation on REMA, published on 12 March, DESNZ stated that to ensure security of supply in 2035, it expects to need 55GW of short-duration flexibility and 30-50GW of long-duration flexibility. While aiming for as much of this long-duration capacity as possible to be low carbon, DESNZ also set out its expectation that a limited amount of new-build gas capacity would be required in the immediate term while low-carbon long-duration alternatives, such as LDES, scale up.
In order to bring forward low-carbon long-duration storage, DESNZ confirmed that it would progress the development of bespoke policies to support LDES, hydrogen to power and gas CCUS. However, DESNZ also set out that, in the long-term, its intention was to provide a route to transition low-carbon long-duration flexible technologies away from any administratively awarded bespoke mechanisms, with an optimised capacity market ultimately seen as the primary scheme for supporting the deployment of a competitive mix of low-carbon flexibility. We would expect investors to see early mover advantage in securing bespoke support under the LDES scheme.
Implications for real estate
There are important implications for real estate specifically in the proposed criteria for securing cap-and-floor arrangements. First, the criteria include the location and agreement for the proposed project’s grid connection. This is an area that continues to see challenges and delays. However, there have been positive steps taken in the form of the government’s Connections Action Plan. The industry awaits the impact of these measures in 2024.
Other relevant criteria relate to the specific terms of the land and/or lease ownership on which the project will be constructed and operated, planning permission, environmental permits, and whether the project has an electricity generation licence. While again there have been measures to streamline and expedite these processes to facilitate higher deployment rates, they can still prove an impediment to securing capital for a project.
Concluding thoughts
While LDES has been a component of the government’s net zero strategy since 2021, the proposed investment framework is still in its relatively early stages and there are significant outstanding questions that need to be addressed before capital will be deployed at the rate necessary to meet the 2035 decarbonisation deadline.
The UK has not seen any new LDES assets constructed in around 40 years. However, high-profile, landmark projects have in recent years demonstrated not only the viability but the extraordinary opportunity that LDES presents to investors and developers. Though these are promising signs of the market coming to life, it may not be sustainable without a more concrete framework for investment.
Juliet Stradling and Michael Kruger are partners in the future energy team at TLT LLP
