The announcement followed a consultation held earlier this year which proposed a cap and floor scheme to encourage LDES investment. Such a model provides revenue support to developers in lean times, as well as a requirement for profit-sharing when the going is good.

The ‘floor’ is a set threshold in relationship to their gross annual profit margin, defined as the difference between the revenues from selling electricity back to the grid, and the cost of charging.  

Floor levels are set low to minimise the likelihood of their use, while still providing reassurance to investors that operators can meet debt payments in the unlikely scenario that revenues are much lower than forecast. They are not high enough for the asset owners to make a profit (when considering the cost of debt), so there is no incentive for them to seek floor payments – they are merely a form of insurance, explains the government.  

In return for consumers underwriting this risk, a revenue ‘cap’ ensures that LDES asset owners must share some or all profits above a certain level.

Industry watchdog Ofgem has agreed to act as the regulator and delivery body for the scheme, the first round of which is expected to be open to applicants next year.

LDES technology is not new. Great Britain currently has 2.8 GW of LDES across four existing pumped storage hydro schemes in Scotland and Wales, which already play a significant role in powering the country. However, no new sites have been built for nearly 40 years because they are expensive to develop, even though operating costs are comparatively low.

Pumped storage plants act like giant water batteries. They use reversible turbines to pump water from a lower reservoir to an upper reservoir, which stores excess power from sources such as wind farms when supply outstrips demand. These same turbines are then reversed to bring the stored water back through the plant’s turbines to generate power when needed.

Other LDES technologies include liquid air energy storage, compressed air energy storage and flow batteries.

According to government analysis, deploying 20 GW of LDES could save the UK electricity system £24bn between 2025 and 2050. It would reduce household energy bills as additional cheaper renewable energy would be available to meet demand at peak times, which would cut reliance on natural gas peaking plants.

Meanwhile, the National Electricity System Operator has estimated that some 11.5–15.3 GW of LDES will be required by 2050 to achieve net zero.

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

The announcement was welcomed by LDES developers such as SSE Renewables, which is planning to build the 1.3 GW Coire Glas pumped storage hydro scheme in the Scottish Highlands. The company hopes to make a final investment decision (FID) on the project pending ‘successfully securing a cap and floor agreement in an appropriately designed scheme’.

Robert Bryce, Director of Hydro, SSE Renewables, said: ‘[The] cap and floor investment framework is a massive step forward in delivering more of the flexible homegrown energy the UK needs in our transition to net zero. SSE’s Coire Glas has the potential to be at the forefront of delivering much needed large-scale long duration electricity storage – providing vital back up to an increasingly renewables-led system and bolstering energy security.’

Anticipated to deliver up to 30 GWh of storage capacity, doubling the total electricity storage capacity in Great Britain, Coire Glas could ‘shift the dial on pumped hydro storage – harnessing the power of wind and water to become Britain’s biggest natural battery, storing excess renewable energy at times of low demand and supporting a future clean electricity system with instant power,’ according to Bryce.

In addition to Coire Glas, SSE Renewables plans to convert the largest conventional hydro power station in its existing hydro power fleet, the 152.5 MW Sloy power station in southern Scotland, into a pumped storage hydro scheme. It is also co-developing a new pumped storage hydro project at Loch Fearna in Scotland’s Great Glen, in a 50:50 joint venture led by Gilkes Energy.

Drax, too, welcomed confirmation of the cap and floor scheme. It is currently 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 more than double the site’s total generation capacity to over 1 GW.

Ian Kinnaird, Drax’s Scottish Assets Director, said: ‘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… Pumped storage stabilises the electricity system, helping to balance supply and demand through storing excess power. When Scotland’s wind turbines are generating more power than we need, Drax’s Cruachan steps in to store the renewable electricity so it doesn’t go to waste… We look forward to [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.’

In addition to the proposed construction of a new plant, Drax is currently progressing an £80mn major refurbishment of its existing Cruachan site. The refurbishment will see original parts replaced and the generating capacity of the power station upgraded from 440 MW to 480 MW.

Meanwhile, renewables organisations such as the Association for Renewable Energy and Clean Technology (REA) were quick to applaud the announcement. ‘Long-duration energy storage is essential for meeting future low-carbon energy demands in a cost-effective way while ensuring the security of supply,’ said Mark Sommerfeld, Deputy Director of Policy, Association for Renewable Energy and Clean Technology (REA). ‘Today’s announcement finally confirms a scheme to unlock private investment in several ready-to-go projects, allowing construction to begin. The initiative will create high-quality jobs, enhance UK skills and highlight the country’s world-leading expertise in this field.’

Sommerfeld also noted that while the government’s initial focus was on pumped hydro storage, he was ‘pleased to see a clear pathway for other innovative long-duration storage solutions that are also ready for deployment and can deliver additional benefits to our power system’.