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Government goes long on energy storage challenge

Kicking off 2024 with a bang, early January saw the Department for Energy Security and Net Zero publish a consultation on proposals to foster new investment into long-duration energy storage (LDES).

The consultation’s chief aim is the development of a “cap and floor” scheme for LDES technologies. Development of these technologies has struggled due to a series of barriers, including “lack of revenue certainty, high upfront capital costs and long build times” the document notes.

Such a support scheme would provide revenue certainty for investors by providing a guaranteed revenue should returns from operating assets drop below the agreed floor. DESNZ says it would also offers protection to consumers by providing a cap on the revenue that operators can earn, with some or all of the revenue earned over the agreed cap returned to customers.

Support would be offered for both established and new technologies via two distinct routes for application.

The first, Stream 1 would cover “established technologies” with a Technology Readiness Level (TRL) of 9, offering a minimum capacity of 100MW/600MWh. Possible technologies explicitly identified include pumped hydro storage and liquid air electricity storage (LAES).

Stream 2 would be open to novel technologies with a TRL of 8, a supply duration of at least 6 hours at a minimum capacity of 50MW (ie 300MWh), with other LAES, compressed air electricity storage (CAES), and flow batteries given as potential examples.

The department suggests the mechanism could be delivered via new conditions in electrical generation licences issued by Ofgem, or via Contract for Difference-style contracts. These would be issued over the operational – but not theoretical – lifetime of the projects.

Most notably however, lithium-ion batteries – currently the UK’s storage workhorse – will be excluded from the scheme. The framework also eschews some technologies – such as geothermal or thermal storage – which do not convert the stored energy back into electricity.

The Cruachan Dam pumped storage hydro facility in Scotland. Supplied by Drax

Storing more, emitting less

The document landed alongside an analysis paper by LCP Delta and Regen, who noted that various forms of flexible energy generation including hydrogen to power, gas CCS, unabated gas, and LDES would be needed across the future UK energy system with “at least 30 GW, but potentially up to 50 GW” of capacity likely required by 2035, the majority of which should be as low-carbon as possible.

Its headline findings included analysis which suggested deploying up to 20GW of LDES could result in system-wide savings of up to £24bn – equivalent to around 3.3% of total system costs.

Regen and LCP also make clear the emissions benefit of adopting more LDES. Adding just 3GW of capacity by 2035 would reduce emissions intensity of the power system by 3-8% (0.3-0.8gCO2e/kWh), it said. Adding 12GW could spur this to 10-28% (1-2.5gCO2e/kWh).

In general, the higher the duration of the LDES deployed the larger the impact on emissions, with durations of 16-32 hours (the upper end of modelled deployment) having the largest impact on emissions, it notes.

Regen also found the case for LDES is bolstered in scenarios with low deployment of CCUS and/or hydrogen to power – offering system savings of around £30bn and £50bn, respectively – because these storage assets could prevent the need for additional generation to be built.

This highlights that LDES has “significant options value” in providing additional flexibility to help manage uncertainty with alternative low carbon peaking capacity, the analysis said.

Some safeguards are also mooted; the consultation includes proposals to help minimise the risk of “gaming” by cap and floor users, while DESNZ also says it will continue to work closely with the REMA programme to consider how any LDES investment framework could evolve in line with future market arrangements.

Doffing their caps

The proposed cap and floor system is good news for pumped hydro assets – currently seen as “the only form” of LDES on the UK grid, with around 2.8GW of capacity in service.

Backers of such schemes have long argued that the lack of a support framework means they struggle to secure the major investment required to build or expand assets. In combination with limited options for site development, that has meant no new pumped hydro plants have been built in the UK since 1984.

SSE Renewables – which has plans for a scheme of up to 1.5GW at Coire Glas above Loch Lochy – hailed the “welcome news” but cautioned that any cap and floor system would need to be considered alongside broader reforms.

“This should include the Capacity Market and flexibility markets to ensure the overall market design fully values the contribution of low carbon flexible assets such as pumped storage.” it said.

Coire Glas, Loch Lochy. Supplied by SSE Renewables

Finlay McCutcheon, the group’s director of onshore for Europe, said Coire Glas is “undoubtedly one of the most ambitious and pioneering infrastructure projects the UK has seen in recent years.

“However, our ability to deliver a project of this scale hinges on reaching a positive final investment decision by late 2025 or early 2026 and will clearly rely on this consultation process yielding an investable cap and floor mechanism to be in place by the end of 2024.

“Given the time taken to reach this point, much work is now needed to ensure an effective mechanism is finalised and put in place as early as possible this year to enable projects such as Coire Glas to take final investment decisions and move into construction.”

Drax, which plans to expand its 440MW Cruachan pumped hydro plant to over 1GW, also welcomed the consultation with Scottish assets director Ian Kinnaird describing the move as “a big step towards making a new generation of pumped storage hydro plants a reality.

“These new plants would enhance UK national energy security and play a significant role in the fight against climate change.

“We look forward to working constructively with the UK Government and other stakeholders to help deliver a policy environment which secures investment, strengthens our energy security, and delivers for consumers. Drax is ready to move mountains to tackle climate change.”

Assault on batteries

Yet the explicit exclusion of lithium-ion batteries – a technology which is already competitive and providing considerable flexibility in the market – has caused upset.

One operator of battery assets reached by E-FWD warned the framework risked “crowding out” li-ion from both long and short-duration markets, and voiced concerns that government is “looking narrowly at the issue through a storage medium, rather than a full look at what’s available.”

“If you end up with LDES technologies like the ones proposed you will crowd out short-duration technologies, because a long-duration asset with a cosy long-term contract to cover its return on capex – which is used very infrequently – is going to then show up in the short-term market.

“The issue is that unless it’s adjusted for efficiency we’ll end up with the power that’s stored when there’s excess generation being wasted through round-trip efficiency losses, resulting in the need for far more generation to be installed” to meet rare, high-demand/low renewables events.

File photo of a 100MW Zenobe battery site in Capenhurst, UK.

RenewableUK’s EnergyPulse Energy Storage report highlighted that the pipeline of battery projects across the country has soared by nearly 70%, from 50.3GW in late 2022 to 84.8GW in December. Of this around 4GW is operational and the same again under construction, with the remainder in pre-planning or various stages of development.

Yet the operator warned that the 35GW or so of li-ion assets currently in the planning system “won’t get built if people carry on like this.”

“Capacity market contracts now for short-duration batteries don’t earn a full value unless they’re built for 8 hours – but then we’re being excluded from the LDES, so we’ll never build for 8 hours.

“You are going to kill the most competitive technology we’ve got,” they said.

Ed Porter of battery data analysts Modo Energy also warned that the 100MW Stream 1 scale meant “a huge capital ask for a relatively under-deployed asset class.”

“Lithium is being excluded on account of it being commercially feasible at shorter durations. It’s not acknowledged that it wouldn’t be at 6 hours (currently) and there would be a massive missing money impact of subsidising 20GW of other storage tech,” he added.

The size of the prize

Alastair Martin, founder and chief strategy officer at Flexitricity, a demand side flexibility business, suggested the proposed frameworks were more important in helping to bridge the commercialisation gap for earlier-stage LDES technologies.

“Lithium’s found a niche it is extraordinarily good at, and the challenge it faces now is not about proving its commercial worth, technical capability or economics. The challenge now is…what’s the best market opportunity the rest of the time?”

“That’s entirely separate to the question that government is trying to address with LDES.”

Instead he suggests DESNZ is attempting to “thread the needle” between addressing the challenges of dunkelflaute and diurnal changes in demand and helping earlier stage technologies overcome their commercialisation gap.

“I understand the complaints [from battery operators], but I also understand the size of the prize if you can enable the people who can store energy for a week. This is trying to address those myriad challenges that we are going to need in some form.”

Meanwhile, he said both cap and floor and CfDs systems have a solid track record for both investors and consumers – as has the Capacity Market in allowing operators to stack various forms of revenue from their assets.

“What we need to see is that if someone builds an LDES asset, then the support mechanism is stackable with everything else they can usefully and technically do – that has to be in by default,” he added.

DESNZ is seeking feedback on the eligibility criteria it intends to use for assessing applicants, the design of the cap and floor mechanism and proposed options for delivering the scheme, with over 50 questions posed in its 60+ page consultation.

Responses should be submitted by 5 March.

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