Long-term energy storage in the UK: the best cap and floor investment mechanism available
A cap and floor regime would be the most beneficial solution to support long-term energy storage in the UK, according to a report by KPMG.
The professional services firm was contracted to write the report by power generation group Drax. He explained that there is currently no appropriate investment mechanism for long-term storage.
By examining four investment mechanisms – the contracts for difference (CfD) regime, the regulated asset value (RAV) model, the cap and floor regime, and a reformed capacity market – he identified the cap and the floor as the best solution.
Currently, challenges facing long-duration storage projects include revenue and cost uncertainty, long project development timelines, and high upfront capital expenditure requirements.
Last year, the UK’s Department for Business, Energy and Industrial Strategy (BEIS) launched a call for evidence on how to enable long-term energy storage, including market barriers present and how they might be resolved.
KPMG found that a cap and floor regime would reduce risk to investors while encouraging operators of new storage facilities to meet system needs, helping National Grid ESO maintain security of supply.
In a cap and floor mechanism, revenues or margins are subject to minimum and maximum levels. Below the “floor”, customers would increase their income, and income above the “cap” would be returned in whole or in part to the customers.
However, a number of specific design features would be required to reflect the nature of flexibility and long-term storage projects. Specifically, the mechanism should have the flexibility to reflect differences in long-duration storage technologies, as well as to ensure that revenue stabilization does not reduce incentives to deliver efficient market outcomes.
Finally, pricing costs should be treated as “market-related costs”, which would allow them to be excluded from the constituent elements of the cap and floor levels and treated instead as net revenue before comparison with the cap and floor. the floor in each evaluation period. This means that they would pass through the ceiling and floor mechanism instead of being transmitted to consumers.
KPMG explained how the same support scheme has been “transformational” in unlocking private investment in cross-border interconnectors since its launch in 2014. This is because investors have been able to see the project’s maximum and minimum annual revenues on a period of 25 years, which reduces the risks.
KPMG also found that while the capacity market could provide stable minimum revenue streams for long-term storage, payments would likely not be sufficient to repay debt costs for large-scale investments.
The RAV model, meanwhile, may not provide enough incentives for asset operators to respond to market signals, KPMG said. It also exerts minimal competitive pressure to increase efficiency.
Finally, CfD may be unsuitable because it generally encourages the export of electricity regardless of market conditions and therefore may not reflect the operating characteristics or value of storage assets.
“With longer storage, the system would operate more efficiently in terms of reducing emissions, reducing costs and maintaining security of supply,” said Penny Small, chief production officer for Drax Group, adding that technologies such as pumped hydro – which Drax owns – are key to achieving net zero because of their ability to store excess renewable generation.
Drax currently plans to develop a 600 MW pumped hydroelectric power station at its existing Cruachan facility in Argyll, Scotland.
Other long-duration storage technologies include Liquid Air Energy Storage (LAES) – with Highview Power developing a 50MW/250MWh LAES project in Greater Manchester – as well as various battery storage technologies capable of long-term applications, such as vanadium flux storage.
The report echoes views expressed at an event hosted by our publisher Solar Media in March last year. Robert Hull, chief executive of energy consultancy Riverswan and former chief executive of UK energy market regulator Ofgem, said overall policy supports long-duration energy storage technologies, but mechanisms for generating income in place is inadequate.
While the market for shorter-lived technologies, particularly lithium-ion battery storage, is growing and dynamic, due to a range of revenue opportunities that can be “stacked” and combined, there is no There are no long-term price signals and therefore a lack of investment certainty for longer duration storage persists, Hull said.
Additional reporting for Energy-Storage.news by Andy Colthorpe.
This story first appeared on Current±.